Allow us ‘cut to the chase’ on one thing when it comes to 401(k)s: they are almost always valuable tools for retirement planning, for those who can access them. 401(k)s have been bedrocks of retirement planning for a long time and could remain so for years to come.(Click here to get the ebook, 5 Ways to Enhance Your Retirement Planning Strategy). If you’re working and have access to one, do everything you can to max it out and invest it according to your risk tolerance and long-term objectives. It’s hard to imagine regretting that type of planning.
As many investor are aware, 401(k)s generally offer a tax deduction for contributions and tax-deferred growth over time. Given that the IRS is involved (taxes), there are also plenty of rules and exceptions that fall under the 401(k) umbrella. Here are four unique ones that many folks may not be aware of:
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You Do Not have to be Retired to Roll Over a 401(k) – “rollovers” are often categorized as a “thing you do when you retire,” but they don’t necessarily have to be. If you switch jobs and leave your 401(k) in your former employer’s plan, you can generally roll it over into an IRA—or into your new employers 401(k)—without incurring a penalty.
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Rolling Over Your 401(k) Can Expand your Investment Universe Significantly - rolling your 401(k) into an IRA, in many cases, will give you greater control over your investments. Instead of being limited to the investment options available in the employer’s plan, you can potentially access a significantly larger universe of managers and investment choices in your IRA.
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In Some Cases, You Can Borrow From Your 401(k) Without Incurring a Penalty – It depends on your qualified plan provider, but if they allow a loan the maximum allowable amount is either (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000—whichever is less. The catch is, you have to pay it back. To avoid penalty, the IRS requires the repayment of the loan within 5 years, and payments must be made in substantially equal payments that include principal and interest and that are paid at least quarterly.1
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Medical Expenses May Qualify for Early Distributions without Penalty – if you have deductible medical expenses that exceed 10% of your adjusted gross income (7.5% if you and your spouse are over 65), you can potentially take a withdrawal from your 401(k) without incurring the 10% penalty (this is assuming you’re still employed or under the age of 59.5). ). If you’re wondering whether the medical expenses that apply to you are deductible or not, be sure to cross reference with the IRS.2 You can find a comprehensive list here: https://www.irs.gov/taxtopics/tc502.html.
Be Sure to Consult Your Financial Advisor Before Making Big Moves with Your 401(k)
The last thing you want is an unexpected tax bill or a levied penalty because of some action you take with your 401(k), so be sure to discuss what you’re trying to accomplish with your financial advisor first. Whether it’s a rollover or a potential loan, there are probably going to be several options and stipulations involved. It makes sense to double check.
If you want to use one of our Wealth Managers as a sounding board for plans or questions about your 401(k), please do not hesitate to reach out to us! You can simply call 1-800-541-7774 or send us a note to wealth@wrapmanager.com.
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The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.
