How to Take money from 401k plan.

How to Take money from 401k plan.

• When you leave your current employer, you can withdraw your 401(k) funds in a lump sum. To do this, simply instruct your 401(k) plan administrator to cut you a check.

• Then you're free to do whatever you please with those funds. You can use them to meet expenses, put them toward a large purchase or invest them elsewhere.

• While cashing out is certainly tempting, it's almost never a good idea. Taking a lump sum distribution from your 401(k) can significantly reduce your retirement savings, and is generally not advisable unless you urgently need money and have no other alternatives.

• Not only will you miss out on the continued tax-deferred growth of your 401(k) funds, but you'll also face an immediate tax bite.

• First, you'll have to pay federal (and possibly state) income tax on the money you withdraw. If the amount is large enough, you could even be pushed into a higher tax bracket for the year.

• If you're under age 59½, you'll generally have to pay a 10 percent premature distribution penalty tax in addition to regular income tax, unless you qualify for an exception.

• For instance, you're generally exempt from this penalty if you're 55 or older when you leave your job.

• And, because your employer is also required to withhold 20 percent of your distribution for federal taxes, the amount of cash you get may be significantly less than you expect.

• Because lump-sum distributions from 401(k) plans involve complex tax issues, especially for individuals born before 1936, consult a tax professional for more information.