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Can my employer refuse to pay out their contributions to my retirement plan even if I am fully vested in it?

I am terminating my current employment. I am also planning to cash out my retirement plan. I am fully aware of the reasons why I should not do this but I have thought long and hard about it and it really is what's best for me. But my employer is saying that I am only able to cash out the portion of the account that I contributed and that the contributions from them can not be cashed out until retirement age. Can they do that if I am fully vested?

Jul 01, 2015 by Stacy in  |  Flag
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Frank Reilly Level 20

To answer the question specifically, ‘vesting’ is a term used to describe when an employee is entitled unconditionally to keep the money in a retirement plan. Therefore, you maintain control over any vested amount and your employer cannot withhold those funds from you. You may of course want to double check the vesting schedule to be sure you are in fact vested. There are two types of vesting schedules – the graduated method and cliff method. Your specific vesting schedule should be detailed in your employment agreement.

Of course there are other concerns in your scenario. Taking early distributions from your retirement plan can results in tax penalties, income taxes, and the opportunity cost on those tax-deferred assets can be significant. We rarely, if ever, advise a client to take an early distribution, but as you have already recognized every person's circumstances are different.

Here at RFA, we are currently offering a free 401(k) tuneup for anyone who has more questions about their own. We will take a look, analyze, and give some direct recommendations on your 401(k) because we believe it is crucial to understand the in's and out's of such a complicated plan. Just give us a call at (800) 682-3237 or email info@rfawealth.com and we are more than happy to help you out.

Comment   |  Flag   |  Jul 10, 2015 from La Mesa, CA

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Stacy... Based on what you are telling me and the way I am understanding it the answer is NO they cannot just distribute the amount you put in and leave the vested company contribution balance in the plan. But before you go at them get a copy of the plan SPD and review the section about distributions and remember every plan is a bit different.

Will Orr 281-583-2277

View all 4 Comments   |  Flag   |  Jul 01, 2015 from Conroe, TX
Michael Baker

Stacy, that looks right to me. I'd encourage you to establish an IRA of your own and roll the assets into that account. You want to control the assets and an IRA will give you that ability. If you're looking for guidance on how to invest those assets, an advisor would be able to help with this.

Flag |  Jul 02, 2015
Jorge A. Romero, CFP®

Sounds like you fall under Section B; accordingly it seems that while you can take the employee funds out (you're vested), that the company contributions would be deferred until retirement which matches what you were told. The company portion doesn't go into an IRA per se; it stays within the plan as a future liability (like a pension). This doesn't sound like a 401k type plan; perhaps more like a Money Purchase Plan.

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Flag |  Jul 02, 2015

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Stacy While your decision to 'cash out' your 401k is not in your best interest. You can roll over the 401k to an IRA and then cash out. There is nothing your former employer can do about this.

Before you do this consult with a fiduciary adviser. They will help you protect your future self from your current self.


1 Comment   |  Flag   |  Jul 06, 2015 from Green Bay, WI
Eric Simonds CFP®

In all fairness you do not KNOW that cashing out the retirement account is not is Stacy's best interest. I think that 99% your automatic answer would be applicable and true, there are occasions where that resource is best spent elsewhere such as to prevent a foreclosure or in the case of one of my clients, to start a business which has strong potential and an iron clad business plan. I currently work with a gentleman who started a million dollar a year business after he was let go and his only source of funds was his retirement account. Although seldom advisable, such cased do exist.

Regardless Stacy, I agree that a meeting with a fiduciary advisor is a good idea.

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Flag |  Jul 08, 2015 near Brunswick, ME

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Ask for the Summary Plan Document. Take that to your advisor and they should be able to tell you exactly what you can and cannot do with your money. Every plan has different rules and their is no way to know with out the Plan Document.

Comment   |  Flag   |  Jul 09, 2015

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