I would like to be able to draw the money out while avoiding the 10% penalty on a 401K. I do not want to do so until January 2014 as I already have $125,000 in income for this year prior to the layoff. I also have to move the money by 12/12/2013 to another plan or to an IRA within the Principals plan. Does this affect the withdrawal and or penalty. . Can I withdraw the money to start a new business if I utilize the money for start up costs and ongoing costs. I am in the process of starting a home health care business that is set up as an LLC. I am looking at different options as to how to avoid taxes on the money now while still being able to use the money for the business.
I am sorry to hear that you lost your job after so many years. Since you are past the age of 54 you will avoid the 10% early distribution penalty if you withdraw the money from the 401(k). However if you role the 401(k) balance into an IRA you will have to wait until age 59-1/2 to avoid the penalty. There are no exceptions to the early withdrawal penalty for using the proceeds to start a new business.
Although you didn’t ask this I’ll share with you that I am not a fan of raiding your retirement account to start a new business. The retirement account proceeds are best saved and invested for your retirement. I do applaud you for starting a business. As a business owner I know that running a successful business can be very rewarding. However, if you have never tried to run your own business I suspect you will find that it is more of a challenge then you believe not matter how difficult you feel it will be. For this reason your investment in a business is risky and your retirement assets should instead be diversified across many established companies so that if one company goes under you don’t lose your entire retirement savings. My advice would be to roll your 401(k) account into an IRA where you can invest in mutual funds or exchange traded funds. A discount brokerage firm such as TD Ameritrade, Schwab or Fidelity is the place to open your IRA. I would not leave it with The Principal because they will limit your available investment options and most likely try to steer you to their expensive proprietary mutual funds or insurance products.
To start your business consider a "friends and families" loan. It will be hard to get a bank loan for a new company although you may find a business loan available through a credit card company if your credit score is high. I wish you much success in your new endeavor and career.
Steve, you can take money out of the 401(k) plan now without a penalty because you are separated from the company, but you’d still have to pay income tax.
They can encourage you to roll your money out of the plan, but unless the plan is terminating, I don’t see how they can force you out if your balance is above $5000. The advantage, and probably the only advantage of being in that 401(k) is you will avoid the 10% penalty. If you are in a 401(k) and are separated from the employer, you can withdraw as ordinary income at age 55; if you are in an IRA, you must be 59 1/2 , unless you take it out as a 72T, which is equal periodic payments. This would not help much for starting a business, and I don’t encourage you to drain what little you have in retirement assets to start a business. I hope this helps.