How do I request a 401(k) distribution?

How do I request a 401(k) distribution?


If you’re currently saving for your retirement in a 401(k) plan—congratulations! You’ve made a smart financial decision to help you get closer to being retirement ready when the time comes. Even if you’re not planning on touching the money in your 401(k) account until the day you retire, life has a funny way of shaking up plans.

Unfortunately, too few savers are aware that there are rules, penalties, and potential tax implications for taking money out of their 401(k) plan before they reach retirement age. A distribution from your 401(k) can come in many shapes and forms—so it’s important that you understand what your options are if you need to access those funds.

Let’s start with the basics.

What is a 401(k) distribution?

Simply put, a 401(k) distribution is a withdrawal of funds from your 401(k) account. However, nothing is ever quite that cut and dry; options for taking a distribution vary greatly depending on your specific 401(k) plan’s plan document, in addition to other factors like your current employment status and types of contributions in the account (pre-tax, post-tax, fully vested, etc.).

Your plan document dictates when and why you can request a distribution, but most plans will allow a distribution for any of the following reasons:

  • Your employment is terminated

  • Your employer dissolves your 401(k) plan

  • You become disabled

  • You pass away (funds would be distributed to your selected beneficiary)

Perhaps the most common reason to take a distribution from your 401(k) is when you change jobs and move into the new job’s retirement plan, but if you’re thinking that changing jobs is the perfect excuse to tap into your retirement savings to help fund current expenses, think again.

You receive immediate tax benefits by saving in a 401(k) plan, and because of that, you’re expected to leave that money alone to grow until you reach an age that would be suitable to retire; most plans have a normal retirement age of 65. And if you haven’t reached age 59 ½ but take a distribution from your 401(k) anyway, you’ll be hit with some pretty serious penalties. For starters, if any portion of your distribution could be rolled over (into a new employer’s 401(k) plan, for example) and you choose not to make a direct rollover, the plan is required by law to withhold 20 percent of the taxable amount.

So, if you’re 30 years old, are in the process of changing jobs (and by extension, 401(k) plans), and decide to keep $15,000 of your 401(k) savings for yourself to put a down payment on your new house instead of rolling it into your new employer’s plan, you’re essentially giving up $3,000 of your hard-earned savings right off the bat because of that 20 percent deduction.

On top of that, if you’re under the age of 59 ½, you’ll be hit with an additional 10 percent early withdrawal penalty on any distributions you take when you file your taxes for the year. Using the same scenario as above, you can now kiss an extra $1,500 of those savings goodbye at tax time, meaning you’re paying a grand total of $4,500 in taxes and penalties on that $15,000 distribution. Clearly, these penalties are no joke—so keep that in mind if you’re considering keeping some of your 401(k) savings for yourself rather than rolling them over to a new qualified plan.

If you made after-tax Roth contributions instead of pre-tax 401(k) contributions, the tax rules would also apply to the earnings on the Roth contributions.

You might also be interested in: What happens when you make an early 401(k) withdrawal?

As we mentioned before, not all distribution options will be available for every 401(k) plan. Your options for taking a distribution will vary based on what’s outlined in your specific 401(k)’s plan document. Depending on what your plan document says, you may be able to request one of the following distributions:

Types of 401(k) distributions

  • Separation of Employment

Perhaps the most common distribution request, Separation of Employment distributions occur when—you guessed it—the employee separates their employment with the company. You may qualify for this distribution for a variety of reasons, including reaching retirement, changing jobs, becoming disabled, or passing away. It’s important to note that this distribution type only applies to employees who have a vested balance, and only the vested balance is available for distribution.

  • Hardship Withdrawal

Hardship Withdrawal distribution options are only available if the plan document allows for them, and you must meet certain criteria to even qualify for a Hardship Withdrawal. Hardships are limited to expenses covering medical care, home purchase, tuition, prevention of eviction, funerals, and casualty loss. If you plan to take a Hardship Withdrawal, you must also be able to provide proof of financial hardship as outlined by the IRS.

  • In-Service Distribution

In-Service Distributions are only available to active employees who meet the age required for withdrawal according to the plan document. In many cases, this age is 59 ½— but be sure to check your 401(k)’s plan document prior to requesting an In-Service Distribution to know what the age requirements for your specific plan are.

  • Required Minimum Distribution

Required Minimum Distributions (RMD) are a little bit different than the other distribution options listed above—in part because they are required, as the name suggests. Unless you’re still employed, you must begin taking distributions from your 401(k) account once you reach age 70 ½. And in some instances, people who reach that age may still need to take their RMD even if they’re still working.

