Need to Tap 401(k) Funds? Know the Rules.

While clients should always be advised to tap non-retirement funds to cover costs before looking at retirement dollars, sometimes the need to access retirement funds does arise. Clients should know that it can be tough to reach 401(k) funds before age 59 1/2 without a qualifying reason. Individuals can withdraw all of their 401(k) funds when they leave employment--even if they aren't yet age 59 1/2. Before age 59 1/2, plans can permit in-service withdrawal of pre-tax contributions and Roth elective deferrals only for qualifying hardships or Congress-blessed reasons (i.e., to pay for long-term care insurance or in cases involving natural disasters or domestic violence). Post SECURE Acts, plans are even permitted to allow up to $1,000 in annual withdrawals to cover emergencies. Most plans elect to similarly restrict withdrawal of employer matching contributions, although plans are legally permitted to impose more flexible rules (i.e., allowing access if you've participated in the plan for at least five years or after the match has been deposited for at least a year). Plans are permitted to impose less restrictive withdrawal rules for after-tax, non-Roth contributions or for amounts rolled over from another plan. In all cases, it's important that clients understand that the plan terms will govern--and the funds will be taxable even if a penalty-exception applies. For more information on the rules governing 401(k) hardship withdrawals, visit Tax Facts Online. Read More: Link to Q3798.