Withdrawing Early, When You’re Out of Options
Many employers will allow loans and hardship withdrawals from the 401(k) partly because they don’t want employees to hesitate to enroll in the first place for fear that their money will be completely inaccessible to them. The Summary Plan Document will outline the details of how the loan will work. Often the amount you can borrow is limited to 50 percent of the vested balance of your account. The loan isn’t taxable and doesn’t carry the 10 percent early withdrawal penalty unless you leave the employer and are not able to pay the loan back. In that case, there will be a short grace period before you have to restore the funds or the loan is considered a distribution and is taxable.
Loan payments are deducted from your pay pretax. The loan term and interest rate are up to the employer, but most will give a 5- or 10-year term with interest at the prime rate plus 1 or 2 percent. The interest is paid back to your account, less 1 or 2 percent as a fee for the loan.
The prime rate is the interest rate that commercial banks charge their best customers, generally large companies. It is lower than virtually all rates because the risk of default is very low.
Taking a loan against your 401(k) balance should be your last resort. The loan can hurt your account performance, and because the collateral amount that you’re borrowing against is often held in a conservative account within your plan, your account may not perform as well as it would without the loan.
If your employer offers hardship withdrawals, you could be eligible for one if you have …
• An immediate and severe financial need, and the money isn’t available from anyplace else.
• Already borrowed as much from the 401(k) plan as you’re eligible, so a hardship withdrawal is the only option for getting money from the account.
You can use the money only for the following things, and you can’t withdraw more than you need for the expense.
• Buying your primary home (not a vacation or second home).
• Paying 12 months’ worth of college tuition, room and board, and fees for you, your spouse, your dependents, or children.
• Preventing foreclosure or eviction from your primary home.
• Paying tax-deductible medical expenses that will not be reimbursed by health insurance for you, your spouse, or your dependents.
Rainy Days
Many 401(k) plans offer loans and hardship withdrawals. Consider this important feature if you have only a small amount of liquid savings or a lot of debt. Roll the money from your previous employer’s 401 (k) plan into your new 401(k) to make the larger balance available in case of financial catastrophe.
You’ll owe income tax but not the 10 percent penalty if you make a hardship withdrawal for these reasons:
• For income because you are permanently disabled.
• To pay medical debts that exceed 7.5 percent of your adjusted gross income.
• To comply with a court order, such as in a divorce.
• You retire between the ages of 55 and 59 ½ and start a series of regular payments from the 401(k) based on an IRS formula and your life expectancy.
Unlike loans, hardship withdrawals are permanent. Once the money is out of the account, you can’t put it back. The only alternative to rebuild the 401(k) is through regular contributions.
The Least You Need to Know
• If you don’t yet have any savings built up, start setting aside your emergency fund while investing in your 401(k).
• An employer match is one of the best parts of a 401(k) and well worth adjusting your contribution in order to qualify for.
• The trustee-to-trustee direct transfer is by far the easiest and least risky of the rollover options.
• The best place to check the fees in your 401(k) investments is to refer to the prospectus or visit www.Morningstar.com.
• As your beneficiary situation changes, you must update the official beneficiary designations on your 401(k).
• Your 401(k) plan details are always available for you to review in the Summary Plan Document.
..................Content has been hidden....................
You can't read the all page of ebook, please click here login for view all page.