Retirement savers may not always be limited to the investments offered by their 401(k) plan.
Workplace plans that allow in-service, non-hardship withdrawals give participants an opportunity to move funds directly into an individual retirement account (IRA) or other qualified plan to pursue additional investment choices.
Many 401(k) plans offer in-service hardship withdrawals that allow participants to withdraw funds if they provide proof of financial hardship. Generally, withdrawals must be used to pay qualified expenses such as medical or educational costs, or to purchase a primary residence.
In-service, non-hardship 401(k) withdrawals are less common. Proving a hardship is not necessary, and participants may take advantage of this provision at age 59½, or when they have met other requirements specific to the plan. With this option, funds may be rolled over directly into an IRA or other retirement plan without penalty.
Before making a withdrawal, there are some tax considerations:
Check state laws regarding asset protection. Federal bankruptcy laws protect IRA assets rolled over from a qualified retirement plan from creditor claims. Federal law protects 401(k) assets from creditor claims outside of bankruptcy as well in nearly all instances, but state laws vary, and assets may not be fully protected.
Explore all benefits of the 401(k) plan. A 401(k) plan may offer benefits that are beneficial but unavailable through an IRA, such as the ability to take a loan.
Consult a tax professional. If the plan holds highly appreciated employer stock, partial distributions may jeopardize tax benefits related to the stock. To learn more about taxes and net unrealized appreciation of stock, read Putnam’s investor education article, “Understanding the NUA rule.”
An in-service, non-hardship distribution may make sense if:
- The retirement plan offers limited investment choices
- You are age 59½ or older
- The retirement plan does not offer access to professional investment advice
- You may benefit from investing IRA assets in a vehicle that may provide lifetime retirement income (which many retirement plans do not offer)
- The IRA offers more flexibility around designating beneficiaries and taking advantage of “stretch IRA” distributions
- You want to consolidate retirement assets within a Rollover IRA
- You are interested in converting retirement assets to a Roth IRA (assuming that Roth conversions are not allowed within the plan)
If an investor does not know if his or her plan has a provision for in-service, non-hardship withdrawals, he or she could request a copy of the plan’s Summary Plan Description, or, a quick check of the year-end statement may have the answer. If the plan allows these withdrawals, there may be a separate column that indicates the dollar amount of funds available for withdrawal.
Rules governing 401(k) plans vary greatly. It is important to work with a financial representative or tax advisor to determine if making the withdrawal makes sense. For more detailed information, read Putnam’s investor education article on non-hardship withdrawals.