The 401k plan was introduced by the US government to help people save money for retirement. To make sure that the savings made under this plan serves its purpose, the government is strict in allowing 401k distribution without charging penalty fees.
As a rule, 401k distribution is allowed only in very limited conditions. A penalty-free distribution generally can be made only when the participant turns 59 ½ years old. Another condition that allows distributions is when the withdrawal will be made to the beneficiary upon the death of the participant. Distribution may also be done when the participant becomes permanently disabled, is severed from employment, or incurs financial hardship.
Meeting any of these conditions, the 401k distribution can then be made either in non-periodic or periodic payment, depending on the terms stated in the participant’s plan. Non-periodic distribution means payment given all at one time, i. e., lump sum payment. Here, the participant must be provided his entire benefits by the required start date for all 401k plans. This set date is April 1 of the first year after the later year between these two – the calendar year when the participant turns 70 ½ years old and the calendar year when the participant retires.
Periodic distribution, on the other hand, means the participant must start receiving his yearly benefits from the same required start date. The annual amount is calculated over his life expectancy or the joint life expectancy of the participant and his beneficiary.
There are certain plans, though, that specify that a participant has to start receiving his benefits April 1 of the year after he turns 70 ½ years old, regardless of whether he has retired or not. For instance, this applies to participants who own at least 5% of the employer company that takes care of his 401k plan.
However, there are also particular circumstances when a plan administrator cannot simply execute the distribution without getting a formal consent from the plan participant. The participant would generally need to submit his formal consent to the plan administrator if his balance is over $5,000. If specified in the plan, the spouse’s consent may also be needed prior to the execution of the distribution.
After the 401k distribution for the starting year, the distributions in the following years are not set for April 1 anymore, but by December 31 of each of the succeeding years. If, for instance, a distribution was not received during the starting year, the plan administrator should make sure that the minimum amount of benefits for the first two years must be distributed in the second year. One batch of benefits should be distributed by April 1 and another, by December 31.