Early Distribution from 401(k)

In this case, the managing institution transfers your 401(k) account assets directly to you. This is the least desirable option, unless you really need the money.

If you choose this option, you have 60 days to change your mind and rollover your 401(k) assets into another qualified retirement plan, before you are subject to the 10% early-withdrawal penalty. If you receive properties such as stocks vs cash, you may sell them and rollover the cash proceeds. If your properties go up in value and you sell them within the 60 days, you may rollover the profits too, tax free.

With few exceptions, the IRS requires the payer (e.g., managing institution) to automatically withhold 20% tax on your distribution, period. In other words, you'll typically receive only 80%, even if you intend to reinvest the full 100% in a qualified plan within 60 days. Worse, if you want to reinvest the entire 100%, you'll have to add the 20% back out of your own pocket, and then try to work it out on your next tax return.

If you don't rollover your 401(k) to a qualified plan in whole or part within 60 days, you'll have to pay the additional, 10% penalty on the amount you didn't rollover, if you are also under age 59 ½ and don't qualify for IRS exceptions. There are only a few exceptions, and most don't apply to "average" tax payers.

Depending on your total income and other taxes withheld for the year, you might even owe more in Federal taxes than the initial 20% the payer withheld on your behalf, plus state and local taxes.

It can be more complex than this, but these are the main reasons that the direct rollover mentioned on previous pages is the better choice, if you plan to reinvest your 401(k) assets after leaving your job.

401(k) Options After Leaving Your Job
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