Just Learned 401k Does NOT Allow Any Withdrawals Before 59.5 y.o. :|

[morjax]

I have long been a lurker but have not frequently posted. I am feeling fairly gobsmacked this morning. I have been diligently socking money away in my company 401k that has a fairly generous matching, and inquired this morning about the possibility of doing an in-service rollover from my current holding (SP500-type) to a traditional IRA (VTSAX-type) for the purposes of a lower expense ratio.

I am quite distressed to find that I cannot affect ANY distributions or rollovers before the age of 59.5, for any reason except an approved application for medical hardship, whether still employed with them or not!

ACK!!

I know I'm still in the emotional state of shock phase and probably not thinking altogether logically, but I feel like this is going to blow a hole in any plans to utilize that money for FI before that age :/ The way the plan is set up, you only get the full profit sharing put into your account when you put that into the company plan. If you were to take some in cash in order to, say, put the money in another account to be able to access it before age 59.5, you get a notable amount less of the profit sharing. And it's a toggle switch: either put it all in 401k, or get less total, but some of it in cash (and not a choosable amount, it's just on or off).

I am feeling like I got a right punch in the gut this morning. If I have aspirations of FIRE, I am feeling like the only option would be to take the hit for putting less into the company plan and putting it somewhere like a VTSAX with vanguard or betterment; either miss out on profit sharing, or I can't access that profit sharing at all until after I'm 60 :'( :'(

Looking for support, planning, etc. I am feeling lousy!

[Riptoast]

Is this no-rollover rule only for while you are still an employee? As long as you are working and earning a paycheck you shouldn't need to access that money early, and once you quit you should be able to rollover to an IRA. Many companies have rules about transferring money out of their 401k plans while you are working for them, but I have never heard of them restricting your money once you leave.

[beltim]

I am quite distressed to find that I cannot affect ANY distributions or rollovers before the age of 59.5, for any reason except an approved application for medical hardship, whether still employed with them or not!

This sounds illegal.  As long as you're vested, I don't see a legal reason why the employer would be permitted to prevent you from rolling over your 401k after you finish your employment.  See for example:
https://www.investopedia.com/articles/investing/092216/why-would-your-401k-be-unavailable-after-your-leave-job.asp

[rubybeth]

I am quite distressed to find that I cannot affect ANY distributions or rollovers before the age of 59.5, for any reason except an approved application for medical hardship, whether still employed with them or not!

I would double check this. Once you leave employment, how can they make you leave the funds in their 401k? I'd ask for documentation for where this is stated. This is not common, and they may not be interpreting this correctly. If it's HR telling you this, I'd contact the actual plan administrator--and confirm and re-confirm, with documentation.

[FIPurpose]

Another vote for: you likely misheard this and/or HR just says things without actually verifying.

[Proud Foot]

What would happen with the money in the account once you stop working there? This isn't too uncommon to not allow in-service rollovers but I never have heard of one that required you to keep the money in the 401k once you are no longer an employee.

The way the plan is set up, you only get the full profit sharing put into your account when you put that into the company plan. If you were to take some in cash in order to, say, put the money in another account to be able to access it before age 59.5, you get a notable amount less of the profit sharing. And it's a toggle switch: either put it all in 401k, or get less total, but some of it in cash (and not a choosable amount, it's just on or off).

I don't quite understand this portion. Most of the profit sharing plans I have seen (previous life auditing retirement plans) have been as a direct contribution by the employer to the 401k with a set vesting schedule.

Is there anything keeping you from maxing the 401k and saving additional funds in either an IRA or taxable account?

[JLee]

Just roll it over into an IRA when you quit.

https://www.thebalancecareers.com/what-happens-to-your-401k-when-you-leave-a-job-2063413

[skuzuker28]

Request a copy of the Summary Plan Description, that has the actual provisions of the plan.  Sounds like HR doesn't quite know what they are talking about.

It does sound like there is some sort of vesting schedule for the profit-sharing contributions, I think the max is 5 years.  Not unusual for a plan to not allow partial rollovers, so this may be a case of just waiting until the profit sharing is vested.  Again, the SPD should have this info.

[morjax]

Riptoast, even if I move to another employer and am not receiving paychecks from this company, the only possible way to move or remove money from this 401k account before the age of 59.5 is through an approved application of medical hardship, which can only be applied for if I'm not longer employed here.

