Lessening the penalty of early 401(k) withdrawals (Part 2)

Posted In: COVID-19 Market Update

This is the conclusion of a two-part series about 401(k) withdrawals.

 

The Loan Option

If a withdrawal is not allowed, the plan may offer a loan provision.  The loan size is typically the lesser of $50,000 and 50% of your vested account.  A 401(k) loan involves cash being made available within the account, usually after paying a processing fee, and then paying back the principal.  How the interest rate is calculated is within the SPD, but that interest will go directly to you, because you are the lender as well.  While receiving the interest is good and a forced way to save more, it is important to note that none of the repayment is tax deferred or applies to company matching.

 

The Hardship Withdrawal Option

Another option to minimize early withdrawal penalties can be a hardship withdrawal, although this is subject to applicable income taxes. A hardship withdrawal can be taken without penalty, provided that it is for one of the acceptable reasons:

  • Medical expense: Un-reimbursed medical expenses for you, your spouse, or dependents
  • Home purchase: For the purchase of your primary residence
  • Foreclosure risk: To prevent foreclosure or eviction
  • Educational expenses: College tuition/educational expenses for you, your spouse, or your children
  • Funeral expenses
  • Home repair: Expenses for the repair of damage

Options when you leave your job

You may wonder what becomes of your 401(k) if you leave your job. Depending on your employer’s rules for retirement plans, you might be able to leave your account where it already is. This is the simplest option, though it is rarely the most beneficial long term. You should be able to roll over the money from the old 401(k) into a new account with a new employer, or into an individual retirement account (IRA).

 

If you have the option to roll the 401(k) account into an IRA, this typically is the best move. An IRA will grant you far more investment access and freedom than exists in a 401(k) account.

 

Conclusion

It is a good idea to speak with your financial advisor before deciding to take an early withdrawal or loan from your 401(k).  This should only be considered after careful review of all other options, and it is usually advised in cases of emergency only.  Keeping an adequate emergency fund is a good way to avoid needing to take an early withdrawal and the associated penalties.

 

If things are feeling financially tight, don’t panic by diving into your 401(k) just yet. Call Ambassador Advisors today, if you have questions about how your individual situation could impact your 401(k). We can help you review your options and navigate the best course for your current circumstances.

 

 

Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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