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Speaking in general terms, IRA and 401(k) assets that are distributed and are not rolled to another IRA or eligible retirement plan will be subject to income tax, and may also be subject to an early-withdrawal penalty if you are under age age 59½.
- Within an IRA, you can typically buy and sell whatever assets you like, so long as withdrawals are not made until age 59½.
- The assets available for investment in an IRA will largely depend on the custodian or broker you have chosen to house your retirement account.
- 401(k) plans may have limited investment options, in which case you can rollover your 401(k) to a qualified IRA without penalty.
Now, you may be able to change your IRA investment(s), or even transfer your account to another financial institution that offers the types of options you prefer. Check with your financial institution regarding its policies for allowing transfers, as there are some IRA products that require a minimum investment period in order to avoid early termination charges. As long as a qualified rollover is made within 60 days of withdrawing the funds to be rolled over, there is no penalty.
Within your IRA plan, you can invest in any number of assets from stocks to bonds to mutual funds and ETFs. Some IRA custodians even allow for commodities or real estate. You may have to pay your custodian a broker fee or commission to trade inside of it, but as long as it stays in your IRA there are no tax penalties.
401(k) Plan Complications
The 401(k) plan is a different matter. You are able to withdraw assets from your 401(k) plan only if you experience a triggering event. For most 401(k) plans, the triggering events are the following:
- Attaining retirement age (this is generally age 59½, but could be either earlier or as late as age 65)
- Termination of employment (you are no longer employed by the company that offers the 401(k) plan in question)
- Death – in this case, your beneficiaries are allowed to distribute your assets
- Disability – the document that governs the 401(k) plan generally provides a definition of “disability”; this may vary among plans
- If your employer terminates the 401(k) plan and does not replace it with another qualified plan
If none of these occurs, then you cannot withdraw assets from your 401(k) plan account unless the plan allows for an in-service withdrawal. An in-service withdrawal is one that can occur before you experience a triggering event.
Some 401(k) plans limit in-service withdrawals to certain circumstances. For example, you may be allowed a withdrawal if you need the assets to pay medical expenses or your mortgage or rent. Your plan administrator will be able to explain whether your plan has these provisions and any applicable limitations.
The Bottom Line
If you do experience a triggering event, you may roll your 401(k) assets into a Traditional IRA or another qualified plan.
You should consult with a competent financial advisor or investment professional before taking action. There is usually a cost associated with any consultation (unless you can get it for free from your employer), but it may be well worth it.
This question was answered by Denise Appleby