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Kenneth Petersen: 401(k) plan early distributions

Fri, 11 May 2012 10:00:13 +0000

Q: Last week you answered my question about doing a rollover from my 401(k) plan to an IRA. You said that if I am under 59½ and withdraw money from my retirement plan I would pay a penalty in addition to taxes unless I meet certain exceptions. What are those exceptions?

A: the penalty for taking an early distribution from your retirement account if you are under age 59½ is an additional income tax of 10percent added to the regular tax you would pay on the distribution. the 10percent additional tax does not apply to the following payments from your retirement plan:

1. Payments made after you separate from your job if you will be at least 55 in the year of your separation.

2. Payments that start after you separate from your job if they are paid at least annually in equal or close to equal amounts over your life or life expectancy or the joint lives or joint life expectancy of you and your beneficiary.

3. Payments from a government defined benefit pension plan made after you leave your job if you are a public safety employee and you are at least 50 in the year you separate from service

4. Payments made due to disability.

5. Payments of Employee Stock Ownership Plan dividends.

6. Corrective distributions of contributions that exceed tax law limitations.

7. Cost of insurance paid by your retirement plan.

8. Withdrawals of contributions made under special automatic enrollment rules pursuant to your request within 90 days of

enrollment.

9. Payments made directly to the government to satisfy a federal tax levy.

10. Payments made to a former spouse under a qualified domestic relations order (QDRO).

11. Payments up to the amount of your deductible medical expenses.

12. certain payments made while you are on active duty if you were a member of a reserve component of the Armed Forces called to duty after Sept. 11, 2001 for more than 179 days.

13. Payments of certain automatic enrollment contributions requested to be withdrawn within 90 days of the first contributions.

Q: if I roll over my retirement plan to an IRA and then withdraw money before I reach age 59½, will the 10 percent penalty apply?

A: yes, unless an exception applies. the exceptions for an IRA are the same as those listed above except as follows:

1. there is no exception for payments after separation from sevice that are made after age 55.

2. the exception for a QDRO does not apply. there is a special exception for IRAs that allows you to make a tax-free transfer directly to an IRA of a spouse or former spouse as part of a divorce or separation agreement.

3. the exception for payments made at least annually in equal or close to equal amounts over a specified period applies without regard to whether you have had a separation from your job.

4. there are additional exceptions for payments for qualified educational expenses, payments of up to $10,000 that you use to make a qualified first-time home purchase, and payments after you have received unemployment compensation for 12 consecutive weeks (or if you are were self-employed and otherwise would have been eligible to receive unemployment compensation).

Kenneth B. Petersen is an investment adviser and principal of Monterey Private Wealth, inc., in Monterey. Send questions concerning investing, retirement or estate planning to 2340 Garden Road, Suite 202, Monterey 93940 or ken@montereypw.com.

LadyJag asked: My manager did not notify HR when I went on medical leave, so payroll continued to cut regular paychecks and deposit them into my 401k and bank accounts.
Well, I quit my job, and then HR started harassing me about paying the company back. so I wrote them a check for the wages paid me during my leave.
Two months later, I get a letter from the company, saying I owe them for what they put into my 401k, including the company match amount. WHY?
If I withdraw that money, I have to pay a penalty. If I take the money from my personal account, then it’s like they’re forcing me to make 401k contributions.
Can they legally force me to do this?
Serious answers only, please – “gamers” will be reported.Outdoor Wood Furnace

Why do I have to pay back money put into my 401k?

MarketWatch First Take: Yahoo job cuts just the start of bigger plan

Thu, 05 Apr 2012 00:00:04 +0000

As Yahoo?s new CEO makes his first move to restructure the Internet pioneer, some investors expect more to happen over the next few weeks, writes Therese Poletti.

MarketWatch First Take: Yahoo job cuts just the start of bigger plan

The Importance of Rebalancing

Mon, 27 Feb 2012 01:00:14 +0000

It’s impossible to predict the financial markets. Why? sure, economists can do a good job explaining what has already happened.? But with millions of variables, it’s impossible to credibly and repeatedly predict how things will move going forward.? does that mean you should give up on trying to do the smart thing with you investments?

