Tag Archives: 401k

Plan your exit – the last chapter.

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To roll or not to roll, that is the question. Many people leave their 401k with their company when they retire vs. rolling it to an individual IRA; there are pros and cons to this approach.

In the past, 401k accounts have been cheaper. With the new regulations to disclose all fees, this may not be the case. If you roll your 401k into an IRA account, you will generally have much more investment freedom. If you have changed jobs throughout your working life, make sure to track down all of your old 401k accounts and consolidate them into a single IRA for easier accounting and reporting.

 

disclosures:http://www.hechteffect.net/?page_id=31

It’s time for a Q & A!

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Q: I have $10,000 sitting in a 401(K) that is not earning much and I owe $20,000 on a credit card with 9.5% interest. Should I take some out of the 401(k) to pay off this debt? I am under 59.5 years old.

A: Generally, this is not a good idea. Firs,t whatever you withdraw from the 401(k) will be added to your income and taxed. This could put you into a higher tax bracket. Next, you will have to pay an additional 10% early withdrawal penalty due to you age. These two taxes could reduce your withdrawal amount by 25% turning your $10,000 into a spendable amount of only $7,500.
This would leave you with the remaining credit card balance and no retirement fund. If we look at the loss of compounding tax deferred dollars, for every $1000 withdrawn, you will be losing $7,686 in future spending dollars.

Here is what I recommend: reduce the amount that you are contributing to your 401(k) and apply the difference to the credit card debt. Contact the credit card company to see if you can get the interest rate lowered. You do not know if this is possible if you do not ask. Put together a budget and track where your income goes. Look for areas where you can spend less to reduce the debt, and you will have more money for short and long term savings.

I have some credit card debt that I would like to pay off. Should I suspend my 401k contributions to do this?

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I admire your desire to pay off your indebtedness; however, you should continue to make your 401k contributions. Typically, company matching boosts your yield on the contributions up as much as 50%. Even though you are paying interest on the credit card, you can’t afford to pass up that match.
You may want to reduce what you are contributing to your 401k until the debt is paid off then do not charge more than you can pay when you receive the bill.
After the debt is paid, please increase your 401k contribution to what is was before.

I turned 70 1/2 last year and I have to take my first RMD by April 1st. How do I calculate what I need to withdraw?

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April 1 is the date of your first withdrawal the year after you turn 70 1/2. After the first year, your annual RMD must be withdrawn by 12/31. If you are still working and contributing to a 401k, you do not need to take withdrawals from the 401k until you do retire.

If you go to www.irs.gov and look for publication 590 you will find the withdrawal tables to be used.

I am 55 yrs old and have lost my job. I need to use the money in my 401k to survive. What is the penalty for doing this?

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Anything you withdraw from your 401k will be fully taxable at your ordinary income tax rate plus a 10% penalty. You may be able to avoide the penalty under these circumstances:

If your plan allows you to take a loan

If you can replace the funds within 60 days

If you roll the 401k into an IRA then use Rule 72T to take the withdrawal.

Retirement Account questions.

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Q: I am unemployed. Is it better for me to make an IRA deposit with a bank or brokerage company?

A: It does not matter which you choose, but you must have earned income to make an IRA deposit.

Q: I was recently laid off and am not sure what options I have with my 401k.

A: You generally have 4 options: leave your 401k with your former employer, roll your 401k over to an IRA, roll your old 401k into your new, future employers’ 401k, or cash it out. All choices should be considered carefully.