Question: I lost my job several months ago, and have exhausted my savings. However, I have some money in a 401(k) Plan from an old employer. I need to get to some of it to pay my rent, but I don’t want to pay tax on the entire amount in the Plan. What is the best way for me to get to a portion of it? I am under the age of 59 1/2 and would be faced with the 10% withdrawal penalty in addition to income tax.
Answer: The first thing you should do is to make sure that you are living on a minimalist budget, so that you take out only the small amount that you really need. Next, contact your investment professional and ask him/her to open an IRA account for you, and to execute a trustee-to-trustee transfer of your funds into the new IRA. Tell the investment person you need to have some money sent to you right away after the funds clear and are deposited into your IRA. Doing it this way will ensure that their is no automatic tax withholding to your 401(k) Plan, as there would be if you asked your Plan’s provider to just send your money to you in check form. Also, this way gives you control of when to take money out, and how much to take–just based on your needs. Also, as the year end approaches, this gives you a way to spread the tax due over a couple of tax years.
Question: How should I invest the money?
Answer: If you are having financial difficulty and are not sure if you will need more of the money, then you don’t want to invest the money for the long-term nor pay any sales charges to invest or contingent deferred sales charges (CDSC) to pull the money out. Short term investments such as savings accounts or FDIC-money market accounts are suitable because the principal is guaranteed by the FDIC not to lose any value. Avoid annuities or mutual funds until your situation is more stable, you have adequate savings, and you can resume planning for the future.
Question: Is there any way around paying the 10% pre-age 591/2 penalty?
Answer: Some expenses of your family may be deemed to be immediate and heavy, including certain medical expenses, costs relating to the purchase of a principal residence, tuition and related educational fees and expenses, payments necessary to prevent eviction from or foreclosure on a principal residence, burial or funeral expenses, and certain expenses for the repair of damage to your principal residence. For more information, go to IRS.gov.
Question: What are some other issues to be aware of?
Answer: There are too many to cover in this article; however, be sure to ask your financial professional about all of the issues that pertain to you, including the tax issues. Be sure to plan for the extra tax that you will owe on the IRA or 401(k) distribution. If you need the money very quickly, you might ask the current 401(k) Plan to send you some money now, but to execute the trustee-to-trustee rollover on the balance.