When your 401(k) plan fully vests, it means that if you leave the company, you get to keep all of the money in your 401(k) plan, including your employer's contributions on your behalf. However, it does not necessarily mean that you are able to access your 401(k) account at any time.
The IRS only requires that plans permit you to take your money out of your 401(k) plan after you leave employment, suffer a permanent disability, turn 59 1/2 or the plan is terminated. For example, if you are fully vested in your 401(k) plan when you turn 50, unless you leave your job, suffer a permanent disability or the company terminates the plan, you can't take money out of your 401(k) plan, unless the company has rules that allow it.
Your 401(k) plan might also permit hardship distributions, which allow you to take distributions to cover the costs of any immediate and heavy financial burden that you couldn't cover with other costs. The permitted withdrawals vary by plan and may include costs to avoid foreclosure, funeral expenses or college tuition. Your employer may permit your hardship distribution amount to include vested amounts. However, 401(k) plans do not have to permit any hardship withdrawals, even if you are fully vested.
Even if you are vested, taking early distributions from a 401(k) likely will mean you have to pay the additional penalty tax. The penalty equals 10 percent of the taxable portion of the distribution for any distributions taken before you reach age 59 1/2. For example, if you take a hardship distribution of $6,000, you'll usually owe a $600 tax penalty in addition to the deferred income taxes you must pay. However, exceptions to the penalty do exist and include distributions taken because of a permanent disability, if you retired after turning 55 years old or for a qualified domestic relations order.
When you become vested in your 401(k) plan, you may be able to borrow more money from it in the form of a 401(k) plan loan if your company allows it. The maximum amount you can borrow equals the smaller of $50,000 or half your vested account balance. For example, if you have a vested account balance of only $70,000, you could only borrow $35,000. However, if you become vested in the $30,000 of employer contributions, thereby boosting your vested balance to $100,000, you could borrow an additional $15,000.
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