Getting Money Out of Your 401(k)
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- How do I get distributions from my account?
A 401(k) is a long-range retirement plan. There are two ways to get money out of your account – distributions paid at retirement, or under specific circumstances, by withdrawing your money before retirement.
- When must distributions begin – and how long will I receive them?
According to IRS regulations, you are required to begin receiving distributions no later than April 1st following the year you reach age 70½ (unless you are still working for the company or are a 5% owner).
Once you begin receiving required distributions, you must continue to receive them until your account value is depleted or until your death.
- How are distributions paid?
There are multiple options generally available from which to choose, for the distribution of your assets from your 401(k) account:
• Automatic withdrawal
• Annuity payout options
• Lump sum withdrawalContact your plan administrator or check your Summary Plan Description about the availability, or for more information about these options.
- What circumstances permit withdrawal of money from my account?
The IRS permits withdrawal of elective contributions, vested employer contributions and earnings for the following reasons. Some plans may have additional withdrawal limitations. Check your Summary Plan Description.
• Normal retirement age
• Attainment of age 59 ½
• Separation from service with your employer
• Total and permanent disability
• Upon your death, distributions will be made to your beneficiaries
• Qualified domestic relations order (divorce payments to ex-spouse or children), commonly referred to as a QDRO
• Financial hardship (some restrictions)If money is withdrawn for one of the above reasons, income taxes must be paid, unless the distribution is rolled to an IRA or another employer’s plan. In addition, the account may have withdrawal or surrender charges.Also, for withdrawals made before age 59 ½, the IRS may impose a 10% tax penalty.Financial hardship withdrawals will have additional restrictions following the withdrawal – including suspension of your ongoing salary deferral contributions and/or limitations on your contributions.
- What is vesting?
Vesting is the right an employee gradually acquires by length of service at a company to receive employer-contributed benefits. Your plan may apply a vesting schedule to employer contributions. You are always vested in your elective contributions. Check your Summary Plan Description for more detailed information.
- What if I change jobs?
If you remain eligible for a 401(k) plan when you change employers you have several options.
• If your vested account balance is $5,000 or more, leave your assets in the 401(k) plan. You will be able to transfer funds within your account, but cannot make additional contributions.
• Roll your account value directly into another eligible retirement plan.
• Take a lump sum distribution (see above). To avoid taxes, you should roll the lump sum distribution into an IRA.
- May I take out a loan?
Check with your plan administrator or Summary Plan Description to see if loans are available for your plan.
If the loan option is available, there are maximum dollar amount restrictions – generally 50% of the contract value, not to exceed $50,000.
The maximum loan is reduced by the highest outstanding loan balance in the previous 12 months.
A loan must be repaid in five years unless it is being used to purchase your principal residence, in which case it may be repaid over a longer term. If your loan defaults, it will be reported as taxable income.
- What happens to my account if I die?
If you die before electing a payment option and your named beneficiary is your spouse, he/she may choose any form of distribution that was available to you. Your spouse would also have the option of a roll over to another eligible retirement plan. Your spouse may choose to leave the accumulated assets in the contract/program or may choose distributions over his/her life expectancy.
A named beneficiary who is not your spouse has two options:
• Choose to receive a lump sum distribution, payable within 5 years
• Choose, within one year of your death, to receive a set periodic payment, the amount of which is based upon that beneficiary’s life expectancyIf you elected to receive a payment option based upon your lifetime, and die after you have started to receive these payments, then your beneficiary can receive payments over his/her remaining life expectancy. The beneficiary may also choose to take the entire remaining interest at any time during the payout period, but this would result in the beneficiary paying income taxes at this time.
