How to Close Your 401k

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Closing a 401k account is not advisable but you do have the option of closing your account to direct the amount from the account to another investment. Cashing it out will subject you to tax penalties. This is referred to as an IRA rollover which is a specially designed plan to facilitate the tax free transfer of your money from your account to another investment program.

Step 1

If you terminated your employment and you decided to rollover your 401k account into an IRA rollover, you need to fill out the IRS Form 1099-R, which is basically a request for the distribution of the funds inside your 401k accounts. This transaction can be completed within the span of 60 days from the date the request was made.

Step 2

Transact with a broker of a financial institutions to open an IRA rollover account and deposit your 401k money after the lapse of 60 days. Take note that in an IRA rollover, your money earns a high interest rate and at the same time enjoys a tax-deferred privilege.

Step 3

Immediately after the lapse of the 60 days from the time the request was submitted, you are required to deposit the 401k money. In order to be able to make the deposit, fill out the Form 5498 which is the Complete IRS form.

Step 4

You need to discuss with your broker or the firm with regard to the investment options that can be taken for your rollover IRA account as a temporary procedure prior to the establishment of regular or a Roth IRA account.

Step 5

As mentioned, you are not prohibited to close your 401k account but you are just discouraged to do so. You can still pursue to close your 401k account but then you are to be charged with a ten percent penalty and the amount is to be subjected to the regular income tax rates as a consequence of the closure of the account.

Step 6

As to a closure of inherited accounts, the rules do not require you to immediately close the inherited 401k account and likewise, you have the option of allowing the 401k account that you have inherited from your parent, or spouse, or relatives to grow under a tax-deferred status. Also, you may also convert that 401k account to a rollover IRA.

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