Hardship w/d: 401k vs IRA
Client has a prior employer 401(k) and IRA funds. Are there any differences in the hardship withdrawal rules between a 401k and IRA?
Client has a prior employer 401(k) and IRA funds. Are there any differences in the hardship withdrawal rules between a 401k and IRA?
Permalink Submitted by Alan - IRA critic on Thu, 2021-05-13 15:42
Hardship withdrawals are only for active employees to be able to withdraw from a qualified plan for certain needs. Client should have full access to either the old 401k or the IRA for current needs. An IRA withdrawal can be rolled over within 60 days if client has the funds to do so and has a rollover available per the one rollover limitation.
Permalink Submitted by brcwm on Fri, 2021-05-14 18:53
We’re trying to determine if there is any reason to keep in 401k (terrible/costly plan) for a pre-59 1/2 withdrawal or rollover to IRA, then withdrawal from there?
Permalink Submitted by Alan - IRA critic on Fri, 2021-05-14 21:52
If the client will need funds from the 401k before 59.5, if separation from service occurred in the age 55 is reached or later, the funds can be tapped penalty free. However, the value of this depends on the plan allowing somewhat flexible distributions during that period, and not requiring a lump sum distribution. In that case, there is also the option to directly rollover only part of the 401k that will not be needed, so that this portion can be invested in a lower cost IRA account. So the first thing to do is check how flexible the 401k distributions will be. If they are not flexible and the expenses are high, there is also the choice to roll to an IRA and then start a 72t plan to receive penalty free distributions. Normally, avoiding 72t is preferred, but with a bad 401k plan is might be the better option if all parties understand the inflexible nature of a 72t plan.