Investing Advice

Retirement Plans - Continued

You would have up to 5 years to repay the loan, but if you leave your job it must be repaid within 30 days. Any amount that you fail to repay is subject to the 10% early withdrawal penalty and taxes. And the interest? The interest you pay goes directly into your account – you are paying it to yourself!

Most plans also allow for hardship withdrawals for medical expenses, college tuition, purchase of a primary residence, or to prevent eviction or foreclosure on your home. But these withdrawals do not escape the 10% tax penalty.

If you leave your job, you have 3 good options. You can leave your money right where it is (if it is more than $1,000). You can roll your money over into the retirement plan offered by your new employer. Or you can roll your money into an IRA (if your adjusted gross income that year is less than $100,000). All brokerages will handle this trustee-to-trustee transfer for you when you fill out a simple short form. The typical 401(k) plan offers relatively few investment options, but with a brokerage firm, your options are limitless.

Another option is to cash it out. But if you’re under 55, you’ll be paying not only the 10% penalty, but also state and federal income taxes. Cashing out when you lose your job and 55 or older will not trigger a penalty.

If you are under 55, there is actually one other option if you lose your job. You can access the money penalty free if you take substantially equal payments based on your life expectancy.

However you'll need to continue with this withdrawal schedule either for five years or until you reach age 59½, whichever comes LAST. Consult with a qualified tax advisor for details.

When rolling your company’s stock from your 401(k) to an IRA, there is an opportunity to save a bundle on taxes (assuming the value of the stock has gone up).

Instead of rolling this part of your plan into an IRA, transfer it to a regular taxable brokerage account, paying the taxes and penalty. You’ll only be taxed on the amount that the shares cost your company, which is probably small. After holding the shares in the new account for 12 months, you can then sell them and only pay the lower rate long-term capital gains tax, either 8% or 18% depending on your taxable income. Check with your tax advisor.

A bit of advice – limit the portion of your 401(k) that is invested in your company’s stock to no more than 20% of your account, 10% if your employer doesn’t match your stock purchases.

Some employees believe that they are in a better position to predict their company’s stock performance since they work there. However, your company has absolutely no control over the stock’s price. If the company runs into hard times, even for a short period, the market will hammer the price.

You could lose most of your retirement savings if you are too heavily invested. Employee’s at Enron in 2001, found this out the hard way, as Enron’s share price tumbled from over $80 down to 60 cents.

And if you think beefing up your 401(k) with your company’s stock shows company loyalty, sorry, you are wrong. Your company isn’t paying any attention to how you choose to allocate your retirement plan.

Most plans offered to employees allow you to choose among various mutual funds in any proportion and combination that you wish. A growing number of 401(k) plans, offered by some companies who use Fidelity or Charles Schwab, are now offering brokerage services allowing employees to buy and sell stocks from their account. This is known as a “brokerage window”.

An often overlooked fact is that even though most withdrawals from a 401(k) are taxable, the contributions you make to the plan lower your adjusted gross income, placing many in a lower tax bracket. This saves you more money, as much as an extra $1,200 a year.

Other Retirement Planning Topics:

  1. Retirement Planning
  2. IRA’s (Individual Retirement Account) – Traditional IRA
  3. Roth IRA – Taking Money Out
  4. Employer Sponsored Retirement Plans
  5. Retirement Plans - Continued
  6. 401K Savings
  7. Notes for 403(b) Plan Participants
  8. Senior citizens retirement resources
  9. Retirement Plans for Small Business and Sole Proprietors
  10. Simplified Employee Pension (SEP) IRAs
  11. SIMPLE (Savings Incentive Match Plan for Employees) IRA
  12. Your own 401(k) for the self-employed
  13. Employer Retirement Plan Vesting and Contribution
  14. Forgotten Retirement Benefits
  15. Other thoughts about retirement accounts
  16. Other thoughts about your retirement needs

Did you find the information you were looking for?
After reading the above article, what is still your biggest question?

Get Weekly Investing Advice
Receive free practical investment advice and tips delivered weekly to your email box with contributions from financial planners, investors, and financing and loan professionals.
  I want to ask a question and receive investment tips.
  I only want to ask a question and don't want helpful advice.
E-Mail Address:  
Your Name:  

To find more investing and stock related websites input the phrase "investing advice" directly into the search box below or simply type in your own search phrase to see over 1 million other investing, stocks and online trading websites.
Who's Not Investing?

Millions marry and start families each year without taking basic steps to make sure their future, as well as their children's, is financially secure.

According to a recent survey by Princeton University and the Consumer Federation of America, 70% of households with incomes under $50,000 a year have retirement savings of less than $5,000. This same report said "most Americans are living paycheck to paycheck".

Learn more about how you can plan, save and invest smart for your family's future.

 Investing Money Sections
arrow Why Invest Money?
arrow Investment Basics
arrow Saving Money
arrow Stock Market History
arrow Stock Market Basics
arrow Stock Market Indexes
arrow Stock Market Investing
arrow Mutual Funds
arrow Investing Advice
arrow Retirement Planning
arrow Saving for College
arrow Financial Planners
arrow Investment Opportunities
arrow Financial Charts
arrow Investment Terms


Return Home

 Home | Contact Us | Privacy | Site Map | Legal notices
 Copyright A to Z Investments © 2005. All rights reserved.