I am feeling pretty dang bad about learning this, because it has been basically my only outlet for socking money for FI so far, and now I can't access it! >:[

I know I can simply start fresh with another personal account for before age 59.5 and leave the existing money for after, but I'd be losing out on something like 10% of my salary by taking the 401k+cash option instead of the 401k only option.

1) 401k only option, inaccessible until age 59.5: for max profit sharing months, 19% of salary into 401k, and 26% in cash (with additional voluntary contributions up to 12%)

2) 401k+cash option, with 401k portion inaccessible and cash taxed as income: 12% of salary into 401k, and 33% in cash (again, voluntary contributions possible)

3) cash only option, taxed as income: 0% into 401k, up to 38% as cash, no voluntary contributions.

Sad morjax is sad. Still floundering trying to figure out what I'm gonna do.

[JLee]

Riptoast, even if I move to another employer and am not receiving paychecks from this company, the only possible way to move or remove money from this 401k account before the age of 59.5 is through an approved application of medical hardship, which can only be applied for if I'm not longer employed here.

I am feeling pretty dang bad about learning this, because it has been basically my only outlet for socking money for FI so far, and now I can't access it! >:[

I know I can simply start fresh with another personal account for before age 59.5 and leave the existing money for after, but I'd be losing out on something like 10% of my salary by taking the 401k+cash option instead of the 401k only option.

1) 401k only option, inaccessible until age 59.5: for max profit sharing months, 19% of salary into 401k, and 26% in cash (with additional voluntary contributions up to 12%)

2) 401k+cash option, with 401k portion inaccessible and cash taxed as income: 12% of salary into 401k, and 33% in cash (again, voluntary contributions possible)

3) cash only option, taxed as income: 0% into 401k, up to 38% as cash, no voluntary contributions.

Sad morjax is sad. Still floundering trying to figure out what I'm gonna do.

The good news is that it's illegal for your employer to prevent you from withdrawing the contributions you've made:

https://www.investopedia.com/articles/investing/092216/why-would-your-401k-be-unavailable-after-your-leave-job.asp

[morjax]

@beltim, @rubybeth, @FIPurpose:I asked:

"Also, are there other ways besides distributions or rollovers by which funds can be moved from my [retirement plan] in before age 59.5? If it’s not possible to move funds from [retirement plan] in any way before age 59.5, that is not something I was aware of, and somewhat distressing."

Here's the message from HR (at the risk of sharing too much, I guess?), who is the person who handles this stuff within the company:

"As for moving funds from the plan before age 59 ½, our plan does not allow it. Please see the last section on page 12 of the attached brochure."

and then the  brochure then states:
"WITHDRAWALS WHILE EMPLOYED BY [CompanyName]
After you reach age 59.5, you can withdraw your contributions from the plan for any reason by calling the Retirement Service Center or via the website. Money received from your account after age 59.5 is considered taxable income subject to withholding when it is withdrawn. Before you reach age 59.5, you can withdraw your contributions from the plan only because of a medical hardship. You may request a hardship withdrawal at any time, and you will receive a check within 30 days of the approved request. You will not be able to participate in the plan for six months after taking a medical hardship withdrawal." (emphasis mine)

@dleavitt: I have sent a follow up to confirm (1) can a worker withdrawal or rollover for any reason before 59.5, but after employment has ceased, and (2) to get a copy of the SPD.

Will report back. I'm still feeling friggin' gobsmacked.

[skuzuker28]

Riptoast, even if I move to another employer and am not receiving paychecks from this company, the only possible way to move or remove money from this 401k account before the age of 59.5 is through an approved application of medical hardship, which can only be applied for if I'm not longer employed here.

I am feeling pretty dang bad about learning this, because it has been basically my only outlet for socking money for FI so far, and now I can't access it! >:[

I know I can simply start fresh with another personal account for before age 59.5 and leave the existing money for after, but I'd be losing out on something like 10% of my salary by taking the 401k+cash option instead of the 401k only option.

1) 401k only option, inaccessible until age 59.5: for max profit sharing months, 19% of salary into 401k, and 26% in cash (with additional voluntary contributions up to 12%)

2) 401k+cash option, with 401k portion inaccessible and cash taxed as income: 12% of salary into 401k, and 33% in cash (again, voluntary contributions possible)

3) cash only option, taxed as income: 0% into 401k, up to 38% as cash, no voluntary contributions.

Sad morjax is sad. Still floundering trying to figure out what I'm gonna do.

