Oftentimes you can take a loan against your 401k, which is really, “get a loan from the administrator of the 401k, and make that loan one of the assets in your 401k portfolio”. If that’s available (it depends on the plan) it’s probably cheaper than taking a distribution for that kind of purchase.
One clarification - and I haven’t read the whole thread - you are NOT generally required to roll out cash in a 401k when you leave a job. Most plans will cheerfully allow you to keep the money in there.
Small flag on the play, Deth. I just looked it up with my home office.
Here’s the Age 55 rule:
Age 55 Rule
If an employee takes a distribution from a Qualified Plan (as opposed to an IRA), and has separated from service in the calendar year in which they turn 55 or older, the 10% early withdrawal penalty will not apply. In addition:
This penalty exception is available for distributions issued directly to the participant.
A mandatory 20% withholding applies to the distribution.
This penalty exception does not apply to participants that retire prior to the year in which they turn 55, and wait until they turn 55 to take a distribution.
Not applicable for any IRA.
This option is not available for money rolled to an IRA.
Examples
Brian left his employer in April. He will be 55 later that year, so he may take a penalty-free distribution directly from the qualified plan of his former employer anytime during that year, or any later year.
Mary left her employer when she was 52, and never rolled her plan to an IRA. She is now 55, and wants to take a distribution directly to her, versus rolling into an IRA. This would be penalized because she was not at least 55 when she separated from service.
Sure. More & better details about my rather short answer, thanks.
No, but you can use up to $10k from an IRA for that purpose. You still have to pay taxes, but you don’t have to pay the 10% penalty.
Yep.
And even if you put the rest of the money in an IRA or whatever, you have to make up that 20% out of pocket or it’s treated as a distribution (with associated tax and penalties).
Say you are rolling over 100,000 dollars. They take out 20,000 dollars for taxes so you get 80,000 dollars.
Then you take that 80K over to Vanguard or whomever, and set up an IRA.
The 20,000 is treated as a withdrawal.
If your income tax rate winds up being 25%, you have a tax bill of 5,000 (25% of 20,000), and a penalty of 2,000 (10% of 20K). While you’d get a refund of the other 13,000 dollars, you’ve still thrown away the 7,000 dollars - and you can’t use the 13,000 to repay any of the 20,000 “withdrawal”.
A friend of mine was in this position a number of years back. She happened to have sufficient savings on hand so that she was able to deposit the entire amount in an IRA, so she got the 20K (or whatever it was) back the following tax season.
There are lots more nuances, but the take-away tl/dr lesson regarding having your hands on the money, at all, is “Don’t”.
Yep. The nice thing is that you’re paying interest on the loan, to yourself.
The rules on 401(k) loans are different depending on the purpose: last year we took out a loan against mine to purchase a condo for my husband’s parents. I have to pay back that loan in 4 years. If it were to purchase a primary residence for ourselves, I’d have 10 years to pay it back.
And of course if I were to quit or leave the job, any outstanding balance on the loan would be treated as a distribution, and therefore subject to taxes and most likely penalties, unless I were able to repay it all within a very short time. Perhaps some plans allow loans to continue even after you separate but that’s not the norm.
OK, thanks, but unlike making “hardship withdrawals” when employed, for which you must demonstrate hardship…when you lose your job, you can cash out as much money from your 401(k) as you like, no questions asked, right?
(Still having to pay the steep penalties, though, of course)
I think you are correct, and that this applies to any time when you are not employed by the company that sponsors the plan in question.
Yes. It doesn’t matter why you’ve separated from the employer. When they notify the 401k plan administrator (I administer several) that you’re no longer ‘in-service’ you have the right to
- Leave it where it is.
- Roll it to your next employer’s 401k (or 403b).
- Roll it to a traditional IRA.
- Take it for yourself (taxable event and may incur a penalty).
That’s pretty much your options, right there. Note, however, that it may take a month or two for the notification of your separation to get to the plan administrators.
If you want, send me a PM and I can answer specific questions.
Thanks! I think that answers about everything. 