Each Wednesday 401kBasics posts a new article in a weekly series called “Keep the Course”. This series is designed to give the average consumer information on how to keep their 401k plan on track! Your feedback or suggestions on future articles is welcome.
Often times, people invest money in their 401k plan without fully understanding the way the plan works or the withdrawal restrictions associated with it. A 401k plans allow you to save up on a pre tax basis, and the taxation on the earnings are also tax deferred until withdrawn. In exchange for this benefit, it is extremely difficult to withdraw money once it’s invested in the plan.
While you’re still actively employed, in order to be eligible for a withdrawal, you need to have what is called a “distributable event”. For your own elective deferrals these, per IRS regulations, are as follows:
- The plan terminates and no successor defined contribution plan is established or maintained by the employer
- You reach age 59½ or incur a financial hardship
These distributable events are the ones an employer can elect to include in their plan regulations, but are not required to include them. The distributable events for the employer match or employer profit sharing contributions may be a little more lenient. To fully understand if/when you can withdraw from your 401k plan, ask your plan sponsor (employer) for a Summary Plan Description. This is a booklet that is written in plain English and has the details of your retirement plan.
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