In service withdrawls and rollovers

[Guest Bob Monte]

I have always thought that one could not rollover any portion of a 401-k account while still actively employed by the sponsoring employer; nor make withdrawals at all except for hardship or loans. If an employer makes special one-time contributions (profit sharing) to a 401-k are they permitted to allow you to withdraw and/or rollover this amount? If you can withdraw or roll it over, what are the rules for penalty and withholding?

[R. Butler]

The statement "one could not rollover any portion of a 401-k account while still actively employed by the sponsoring employer" is not necessarily correct. You need to check the plan document for in-service distribution rules.

In-service distributions not rolled over are subject to the income tax. Generally distributions not rolled over are subject to 20% mandatory tax withholding. Also, generally in-service distributions prior to the age of 59 1/2 are subject to a 10%early withdrawal penalty. You need to review the Special Tax Notice Reagrding Plan Payments for a more detailed discussion of tax withholding implications. The plan administrator should be able to provide you with one.

State withholding rules vary.

[MGB]

Bob,

You are correct with respect to elective deferrals (the amount that a participant contributes on a pre-tax basis). That cannot be distributed while actively employed. This is the only "401(k) account". The plan is a profit sharing plan (there is no such thing as a 401(k) plan). The entire plan is not subject to the same rules that apply to the elective deferral portion of the plan.

If the company makes a profit sharing contribution, it is not going into the "401(k) account", and therefore, is not limited to those rules. The law does allow in-service withdrawals of profit sharing contributions. However, as already noted, it is up to the specific plan document whether or not those amounts may be distributed while in service (they don't have to allow it and may restrict the distributions in the same manner as the 401(k) account). There may be other styles of restrictions in the plan, such as only allowing distributions after the contribution has been vested for a certain period of time (e.g., 2 years).

The tax/withholding rules are the same whether the person is still employed or terminated.

[Blinky the 3-eyed Fish]

MGB, if the document allows, 401(k) deferrals can be distributed while actively employed if the participant reaches age 59 1/2.

[Guest Bob Monte]

I want to thank the three of you for clearing that up for me. I didn't think that the source mattered so now I have learned something new. Again thanx