A common misconception with 401(k) plans is that once money is contributed to one, it is locked away. Although often not the best idea, 401(k) participants can access their funds any time they want. the time it takes to obtain 401(k) funds through a disbursement check can vary. however, it’s a good idea to understand the process before deciding whether to accept a 401(k) payout.
Typically, the time it takes to receive a 401(k) disbursement check is two to four weeks. Your 401(k) administrator will need time to process your application; then, it will take time for the check to travel through the mail system.
If you need your 401(k) funds right away, you may be better off using other avenues to get the funds. however, unless you have a fully funded emergency fund, your 401(k) may be the most important account you have.
Let’s look at how to request a 401(k) disbursement and the process of receiving the funds. this way, you can be better informed if taking a 401(k) payout is in your best interest.
what are the penalties for accepting a 401(k) payout?
There are two types of 401(k) disbursements, retirement disbursements and early retirement distributions.
Retirement disbursements are pretty straightforward. Once you turn age 59½, the IRS allows you to start receiving distributions from your 401(k) as income in retirement. income tax will be assessed on any amount you withdraw since you made contributions with pre-tax earnings.
Early retirement payouts are withdrawals from a 401(k) before you turn 59½. As a result, the IRS issues a 10% penalty tax on any amount withdrawn from a 401(k) before reaching 59½.
how to request a 401(k) payout from your plan
Many 401(k) accounts are now managed online. Much like managing a checking account, a 401(k) can be accessed through an online portal where account holders can do just about anything they want with their 401(k).
Most 401(k) plans have a way to request a payout directly from your online account. you can set any amount allowed by the plan or its guidelines and request how to receive your funds.
The processing of a distribution will depend on the 401(k) administrator’s process. however, most disbursements will be processed within one to two weeks.
factors that can delay the disbursement process
Although it is still up to the institution administering the 401(k), there may be delays in the process that are out of their control and even the control of the plan administrator.
If you are required to pay the 10% penalty tax, this may require an additional step in processing. However, if you are exempt from the 10% penalty through any of the exemptions the IRS outlines, this can add significant time. Your 401(k) administrator may need to submit additional documentation and proof that your disbursement meets the criteria for exemption from the 10% penalty.
receive your disbursement check in the mail
Once your disbursement is approved and processed, you have two options for receiving the funds you are withdrawing. You can opt for an automatic check on your bank account, or you can have the 401(k) administrator send you a physical check.
If you choose to receive a check, there may be an additional period for them to issue the check and prepare it for mailing to you.
then you will have to wait for the standard time it takes for the postal service to send you the check.
In total, it can take two to four weeks from the time you submit your disbursement request to receive your check in the mail, plus the additional time it takes to deposit the check into your bank account.
You may need to deposit your 401(k) disbursement check shortly after receiving it
If you requested a payout to roll over your 401(k) to another 401(k) or an IRA, you must deposit the check within 60 days.
When you make a 401(k) disbursement to roll over the funds into another eligible retirement account, the IRS waives all taxes and penalties. Since you are putting the money back into a retirement account, these disbursements are allowed.
However, if you don’t deposit your 401(k) disbursement check on time, you may have to pay income taxes and a 10% penalty on the amount you withdrew.