401k Withdrawal

"In Service" 401k Withdrawals—a little known liquidity option

By law, you can not take 401k withdrawals, that is, pre-tax salary deferrals, before severance, plan termination, turning 59 1/2, death, disability or hardship (and you can’t roll over hardship withdrawals). However, there are ways to get money out of your 401k plan prior to retirment -- through loans and hardship withdrawals. Additionally, if the plan permits, through non-hardship "in service" 401k withdrawals.

If permitted by your company-sponsored retirement plan, in-service, non-hardship 401k withdrawals can give you pre-retirement access to your retirement assets. With an in-service, 401k withdrawal, you can request a distribution from your retirement account while you are still employed. However, not all company-sponsored etirement plans offer these in-service 401k withdrawals.

This type of withdrawal is treated as ordinary income and will trigger a tax liability. In addition, if you’re under age 591/2, you could be subject to a 10% early withdrawal penalty. However, by taking the 401k withdrawal as a 401k rollover, for example into an IRA, you continue to benefit from tax-deferred growth without an immediate tax liability or penalty. You CAN rollover (or otherwise withdraw) employer contributions, or employee (after-tax or rollover) contributions. And you can do so without any required taxes or penalties.

Why would individiuals want to make a 401k withdrawal prior to retirement?

More flexibile investment choices that may not be offered in your 401k plan
Diversify Concentrated Positions: Some plans have limited investment options.
Others specify that certain contributions must be invested in company stock (e.g., employer matching contributions) and you may have accumulated too much in one asset for prudent diversification
Asset Consolidation: IRA rollovers can be used to help you consolidate your retirement assets. It then becomes easier to develop a comprehensive retirement income strategy, monitor performance, rebalance as needed, and calculate required minimum distributions.
To simplify estate planning
Professional Guidance: You may choose to have your retirement plan assets managed by a professional and need to make a 401k withdrawal to make that possible.