What are the 401k distribution rules?


401k funds can be distributed either in a lump sum, or on a periodic basis, such as in regular installment payments. 401k elective deferrals are subject to very strict distribution rules.

401k Distribution Triggering Events

One of the following triggering events must take place in order for distributions to be made:

  • The worker attains age 59.5 or is in a state of financial hardship as defined by the plan;
  • The worker reaches retirement age;
  • The worker becomes disabled;
  • The worker dies;
  • The worker leaves the job.

Note that under a 401k plan, employees might be allowed to make in-service withdrawals without having experienced a triggering event. However, depending on the terms and conditions of the plan, in-service withdrawals might be allowed only when the participants experience financial hardship, such as having to pay medical expenses, buying a home and paying for their children's college.

Other 401k Distribution Rules

  • If an employee's 401k balance exceeds $5,000, their consent is required before a distribution is made. Under some 401k plan terms, the participant's spouse's consent might be required for distributions to be made. Rollovers from other plans might or might not be included in the $5,000 restriction amount.
  • The money must be transferred to an employee's IRA, if a distribution exceeding $1,000 is made and the employee (or their beneficiary) has not selected to directly receive the distribution or transfer it to a retirement plan.

401k Required Minimum Distributions

Under current income tax law, every participant in 401k has to start receiving minimum distribution amounts either in the calendar year in which they attain age 70.5, or in the year when they retire. Each participant's required minimum distribution (RMD) is determined by the respective plan administrator. Failing to take your RMDs can result in you paying a 50 percent excess-accumulation penalty on the non-distributed amount.

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