These 401K tips focus on withdrawing funds, taking loans, and paying taxes on your 401K after you retire (or before you retire, if you need to cash your 401K early!). Financial planner Rick Rodgers cautions investors to think twice before breaking into established 401K plans…
Before his 401K tips, a quip:
“When a man retires and time is no longer a matter of urgent importance, his colleagues generally present him with a watch.” ~ R.C. Sherriff.
You may not need a watch when you retire – but you will need money! For detailed 401K info, read Smartest 401(k) Book You’ll Ever Read: Maximize Your Retirement Savings…the Smart Way! by Daniel Solin. And, read on for Rodgers’ simple 401K tips – focusing on withdrawing funds early and paying taxes.
Quick Tips for Your 401K – Withdrawing Funds and Paying Taxes
Think twice before taking money from your 401(k) – this money is for your future! Once it has been withdrawn and spent, it’s gone forever. Even hardship withdrawals are subject to tax and perhaps even penalties.
If your 401(k) plan permits loans, you can borrow up to $50,000 or 50% of your account balance (whichever is less). You must pay the loan off within five years, unless the money is used to buy a house. The interest rate charged is usually prime plus one or two percent, so the rates are competitive.
Be cautious, because people often get themselves into trouble with 401(k) loans. If you lose your job, you must pay the loan back within 60 days or it will be considered a withdrawal – subject to tax and penalty. Losing a job is not typically a great time to be paying back a loan quickly! The amount of money you are borrowing is set aside in your 401(k) as collateral for the loan. Typically, these funds are placed in the stable value fund in the plan. If you borrow money on or withdraw money from your 401K, you’ll miss out on growth opportunities in the market while you are paying back the loan.
Simple 401K Tips – What You Need to Know
1. There is a mandatory 20% tax withheld from all withdrawals. The 401K plan must withhold 20% for taxes for any distributions from the plan, except when the money is rolled over to another qualified plan – IRA or 401K. Many people think this is the tax. The actual tax will be calculated when you file your return for the year you withdrew the money. So, you could end up owing much more than 20%.
2. Early withdrawal penalties end at age 55, not 59 ½. The 10% early withdrawal penalty does not apply to distributions from corporate plan if the recipient is age 55 or older. Therefore, if you retire at age 55, you do not want to rollover your 401K plan to an IRA, where you will have to wait to age 59 ½ to access those funds without penalty.
3. Many employers offer Roth 401K as an option. Tax deferral is a great thing while you’re working! But, tax deferrals aren’t so great when you are retired. All the money you stashed away during your working years is now taxable, if you try to access it in retirement. Consider saving some of your money in a Roth 401K, if your company offers the option. You don’t get to deduct the money when it goes in the plan, but all withdrawals will be tax free when you are retired.
For more info on saving money for retirement, read Tips for Maximizing Your Retirement Income – also contributed by Rodgers.
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Rick Rodgers, CFP® is an author, keynote speaker, wealth manager and President of Rodgers & Associates, “The Retirement Specialists”, in Lancaster, PA. He is a 25 year industry veteran that specializes in helping people who are retired or about to retire make smart choices about money.