Tag Archive: 401K

Jun 30

How To Cash Out 401(k) – To Pay Off Dept

Nest Egg

Nest Egg

How To Cash Out 401K – To Pay Off Dept, Need money to pay off Credit Cards?

Here are few things you need to know about your 401K

First of all you hear a lot of people telling you not to touch your nest egg. If you do you will have nothing for your retirement.  Well I am here to tell you otherwise and explain why and how to do it. The people that tell you not to touch your 401K plan do not have debt so they are not in your situation. In normal case you don’t want to touch your 401k Plan so that you can have nice retirement plan. If you are in situation that you have credit card dept or any other dept that is subject to interest rate than that should be  #1 Priority!!!  You will pay a lot more in interest than your retirement nest egg will ever grow.

The Truth is that it’s hard to cash out you 401K plan or in most cases impossible. There are however other options that are available that may or may not work for you. Before I get to your alternative options, below you will find a list of exceptions that government has created. If your 401k balance is less than $1000 you can  check with your 401k administrator if you can just cash it out. otherwise keep on reading.

You should also be aware that Uncle Sam will take large chunk because your contributions were Pre-Taxed. Remember that your 401K is not Tax Free; it is simply tax-deferred. That means that if you have currently contributed with pre-tax funds you will have to pay taxes once you start taking distribution.  To Give you idea on how much it will cost you to get your money back a created a example. Those numbers are only estimate to give is sense of what you are looking at, If you take a $20,000 hardship withdrawal to pay for your child’s college tuition, you will owe $6,000 in federal income taxes,$1,500 in State Taxes and an additional $2,000 to cover the early withdrawal penalty. You’ll be left with around $10,500 after Taxes. It might be little less or maybe little more depending on your state tax % rate.

Congress made provisions in the 401k rules to allow plan withdrawals in a limited number of hardship situations. These include:

  • Un-reimbursed medical expenses for you, your spouse, or      dependents.
  • Purchase of an employee’s principal residence.
  • Payment of college tuition and related educational costs      such as room and board for the next 12 months for you, your spouse,      dependents, or children who are no longer dependents.
  • Payments necessary to prevent eviction of you from your      home, or foreclosure on the mortgage of your principal residence.
  • For funeral expenses.
  • Certain expenses for the repair of damage to the      employee’s principal residence.

You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:

  • You become totally disabled.
  • You are in debt for medical expenses that exceed 7.5      percent of your adjusted gross income.
  • You are required by court order to give the money to      your divorced spouse, a child, or a dependent.
  • You are separated from service (through permanent      layoff, termination, quitting or taking early retirement) in the year you      turn 55, or later.
  • You are separated from service and you have set-up a      payment schedule to withdraw money in substantially equal amounts over the      course of your life expectancy. (Once you begin taking this kind of      distribution you are required to continue for five years or until you      reach age 59 1/2, whichever is longer.)

IF you don’t meet any requirements above here are options you may have in getting money from your 401K plan:

  1. 1.     The first and best option is to take a loan against you 401k Plan

This should best option and also your last resort as well. Most 401k plans set up by your employer will allow you to take a loan from you 401k account with low interest and best off all you will be paying yourself off. The only catch it that only 50% of your total accounts balance can be used for a loan. Your employer or your 401k plan administrator will set up payment plan usually directly subtracting from your pay check. To get this process started contact your employer or human resources so that they can get your paper work started. In most cases you will have a paycheck within 2 weeks.

  1. 2.     If you are close to your employer you can ask them to fire you and then rehire you.

This options only works if you are in good terms with your employer. You don’t want to be stuck unemployed if your employer decides not to re-hire you. When you are no longer employed you are allowed to transfer your founds to a new 401k plan or IRA. Just contact company like fidelity and they will help you transfer the funds to IRA and you be able to take cash out.

  1. 3.     Quit – Quitting your job to cash out your 401k is the worst option and I would strongly advise not to do it.

Quitting is the worst option but it’s a option. This process will let you transfer you Nest egg to IRA account but then you will be unemployed, with no income. So please don’t do it.

