Considering taking a 401(k) withdrawal? We've summarized optional distributions that may be available in your retirement plan.
When can I get my money? This questions is asked often. At the very least, there are only 4 events that would allow a plan participant to withdraw his or her account: death, disability, termination, and retirement. Beyond those events, your retirement plan may allow for additional provisions that provide access to participant assets sooner.
In-Service Distribution
In-service distributions may be permitted at any time in the year a plan participant attains age 59-1/2, with respect to Qualified accounts, including:
- 401(k) salary deferrals, pre-tax or Roth;
- Safe Harbor 401(k) non-elective or matching accounts;
- Qualified non-elective contribution accounts; and
- Qualified matching contribution accounts
In-Service Distributions Permissible at Age 59-1/2 from 401(k) Accounts
Some Plan documents make in-service distribution provisions contingent upon the accounts eligible for in-service distributions being 100% vested.
This added vesting restriction is unnecessary with respect to Qualified accounts in a 401(k) plan.
Qualified accounts are already 100% vested, by definition and include: salary deferrals, qualified non-elective contributions, qualified matching contributions, and employer contributions made to maintain Safe Harbor 401(k) requirements.
Hardship Withdrawal
A hardship withdrawal is a type of in-service distribution that may only be permitted under a 401(k) Plan or a Profit Sharing Plan. Additionally, a hardship withdrawal only applies when specific conditions have been met.
Hardship Events & Expenses
A hardship withdrawal is generally limited to specific events where plan participants have an immediate and heavy financial need with no other alternative options to access funds. The following events are considered Hardship Events:
- Medical Care*
- Purchase of a principal residence
- Post-secondary education (next 12 months)*
- Prevent eviction or foreclosure from principal residence
- Funeral Expenses*
*Can be inclusive of primary beneficiary at the time of the hardship.
Unlike Plan Loans, discussed below, a hardship withdrawal is not repaid. Previous legislature prevented a participant from deferring into their account for a period of 6 months from the date of the withdrawal, this requirement has been eliminated for distributions made on or after January 1, 2020.
Additionally, the final regulations, published on September 23, 2019, eliminated the requirement to take a plan loan first before a hardship withdrawal, if the plan permits loans; however, a plan may still require a loan be taken first.
For distributions made on or after January 1, 2020, there are 3 requirements to show need:
- Employee has obtained all “currently available” distributions under the plan and all other plans of deferred compensation
- Employee provides written representation to plan administrator
- Plan administrator has no actual knowledge that is contrary to the representation
Although regulations modified the hardship withdrawal rules, a plan may still limit the number of hardships taken in a year, impose a loan-first requirements, and/or impose a minimum threshold amount for the withdrawal (i.e. $1,000, anything under would not be permitted by the plan in this example).
Plan Loan
You may be eligible to borrow money from your retirement savings account by taking a Plan Loan. Depending on your Plan's Document, participants may withdraw up to the lesser of 50% of the vested account balance or $50,000 within a 12-month period.
These borrowed monies are repaid back to the plan within no more than 5 years of the withdrawal; however, your Plan may allow for Primary Residence loans as well. Primary Residence loans may have their term length extended beyond the regular 5 year-period, often with a maximum term of 15 years.
Both General Purpose and Primary Residence loans are repaid with interest. The interest that will accrue over the life of the loan is repaid back into your account that the funds were withdrawn. The key difference between a General Purpose and Primary Residence loan is that the funds withdrawn for a General Purpose loan may be used at the borrowers discretion where as a Primary Residence loan may only be withdrawn for the cost needed in order to acquire the principal residence.
In addition, when reviewing whether or not a Plan Loan is for you, there may be specific requirements your Plan and Plan Administrator may request. For example, you may be required to provide supporting documentation for a Primary Residence loan, including a sales agreement or good faith estimate that shows a cash amount needed, or other such materials.
Guidance
Always consult with your plan administrator, HR managers, a qualified tax consultant, and/or the financial professional associated with your retirement plan.
This Knowledge Base article includes information on withdrawal options that may be available to plan participants. While we have done our research please understand that this information is not tax advice, investment advice, nor an endorsement to withdraw and the information may change. Always consult your advisors and tax professionals on what options work best for you when it comes to your unique situation and to your retirement account.