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Charles Curtin: In-service-withdrawals from 401(k) plans

It's Your Money

Posted: September 22, 2010 7:36 p.m.
Updated: September 23, 2010 4:55 a.m.

You’re probably familiar with the rules for putting money into a 401(k) plan.   But are you familiar with the rules for taking your money out?

All 401(k) plans different
Federal law specifies the withdrawal options that 401(k) plan can offer.  But your plan can be stricter than the law allows (i.e. offer fewer withdrawal options), and may even provide that you can’t take any money out until you reach normal retirement age (usually 65).  However, many plans are more flexible.

Withdrawing your own contributions
If your plan allows, you can withdraw your own pretax and Roth contributions (and in some cases, any investment earning on them) for one of the following reasons:
- You terminate employment
- You attain age 59 ½
- You become disabled
- You incur a hardship

Withdrawing employer contributions
Getting employer dollars out of a 401(k) plan can be even more challenging.  Many plans won’t let you withdraw employer contributions at all before you terminate employment. But some plans are more flexible and let you withdraw at least some vested employer contributions before then. “Vested” means that you own the contributions, and they can’t be forfeited for any reason.  In general, a 401(k) plan can let you withdraw vested matching or profit-sharing contributions if:
- You become disabled
- You incur a hardship
- You attain a specified age
- You participate in the plan for at least five years, or
- The employer contribution has been in the account for minimum of two years

Your own pretax contributions, company contributions and investment earning are taxable when withdrawn from the plan. 
If you’ve made any after-tax contributions, they’ll be nontaxable when withdrawn.  Each withdrawal is deemed to carry out a pro-rata portion of taxable and nontaxable dollars. Any Roth contributions, and investment earnings on them, are treated separately: if your distribution is qualified, then your withdrawal will be entirely free from federal income taxes. If your withdrawal is nonqualified, then each withdrawal will be deemed to carry out a pro-rata amount of your nontaxable Roth contributions and taxable investment earnings. And keep in mind that taxable distributions made prior to age 59 ½ are generally subject to a 10-percent premature distribution tax in addition to any income tax due, unless an exception applies.

Be informed    
You should become familiar with the terms of your employer’s 401(k) plan to understand your particular withdrawal rights. A good place to start is the plan’s summary plan descriptions (SPD).  Your employer will give you a copy of the SOD within 90 days after you join the plan.

Article courtesy of SagePoint Financial, Inc. Charles Curtin is a SagePoint financial advisor with over 19 years of financial & insurance services industry and specializes in retirement and estate planning. He can be reached at (661) 678-3342.  His views represents his own views and not necessarily those of The Signal. “It’s Your Money” appears Thursdays and rotates between a handful of the valley’s financial professionals.


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