I was laid off in 2010 and haven't secured a full time job yet. I have run out of savings and want to know what the penalties would be if any if I take out money from either my IRA or my 401? Is it a good idea or should I just leave the money where it is? I will be 56 next week?
I’m sorry you have had to struggle; I know it can be frustrating. But don’t give up!
On your accounts – the answer is “Yes and No.” And I’ll throw in an “It depends…” for good measure! But there is some good news and, because of your age, there is a simple window of opportunity, depending upon how much money you need.
The 401k is simplest answer, so let’s focus on that first. Because you left the 401k at the employer (I’m assuming that you did this, and did NOT roll it to an IRA) then you can actually make penalty-free withdrawals from the 401k starting at age 55. This is explained in the 401k Resource Guide to Plan Sponsors, provided by the IRS. Here is the link to that resource:
All plan sponsors are required to provide that you can take money out from your 401k (penalty free) after age 55 IF you are no longer working for your employer, AND you did NOT roll the account to an IRA. This option is often overlooked by financial planners because the common advice is to roll 401k’s to IRA’s because of the increased investment flexibility that IRA’s provide. However, as you have found out – that may be offset by life circumstances, which is exactly why the law allows early withdrawals in a case like yours.
So, just call your 401k plan provider or visit your benefits website and make the withdrawal. It is generally easy, depending upon the infrastructure of the retirement plan. They will have to withhold 20% in taxes, however, that is not optional.
The IRA and the Annuity are more difficult. You can, in fact, make penalty-free early withdrawals from IRA accounts, but they must either be for certain penalty exempt purposes (education, first time home purchase, medical bills, etc). This is Topic 557 in the IRS Code. Here is the link:
You can also set up a recurring income stream (called “Substantially Equal Periodic Payments) from an IRA. This series of withdrawals is called 72T distributions because it falls under IRS Code 72(t). In this case, I DEFINITELY suggest you work with a financial advisor familiar with the strategy, or a CPA - to do it right, because if you do it incorrectly, the penalties are VERY painful – early withdrawal penalties (and taxes plus penalties and interest). There are 3 separate methods of 72 T distributions, each with their own calculation formula. Here is the link that explains it all – but again, this is NOT a do-it-yourself strategy. Get help!
On the Annuity, I would just call the insurance company or the agent assigned to the annuity and ask. The short answer is yes, there is a way to get the money out, but it typically requires an income stream (annuity) or substantially equal payments similar to that of an IRA.
Best wishes, Jon Castle PARAGON Wealth Strategies, LLC http://www.WealthGuards.com
Mary, I'm so sorry to hear you were laid off and haven't found a full-time job yet. Withdrawing before 59 1/2 does normally cause the 10% penalty rule, but there are ways around that. If you can find an advisor or CPA to hire for a set fee or per hour time, they can help you determine the best way to get around that. It typically involves taking consistent distributions. Hope that helps.
I would like to provide a correction to Jonathan answer, the rule 55 apples ONLY if you left the employer with in the year you turned 55 or later then you can take distributions from 401k with out 10% penalty, however if you left your employer lets say at 53, the rule of 55 does not apply to you. Meaning you WILL NOT be able to take distributions once you turn 55 if you left the firm before you turned 55 or with in a year when you turned 55. feel free to verify that . this is a quote directly form the link that Jonathan provided above : Distributions, Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55. Your option to try to avoid 10% penalty, i would suggest speaking with a CPA before you act on it would be to set up a SSEP, systematic equal periodic payment. basically you would have to take out the same distribution payment from your assets until you reach 59 1/2 or 5 years which one one is later. once you set up the payment you can not change it it has to be the same every year. As I said please contact a CPA to make sure you understand all your options before you do any thing. Let me know if you have any questions Sincerely Michael