How Can I Get Money From My 401k

Three Consequences Of A 401 Early Withdrawal Or Cashing Out A 401

Can I Take A Lump Sum From My 401k When I Retire

Not sure how to withdraw money from your 401k when you retire? Can you take a lump sum? Be sure to fully understand all of your options before deciding so you can hopefully avoid a big tax mistake.

Gary,How will my money be given out to me from my 401k when I retire? Will a portion be given monthly or will it be given in a lump sum?

I would like to get a big wad as soon as I retire for a new home in a new location.Owen

Owens not the only one asking this question. According to the Wharton School of Business, in the next 10 years, over 10 million people will reach age 65. So quite a few folks will be looking for an answer.

First heres a disclaimer. Before making decisions that could significantly affect your taxes, its wise to see a qualified tax professional. This is a big decision. Dont risk making a big mistake.

Withdrawing Money From A 401 After Retirement

Once you have retired, you will no longer contribute to the 401 plan, and the plan administrator is required to maintain the account if it has more than a $5000 balance. If the account has less than $5000, it will trigger a lump-sum distribution, and the plan administrator will mail you a check with your full 401 balance minus 20% withholding tax.

Before you can start taking distributions, you should contact the plan administrator about the specific rules of the 401 plan. The plan sponsor must get your consent before initiating the distribution of your retirement savings. In some 401 plans, the plan administrator may require the consent of your spouse before sending a distribution. You can choose to receive non-periodic or periodic distributions from the 401 plan.

For required minimum distributions, the plan administrator calculates the amount of distribution for the qualified plans in each calendar year. The 401 may provide that you either receive the entire benefits in the 401 by the required beginning date or receive periodic distributions from the required date in amounts calculated to distribute the entire benefits over your life expectancy.

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Calculating Required Minimum Distributions For Designated Beneficiaries

Generally, for individuals or employees with accounts who die prior to January 1, 2020, designated beneficiaries of retirement accounts and IRAs calculate RMDs using the Single Life Table ). The table provides a life expectancy factor based on the beneficiarys age. The account balance is divided by this life expectancy factor to determine the first RMD. The life expectancy is reduced by one for each subsequent year.

If the distribution is from a qualified retirement plan, the plan document will establish the RMD rules, and the plan administrator should provide the beneficiary with his or her options. The options for the RMD pay-out period may be as short as 5 years, or as long as the life expectancy of the beneficiary. Therefore, if the distribution is from a qualified plan, the beneficiary should contact the plan administrator. For IRA distributions, see Publication 590-B, Distribution from Individual Retirement Arrangements , or this chart of required minimum distributions to help calculate the required minimum distributions.

Withdrawing From A Roth 401k

Most 401k plans involve pre-tax contributions, but some allow for Roth contributions, meaning those made after taxes already have been paid.

The benefit of making a Roth contribution to your 401k plan is that you already have paid the taxes and, when you withdraw the money, there is no tax on the amount gained as long as you meet these two provisions:

• You withdraw the money at least five years after your first contribution to the Roth account
• You are older than 59 ½ or you became disabled or the money goes to someone who is the beneficiary after your death

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What You Need To Know To Avoid Costly Mistakes

In an ideal world, everybody would leave their 401 funds alone until they need the money for retirement. That might mean rolling your account over to an Individual Retirement Account , but it also means not cashing out the funds prior to reaching retirement age, to allow the money to grow to its maximum potential amount. In investing, time truly is your best asset. At some point though, you will begin taking distributions, and here’s what you need to know.

The best way to take money out of your 401 plan depends on three things:

What If You Only Need The Money Short Term

Although there are other qualifying exceptions to withdraw IRA or 401k assets penalty-free, those listed above are the major ones. But suppose youre not interested in paying any taxes at all. You can still use your 401k to borrow money via a loan. The interest goes to you, the loan isnt taxable, and it wouldnt show up on your credit report. Heres how it works.

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Withdrawing From Your 401 Before Age 55

You have two options if you’re younger than age 55, and if you still work for the company that manages your 401 plan. This assumes that these options are made available by your employer. You can take a 401 loan if you need access to the money, or you can take a hardship withdrawal. but only from a current 401 account held by your employer. You can’t loans out on older 401 accounts. You can roll the funds over to an IRA or another employer’s 401 plan if you’re no longer employed by the company. But these plans must accept these types of rollovers.

