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Deductions & credits
If the employee is still employed with the plan sponsor, withdrawals are usually not allowed except in the case of a “hardship.“ It is up to the employer to determine what their hardship rules are and how to enforce them. The employee won’t get in trouble from the IRS if they make a hardship withdrawal that doesn’t really qualify—any penalties or responsibilities would fall on the employer for not following their hardship rules. Withdrawals are still subject to income tax and the 10% penalty for early withdrawal, of course, but there is no additional penalty for the employee if a withdrawal is allowed that is not really a hardship.
After the employee has separated from service, they can withdraw from a 401(k) at any time for any reason. They pen pay a penalty if the withdrawal is considered “early “, but there are no other limitations.