More people dipping into their 401K retirement accounts
RENO, Nev. (KOLO) - More Americans are finding themselves pulling money out of their 401K Retirement accounts before its time.
That’s according to the Bank of America who reports an increase in withdrawals for financial distress.
While that may seem tempting, penalties will soon follow.
“So, you are going to pay the 10% penalty if you are under age 59,” says Richard Jay with Iconic Wealth Advisory Group. “You are also going to pay the income tax on it. And in theory that income tax could actually push you up into a higher tax bracket.”
That bill will come the following April during tax season.
Jay says the IRS will allow for a money withdrawal out of the 401K with payment back in 60 days with no penalty. But that can only be done once per calendar year.
And studies have shown people don’t pay it back.
Pulling money from the retirement account means fewer funds at retirement, or the employee may have to work longer to make up those funds.
Companies who offer 401K retirement accounts may allow for a loan to be drawn from that retirement money. But it will have to be paid back--plus interest.
There will be no IRS tax on that loan.
“I would say roughly 50% of the companies offer loans,” says Jay. “Some don’t because they say we don’t want our employees to think this is a piggy bank. I get it.”
There is something called a “hardship distribution” where because of medical expenses, or eviction or to make repairs to a primary residence because of fire or earthquake the money is needed urgently.
The money withdrawn cannot be paid back to the account. And once again, it will be considered income, income taxes will be owed on the money---a penalty however may be avoided.
Advice given during the recession can apply to those who are considering withdrawing money from their 401K these days. Take a look at unnecessary expenses like a daily trip to Starbucks.
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