Wanting to take money out of 401k, does there need to be a reason?

TL;DR – It depends, but probably. Rules vary a ton between plans.

They’re always going to ask and there are some good, helpful, reasons for them to. There are also a few steps to getting a straight withdrawal from a 401k and generally you’ll need to identify why you want the money at some point. But not always.

The helpful reasons to ask

- There are withdrawals that are “exempt” from the tax penalties (and withholding), so they’ll usually ask to make sure you’re not going to be taxed without it being necessary. (IRS link)
– It’s sometimes possible to take a loan from your 401k and pay it back, so they want to make sure people are aware of those options. There’s no withholding or tax penalties on a loan.

And the steps (which are completely dependent on the plan rules for your particular plan)

- Some plans don’t offer a way to get at your retirement money while still employed with the company that sponsors the plan, so that might be a good first question
– Plans that do allow for withdrawals sometimes require you to take a loan first instead
– Almost all plans consider withdrawals to be “hardship withdrawals” so require that you either need the money for reasons laid out in the plan rules or some other process to prove hardship. Whoever takes care of your account should be able to identify who makes a decision if there is one.
– If you get a distribution/withdrawal, the IRS is notified and you get tax form at the end of the year, but no one else is involved as far as beneficiaries or things along those lines.

If you don’t want to discuss your situation with the person on the phone, you can just request paperwork and a list of suitable reasons usually. They’ll send it without you needing to share too much there.

The best first step is probably to give them a call and just ask questions until you know all your options.

Take a loan, you will be hit by penalties and tax liabilities. The age for withdrawal and no penalty is 59 and half years old, you still a have tax liability at 59 and half.

Are you withdrawing becasue you need the money or because you don’t like or trust your existing plan? If it is the latter, you can roll it over into another plan without a penalty. Fidelity, Vanguard, and many others have plans with no fees and very low load ETFs.

If you just need money look into a 401k loan rather than a distribution.

I just rolled-over an old 401k from Wells-Fargo into an IRA with Fidelity (who manages another old 401k of mine). They asked questions, but mostly in regards to determining to whom to make the check payable.

There are different rules between plans and whether it’s an old plan in which you’re fully-vested, or an active plan, in which you may only be partially-vested if your employer makes matching contributions. For active plans, you often deal with the plan administrator at your company, rather than the bank.

I promptly withdrew 10k from the new IRA to use toward my down payment on my first home, which it is penalty-free for that reason, but it will still be taxed (that option does not apply to 401k plans). I told them the reason at the outset, so I am unsure whether they would have asked.

It is your money, so they can’t stop you from withdrawing it if fully-vested; but they are obligated to advise you about the penalty and whether there may other options, like the loan option mentioned above (which I also recommend to avoid penalties).

The bank from whom you make the withdrawal will notify the IRS, and they will also offer the option to withhold taxes from your check.

Just a couple of notes.

IRAs are going to be significantly different than 401k accounts. 401k rules are set up by the company who sponsors the plan and many don’t allow for distributions at all, some don’t even allow for loans. It’s the #1 cause of anger when people call.

I worked for a couple years at Fidelity, primarily servicing 401k accounts.