401K Withdrawal Options You Need to Know

by Fern LaRocca CFP®

in 401k Withdrawal

Want a $500.00 credit card? Guaranteed Instant Approval. Bad credit accepted. Reports to a major credit bureau. Apply Today!

Your 401k withdrawal options are limited to what is written in your Summary plan document. Not all 401K plans allow loans so it is best to check what you can and can’t do first before you even consider a 401K withdrawal. The penalties are severe for taking a withdrawal from a 401k if you are under the age of 59 and a half. Let’s take an example. If you were 50 years old and took out $10,000. First you would pay federal income tax on 10% or $1,000 and if you lived in California, like I do, there would also be a state tax of 2.5% or $250.  Then there is the 10% penalty tax on top of that. That would be an additional $1,000. So your total expenses for that withdrawal would be $2,000 to $2,250, or in percentage terms 20%-22.50%. When you look at it like that, you can see that if you really needed the money, a cash advance on a credit card would be a less expensive choice to get cash and keep your 401k maximum account balance in tact.

Now if you are 55 and older and you leave your job or you are laid off, there are other 401k withdrawal rules . You can take one of three withdrawal options according to the IRS ruling 72T provisions. These options allow you to take a lump sum or a form of monthly income. Be careful how you decide because you are stuck with that decision until 5 years or age 59 and a half (whichever comes first).  This is a great backup plan for older employees in case their severance or unemployment benefits run out. The withdrawals are taxable which can be tricky since you would want to make sure there is some withholding on the payment stream so as to not get stuck with a large tax bill at the end of the year.

To get the 401k maximum balance, however, you still want to try to not touch that money and let it grow as much as possible. Many people watched their 401k balance shrink as fast as the economy did. Those people didn’t have a diversified portfolio or a risk ratio that they were comfortable with. Keep the money growing for the 401k maximum balance , but if you really need it review these options in detail with your fee-only financial advisor or Wealth Coach.  Remember, too, don’t tap your 401K withdrawal if you are unemployed, laid off or in debt. Consider filing bankruptcy as an option.

Technorati Tags: ,

{ 1 trackback }

401K Withdrawal or Rollover? 4 Factors to Consider at CitySpeakers.org
at

{ 0 comments… add one now }