Yes, it’s your pot of cash sitting in a 401(k) account waiting for retirement.
You’re supposed to resist the temptation to withdraw the money. But you need it now.
Here are a few ways to get your hands on those funds without suffering a 10 percent penalty on top of income taxes.
Congress created 401(k) retirement plans in 1978. They are governed by the Employee Retirement Income Security Act of 1974 in addition to the tax code. Many companies adopted the plan as a way to help millions of employees save for retirement and supplement Social Security checks. Beyond the 401(k), variations include the SIMPLE 401(k) and safe-harbor 401(k).
Qualified plans such as the 401(k) are defined-contribution plans.
In some companies, all contributions come from employees. Some companies supplement their employees’ contributions with matching funds.
In 2017, the maximum amount of compensation that can be deferred into a 401(k) plan is $18,000 for employees younger than 50. Those who will turn 50 or older by the end of the year can make catch-up contributions to a total of $24,000.
The maximum joint employee/employer contribution limit for 2017 is $54,000 for employees younger than 50 and $59,000 at 50 and older.
Funds in a 401(k) account can be invested in stocks, bonds and other instruments.
Normally, withdrawal is permitted without a 10 percent penalty once the account owner turns age 59½. Required minimum distributions must start by April 1 of the year following the year that the owner turns age 70½.
The Financial Industry Regulatory Authority provides a free calculator to determine the amount that must be withdrawn depending on the account balance and the age of the owner. At any age, distributions count as ordinary income and are taxed accordingly.
North Bay Business Journal met with Alicia Cerruti, CPA and senior tax manager in Pisenti & Brinker’s Petaluma office, where she has worked for a dozen years. Cerruti guides businesses and individuals with high net worth, as well as nonprofits, through the sometimes tricky realm of taxes.
Taking money out of a 401(k) plan before age 59½ is not easy without suffering the 10 percent penalty. The funds, after all, are intended to go toward retirement. “There are not a lot of choices” for withdrawal. “That’s the point of it,” Cerruti said.
As a result, “there are very limited scenarios in which you can avoid that penalty” of 10 percent. You are always going to have the tax.”
Withdrawals before age 59½ from a 401(k) plan can be done typically in these circumstances, according to Cerruti.
If the 401(k) owner dies, heirs can take the money without the 10 percent penalty.
Total and permanent disability qualifies the 401(k) owner to take distributions without penalty. “Your physical and mental state prevents you from being able to carry on a normal line of work,” she said, such as heart or breathing conditions.
If the 401(k) owner leaves employment after age 55, withdrawal without penalty may be possible. “You have to look at how your plan is written,” she said. “If you work through that period when you turn 55 and then separate from the employment, you can probably get an exception.”
Age 50 for some workers