Think twice about cashing out. You’ll lose valuable creditor protection that stays in place when you keep the funds in your 401 plan at work. You could also be subject to a tax penalty, depending on why you’re taking the money.

The Risks Of A Rollover

Before people roll over their 401 funds to an IRA, however, they should consider the potential consequences. “Consider the costs inside the 401 funds versus the total cost of an IRA,” including advisor fees and commissions, urges Terry Prather, a financial planner in Evansville, Ind.

Prather raises another, noteworthy scenario. A 401 typically requires a spouse to be named as the primary beneficiary of a particular account unless the spouse signs a waiver provided by the plan administrator. An IRA doesn’t require spousal consent to name someone other than the spouse as the primary beneficiary.

“If a participant is planning to remarry soon and wants to name someone other than the new spouse as the beneficiarychildren form a prior marriage, perhapsa direct rollover to an IRA may be desirable,” Prather says.

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Move Your Retirement Savings Directly Into Your Current Or New Qrp If The Qrp Allows

If you are at a new company, moving your retirement savings to this employers QRP may be an option. This option may be appropriate if youd like to keep your retirement savings in one account, and if youre satisfied with investment choices offered by this plan. This alternative shares many of the same features and considerations of leaving your money with your former employer.

Features

• Option not available to everyone .
• Waiting period for enrolling in new employers plan may apply.
• New employers plan will determine:
• When and how you access your retirement savings.

• Which investment options are available to you.

Note: If you choose this option, make sure your new employer will accept a transfer from your old plan, and then contact the new plan provider to get the process started. Also, remember to periodically review your investments, and carefully track associated paperwork and documents. There may be no RMDs from your QRP where you are currently employed, as long as the plan allows and you are not a 5% or more owner of that company.

Another Option: A 401 Loan

If your employer offers 401 loanswhich differ from hardship withdrawalsborrowing from your own assets may be a better way to go. Under IRS 401 loan guidelines, savers can take out up to 50% of their vested balance, or up to $50,000 . One of the advantages of a loan is that the plan participant isnt forced to pay income taxes on it that same year, nor does it incur that early withdrawal penalty.

Be aware, however, that you have to repay the loan, along with interest, within five years . If you and your employer part ways, you have until October of the following yearthe ultimate deadline for filing tax returnsto repay the loan.

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Should I Take Out A Loan From My 401

Under the CARES Act, you can take out a 401 loan for up to $100,000, or if lower 100% of the vested account balance for the next six months. Thats up from a prior limit of $50,000, or if lower 50%. Individual retirement accounts dont allow loans.

Typically, you have up to five years to repay a 401 loan. Now the new provision gives Americans an additional year to pay back the loan, raising the time period to six years. Outstanding loans due between March 27 and Dec. 31 will also be extended by a year.

Experts say you could consider taking out a loan to tide you over if youve been furloughed, but are confident that youll be working again in the near future. A 401 withdrawal would make more sense for someone who has been laid off and doesnt have a safety net or enough saved for basic expenses over the next three to six months, they said.

To be sure, if you lose your job, you could be on the hook for taxes for the amount borrowed for a loan.

The loan and withdrawal changes may provide current and future retirees more flexibility, but individuals need to understand the potential long-term financial consequences, experts say.

What If You Are The Beneficiary Of A 401 Plan

If you are the beneficiary of a 401 plan, you’ll have a little bit different set of rules that apply to taking money out of the 401 plan. Your choices will depend on whether you were the spouse or non-spouse of the 401 plan participant and whether the 401 plan participant had reached age 70 1/2the age for required minimum distributions .

If you or your spouse turned 70 1/2 before Jan. 1, 2020, the age for RMDs is still 70 1/2. If you or your spouse turned 70 1/2 on or after Jan. 1, 2020, the age for RMDs is 72.

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Rollover Money: An Easy Option

If youre still working and you cant get money out of your 401 with any of the techniques above, there might be another approach. If you ever made rollover contributions to your 401 into your existing 401, for example), you might be able to take those funds back out. You wont have access to your entire 401 account balance, but you might get a nice chunk of change outat any time, for any reason. Employers are often unaware of this option, so you may need to ask your employer to do some research with your Plan Administrator.

Again, you may have to pay income taxes and tax penalties, and youre raiding your retirement savings, so only use this option when you have no other choice.

