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How can I access partial funds from my 401k plan?

I've separated from my old employer but my 401k is still with them and being managed by Fidelity. I won't be full-time with my current part-time employer until September 2015. I have no intention of retiring anytime soon, I'll be 59-1/2 in August of 2015. My new employers plan (a local PBS affiliate) is a 403b managed by an local agent associated with Nationwide insurance. One option I'm told is I can roll it over to this 403b plan. Should I consider a partial IRA as well? Long story short, I need to access some funds until I have full-time work again. I also have a pension from my old company that I haven't accessed yet. I'm almost at the point of emergency or hardship status. Thank you

Jun 16, 2015 by John in  |  Flag
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Hi John,

Partial distributions are typically not allowed from 401k plans after separation of service (all or none approach). Regardless distributions from 401k plans are typically accompanied by a distribution fee.

Rollover your funds over to an IRA (non-taxable event) and from there just withdraw the amount that you'll need little by little (wait until after august 2015 if at all possible) until hopefully you are back on your feet soon. You are making the right decision in not withdrawing your entire 401k plan.

Hold off on the pension as it may offer a higher payout the longer you wait, you will need those funds once you no longer have a steady income stream (at retirement).

At a later time you can always roll the funds over to your new 403b (check with the plan administrator to make sure they accept IRA money) but for maximum flexibility in both investments and distributions while working i would consider keeping a good chunk in your IRA.

Remember to always do direct trustee to trustee transfer of retirement funds (basically make sure the rollovers are not to your name).

Best of luck!

Carlos

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John,

I would encourage you to sit down with a financial advisor to look at your overall financial situation to help determine what the best option would be for you. In response to your question regarding how to request funds from your 401(k), you can contact Fidelity directly to issue you a check. That said, that may not be your best source of funds, which is why I would encourage you to sit down with someone to look at the overall financial picture.

If you can wait until after you turn 59-1/2 to withdraw from your 401(k), you will at least save yourself the 10% tax penalty. However, if you are eligible for a hardship withdraw, this would not be a concern. You may also want to look at rolling your funds into your 403(b) and taking a loan from that account. I generally try to help clients identify another source of funds, if possible. Consider how much money you need, the tax implications of how you get that money, the cost of borrowing (if you decide to borrow), when the funds are needed and for what purpose, etc.

In response to considering a partial rollover into an IRA, it would be in your best interest to establish a relationship with a financial advisor and it sounds like you do not already have one. If you choose to do a partial rollover into an IRA, this might be an opportunity to establish that relationship. Additionally, you may find that you have more investment options than what are available with your employer plan.

Leah

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Hi John,

Based on what you described you should be able to rollover the entire balance of your 401k plan into a Rollover IRA; given that you have some short term distributions needs, you'd probably want to keep some of those funds in a short term allocation such as a money market fund within the Rollover IRA.

If at all possible wait until after 59 1/2 so you avoid the 10% early withdrawal penalty that is typical of taxable distributions under 59 1/2. Another reason to rollover the funds would be your control over tax withholdings. A 401k or 403b plan administrator is required to withhold 20% for taxes out of any taxable distribution that is paid to you. You may or may not be in the 20% tax bracket and while you would true up/down the withholding at tax time, you'd find that any over withholding refunded to you then may not be able to go back to an IRA/403b plan in the same manner as it came out.

Since you are no longer an active employee in the 401k plan, the hardship provisions typically don't apply; moreover, hardship distributions, which must meet a very rigid IRS definition and are limited by the need & cause, are still subject to an early withdrawal penalty of 10%. The 401k Summary Plan Document (SPD) would provide specificity on the plan options, but the rules can be tricky to say the least. A loan on the old plan would be similar in limitation; since there is no income to pledge the loan against, it too is unlikely to be an option so a rollover may prove the most practical and efficient based on what you described.

Once things settle down for you then you can decide if you wish to maintain the funds in the Rollover IRA, or if rolling the funds into your new company's 403b plan provider (if allowed) makes sense for you. You'd want to explore the options available to you in both cases; typically a 403b, specially one managed through an insurance company, is likely to have higher cost funds and like other 403b plans the choices would be limited to those provided by the plan. In contrast, an IRA can invest in just about anything and thus can be a more efficient vehicle when designing a plan.

You'd also notice that unfortunately when it comes to retirement plans such as 401k/403b you're kind of on your own in terms of figuring things out; there are tons of rules and regulations that often bar the Plan sponsor, administrators and provider from giving you actual financial advice. There are educational tools such as websites, and sometimes even locally held events, but the information is often limited to broad topics such as enrollment and general questions. Therefore you may find that establishing a relationship with a financial planner to be beneficial to you on many fronts.

As this is a time of change, it would make sense for you to explore not only the current issue at hand, but more importantly a longer term roadmap that can give you clarity on the issues you've identified as well as those that you may not yet be thinking about.

The issue of whether or not to take the lump sum option on a pension benefit is a very important choice to evaluate and one you'd definitely want to have a clear understanding of the pros/cons. Until things settle down and until you have time to develop a plan, I'd opt to play it safe and leave the pension alone.

Hope that helps.

My best,

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