Instead, be sure to follow proven strategies.? Although proven strategies such as periodic rebalancing won’t make you immediately rich, they can do wonders to keep you from losing your shirt.? Learn how periodically rebalancing forces you to sell high and buy low.

The Importance of Rebalancing originally appeared on About.com Retirement Planning on Monday, August 15th, 2011 at 13:00:06.

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The Importance of Rebalancing

Can I Roll Over My 401(k) Without A Penalty?

Thu, 03 Nov 2011 12:00:17 +0000

By Quentin Fottrell

Question: I attended a community college for around two years and during that time I had a job with a 401(k) that accumulated a modest $2,000. Last August, I had to quit my job in order to attend the University of Illinois at Urbana-Champaign. Now, I am faced with the decision of what to do with my 401(k). the plans administrator recently sent me a letter letting me know that I had to act on the plan and either withdraw the money or they would roll it over to an IRA.

Is there typically a fee or penalty, whether from the IRS or the plan’s administrators, for the rollover and, if so, typically how much? And more importantly, will my plan to rollover my 401(k) to an IRA, for the purpose of making an education expense withdrawal, and avoid the typical 10% penalty, work? Or may I not make a withdrawal from an IRA that early?

– Jessica Radek, Northlake Il.

Answer: your plan is a sound one. You will avoid the 10% early withdrawal penalty by taking a “direct rollover” — from one trustee to another — from your 401(k) plan to an IRA. (To do this, you open the IRA first, then fund it with the 401(k), not the other way around). as for a rollover fee, most brokerage firms don’t have them, says Robert Schmansky, founder of Clear Financial Advisors in Bloomfield Hills, Mich. for instance, online brokerages E*Trade and Scottrade.com have no minimum fee for an IRA rollover, nor do TDAmeritrade, Vanguard or Charles Schwab.

Once the IRA is funded from the rollover, you can make a penalty-free early withdrawal from the IRA for qualified higher-education expenses. Most brokerages don’t charge withdrawal fees, either. Eligible expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus an amount for room and board determined by your school if you attend at least part-time, says Peter Maris, founder and principal of Resource Financial Group in Wilmette, Il.

There are some potential pitfalls to be aware of. there may be a waiting period to access the newly set-up IRA, says Schmansky – typically just a few weeks. And just because you are avoiding the 10% early withdrawal penalty doesn’t mean you avoid federal income taxes. if you rolled over from a traditional 401(k) to a traditional IRA, the total amount withdrawn is taxable as income. if you have qualified education expenses, any taxes would need to be paid from a different source.

Be sure that the early withdrawal and the associated taxes are worth it. Remember, this is tax-advantaged money in a retirement account. Some financial advisers recommend that you explore options for paying for college before turning to retirement assets, no matter how large or small. However, Dan Mahoney, a spokesman for Charles Schwab, says, “Depending on the client’s situation, it may be better to use their rollover IRA assets for education and pay the taxes rather than take out a student loan and potentially carry on more debt.”

For more details on IRA withdrawals, see the IRS Website or our guides below.

For more:

When the Fleigs moved from California to Ohio in 2004 for Chris’s job as a paper salesman, the lower cost of living allowed Tina, formerly a finance director, to become a stay-at-home mom. (They have two kids, Bailey and Jake, now 3 and 6.)

Saving for college and retirement on 1 income

How to Know When to Quit

Thu, 13 Oct 2011 20:00:05 +0000

This post is from staff writer April Dykman. before I became a full-time freelancer, I worked for a couple of different companies. Both times I started a new job, it started out exciting and fun. great benefits! cool perks! interesting work! after a year or two, it got harder to get up in the morning [...] …

How to Know When to Quit

4 Options for Your 401(k) When Leaving Your Job

Thu, 15 Sep 2011 18:00:09 +0000

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Many traditional money management concepts or principles, such as saving three to six months of expenses for emergencies, have been passed down to become “rules” of a sort. but given all that’s changed with the economy, old school advice may no longer be relevant. Here are some rules to reconsider, and ones that still stand the test of time.

Old School Thinking that may No Longer ApplySave 3 to 6 months’ worth of expenses in your emergency fund

Squirreling away enough to cover three to six months of expenses in case of unemployment, a medical emergency, or other financial disaster is an important goal—but it may not be enough. You’ve probably heard (or worse, witnessed) the horror stories of massive unemployment making it much harder to find a new job. the process can take well over six months; in fact, recent data shows the average length of unemployment has surged to an all-time high of 40.4 weeks.

