Do you know that you can use your 401(k), without using it up?Â Apparently aboutÂ 45 percent of employees leavingÂ 401(k)-generating jobs don't.Â A study by HR consulting firm Hewitt AssociatesÂ has found that those 45 percent are now cashing out their 401(k) plans when they leave a job. That's an alarming statistic, especially when it can be entirely avoided.
We know that, in order to retire, most people must continue to grow their defined benefit plan by 30 percent after they leave their job. So cashing out not only costs them a 10-percent penalty tax and current-year income taxes of up to 35 percent, it also takes away any hope of earnings from future plan growth. Oh, and there's no longer even a basic retirement account to tap into when the going gets tough.
If you're tempted to cash out, there are other options.
Once the funds are rolled over to an IRA, you can:
Take a 60-day loan from your IRA once every year -- as long as the money is put back within that timeframe.
Withdraw money without penalty for medical expenses above 7.5 percent of your income, health-insurance premiums while unemployed, going back to school, paying forÂ family member's higher education expenses,Â or a first-home purchase.
Withdraw without penalty any IRA money you've deposited since filing last year's taxes.
Do an "I'll scratch your back if you'll scratch mine" arrangement, where -- if your IRA is with a custodial firm that allows self-direction into private notes (and a growing number do) -- your IRA can make a loan to a non-family member. A non-family member's IRA also can make a loan to you. Both loans must be paid back with market-rate interest, to comply with the ERISA codes that regulate retirement account investing. But you'll still have your retirement account and your friend will still have theirs.
In the case of a Roth IRA, which are the IRAs where you'll pay taxes on your contributions as income now but pay no taxes when you later make withdrawals, you can withdraw your contributions without penalty as long as they've been in the account for at least five years.
These strategies are relatively simple, and are being used by thousands already to get them through the tight spots and back on track to a well-funded retirement. Next time you're tempted to take a costly withdrawal, take a moment first to see if any of these options would work for you. You may save yourself a boatload on taxes and fees, and save your retirement in the process.Â
|Â Jennifer D. Meacham, Gather Money Correspondent|
Jennifer's column, "The Bottom Line," is published every weekÂ to theÂ Gather Essentials: Money channel.
Jennifer is a business and personal finance columnist who covers money matters for RedwoodAge.comÂ and real estate news for RISMedia, and co-authored the best-selling retirement investing guide "IRA Wealth: Revolutionary IRA Strategies for Real Estate Investment" (Square One Publishers, New York).
Keep up on the latest news and analysis into how you can take control of your business and personal financial future by joining Jennifer's "Self-Directed Investing 101" network.