Home  >  Financial Articles and Q&A  >  I was laid off in 7/10. I will be 56 & have a 401K, iRA &...

I was laid off in 7/10. I will be 56 & have a 401K, iRA & Annuity. Will I be penalized if I take money out of my accts?

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?

May 08, 2014 by Mary J in  |  Flag
3 Answers  |  5 Followers
Follow Question
3 votes

Hello Mary,

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:

http://www.irs.gov/Retirement-Plans/Plan-Sponsor/401(k)-Resource-Guide---Plan-Sponsors---General-Distribution-Rules

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:

http://www.irs.gov/taxtopics/tc557.html

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!

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments

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

1 Comment   |  Flag   |  May 08, 2014 from Jacksonville, FL
Edward

Hi Mary, It all can be very confusing. I would suggest sitting down with a Registered Investment Advisor (RIA) that is registered in your state. They are fee based and will have your best interests at heart. An easy way to avoid financial sales people is to ask them if they have a series 6 or 7. If they do that typically means that they sell products. Therefore, seek out a RIA. Also, anytime you see letters after someone's name ask if they pay an annual fee to be able to use the designation. For example: A Dr. does not pay a fee annually to say he is a Dr. while a CFP does. Good Luck. ED

Flag |  May 09, 2014 near Saint Johns, FL

1|600 characters needed characters left
1 vote

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.

Comment   |  Flag   |  May 08, 2014 from King of Prussia, PA

1|600 characters needed characters left
1 vote

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

1 Comment   |  Flag   |  May 09, 2014 from Farmington, CT
Michael V Mezheritskiy

Here is the entire paragraph from the link Exceptions. The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances:
Made to a beneficiary (or to the estate of the participant) on or after the death of the participant.
Made because the participant has a qualifying disability.
Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.)
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.
Made to an alternate payee under a qualified domestic relations order (QDRO).
Made to a participant for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the participant itemizes deductions).
Timely made to reduce excess contributions.
Timely made to reduce excess employee or matching employer contributions.
Timely made to reduce excess elective deferrals.
Made because of an IRS levy on the plan., or
Made on account of certain disasters which IRS relief has been granted.

Flag |  May 09, 2014 near Farmington, CT

1|600 characters needed characters left