Letter Re: Cashing out your 401K accounts

Dear C.P.

This is in response to your query about cashing out your 401K accounts. I am a CPA in California and have been practicing for 20 years. I like your idea of cashing out your retirement accounts to live in a paid-for home. I have two suggestions:

  1. If you can, wait until you are 59 1/2 before cashing them out. This avoids the additional 10% federal tax on early withdrawal. There may be other ways to avoid this penalty that are more detailed, so ask a CPA that is familiar with this. Rolling all of the accounts directly into a self-directed IRA with a discount broker or reputable precious metals broker will give you more options for tax-free or at least penalty-free withdrawal under the tax regulations.
  2. If you do wait to cash them out, you may wish to close out any positions you have in the bond or stock market and leave your funds in a cash account or money market “guaranteed” type of account within the Plan to avoid risking the principal on any market crashes or adjustments.

Depending on your tax situation, you may wish to split the distribution over a two calendar year period, to keep yourself in a lower tax bracket. Withdraw half before December 31st and the other half first thing in January of the next year.