Whether this is an unusual financial circumstance or the “new normal,” the uncertain economy and crappy job market means, for most people, “three to six months of expenses” is a good place to start, but not a smart place to stop (as one commenter noted on a blog post about the need for bigger emergency funds at the Squirrelers personal finance blog).

So how much should you save? Eight to twelve months might be the new three to six, but if that seems like an enormous goal, don’t get disheartened. as before, just start saving as much as you can…but don’t stop at the six month mark.

Refrain from using credit cards

A cash-only policy may help you get out of debt or keep tabs on your spending more easily, but not using your credit can also have a negative effect on how lenders view your creditworthiness.

SmartMoney reports that lenders are closing or slashing lines of credit for borrowers with high FICO scores (median 770) due to inactivity. that lowered credit limit available means their credit scores would drop. And credit scores aren’t what they used to be, either: Time says that a score of 750, which used to be considered “elite” may now be at the bottom of “very good,” due to tighter lending practices these days.

The moral is to go ahead and swipe that plastic regularly, and pay off the bills in full, of course.

SmartMoney has a few other old school financial rules you may want to break, challenging conventional wisdom like converting your traditional IRA to Roth (if you’re up to 10 years away from retiring, it can take years to make up for the taxes on the conversion).

Retire at age 65

Speaking of retiring, it may be time to put aside notions of 65 being the ideal retirement age. (So long, decent retirement age, we hardly knew you.)

The Simple Dollar points out that when the national retirement age of 65 was established for the Social Security Act in 1935 (over 75 years ago!), the average American lifespan was 61.7 years. Today, we still think of retirement age as 65, but the average lifespan is now 78 years—16 years more.

What this means for retirement planning is that we’ll probably have to change our approach and our perspective, looking at the period beyond age 65 as one of productivity (perhaps for a second career). While retirement investment tools are still helpful, we may need to tweak the inputs to account for longer lifespans, a second line of work, or just increased savings needs.

Just as “8 to 12 months” may be the new “3 to 6 months” for emergency fund savings and 750 may be the new 680 for credit scores, 65 may be the new 45 when it comes to our age and productivity.

Golden Rules of Money Management that Will always be Relevant

Two very basic money principles won’t ever change:

Spend less than you earn and invest the difference

It’s a boring and old piece of advice, but it’s also one you can count on: to increase your wealth, spend less than you earn, and invest the difference. this may be easier said than done, but the principle of living within your means is really the fundamental rule of personal finance.

Invest in assets, not liabilities

Of course, this also begs the question of what to do with the surplus or where to invest it. the other basic rule that will also stand the test of time is to direct your money to those items that will increase in value or produce income (assets), rather than those that will depreciate in value or end up requiring even more investment or upkeep (liabilites). this is the secret to building wealth most people ignore, the Frugal Dad blog says: “Buy Assets, Avoid Liabilities.” as an example, you could spend $200 on a new smartphone and then have to shell out more each month for the data and calling plans…or you could buy $200 in Verizon stock.

We’re all for buying smartphones and value them as a productivity tool, but it makes sense to apply this reasoning to every major purchase: will it improve your quality of life or increase in value, or will this item make you spend additional money each month just to have it?

Staying Flexible Is Key

The main lesson here may be to regularly take stock of what our financial priorities are and our progress, and to update our plans and budget according to changing circumstances and our goals. Previously mentioned financial priorities worksheets can help you plan for your big picture goals—which you should reevaluate whenever your life (and the world around you) changes in any big way.

Being able to adapt and adjust to changing financial challenges may be the best money management skill to have. what are your money management “rules” for this new economy? Photo by Lexie Rydberg.

You can follow or contact Melanie Pinola, the author of this post, on Twitter.

Send an email to Melanie Pinola, the author of this post, at melanie@lifehacker.com.

soulravah asked: ………..

I have money invested in my 401K.

if I get fired from work, what kind of taxes will I owe if I need to access my 401K for funds, while looking for a new job?

Thanks!
Question posted courtesy of: Gertrude

How can I access my 401K for funds, if fired from work?