How to Take a Partial Distribution From Your 401k
Understand the key rules and financial implications of a partial 401k withdrawal to help you navigate this important financial decision.
A partial distribution from a 401(k) plan involves withdrawing a portion of your vested account balance. This action is a financial decision governed by specific plan provisions and federal regulations. Because these accounts are intended for retirement, accessing funds is a regulated process. Understanding the tax implications and procedural requirements is necessary to make an informed choice.
Eligibility for a Partial Distribution
Access to 401(k) funds is restricted, and you must experience a qualifying event to take a partial distribution. A common event is a separation from service, such as quitting, being laid off, or retiring. Another trigger is reaching age 59½, at which point many plans allow in-service withdrawals while you are still employed.
A participant who becomes totally and permanently disabled can also access their 401(k) funds. However, the availability of any distribution option depends on your plan’s rules. You must consult your plan’s Summary Plan Description (SPD) to see which distributable events your plan allows, as not all plans permit options like in-service withdrawals.
Hardship Withdrawals
Some plans permit hardship withdrawals if you face an “immediate and heavy financial need” as defined by the IRS. Qualifying needs include:
- Costs for certain medical expenses
- Payments to prevent eviction or foreclosure on a primary home
- Expenses for purchasing a principal residence
- Paying for burial or funeral expenses
- Certain home repair costs
- Tuition for the next 12 months of postsecondary education
The amount of the withdrawal is limited to what is necessary to satisfy the financial need. Your plan may require documentation to substantiate the hardship before approving the request.
Tax Consequences of a Partial Distribution
When you take a partial distribution from a traditional 401(k), the amount is treated as ordinary income for that year. This withdrawal is added to your other income and taxed at your federal and state income tax rates. The distribution is reported to you and the IRS on Form 1099-R, detailing the gross amount and any taxes withheld.
If you are under age 59½, the IRS imposes a 10% additional tax on the taxable amount. This early withdrawal penalty is in addition to the ordinary income tax you will owe. For example, on a $20,000 distribution, the penalty is an additional $2,000 tax. You report and pay this penalty on your tax return using Form 5329.
Certain situations allow you to avoid the 10% early withdrawal penalty. An exception applies if you leave your job during or after the calendar year in which you turn 55. This is known as the “Rule of 55,” and it only applies to distributions from the 401(k) plan of the employer you just left. If you roll those funds over to an IRA, the exception does not carry over. Other exceptions include:
- Distributions made because of a total and permanent disability
- Distributions for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income
- Distributions made to a beneficiary after the account owner’s death
- Withdrawals for qualified military reservists called to active duty
- Withdrawals for the birth or adoption of a child, up to $5,000
Information and Decisions for Your Distribution Request
Before initiating a distribution, you must gather personal information. Your plan administrator will require your full legal name, mailing address, Social Security number, and 401(k) account number. You must also specify the withdrawal amount, either as a dollar figure or a percentage of your vested balance.
The primary decision is whether to receive a cash payment or execute a direct rollover into another retirement account, such as an IRA. A direct rollover is not a taxable event, while a cash payment is, as detailed in the previous section.
You must obtain the distribution request form from your plan administrator, often available online or from your HR department. On this form, enter your personal information, the withdrawal amount, and your choice of cash or rollover. If choosing a rollover, provide the details for the receiving institution.
Submitting Your Request and Receiving Funds
After completing the request form, submit it according to your plan’s procedures. Common methods include uploading it to a secure online portal, mailing it, or delivering it to your HR department.
If you receive an eligible rollover distribution as cash, your plan must withhold 20% for federal income taxes. For a $10,000 distribution, $2,000 is sent to the IRS, and you receive $8,000. This 20% withholding is a prepayment of your tax liability, and you will reconcile the final amount on your tax return. Distributions not eligible for rollover, like hardship withdrawals, are subject to a 10% withholding, which you can often elect out of.
After submitting your form, you will receive a confirmation from your plan administrator. Processing time ranges from 7 to 14 business days. Funds are delivered as a physical check or via direct deposit.