Why understanding your withdrawal options could matter more than you think.
If you’re counting on your 401(k) for retirement, there’s something important you may not have considered: how your plan’s rules could affect your access to your money.
Some retirement plans use a system called a “withdrawal hierarchy.” It’s a set order of how your money is taken out, and it’s not always flexible. These rules can impact how you use your savings, and in some cases, may limit your options more than you expect.
What’s a Withdrawal Hierarchy?
A withdrawal hierarchy is just a fancy way of saying your plan decides which funds you pull from first. This matters because it can influence:
- What investments get sold
- When you’re able to access certain accounts
- How taxes may apply to different parts of your balance
According to the Investment Company Institute, around 45% of 401(k) assets are in mutual funds, which are often affected by these rules.
A Real-Life Example
One person interviewed by The Wall Street Journal found themselves stuck when their former employer wouldn’t let them withdraw specific investments in their 401(k). The company later admitted there had been confusion. But that situation highlights a bigger issue: many people don’t know the rules of their plan until it’s too late to adjust. (1)
What Can Go Wrong?
The Employee Benefit Research Institute has reported that misunderstanding withdrawal rules can lead to mistakes like:
- Taking money out too soon
- Losing access to tax advantages
- Missing opportunities to adjust your investments
Even small missteps can make a difference over time.
Why It Matters in Volatile Markets
When markets are unpredictable, it’s natural to feel uneasy. But reacting quickly — especially if you don’t have flexible access to your funds — can create added stress. Rob Austin, a workplace retirement analyst, has noted that having access to some cash or low-risk investments during uncertain times can make it easier to stay on the course.
Smart Moves to Stay Ready
This isn’t about big changes — it’s about being aware of your plan’s design and making decisions that fit your situation. Here are a few things to think about:
- Know the Rules: Take time to understand how your plan handles withdrawals.
- Build a Plan: Make sure you have enough flexibility to handle the unexpected.
- Keep Some Flexibility: If possible, maintain access to some lower-risk or liquid funds.
- Check for Updates: Retirement plans sometimes change — stay in the loop.
Final Thoughts
Your 401(k) is a tool, but every tool works differently. The more you understand how your specific plan operates, the better you’ll be able to make it work for you.
This isn’t about predicting the future — it’s about staying prepared and avoiding surprises.
Staying informed is key to securing your financial well-being. By maintaining a long-term focus, understanding your plan’s structure, and seeking appropriate guidance, you can work towards a more secure retirement.
Ready to take the next step in optimizing your retirement strategy? Consider scheduling a complimentary meeting to discuss your 401(k) plan and explore strategies tailored to your unique financial situation.
Source:
(1) “How I Got Burned by the 401(k) ‘Hierarchy Trap.’” The Wall Street Journal. www.wsj.com/finance/investing/401k-withdraw-funds-hierarchy-risk-profile-cb03b136
For more complete information about your 401(k) investment options, call your company’s plan administrator or your financial professional for a prospectus. The prospectuses contain details on investment objectives, risks, fees, and expenses, as well as other information about your plan’s investment options, which you should carefully consider. Please read the prospectuses thoroughly before sending money. This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a financial professional regarding your particular financial concerns. Consult with your tax advisor or attorney regarding specific tax issues.
