Rules for liquidating 401k

By default, your custodian will have to withhold 10 percent of the distribution, but you can arrange to have more withheld to cover taxes you might owe.

You might also be able to arrange for state tax withholding if your state has an income tax and if your state and custodian allow for it.

You may take a hardship withdrawal (if your employer permits it) to cover certain expenses, such as: In order to qualify to take a 401K hardship withdrawal, you’ll need to show your employer financial proof that you need to take money out of your 401K.

After all, the IRS let you defer paying taxes on your contributions and growth, but there is a limit to the government’s generosity.This is because you need to determine the taxable amount when you file your taxes.File IRS Form 8606 with your annual income tax filing for the year of the liquidation if it came from a Roth IRA.Also file IRS Form 5329 if the liquidation was an early distribution from a Roth or traditional IRA.Nancy Cross is a certified paralegal who has worked as an employee benefits specialist and counseled employees on retirement preparation, including financial and estate planning.