Get the plan documents.  Either the person(s) you spoke to are mistaken, or you misunderstood.  The plan documents will have the truth.  They cannot prevent you from withdrawing your contributions after separating from employment.  They do have some ability to hold back profit sharing contributions, but I'm pretty sure they can't do that indefinitely until 59.5.

You replied while I was typing this, but the section you quoted only applies to distributions WHILE EMPLOYED.  Once you quit/retire then you can withdraw or rollover, though again you may not get all the profit sharing contributions.

[morjax]

@JLee I am reading through that now. I am concerned per:

But there are several possible reasons why there may be restricted access to the funds in a 401(k) plan. One of them is that the contributions to your 401(k) were entirely made by your company and you did not put any of your own money into it. As Jeremy Portnoff, a financial advisor with Portnoff Financial in Woodbridge, N.J., points out, this could result in a loss of the fund, since it is wholly comprised of funds contributed by the former employer: “[There is] a possibility that if the funds were all employer contributions and are not vested, then you basically forfeit the funds.”

That all funds are actually all employer contributions and that they just say that this part is classified as "employee contribution", and this part is classified as "employer match".

Dangit. I am sure I can come to some moderately acceptable resolution, but it's a real feelsbad right now.

[JLee]

@JLee I am reading through that now. I am concerned per:

But there are several possible reasons why there may be restricted access to the funds in a 401(k) plan. One of them is that the contributions to your 401(k) were entirely made by your company and you did not put any of your own money into it. As Jeremy Portnoff, a financial advisor with Portnoff Financial in Woodbridge, N.J., points out, this could result in a loss of the fund, since it is wholly comprised of funds contributed by the former employer: “[There is] a possibility that if the funds were all employer contributions and are not vested, then you basically forfeit the funds.”

That all funds are actually all employer contributions and that they just say that this part is classified as "employee contribution", and this part is classified as "employer match".

Dangit. I am sure I can come to some moderately acceptable resolution, but it's a real feelsbad right now.

How much are you contributing yourself and how much is your employer contributing?

[morjax]

ok, PHEW. Just heard back form HR:

"Yes, that is correct. Once employment is terminated, a participant can leave the funds in our plan, take a distribution, or rollover funds into another qualified plan or IRA."


That seems to be working as intended then, and I guess just my misunderstanding of the documentation/messages.


Thanks for the safety net and moral support folks. I think my blood pressure has been about double "normal" for the last couple hours O_o

[rubybeth]

ok, PHEW. Just heard back form HR:

"Yes, that is correct. Once employment is terminated, a participant can leave the funds in our plan, take a distribution, or rollover funds into another qualified plan or IRA."

That seems to be working as intended then, and I guess just my misunderstanding of the documentation/messages.

Thanks for the safety net and moral support folks. I think my blood pressure has been about double "normal" for the last couple hours O_o

Yes, the way you asked the question in your original message is what caused them to answer in this way--you didn't clarify if it's while you're still employed there, or after you've quit/left/retired. Once you stop working there, you can roll it into an IRA and do a conversion ladder.

[FIPurpose]

@beltim, @rubybeth, @FIPurpose:I asked:

"Also, are there other ways besides distributions or rollovers by which funds can be moved from my [retirement plan] in before age 59.5? If it’s not possible to move funds from [retirement plan] in any way before age 59.5, that is not something I was aware of, and somewhat distressing."

Here's the message from HR (at the risk of sharing too much, I guess?), who is the person who handles this stuff within the company:

"As for moving funds from the plan before age 59 ½, our plan does not allow it. Please see the last section on page 12 of the attached brochure."

and then the  brochure then states:
"WITHDRAWALS WHILE EMPLOYED BY [CompanyName]
After you reach age 59.5, you can withdraw your contributions from the plan for any reason by calling the Retirement Service Center or via the website. Money received from your account after age 59.5 is considered taxable income subject to withholding when it is withdrawn. Before you reach age 59.5, you can withdraw your contributions from the plan only because of a medical hardship. You may request a hardship withdrawal at any time, and you will receive a check within 30 days of the approved request. You will not be able to participate in the plan for six months after taking a medical hardship withdrawal." (emphasis mine)

@dleavitt: I have sent a follow up to confirm (1) can a worker withdrawal or rollover for any reason before 59.5, but after employment has ceased, and (2) to get a copy of the SPD.

Will report back. I'm still feeling friggin' gobsmacked.

I'm glad you found the answer. But the answer was in your first reply. She copy and pasted part of the documentation. That section was only referring to while employed there.