Saturday, April 12, 2008

You and Your 401k Withdrawal - Be Careful

Pension plans are out and 401(k) plans are in. They are offered by employers as a retirement program for workers and first appeared in the early 1980's. These plans are a much better option all the way around to pensions. They are cheaper for the employers and give the workers many more options for investing their money.

From time to time, savers may be tempted to access their funds when they see a need. Generally, their money is tapped for unforeseen expenses such as during hardships to cover costs of living in health emergencies or unplanned job loss.

Hardship withdrawals come with specific rules for distribution. The IRS has its own policies that it follows. Your individual plan may have strict requirements to meet the definition of "hardship" too. Meeting both specifics is sometimes a challenge.

Before taking any action toward a hardship withdrawal, it is a good idea to check the possible outcomes from all angles with a tax professional since there is a 10% tax penalty on the money that you withdraw and the money is counted as income. Weigh your options.

Others may choose to withdraw their money for additional reasons, such as rolling the funds into an IRA. If this is the intention, the transaction must be completed within 60 days or a 10% penalty will result on the withdrawn funds and the money will be counted as income.

For those who need their money for situations that are not defined as a hardship or when the purpose of the money is that it is not to be rolled into an IRA, a 401(k)loan, or lump sum distribution, is your option. The loan must be paid back, typically within a few years. However, if you leave a company with a loan balance, generally you are required to pay the money back in a short amount of time, say one to two months.

All plans are different, each with their own rules. You have to make sure that you know your plan's limitations. Otherwise, the withdrawal process could be very unpleasant.

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