Where Contributions Come From

• All money that you put into the 401k is a voluntary contribution made by salary reductions. Most contributions are pretax, meaning you reduce your adjusted gross income one dollar for every dollar contributed. Some non-deductible contributions are allowed if you meet the 2011 maximum deductible contribution limit of $16,500 and your employer contributions don't put you up to the maximum $49,000 limit. Employers can match your contributions or make non-elective contributions to all eligible employees.
  
  

Vesting Schedules

• Employer contributions are subject to vesting schedules, often based on years of service. All your contributions are immediately 100 percent vested, but employer contributions may only be partially vested. If the money is not vested, it is not eligible for liquidation. Liquidating the whole account returns the portion not vested back to the employer. There are two vesting schedule choices allowed by the Department of Labor. The first schedule has zero employer contribution vesting until year three when everything is 100 percent vested. The second schedule uses five years to increase the vested portion by 20 percent on each anniversary of employment.
  
  

Distribution Costs

• Liquidating the 401k does is not a free financial transaction. First consider the income taxes for the distributed funds which are added to adjusted gross income. If you are not yet 59 1/2 years of age, there is a 10 percent early distribution penalty as well. Most 401k plans do not assess fees for closing the account, but you should check with your plan administrator to be sure. Certain IRS exceptions do apply to the early distribution penalty. Using funds to buy a first home, pay college expenses, pay non-reimbursed medical expenses or prevent foreclosure or eviction are allowed exceptions. Restrictions do apply to these exceptions, so check with your plan administrator or tax adviser to see if you qualify.
  
  

Taking the Distribution

• Liquidating the 401k is accomplished by filling out a distribution form. Obtain the form from your 401k plan administrator. Complete the form and submit it. If you are stopping all future contributions into the 401k altogether, inquire with the administrator what forms are needed. Payroll will need to make adjustments so that no deductions are taken from your paycheck and contributed into the plan.