Understanding the Process of Closing Out a 401(k) Plan Before or After Retirement
The process of closing out a 401(k) plan can vary significantly depending on whether you are doing so before or after retirement. Two primary differences stand out: availability and taxes.
Key Differences Between Pre-Retirement and Post-Retirement Distributions
One of the most notable differences between closing out a 401(k) plan before and after retirement is the availability of funds and actions you can take. Before you retire, the retirement plan might impose specific restrictions on how and when you can withdraw your funds. These restrictions can vary based on the type of plan you have.
Pre-Retirement: Some 401(k) plans restrict disbursements until the normal retirement age, others restrict them until you terminate employment, and some may only allow distributions after a certain number of years of service with the employer, combined with reaching a certain age.
Requesting In-Service Distributions
If you are still employed and still eligible for a distribution, you should contact your plan administrator to request an In-Service Distribution. This process is largely the same whether you request it due to termination or retirement. The bulk of the paperwork or online application remains consistent in both scenarios.
Post-Retirement Distributions: A Simplified Process
For those closing their 401(k) plan after retirement, the process is generally more straightforward. You would simply request a distribution due to termination or retirement and complete the necessary paperwork or online application. This application process will involve acknowledging required disclosures and electing any tax withholdings, which can exceed the minimum Federal and State requirements.
Tax Considerations: 20% Upfront Tax Withholding and Early Withdrawal Penalties
Both pre- and post-retirement distributions require an upfront tax withholding of 20%, unless you are eligible for an exception specified by the Internal Revenue Service (IRS). If you are under the age of 59 1/2, you may face additional penalties, such as a 10% Federal tax, plus applicable state penalties.
Conclusion: Making an Informed Decision
Whether you are closing out your 401(k) plan before or after retirement, it is important to understand the specific restrictions and tax implications. Consulting with a financial advisor or your plan administrator can help ensure you make the most informed decision about your retirement funds.