The basic features of a 401(k) are pretty well known. They’re usually set up through an employer, you contribute pre-tax dollars, sometimes the employer matches what you put in, and you can't touch the money until retirement. But there are limitations to how and when you can get your money out early. Your company can even refuse to give you your 401(k) before retirement if you need it.
The IRS sets penalties for early withdrawals of money in a 401(k) account. Depending on the situation, these penalties may be a small price to pay in the face of an emergency.
A company can refuse to give you your 401(k) if it goes against their summary plan description. If the plan states early distributions and 401(k) loans are prohibited there may be little you can do to overturn their decision.
Knowing how and when an employer can refuse to give you your 401(k) money early can help decide if investing in one is worth it for you.
Vesting Status May Limit Some of Your 401(k)
When you begin working for a company, one of the benefits they may feature is a company 401(k) match. The employer commits to match a certain percentage of the amount you put into your 401(k).
Some employees require a waiting period before employees can participate in their 401(k) program. Additionally, they may have a period until you're considered fully vested.
Being vested means the money your employer has contributed to your 401(k) becomes yours. Until then, the money sits in your 401(k) and grows, but it's technically not yours yet.
Companies do this to prevent employees from working for a company for a short time, collect their employee matches, and quit.
Should you quit your job or get fired before you're vested, you may forfeit the amount of money your employer contributed to your 401(k). If they refuse to give you your 401(k) matches before you’re vested, there isn't much you can do.
You'll still have access to the money you contributed, along with its growth. You'll just miss out on the money your employer put in.
Your Company May Not Allow 401(k) Loans
Meeting the criteria to withdraw money from your 401(k) due to hardship can be difficult. Proving you need the money for an emergency, and you don't have the fund elsewhere can be cumbersome.
A 401(k) loan is another option to gain access to your 401(k) funds.
You'll be required to repay every dollar, plus interest (which goes into your account as well), usually within five years. Your 401(k) administrator will set the interest rate and terms of the loan.
However, if you leave your job, you will likely have to pay the remaining balance in full within 60 days.
Many employers do not allow 401(k) participants to take out 401(k) loans because of their guidelines.
Employers are not required to provide loans against their 401(k) plans. It’s a company-by-company decision whether to allow their employees to borrow against their 401(K)s.
If you're unable to prove hardship and your employer refuses to give you a 401(k) loan, there isn't much else you can do to withdraw your 401(k) money.
Your 401(k) Account May Be Frozen
The IRS sets the basic guidelines on 401(k)s, but employers can set further limitations with their plans.
One of the powers 401(k) administrators have is placing “freezes” on the 401(k) plans they manage.
An employer can freeze your 401(k) for many reasons. Pending litigations against the plan, company mergers, or changes in who manages the 401(k) plans can all cause your 401(k) to be frozen. Legally, your plan's administrator must provide a 30-day notice beforehand to give participants enough time to make arrangements.
You will be unable to contribute new funds and will be unable to withdraw any funds. However, if you are already receiving required minimum distributions, you are required to receive them. If you are not, document your requests for them to avoid any IRS penalties.
Limited Access to Your 401(k) After You Leave
Although your former employer cannot refuse to give you your 401(k) funds without just cause after you leave, you can find yourself unable to access them.
As mentioned before, if you have an outstanding 401(k) loan when you leave your job, you may be required to pay back the full balance of the loan within 60 days.
Employers can refuse access to your 401(k) until you repay your 401(k) loan.
Additionally, if there are any other lingering financial discrepancies between you and your former employer, they may put on your 401(k) hold.
What Options Do You Have?
Rollover to an IRA
If you no longer feel like your employer-sponsored 401(k) plan fits your needs, you have options.
An IRA is an excellent alternative to rollover your 401(k) funds. An IRA is another type of retirement account that is managed outside of your employer's plan.
You'll still be subject to many of the same withdraw penalties and rules that the IRS sets for 401(k)s; however, if your employer refuses to give you your 401(k) funds, it could be a great option.
Plus, consolidating your 401(k)s into one convenient account allows for better management of your various retirement accounts.
Check Your 401(k) Balance
Before looking at withdrawing money from your 401(k), check your 401(k) balance. The IRS limits 401(k) loans to the lesser of 50% of your balance or $50,000.
If what you need your 401(k) loan for is larger than the limit, then consider another option to get the money.
It will save you from having to reach out to your 401(k) plan's administrator. Also, you're more likely to get more favorable loan terms from a bank or credit union.
Check Vesting Status Before You Quit
If you've been with your company for a couple of years now and participated in their 401(k) plan, your balance is probably pretty sizable.
Moreover, the amount your employer has matched is probably pretty significant as well.
You'll surrender all of the money your employer has matched over the past couple of years if you leave your job before you're fully vested.
By checking your vesting status, you can determine how much longer you need to stay to keep their contributions.
Then you can adequately decide if leaving that money is worth sticking it out a little longer.
Before You Sign Up for a 401(k) Plan
It's an exciting time when you begin a new job—new co-workers, possibly a higher salary, and a new office. Aside from learning your new job, you need to set up health insurance and tax information.
One item that must be on your to-do list is understanding your new employer's 401(k) plan.
Understand what circ*mstances they can refuse to give you your 401(k) funds, the terms of their 401(k) loans, and when and if you can rollover your 401(k) to another account.
Knowing how their 401(k) plan works, you can weigh the benefits and drawbacks before signing up.
