Need Help with 401(k) Distribution Crisis
Karen Ann McDonnell
a full year of unemployment and living off my unemployment benefits
and savings, I am pretty much out of money and need to turn to my
401(k) for a distribution. Having been laid off at 55, I was told
that I could dip into my 401(k) before age 59-1/2 without any penalty.
My 401(k) is very healthy, so I thought I'd have no problem doing that
for the difference I need each month between my bills and what I
currently earn in a part-time job.
Unfortunately, I just called today for my first distribution and was
told that under my 401(k) plan's rules, my first distribution must be
my one and only distribution. Somehow, my 401(k) shuts me down on the
occasion of my first distribution and I must either roll everything
over into an IRA or take the full distribution as income and pay
income taxes on the full amount in one tax year. The problem is that
the IRA would not allow for penalty-free withdrawals before age
59-1/2... which I need!
This came as quite a shock since I only need a small amount of extra
money from the 401(k) to live on each month. But if I put everything
into an IRA, I will be paying "early withdrawal" penalties on every
single withdrawal I make until age 59-1/2. I can't afford to do that.
Is there any way around this or any other option I am not seeing or
being informed of? In all my financial planning, I have relied on the
provision of law that allows for penalty-free withdrawals from a
401(k) for a person in my circumstances. Now I find that my plan
effectively nixes that feature of tax law. Help!!!
Karen M.
Archmedes
Phil Marti
> Unfortunately, I just called today for my first distribution and was
> told that under my 401(k) plan's rules, my first distribution must be
> my one and only distribution. Somehow, my 401(k) shuts me down on the
> occasion of my first distribution and I must either roll everything
> over into an IRA or take the full distribution as income and pay
> income taxes on the full amount in one tax year. The problem is that
> the IRA would not allow for penalty-free withdrawals before age
> 59-1/2... which I need!
>
> This came as quite a shock since I only need a small amount of extra
> money from the 401(k) to live on each month. But if I put everything
> into an IRA, I will be paying "early withdrawal" penalties on every
> single withdrawal I make until age 59-1/2. I can't afford to do that.
>
> Is there any way around this or any other option I am not seeing or
> being informed of?
There are two options I can think of.
1. Roll the whole thing directly into an IRA. Then calculate how much you
need for Substantially Equal Periodic Payments for 5 years. Move that
amount to a different account and begin your SEPPs. After 5 years you can
reconsolidate everything and proceed as you wish.
2. Take a total distribution. (They will withhold 20% of the gross.) Keep
what you need to carry you to 59 1/2 then deposit the balance in a
traditional IRA within 60 days. Your 2007 taxable amount would be just the
amount not rolled over, including the withholding. Since we're so late in
the year, you could even get a refund of the excess withholding (that
portion not required to pay what you're not rolling over) to use as part of
the rollover.
--
Phil Marti
Clarksburg, MD
Karen Ann McDonnell
Hmmmm. Interesting info. Thank you.
Hard to say if SEPP could work for me. At first glance, it looks
onerous and wholly inadequate to meet my current needs.
Looks like I have some serious calculating to do.
Karen M.
Karen Ann McDonnell
wrote:
Thanks very much Phil. You are talking WAY over my head here. This
will take a while to digest. Neither looks like a good or complete
solution, but beggars can't be choosers. I'll have to choose and do
what I can from some not-so-great options.
The real issue is that I don't know how much I'll need from the
401(k)/IRA over the next 5 years. My medical and dental bills
fluctuate wildly. I may get a better job. I could lose my current
part-time job. I could even win the lottery or marry a wealthy man!
I know what I need today and for some major bills coming next month,
but beyond that is impossible to predict with any degree of accuracy.
Still, a partial solution is probably better than no solution at all.
Karen M.
kastnna
You mentioned medical and dental bills to be your primary concern. Do
you fall under any of the hardship distribution exceptions?
Specifically I'm thinking medical expenses exceeding 7.5% of AGI.
Karen Ann McDonnell
My AGI will be essentially zero for 2007. My unemployment benefits
and part-time job will just about match my personal exemption and
itemized deductions. Every other dime I spent this year came out of
savings. So yes... my medical and dental costs are well above 7.5% of
AGI.
On the other hand, I'm not sure my apparently rotten 401(k) plan
allows periodic hardship withdrawals either... and in January, I will
need money specifically for auto insurance, heating oil and property
taxes... plus even more money for medical and dental costs. It's
going to be a crazy roller coaster until at least the end of March.
Karen M.
Phil Marti
>>You mentioned medical and dental bills to be your primary concern. Do
>>you fall under any of the hardship distribution exceptions?
>>Specifically I'm thinking medical expenses exceeding 7.5% of AGI.
>
> My AGI will be essentially zero for 2007. My unemployment benefits
> and part-time job will just about match my personal exemption and
> itemized deductions.
That means your AGI will be in excess of $8,000. You can see what the term
means by looking at the front of a 1040.
> Every other dime I spent this year came out of
> savings. So yes... my medical and dental costs are well above 7.5% of
> AGI.
>
> On the other hand, I'm not sure my apparently rotten 401(k) plan
> allows periodic hardship withdrawals either... and in January, I will
> need money specifically for auto insurance, heating oil and property
> taxes... plus even more money for medical and dental costs. It's
> going to be a crazy roller coaster until at least the end of March.
What was being suggested here was a way to avoid the premature distribution
penalty on at least part of a premature distribution, not some special way
of taking distributions. Just keep good records of your medical expenses.
You can sort it out when it's time to prepare your return. It sounds like
this isn't going to be a possible issue until you're preparing your 2008
return in 2009.
Karen Ann McDonnell
wrote:
>That means your AGI will be in excess of $8,000. You can see what the term
>means by looking at the front of a 1040.
Opps, yes. I see what you mean. I got that wrong.
>What was being suggested here was a way to avoid the premature distribution
>penalty on at least part of a premature distribution, not some special way
>of taking distributions. Just keep good records of your medical expenses.
>You can sort it out when it's time to prepare your return. It sounds like
>this isn't going to be a possible issue until you're preparing your 2008
>return in 2009.
Well, silly me, I delayed certain medical and dental work and put off
the idea of taking any 401(k) distribution until December (i.e., right
now) so I would better know my overall tax situation for year 2007. It
then looked like it made sense to take out some money now (in this tax
year) and some money in January (for the next tax year) to keep me in
the lowest possible tax bracket in both years. Now everything I had
figured out is in the waste basket. My terrible 401(k) plan
effectively nixes that "layoff after age 55" safety net provision of
the law. Thank you former employer!!!
I must admit that I am still in shock right now and unable to think
straight about any of this. My survival plan for the next several
years is gone. Right now, given my need to maintain maximum
flexibility going into 2008, it looks like I have no choice but to go
for the IRA rollover and simply pay the early withdrawal penalties.
Suddenly my 401(k) amount doesn't look so healthy anymore... and
long-term retirement survival is looking a lot less certain.
Like I said, lots of hard analysis ahead once this shock wears off.
Karen M.