Early Withdrawal

Archive for January, 2010

Question: What is the procedure to use my 401k funds to pay for my college expenses ?

I am planning to work in my current position for two years and then go to school for a full time MBA graduate degree. Can I contribute to my company’s 401k plan now and then withdraw the amount after 2 years to fund my college expenses without being subjected to the additional 10% penalty ? For this to happen, do I have to roll over the 401k savings to an IRA first, and then make the withdrawal for college expenses ? Are there any expenses involved in this process ?

Answer: The easiest thing to do would be to roll over the 401(k) into an IRA. Not all 401(k)’s offer hardship withdrawals (all IRAs do) and you may still be subject to the 10% penalty under the 401(k) (but not under the IRA).

Also, check your company’s vesting schedule. If you are not vested within two years, there is no advantage to contributing to the 401(k) as your withdrawal will be taxed at ordinary income levels (though going full time may lower your tax bracket, saving you a little money) and you will not receive the employer match.

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Question: Early Withdrawal? 401K or IRA?

Due to financial problem, I have decided to make a full Early Withdrawal of my 401K. Which one is better? Withdraw it right from 401K, minus TAX plus 10% penalty? or rollover to an IRA first then get it from there? They said early withdrawals from IRA still have TAX and penalty. I don’t wanna do a loan so don’t bother.

Answer: If you take the entire withdrawal directly from the 401(k) administrator, they are likely to withhold not just the 10% but also another 20% for taxes. It depends on the particular rules of the plan administrator.

A better route and one that offers more control is to do a rollover to an IRA and THEN take the distribution. You will be better able to decline to have taxes withheld by an IRA custodian if you so desire and you can worry about them later. Just remember to make sure you have enough put aside in a savings account or somewhere to cover the tax liability next April. A brokerage or bank acting as an IRA custodian can not force you to have taxes withheld. They will send you and the IRS a 1099 form early next year so you can not avoid paying the taxes, you just don’t have to pay them now.

401(k) withdrawals

Question: what does this mean?

What many people don’t realize is that once they reach 70, the decision to withdraw funds is no longer discretionary. A tax rule mandates you to take out a specified amount annually — known as a Required Minimum Distribution (RMD) — by Apr. 1 in the year after you turn 70. This sum is based on a life expectancy formula for you and a spouse who’s your beneficiary, and you must pay income tax on it. Failure to withdraw will get you a penalty of 50% of the amount you were supposed to have taken out. (There is no RMD for withdrawals from a Roth IRA, because your contributions to the account have already been taxed.)

Answer: This means your tax deferred retirement fund is used to provide iincome during retirement and not a way to leave more money for your heirs. You have to remove the money from your IRA and pay tax on it during your expeced life. You don’t have to spend the money if you don’t want to.

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