My son-in-law opened a 401k this year. His company told him that they are not getting a christmas bonus this year (they usually get a sizable one) and they are in need of money for taxes, christmas, etc. He asked about closing his 401k so he could use the money from that, but they told him he could only under certain circumstances. It's his money and even though he will have to pay a penalty, shouldn't he be able to close it? We live in Alabama, his company's headquarters is in Ohio. Any one know ?

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Originally Posted by bamagirl1997

My son-in-law opened a 401k this year. His company told him that they are not getting a christmas bonus this year (they usually get a sizable one) and they are in need of money for taxes, christmas, etc. He asked about closing his 401k so he could use the money from that, but they told him he could only under certain circumstances. It's his money and even though he will have to pay a penalty, shouldn't he be able to close it? We live in Alabama, his company's headquarters is in Ohio. Any one know ?

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Yes, he can close his 401K if he wants to but he will pay a penalty of 10% plus pay taxes on the full amount of his 401K funds.

Whether he is allowed to make a withdrawal is entirely up to the rules of the particular 401(k) plan that his employer has set up. The IRS allows plans to make withdrawals available, but the plan is not required to do so. He should check with the plan administrator to see what the rules of his specific plan are.

Ranger is not entirely correct here, ebaines is. Whether an inservice withdrawal is allowed is part of the plan provisions. Not all plans allow them and those that do, generally put restrictions on them.

Yes its his money, but it was earmarked for a specific purpose and he has yet to pay taxes on that money. That's why the 401K rules make it hard to withdraw. Plus the nature of the penalites is such that you would be throwing away money by taking a withdrawal.

See if he can take a loan against those funds instead. That would be a much better option.

He should also learn to budget better. If not getting a bonus affects him like this, then he hasn't budgeted properly.