Can I roll my 401(k) and/or IRA funds into a more liquid investment fund without penalty?

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.

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.

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.

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 (Contact Denise)