Can a Trustee Refuse Your 401(k) Withdrawal?

Navigating an early withdrawal from a 401(k) can be tricky.

Navigating an early withdrawal from a 401(k) can be tricky.

A 401(k) trustee is responsible for collecting your contributions, making sure the plan's investment choices are prudent ones and distributing the money to you or your beneficiaries when that time comes. Young professionals in a financial pinch may be tempted to think that because it's their money, they should be able to raid their nest egg at will. Unfortunately, it's not that simple.

Setting the Rules

An employee must provide proof of an immediate and heavy financial need to be eligible for a 401(k) hardship withdrawal, according to the Internal Revenue Service. The plan sponsor sets the conditions under which you can tap your account, and they are detailed in its summary plan description. If you're considering a request for a hardship withdrawal, review this document first to see if it's even an option. Your 401(k) trustee can refuse a withdrawal request if it doesn't mesh with the plan rules.

Jumping Through Hoops

You can claim a financial hardship when buying a primary home, preventing foreclosure or eviction from a current one, paying for college tuition due within the next 12 months, or paying for unreimbursed medical expenses. However, this process may require you to reveal personal financial details to your employer, which can be awkward. Luckily, some employers are easing the rules to make the hardship withdrawal process less stressful. Rather than documenting proof of your hardship to your employer, you may be able to self-certify it.

Paying the Price

Taking a 401(k) hardship withdrawal is generally not a good idea. Contributions are tax-deferred to give you an incentive to prepare for retirement. Because the federal government was concerned workers wouldn't be able to resist accessing the money, it built penalties into the rules to discourage that. In most all cases, you'll be taxed on the withdrawal at your ordinary income tax rate and the IRS will also hit you with a 10 percent early withdrawal penalty. Once you take a hardship withdrawal, you can't put the money back into your account. You will lose the tax advantages those funds had.

Taking a Loan

While the government has made its displeasure with hardship withdrawals clear, it takes a less severe stance on borrowing from a 401(k). A loan isn't subject to taxes or penalties, and you can contribute to the plan while you repay it. The interest you'll pay is essentially interest to yourself. Still, if you're thinking about borrowing from your 401(k), make sure you're happy with your employer and your boss is happy with you. If you bail for a better job opportunity or your employer decides to boot you, you'll generally be required to repay the loan balance within 60 days. Otherwise, it will be hit with taxes and the early withdrawal penalty.

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About the Author

Mike Gonyea served as an account manager and strategic planner at a Detroit advertising agency for 20 years. He has covered automotive finance, state and local government and interfaith issues for publications and websites including “The Detroit News,” American Thinker and A Common Word.

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