Besides those limited few options you have no other choices. The government created 401K so that you would not have to survive on social security once you reach your retirement age. What the government forgot to mention that you will be probably paying higher taxes in the future on your 401k distribution. That is why stop investing in your 401k and start investing in your self so that you would be Debt Free. Trust me nothing will feel better than being debt free person.

If you have any comments or questions please feel free to let me know and I will try my best to get your questions or concerns answered

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Jun 28

Investing too early In Your Retirement 401K or IRA a Bad Idea

retirement-for-the-future 401K now and your 401K later

retirement-for-the-future 401K now and your 401K later

Investing to Early or for Wrong Reasons can Hurt your Future

Everywhere you turn you will see advertizing from investment firms telling you to invest in your retirement. The biggest retirement accounts are 401(k) and IRA that allow you to save money for your future retirement. 401k retirement plan is around for a while now but there are still a lot of people that contribute to the IRA or 401k without understanding it. Most people save for their retirement because there co-worker, neighbor even friend is.

First you need to understand how those account work. IRA is slight different than a 401k but they have the same purpose, to some for your retirement. You can contribute to you retirement account as often as you would like, and as much contribution as you wish. Most of the time it is a percentage from your paycheck and the amount is taken pre-tax so that only the reaming amount that you take home is taxed. What a lot folks don’t realize that 401k contribution is pre-taxed and not Tax-Free. Once your account matures when you turn 65 years old you will start getting a paycheck on a weekly or monthly basis and its usually same amount as you getting from you job. The only thing is that you need to know that the paycheck will look like you work paycheck, meaning it will be taxed. Yes you have to pay taxes on your 401k and your IRA unless your contributions were taxed prior.

Most retirement plans will not allow you to just withdrawal the whole amount when you reach retirement age, you will only be allowed to get a normal paycheck as you did before. So the plan to spend a month in the Caribbean’s just went out the window, purchasing that dream house in full is not going to happen. You need to realize that you will be almost 70 years old and not 30, 40, 50 or 60. You already know that you cannot do the things that you did when you were in your twenties so what makes you thing that you will be able to do the same when you turn 70. The only thing that you will be spending your money will be on doctors and medication, unless you take care of yourself to stay healthy than you might be able to go on few trips with friends to play some golf.

The biggest mistake people make that they start to contribute to their retirement plan and even start Collage fund for their kids prior to settle the current debt. Your first priority is to make sure all you credit cards are payed off, mortgage is payed off, and you have at least $15,000 or more in your savings account at all times. Once you do that you can start making small contributions to you retirement. Contributing to your IRA or 401k prior to that will result that you will be loosing money and not gaining like the investment companies claim.

nest eggYou need to remember that there is a Interest rate on your credit cards and on your mortgage. College tuition keeps going up on a alarming rate. You need to understand that even if you save a lot for collage education it will still not cover the whole cost. Best solution is focused on making sure you are free and clear from dept and once collage time approaches you can take out a loan and pay for it. Your retirement account is based on stock market mining that it can gain value or can even loose like you have already seen. A lot of people have lost most of their life savings and the only person that did not lose was your 401(k) or IRA broker. Investment Firm brokers charge fees for maintenance of your account and every time you contribute, buy stocks, sell stocks or do a withdrawal.

Even if your retirement account is gaining value, believe it that you are not getting any richer. You need to look and few factors: What is the percentage value gain has your 401k has received vs. what percentage is the inflation. When you do your calculation you will notice that inflation percentage is a lot grater then your investment. If your lucky you will break even or maybe you would be slightly on top. Retirement plan is not a true investment unless the value of it suppresses inflation rate.

You need to understand that Investment firms are just like a sales person, there job is to sell you a dream and make profit from it. They will tell you a lot of thing that are not true just to get a sale. The fact is when you retire you will not be spending as much as you do now.  If you die before you spending all your regiment money, your kids will get it. Unfortunately they will only get a small portion of it as it will be subject to taxes once more and this time at a much higher rate. So in reality retirement is not the best option. Make sure all your affairs are in order first before you start investing in your future. Live a little now rather than hoping you will do that later as you never know what the future might bring.

 

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