Dear Carrie: I’m 57 years old and unemployed. I accept $250,000 in a 401(k). Can I abjure some of the money beneath hardship? –A Reader
Dear Reader: While it sounds like you’re experiencing a boxy time, your age and the admeasurement of your 401(k) beggarly that you do accept some options for accepting through it. If you were employed, my aboriginal advocacy would be a 401(k) loan. That way you could admission some of your assets after advantageous assets taxes and a accessible amends on your distribution. Unfortunately, a 401(k) accommodation isn’t accustomed already you leave a company.
As you suggest, a accident administration is addition possibility, although what’s advised a accident is actual specific — and the bulk in taxes and penalties can be formidable. Fortunately, there are added alternatives for addition in your situation.
LOOK INTO SEPARATION OF SERVICE
You don’t say back your application cachet changed, but if you larboard or absent your job in the year you angry 55 (or later), you could accede a administration from your 401(k) beneath what’s alleged break of service. This allows you to booty an aboriginal administration after advantageous a penalty, although you will accept to pay assets taxes on it.
CONSIDER TAKING SUBSTANTIALLY EQUAL PERIODIC PAYMENTS
If you larboard your aggregation afore age 55, you can still set up a agenda of “substantially according alternate payments” and abstain the 10 percent penalty. Determined by your activity assumption and an absorption bulk accustomed by the IRS, withdrawals charge be taken for a minimum of 5 years or until you ability age 59 1/2, whichever is longer. So if you started demography them now at 57, you’d accept to abide until age 62. After that, you could booty absolute amounts from your 401(k) penalty-free.
THINK ABOUT A ROLLOVER IRA
Another addition is to cycle over your 401(k) into an IRA. This could absolutely beggarly added advance choices and lower fees. Rolling over can be a adequately simple, no-cost process, but you charge be abiding to cycle your 401(k) anon from your employer to your IRA. If you booty control of the money, timing rules and accessible penalties appear into play. And the IRS additionally allows you to booty a administration from an IRA in essentially according payments with no amends at any age.
DECIDE WHAT TO DO IF YOU HAVE COMPANY STOCK
If you accept accepted aggregation banal in your 401(k), there’s addition accessible advance of action. You don’t accept to cycle this banal over into an IRA and pay accustomed assets tax ante back you abjure it. Rather, you could alteration the banal to a taxable annual and booty advantage of what’s alleged net abeyant appreciation. With this strategy, you about pay taxes alone on the bulk base of the aggregation banal (its bulk back you accustomed it), which could be decidedly lower than the accepted value. Then back you sell, you pay abiding basic assets taxes, not accustomed assets taxes.
CONSIDER A HARDSHIP DISTRIBUTION A LAST RESORT
Qualifying for a accident administration from your 401(k) isn’t easy. First, you charge prove what the IRS considers “immediate and abundant banking need.” In general, the IRS defines this as:
–Medical costs for you, your apron or dependents
–Costs anon accompanying to the acquirement of your arch abode (excluding mortgage payments
–Post accessory charge and accompanying educational fees, including allowance and lath for you, your apron or dependents
–Payments all-important to anticipate you from actuality bankrupt on or evicted from your arch residence
–Certain costs apropos to the adjustment of accident to your arch residence
The bulk of the administration is bound to your own contributions to the plan and possibly your employer’s contributions but doesn’t accommodate balance or assets on your savings. It additionally can’t be for added than the bulk of the specific charge — and you can’t accept added assets accessible to awning it.
Another big abrogating is that alike if you authorize for a accident distribution, you’ll accept to pay (SET ITAL) both (END ITAL) assets taxes and a 10 percent penalty. To me, this like abrading alkali in your wounds!
And finally, addition accessible snag is that while the IRS allows accident distributions, not all affairs do. Some alone acquiesce them beneath actual bound circumstances, for instance to anticipate a foreclosure but not for apprenticeship expenses. Also, a retirement plan isn’t appropriate to acquiesce such distributions already you’re no best alive for the company.
GET SPECIFIC TAX ADVICE
My capital affair for anyone who wants to tap into retirement assets aboriginal is how it will affect banking aegis after on. Remember, you’re not alone annihilative your hard-earned savings, you’re additionally accident the abeyant for tax-deferred growth.
But sometimes, present apropos accept to trump approaching possibilities. If your 401(k) is your alone recourse, I acerb appetite you to allocution to a tax or banking adviser afore demography action. Get admonition specific to your bearings — and alone abjure as abundant as you charge to accumulate yourself afloat until things about-face around.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is admiral of Charles Schwab Foundation and columnist of “It Pays to Talk.” You can e-mail Carrie at [email protected] This cavalcade is no acting for an abundant recommendation, tax, acknowledged or alone advance advice. To acquisition out added about Carrie Schwab-Pomerantz and apprehend appearance by added Creators Syndicate writers and cartoonists, appointment the Creators Syndicate website at www.creators.com.
COPYRIGHT 2012 CHARLES SCHWAB & CO., INC. MEMBER SIPC
DIST BY CREATORS SYNDICATE, INC.
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