A distribution, in the context of an employer-sponsored 401(k) retirement plan, refers to the withdrawal of funds from the account by an eligible participant. When an employee reaches the age of 59½ or experiences a qualifying event, such as retirement, termination, disability, or financial hardship, they become eligible to take distributions from their 401(k) account. These withdrawals may be subject to income taxes and potentially early withdrawal penalties if taken before the age of 59½.
Examples of Distributions in a 401(k) plan:
- 1. Retirement Distributions: Upon reaching the age of 59½ or older, an employee may choose to retire and access their 401(k) savings by taking regular distributions. These withdrawals are typically taxed as ordinary income.
- 2. In-Service Distributions: Some 401(k) plans offer the option of in-service distributions, allowing employees to withdraw a portion of their vested funds before retirement age, while still employed. Certain conditions, like reaching a certain age or years of service, may be required to qualify for this option.
- 3. Hardship Distributions: In times of financial hardship, such as medical expenses or the threat of foreclosure, participants may be allowed to take hardship distributions. However, these distributions are subject to strict IRS guidelines and are taxable, often accompanied by a 10% early withdrawal penalty.
- It is essential for participants to carefully consider the implications of taking a distribution, as it can impact their long-term retirement savings and financial goals. Consulting with a financial advisor is recommended to make informed decisions based on individual circumstances.