Let’s say you leave your job and wish to cash out your 401k. You have several options. You can just leave it where it is, in your former employer’s plan, and then withdraw it in retirement. You can also roll it over into your new employer’s 401k plan. A third option is to roll it over into a self-directed IRA. If done correctly, all three of these options have no tax consequences and continue to protect the tax deferred status of your account.
A fourth option is to withdraw the cash. This is expensive because you will have to pay a 10% penalty, and you will have to pay income taxes on the amount you withdraw.