Cashing Out an Old 401(k): Taxes and Penalties

Cash out 401k taxes are the reason a check from an old plan is smaller than the balance on the statement. Cashing out means the plan pays you. The IRS generally treats that payment as income. This page explains the usual tax picture in plain language. It is not tax advice, and it does not promise you have an account to cash out.

We make Asset Recovery: Lost 401k, a free app that opens official search tools from a former employer and the years you worked. Find the plan before you ask it to send a check.

What a cash-out is

You request a distribution, or you deposit a check the plan already made payable to you and you spend it. The money leaves the retirement account. A direct rollover to an IRA or to a new employer's plan is a different move: the old plan sends the money to the next retirement account, and that transfer is the one people use when they want to avoid treating the balance as income.

The four choices, side by side, are in what to do with an old 401(k). The rollover version is in 401(k) rollover to an IRA.

Taxes people usually see

Three layers show up often:

• Income tax. The amount you keep as cash is generally added to your taxable income for the year.

• Withholding. When a 401(k) pays you directly, instead of sending a direct rollover, federal tax is often withheld up front. A common rate on those eligible rollover distributions is 20 percent. Withholding is a prepayment. It may not match the tax you actually owe.

• An extra 10 percent tax. If you are under 59 1/2, an additional tax often applies on top of income tax. Exceptions exist. One workplace-plan example people ask about is leaving a job in or after the year you turn 55. Whether any exception fits you is a question for the plan and a tax professional, not a guess from a blog.

State income tax can apply as well. The plan's confirmation, and your tax return, are where the numbers become real. A check for the full balance is rare once withholding is taken. If you spend that reduced amount and later owe more at filing time, the gap comes out of your pocket, not out of the plan.

A small-balance force-out is a different event. The plan may mail a check or move the money to a default IRA even if you never asked. That check can still be taxable. The distinction is in small balances and force-outs.

Find the plan before you decide

You cannot weigh cashing out 401k taxes against a rollover until you know the administrator and the balance. Start with the employer name and the years you worked. That order is in how to find a lost 401(k) from a previous job. If the statement is gone, find an old 401(k) without the account number still gets you started.

Asset Recovery: Lost 401k does not calculate your tax and does not request the distribution. You enter each former employer. The app opens DOL Lost and Found, Abandoned Plan Search, or PBGC. Your Social Security number, if a government site needs it, stays on that site. Which database fits which job is in free places to look for a lost 401(k).

If the company changed names or closed, search the name on the old W-2. That situation is in 401(k) when a company closes, merges, or is renamed.

Searching is free. For a shortlist of products, see apps to find a lost 401k. Then locate the account in Lost 401k, and only then decide whether a taxable check is the outcome you want.

Start on our Asset Recovery page or download Lost 401k.