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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: 401k maximum, 401k Withdrawal
When it comes to 401K withdrawals- just say no! Step away from the 401K account and find money somewhere else. You will find that taking money out have severe penalties — not just the 10% that you hear about but also federal income taxes and state income taxes too (depending on the state that you live in. So don’t do it.
Here is an example: Sally lives in California and is 55 years old and takes $10,000 out of her 401k. Sally pays:
Federal 10% penalty tax-$1,000
CA state 2.5% penalty tax-$250
Federal income tax(28% bracket) $2200
State income tax (9% bracket) $1000
Do you think Sally made a wise decision?
Technorati Tags: 401k Contribution Limits, 401k Withdrawal
Only spouses have been able to avoid a large tax bill when they inherit a 401K. The new tax law now allows non-spouses (children and other family members) opportunities to avoid taxes on inherited 401K money.
Typically the spouse is allowed to take the lump sum distribution from a 401K and roll it over to their own IRA where it can grow tax deferred. Tax deferral allows the money to grow fast. When the spouse turns 70 1/2 years old, he/she is required to take minimum distributions from the IRA. A lot of 401K plans don’t give non-spouse beneficiaries the same option. They are forced to take the money out of the 401k plan and pay taxes on the lump sum distribution all in one year.
Starting January 1, 2010, a new law that is part of the economic-recovery package Congress approved late last year, non-spouse beneficiaries will be able to rollover their lump sum distribution from a 401k that they inherited to their own Inherited IRA. An Inherited IRA will make the named non-spouse beneficiary take distributions stretched out over their lifetime. The tax bill will be a lot less than if they had to take the lump sum. It also helps the non-spouse beneficiary which is usually the children not blow through the money as fast as if they had all of it in one year.
A lot of problems can occur when the receiving custodian usually a bank or brokerage firm does not handle the paperwork for an Inherited IRA correctly. Obviously this is something they don’t do everyday and a lot of mistakes have been made where the money was rolled over into a personal IRA instead of an Inherited IRA. Make sure the firm you work with knows and understands how to do this or else it could cost you time and unexpected taxable income or penalties.
When inheriting the proceeds from a 401K, you can avoid a large tax bill. Follow the guidelines above to stretch the money over your lifetime in order to add to your financial plan and lower your tax liability.
Technorati Tags: 401K, 401k Withdrawal
