Having access to savings in your 401(k) can be important. Here are some of your options for withdrawing from your plan.
Since the inception of 401(k) plans in 1980, many companies have offered defined contribution plans as a benefit to their employees. In the process, many Americans have used 401(k) plans to save for retirement with pretax dollars and employer match funds.
In an emergency, you may need to tap those funds, but getting money out of your company’s 401(k) plan can be especially tricky before you reach the official distribution age of 59½. A financial professional can help you determine which of the many withdrawal options is most suitable for your situation.
The three most common ways to access 401(k) funds are hardship withdrawals, non-hardship withdrawals and loans.
While you are employed by the company that offers a 401(k), you usually have an opportunity to access savings under certain hardship conditions. The drawback, however, is that qualifying for this provision can be difficult. Just as the IRS has its list of qualifying financial hardships (medical expenses or disability), individual plans often do as well. That means you must qualify under both sets of rules, which may be more difficult.
Another drawback of a hardship withdrawal before age 59½, is the 10 percent penalty on whatever you’ve withdrawn. The withdrawal is also taxed as income. Taxes and penalties can make a hardship withdrawal expensive.
Not every plan allows non-hardship withdrawals. If yours does, you have an opportunity to take money out of your account and redistribute it as you see fit. Generally, the best bet is to roll the amount into an IRA. That way, you avoid taxes, and you have a larger range of investment options, with potentially lower administrative fees. Rollovers made directly to the owner of the 401(k) must be reinvested in a qualified plan within 60 days or be subject to a 10 percent penalty.
If you receive a distribution eligible for a rollover, 20 percent of it generally will be withheld for income tax. You cannot choose not to have tax withheld from an eligible rollover distribution. However, tax will not be withheld if you have the plan administrator pay the eligible rollover distribution directly to another qualified plan or an IRA in a direct rollover.
If you’re in a bind, a loan may be your only remaining option. A loan from your 401(k) allows you to borrow against your savings. Some plans have use restrictions similar to those for hardship withdrawals. The loan must be paid back, usually within five years, and a loan cannot be rolled over into an IRA. However, if you leave a company and still have an outstanding 401(k) loan, you’re often required to pay it back in a short amount of time, usually one to two months.
Always consult with a professional before making an early 401(k) withdrawal. The tax consequences and the impact on your future retirement savings can be serious. To be sure you’re making the right choice, go over all your options, and pay close attention to the rules and regulations of your individual plan. Just like the plan holders themselves, each plan is different. Doing your homework beforehand and seeking professional advice can help you avoid any painful surprises.
Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Forest Hills Financial Inc. and Securities America are separate entities. Written by Securities America for distribution by Forest Hills Financial, Inc.