How to Get Money Out of Your 401(K) Plan

| January 6, 2024 | 0 Comments

If you are like most working Americans today, you probably have been contributing to a company retirement plan (like a 401(k), 403(b) or SEP IRA, or other plan) for a few years. One question that comes up regularly is: “How (and when) can I get my money out of my retirement plan?” Most often, that means after you retire or change jobs, but not always. There are ways to get money out of a retirement plan before you retire, too.

Some of the methods I’m going to mention may not be available to you – they will depend on specific plan provisions that are different for every retirement plan. For details about your specific plan, the best bet is to go to the plan provider’s website or, if there isn’t one, to contact your Human Resources department for information on what your plan allows or doesn’t.

Rollover. A rollover can either be done at retirement or when you switch jobs. You can take a complete distribution of your retirement plan account balance and “roll” it over to your new employer plan or to an Individual Retirement Account (IRA). Rollovers are not taxable distributions, but there can be hiccups if you’re not careful. A direct rollover, also called a custodian-to-custodian transfer (for example from Fidelity to Schwab) is the easiest and smoothest. A check is often sent directly to the new plan provider and made payable to that provider, ensuring that you never actually take ownership of the retirement funds, even if your plan sends the check to you for deposit at the new plan.

On the other hand, an indirect rollover happens if the check is made payable to you and can result in taxes being withheld. You can still deposit the funds in your new plan within 60 days, but failure to do so results in a taxable distribution of the entire amount, so this really isn’t ideal.

Loans. If you’re still working for the same employer, some retirement plans allow for loans from the plan. Not every plan allows it, and the limitations may be different for each plan. In general, though, these loans must be paid off before you retire or change employers, so borrowing money from a retirement plan can get very complicated.And failing to make loan payments can cause huge problems.

Distributions. Distributions from retirement plans are generally taxable (unless from “Roth” accounts). How much can be distributed depends on specific plan provisions. It can also depend on what kind of money was contributed. For example, money contributed to the plan from your salary may have different distribution restrictions than profit sharing or matching contributions added by your employer. In general, you can only take distributions of salary deferrals when you leave employment, die, become disabled, reach retirement age (as defined by the plan), or some hardship occurs.

Retirement. When you retire from an employer, you have the choice to keep your account in the employer’s plan or to roll it over to an IRA. In either case, you will be required to start taking at least a minimum distribution each year starting at age 73 (or as late as age 75 depending on your birth year). In any event, your plan provider will provide a process to help arrange for distributions at or before this point. Distributions before age 59½ could be subject to an early withdrawal penalty.

Death. Most non-spouse beneficiaries of a retirement plan are now required to distribute retirement plan balances over no more than ten years. Spouses, minor children, or disabled beneficiaries can take longer to distribute these funds.

Hardship. Most retirement plans allow for hardship withdrawals. A Financial hardship is based on an “immediate and heavy financial need” which can include significant medical expenses, purchase of a principal residence, tuition and other education expenses, payments necessary to avoid eviction, funeral expenses and others. Hardship distributions are not tax-free: you will still owe taxes on these distributions. There are exceptions, but distributions taken before age 59½ could also result in penalties.

This is a brief summary of a complex topic. Talk to a Certified Financial Planner® professional if you have questions about accessing your retirement savings. 

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at Brooks and his family live in Mission Hills.

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