You can roll over a part of a 401(k) distribution into a qualified retirement account, but the rollover is subject to certain restrictions. Normally, you can not cash out your 401(k) unless you separate from your job, reach age 59 1/2, or qualify for an early distribution. The non-rollover portion of a distribution is subject to 20 percent withholding, income taxes and possibly a 10-percent early-withdrawal penalty. This makes accessing 401(k) funds costly in many circumstances.
Accessing Your 401(k)
According to U.S. News and World Report, if you separate from your job after reaching age of 55, you can make a 401(k) cash-out totally penalty-free, even if you're not yet 59 1/2 years of age. If you are younger than 55 years of age when you leave your job, you will have to pay taxes and incur a 10 percent 401(k) cash-out penalty on the portion you do not roll over into an individual retirement account or another qualified employer plan.
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You can tap into your 401(k) penalty-free without leaving your job if you have become disabled or have a financial hardship – for example, high medical bills, a divorce-related court order or a levy from the Internal Revenue Service. However, you can't roll over financial hardship distributions; they are not qualified rollover distributions.
Splitting a 401(k) Distribution
Logistics and planning have a lot to do with whether and how much you pay in fees when it comes to your 401(k). You can have the plan custodian transfer the rollover portion of a 401(k) distribution directly to the custodian of the new retirement account, thereby avoiding taxes and early withdrawal penalties on this portion. Alternatively, you can receive the cash and property from your 401(k) and deposit some of the proceeds tax- and penalty-free into another retirement account within 60 days of receiving the distribution. However, be aware that your 401(k) custodian will withhold 20 percent of any distribution not directly transferred to another custodian.
Other 401(k) Restrictions
In addition to hardship distributions, certain other 401(k) withdrawals can not be rolled over. For example, you can not roll over distributions stemming from substantially equal periodic distributions based on your life expectancy, even though this method avoids the 10 percent early withdrawal penalty.
Other rollover-restricted distributions include refunds of excess contributions, minimum required distributions that begin when you reach age 72, a loan from your 401(k) that is treated as a distribution because it doesn't satisfy certain requirements, and dividends on employer securities.
Basic Information: Conduit IRAs
The portion of your 401(k) distribution that you roll over can be deposited into a "conduit" IRA, which is an IRA that receives only rollover money. According to Investopedia, the main advantage of using a conduit IRA is that it automatically qualifies for a subsequent rollover into another employer plan. Some employer retirement plans don't accept IRA rollovers unless they come from a conduit IRA. If you make non-rollover contributions to a conduit IRA, it loses its special status and becomes a regular IRA.