Borrowing Money From My 401k

It may seem like an easy way to get out of debt to borrow from your retirement accounts for DIY debt consolidation, but you can only borrow $50,000 or half the vested balance in your account, if its less than $50,000. You wont face a tax penalty for doing so, like you would with an out-right withdrawal, but youll still have to pay the money back.

And unlike a home equity loan where payments can be drawn out over a 10-to-30-year period, most 401k loans need to be paid back on a shorter time table like five years. This can take a huge chunk out of your paycheck, causing you even further financial distress. Borrowing money from your 401k also limits the ability of your invested dollars to grow.

Paying off some of your debt with a 401k loan could help improve your debt-to-income ratio, a calculation lenders make to determine how much debt you can handle. If youre almost able to qualify for a consolidation or home equity loan, but your DTI ratio is too high, a small loan from your retirement account, amortized over 5 years at a low interest rate may make the difference.

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Gift Money After Reviewing The Gift Tax Rules

Beginning in 2018, you can gift up to $15,000 to a person in a year without IRS interfering with your transaction. If you are gifting more than that amount, you need to file a gift tax return. That doesnt mean that you have to pay a tax on the gift. It means that $15,000 is eligible for lifetime exclusion. This is the amount you can gift away during your lifetime without incurring a gift tax. The total lifetime tax exclusion for gifts is $11.2 million per individual so, gift tax rules are not much of a concern for most people.

How Does A 401 Withdrawal Work

A 401 plan is a retirement option offered by employers, which gives employees a tax break on money set aside for their golden years. Depending on the employer’s 401 plan, contributions made to retirement savings could be matched by employer contributions. Typically, employers match a percentage of an employees contributions, up to a certain portion of their salary.

One provision from The CARES Act allows investors of any age to withdraw as much as $100,000 from retirement accounts including 401 plans and individual retirement accounts this year without paying an early withdrawal penalty of 10%. They can avoid taxes on the withdrawal if the money is put back in the account within three years. If it isn’t returned, taxes can be paid over a three year span.

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Exhausting All Other Options

Investment advisors emphasize that people should exit a 401 only when they deem it absolutely necessary and have exhausted all other options. Remember, the 401 is above all a retirement account. It is wise to consult an investment professional before taking such a dramatic course of action.

“Many employees, as they are exiting their employment through retirement or a job change, rightly seek out advice from financial professionals,” noted Wayne Titus III, who owns AMDG in Plymouth, Michigan. “These may include a range of professions, from insurance agents, brokers, tax preparers, or CPAs.”

The 401 Withdrawal Rules For People Older Than 59

Most 401s offer employer contributions. You can get extra money for your retirement, and you can keep this benefit after you change jobs as long as you meet any vesting requirements. Thats an important advantage that an IRA doesnt have. Stashing pre-tax cash in your 401 also allows it to grow tax-free until you take it out. Theres no limit for the number of withdrawals you can make. After you become 59 ½ years old, you can take your money out without needing to pay an early withdrawal penalty.

You can choose a traditional or a Roth 401 plan. Traditional 401s offer tax-deferred savings, but youll still have to pay taxes when you take the money out. For example, if you withdraw $15,000 from your 401 plan, youll have an additional $15,000 in taxable income that year. With a Roth 401, your contributions come from post-tax dollars. As long as youve had the account for five years, Roth 401 withdrawals are tax-free.

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Withdrawals From A 401

• 401 hardship withdrawals If you find yourself facing dire financial concerns and need cash urgently, your 401 plan may offer a hardship withdrawal option. Unlike a 401 loan, you wont have to repay the money you take out, but you will owe taxes and potentially a premature distribution penalty on the amount that you withdraw. In addition, IRS 401 hardship withdrawal rules state that you may not take out more money than what is needed to cover your hardship situation. In order to qualify for a 401 hardship withdrawal, your plan administrator must offer this option and you must be facing an immediate and heavy financial need. According to the IRS, approved 401 hardship withdrawal reasons include:

• Postsecondary tuition for you or your family
• Medical or funeral expenses for you or your family
• Certain costs related to buying, or repairing damage to, your primary residence
• Preventing your immediate eviction from or foreclosure of your primary residence

If you experience a financial hardship from a circumstance not on this list, you may still be able to qualify for a hardship withdrawal, so check with your plan administrator.

• In-service, non-hardship withdrawals

This type of withdrawal is only allowed under certain plans and is mainly used by those who would like to explore other investment options. Learn more about in-service distributions. An Ameriprise financial advisor can provide more detailed information on in-service 401 distributions.