Early 401k Distributions by Peter Richon
For one of many various reasons, lots of people find themselves accessing their tax-deferred retirement savings accounts before the age of 59 & 1/2. For some, they need to money to pay off debts or to cover living expenses. Others would like to help a child through college or put a down payment on a home for themselves or their children. Some pay for weddings or vacations. The reasons for doing so are numerous. However, the penalties for doing so can be stiff.
As most know, taxes take a bite out of each and every dollar we earn and spend. The government, Uncle Sam & your state require that we pay for their services to us through taxes. This is not a voluntary system.
The advantage of the 401k is that you can contribute funds to your savings pre-tax and have funds grow tax-deferred. This is great while you are saving. The drawback here is that on the backend, the government still requires you to pay tax on that money and, as you pull it out of your 401k or IRA, will require you to report that money as income. The average federal income tax rate for most Americans is roughly 15 percent to 35 percent. You will need to account for this amount to be withheld from your 401k distributions at any age for taxes. Remember also that state taxes will be required in addition.
Even worse, for those who have not reached the age of 59 & 1/2, if you pull funds out of your 401k, you will find yourself subject to additional penalties of 10%. So, if you are requesting a $30,000.00 distribution for example, you will be subject to a $3,000.00 penalty for early withdrawal on top of the taxes that will be due.
There are certain circumstances where this penalty will be waives such as terminal illness, which certainly occurs but, is not the reason that the majority of people take early distributions from their 401k.
There are other reasons why many people would want to access the money in their 401k accounts. You may not like the options that are provided by your company for money management. You may be able to secure more safety, or a better return, outside your company’s plan. You may not like the fees often associated with company sponsored plans coming from your retirement dollar.
This is often a tossup because if you discontinue making contributions to your company’s 401k, you will lose any match to your contributions that you may be receiving. Companies often do not allow distributions until you leave the company or turn 59 & 1/2, even if you are not continuing to contribute.
It is a commonly available fact that, should you leave a company (fired, retired, quit, or changed careers) you should also carry your 401k account with you in the form of a tax-free and penalty-free Qualified IRA Rollover to maintain better control of your money, gaining more options for your investment choices, and avoiding any unforeseen event from within your previous employer’s company, devaluing your account.
There are also some companies that DO allow what is known as an "In-Service Distribution" which allows workers to harvest what they have saved and contributed thus far, roll that amount tax-free to a personal IRA (often with less fees and better investment/savings options) and then continue to contribute new funds to the companies 401k plan and continue to capture any company match.
If a company match is offered on a 401k plan, you should always contribute at least up to the matched amount to get all the "free money" available to you and maximize your retirement potential.
However, at certain times, it does make sense to consider an "In-Service Distribution" if you would like to gain more control of your investment choices and any possible fees and commissions coming from your savings.
By doing an "In-Service Distribution" you typically are not using the money for an immediate purpose, simply placing it in another tax-deferred position inside a new IRA, outside of your company’s control. You therefore would not be subject to pay any tax or penalties for the distribution if the funds are properly placed into another qualifying deferred account within the IRS guidelines.
There are many companies that offer the In-Service Distribution as an option for their employees. There are also many that do not. There are lists of some of the companies that I have found that do offer an "In-Service Distribution" for employees wishing to move their 401k savings available on my website. This option is subject to change at your company’s discretion however. So lists may not be completely accurate or up to date. The best way to find out is to contact you comany's Human Resource Director or Benefits Administrator.
I appreciate any help in keeping my lists up to date. If you find that your company does or does not offer an In-Service Distribution, please keep me informed by submitting the information to me at
www.Early401kDistributions.com
If you do not see your company listed here and would like to find out if they do allow an “In-Service Distribution” or if you would like information on how to go about requesting a distribution be made you should contact the director of your Human Resource Department or you are welcome to contact me. If you would like more information about 401k distributions you can visit the website
www.401kdistributions.com.
For more information or to contact Peter Richon with questions or comments you may call 919-657-4201 or email
prichon@capitalfinancialusa.com