Can You Be Refused to Withdraw From Your 401(k)?

A 401(k) is a retirement plan, and as such it comes with certain rules that owners of the account and employers must follow. While it is possible to access 401(k) funds under certain circumstances, the IRS has very specific restrictions, and the companies sponsoring these plans may add rules that put additional limits on what you can do with the money.

Basics

The IRS mandates that you leave your money in your 401(k) until you reach the minimum retirement age of 59 1/2, become permanently disabled, have a specific financial hardship, the plan dissolves or you leave your job. If you meet any of these conditions, you may be able to take funds from your 401(k), but the amount may be limited and in some cases you can still be refused. It’s also important to be aware that you may or may not be eligible for any additional funds that the company has contributed to your account, depending on the details of your plan and how long you have participated in it.

Withholding

If you do not meet age or hardship requirements, funds withdrawn from a 401(k) plan are typically subject to both income tax and penalty withholding. The amount held back for taxes is 20 percent of the withdrawal amount. You may also be subject to having an additional 10 percent held back to cover the cost of IRS penalties on early withdrawals, though in some cases this may not apply. Note that 401(k) withdrawal amounts are added to your total income for the year, possibly resulting in a tax liability that exceeds the amount of the withholding.

Retirement

Once you have reached retirement age, you may begin to withdraw funds from your 401(k) without incurring any penalties. At this point your employer or fund manager cannot refuse to give you the money in your fund, either as a lump sum distribution or as equal periodic payments. Be aware that you are liable for income taxes on this money, and if you are still working it may be better to wait to take money from your 401(k) until after you retire, to avoid ending up in a higher tax bracket.

Hardship

The IRS allows you to withdraw money from your 401(k) without penalty for any of a number of different hardship situations. Hardships include medical bills, funeral expenses, college expenses or health insurance premiums if you are out of work. You can also take up to $10,000 for the purchase of your first home. Check your 401(k) documents carefully, since even though the IRS allows such withdrawals without penalty, not all plans will let you take money from your plan for hardships.

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