401k Termination
The Internal Revenue Code never uses the word “termination” to describe losing your job; The Code calls that “separation.” In IRS lingo, 401k termination means stopping, cancelling, rolling over, or cashing-out your 401k. Depending on your circumstances, 401k termination may have one of five meanings:
401k Termination: Ending payroll deductions For deferred compensation
Because your employer establishes the rules governing your 401k plan, he may put
some restrictions on your 401k termination, because he must pay administrative costs for changing provisions for your deferred income. But you do have the right to cancel your payroll deductions when you feel the 401k termination serves you best interest. Most employers stipulate that you may make changes only quarterly, every six months, or annually. If they allow changes only once a year, employers typically allow them in January or during the first month of the new fiscal year.
401k Termination: Withdrawal of contributions and earnings At retirement
Retirement is one of the ways you “separate” from your employer, and it naturally causes 401k termination. You may handle this 401k termination in one of several ways: you may arrange for periodic payments from your 401k, you may rollover your funds into an Individual Retirement Account, you may invest your 410k funds in an annuity, or you may elect the most dramatic 401k termination—one lump-sum payment.
401k Termination: Withdrawal from the 401k at Separation from employment
The law requires your employer to maintain your 401k even after you separate from the company, but the IRC gives your employer latitude about the terms and conditions of that maintenance. Most employers require your 401k termination within sixty days of your separation, or they stipulate that failure to move your 401k after the expiration of sixty days will give them the right to charge you for the costs of administering your account, and they will begin deducting fees from your retirement money. It serves your best interests to execute your 401k termination as soon after separation as possible.
401k Termination: Withdrawal of 401k contributions and Earnings because of emergency Or hardship
Although your employer has the right to put serious restrictions on 401k termination due to hardship or emergency, and although the IRS will assess a 10% penalty on the funds you withdraw and tax them as income, nevertheless circumstances sometimes warrant summary 401k termination. You must regard wholesale withdrawal of your 401k funds your very last resort in an emergency, but 401k termination is a viable option.
401k Termination: Other circumstances calling for Termination of 401k participation
Most 401k plans and the law allow for 401k termination when you face “immediate and heavy” financial obligations you can meet in no other way. And the law allows for other 401k termination when exceptional circumstances warrant withdrawal of all your retirement funds. When you confront these situations, you definitely should seek professional advice: consult a tax expert, a financial planner, and maybe even an attorney to explore all of your options before you elect 401k termination as the remedy for you difficulties.