The amount of your RMD is specific to you, calculated based on average life expectancy and the balance of your 401(k) account at the end of the prior year. And while this should come as no surprise, it’s worth mentioning: if you fail to take your RMD as outlined by the IRS, you’ll be penalized. You may be taxed up to 50 percent on the amount that wasn’t taken but should have been.

Read more: Trump executive order asks DOL to raise age for Required Minimum Distributions

Requesting a 401(k) distribution from PAi

Distribution Request Process

While we don’t recommend withdrawing from your 401(k) or otherwise taking a distribution from your retirement account due to the penalties, potential tax implications, and overall decrease in your retirement readiness, we understand that life happens and there are certain circumstances where it may be necessary for you to access your 401(k) funds before reaching retirement age.

You can request a distribution from PAi in a few different ways, but we recommend starting by asking your employer for the Distribution Request Form found on their dedicated employer site under Documents > Administrative Forms. You can also call PAi to get the Distribution Request Form, but since your employer is required to fill out Section A and B of the form, it’s often easiest to request the form from your employer and have them fill out the required sections before you fill in your own information.

Once you’ve completed the form, you can either send it by physical mail to PAi at P.O. Box 60, De Pere, WI 54115 or by fax to 920.337.9978. If you must use email to send the form, it’s important to send the form using a secure service for your own financial protection.

Distribution Options

Before requesting a distribution from PAi, check in with your 401(k) plan’s Summary Plan Description to see which types of distributions your specific plan allows for by navigating to your individual site, logging in, and going to Documents > Plan Documents. Depending on what type of distributions are allowed, you may have a few options for how you’ll receive the distributed funds from PAi:

  • Cash

If you choose a cash distribution, a check made payable to you will be generated and sent to you within 15 days, in addition to mailing time. If you choose this option, remember that PAi is required by law to withhold 20 percent of the withdrawal for federal income taxes—unless the distribution is for Hardship—in addition to any applicable state tax at the time of the distribution.

  • Direct Rollover

If you choose a direct rollover distribution, the entire balance of your 401(k) account will be rolled over to the new qualified plan. A check will be mailed to you (unless specified otherwise) and must be deposited by Trustee or Custodian you designated on your Distribution Request Form.

  • Convert Pre-Tax to Roth Rollover

This distribution option allows you to roll the entire pre-tax account balance over to a Roth (after-tax) account. The taxable amount paid from the non-Roth account during the rollover needs to be reported on the IRS Form 1099-R as taxable income, so be sure to talk to your tax advisor prior to choosing this distribution option to discuss potential tax implications.

  • Cash & Direct Rollover

A Cash & Direct Rollover allows you to keep a portion of your 401(k) balance for yourself, while rolling the remaining balance over to a new qualified plan. If you choose this option, a 20 percent federal income tax will be withheld on the funds that are not rolled over, in addition to any applicable state tax on the gross amount provided. A check in the net amount—minus the applicable fee, as outlined below—will be generated and mailed to you within 15 business days plus mailing time. The funds that you wish to rollover to the new qualified plan will again be mailed to you and will need to be deposited by the Trustee or Custodian you designate on your Distribution Request Form.

  • Transfer In-Kind

Transfer In-Kind distributions occur when the entire balance of the account is transferred in-kind to the Trustee of Custodian of the account, while the assets remain invested and are not sold or liquidated.

Keep in mind, not all retirement plans accept a rollover of in-kind assets, and PAi has specific regulations for Transfer In-Kind distributions on plans that do allow for them. The account must be 100 percent vested and a minimum of $25,000 in assets must be distributed. Additionally, the new account must have identical funds and share classes.

Fees

If you decide to request a 401(k) distribution from PAi, you’ll want to be aware of any applicable fees that may be charged to your account for the distribution. A $75 fee will be assessed for any separation of employment distributions, hardship withdrawals, and in-service distributions.

Expected Timeline for receiving 401(k) distributions from PAi

When you request a distribution from PAi, please understand that it may take up to 15 business days to process the distribution, in addition to mail time. However, as is often the case with certain distributions, like hardship withdrawal requests, funds are needed as soon as possible. If you need to accelerate the process, you can pay a $35 fee to have your check expedited after processing. Once processing is complete, your check will arrive in 1-2 business days.

Any additional questions about the potential tax implications of taking a distribution from your 401(k) account should be directed to your financial advisor or a trusted tax professional. If you have questions about PAi’s distributions process or what options you have as allowed by your plan document, we’re happy to help. Give us a call: 800.236.7400, Option 4.