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My 401(k) plan lists several fees associated with my account. One of the fees is "Final Distribution", which is "$50.00 per distribution". Another is "Withdrawal", which is "$50.00 per withdrawal". I can contact my plan manager for clarification, but before I do, I'm wondering if there is a general distinction between a withdrawal and a distribution used by the financial industry.

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This question had better be asked of the 401k plan administrator rather than here. The plan document that you received when you began participating undoubtedly has a page or more of definitions of the terms used in the contract, and especially so if the meanings are nonstandard. For example, one would expect that a Final Distribution leaves a balance of $0 in the 401k account and so a "per distribution" fee is meaningless in the context of Final Distribution.

As the post by mbhunter indicates, withdrawal and distribution seem to be used interchangeably in IRS documents, and so there probably is a nonstandard meaning assigned to these terms in the 401k document.

Three possible nonstandard meanings of these two words come to mind.

  • Withdrawal = at the request of the participant,
    and
    Distribution = as required by law, e.g. required minimum distribution

  • Withdrawal = anything before age 59.5 or before termination of employment and
    Distribution = anything after age 59.5 or after termination of employment

  • Withdrawal = anything on which the 10% excise tax for premature distributions must be paid, or anything that is not eligible for rollover into another tax-deferred account
    and
    Distribution = anything on which the 10% excise tax does not need to be paid.

But all the above is just idle speculation, and what matters is the plan document's definitions of these terms, and that can be determined only if you read your 401k plan document yourself. Reliance on the answers given by the employer's HR department, or the plan administrator, as to what the plan document says might or might not be advisable: even the IRS has been known to give out incorrect information.

In general, money cannot be withdrawn from a 401k plan and rolled over (or transferred via a trustee-to-trustee transfer) into another tax-deferred plan while the participant is still employed by the sponsor of the 401k plan. Since most 401k plans have poor investment choices and excessive administrator fees, reflect that absent this prohibition, most people would with roll over money from their 401ks into their IRAs as often as feasible.

You can withdraw money from a 401k account without paying the 10% excise tax for several reasons (including financial needs of various specified kinds), but you cannot then change your mind and put that money into your IRA, telling the IRA custodian that it is a rollover from the 401k. To do so will not just trigger the 10% excise tax on premature distributions from a 401k account, but you will also need to pay penalties for excess contributions to your IRA.

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The two terms seem to be used interchangeably. Even the IRS' website uses them interchangeably from one sentence to the next (emphasis mine):

Many 401(k) plans allow employees to make a hardship withdrawal because of immediate and heavy financial needs. Generally, hardship distributions from a 401(k) plan are limited to the amount of the employees' elective contributions only ...

It might a difference in perspective: The account holder withdraws the money, but the fund manager distributes it.

Another way to look at it would be for cases that are only in transition to another tax-advantaged account. You can withdraw the money without it becoming a taxable distribution if you get it into another tax-advantaged account within a certain time limit.

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  • Keep in mind, if you take the money into your hands, there's a mandatory 20% withholding. You were right to equate withdrawal and distribution, with 'transfer' to other account as a distinct option. – JTP - Apologise to Monica Jul 4 '13 at 10:57

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