So maybe you’ve been storing up money in your 401(k) plan for years, possibly even decades. Or maybe you’ve just started paying into your 401(k), and have a little bit of money in your account. You suddenly find yourself in a situation where you need money… and you need it now. What do you do?
Some of you may investigate getting a loan, while others of you turn your thoughts toward your 401(k) account. For those of you thinking about tapping into your 401(k) account, did you know that the IRS has rules that prevent you from taking distributions from your account? The following conditions would have to occur before you can tap into these funds:
- Loss of your job
- Being 59-1/2 years of age
401(k) Plan Sponsor Options
One thing you should be aware of is that your plan sponsor can add additional distribution options for their plan participants. One example of this would be that your plan sponsor may allow you to take a loan from your 401(k) plan account, but your plan sponsor is not required to allow this. If they do allow it, the maximum loan amount available is $50,000 or one-half of your vested account balance. The loan must be repaid within five years and the loan payments must be made through payroll deduction. The interest rate is fixed and for most plans, the interest rate is the prime rate plus 1 percent.
401(k) Distribution Based on Financial Hardship
Some plans allow participants to take a distribution because of a financial hardship. The financial hardship rules require that you have one of the following events in order to qualify for this type of distribution:
- Medical expenses for you, or your spouse, children or dependents
- The purchase (excluding mortgage payments) of your primary residence
- Payment of tuition and related educational fees for the next 12 months of college education for you or your spouse, children or dependents
- The need to prevent the eviction of you from your principal residence
- Payments for burial or funeral expenses for your deceased parent, spouse, children or dependents
- Expenses for the repair of damage to your principal residence
The amount of money you would take based on hardship can’t be more than the amount necessary to satisfy the need, and you must provide documentation of your financial hardship. If your plan allows loans and hardship distributions, you must first take a loan before you are eligible to take a hardship distribution. The hardship distribution is subject to state and federal taxes. It is also subject to the 10 percent early withdrawal penalty if you are under age 59-1/2. Hardship distributions are not able to be rolled over to an Individual Retirement Account (IRA).
401(k) Distribution Help
Between 401(k) and IRA plans, it can be difficult to understand the rules for each kind of account. And it can be overwhelming at times. So don’t go it alone; contact Rea & Associates. Our Ohio Retirement Plan Services team can help you determine whether you are eligible for a distribution, and how you can go about starting one.