Retirement
Planning & 401 K Investing:
Secrets to Keeping the IRS Out of Your 401K
by Paul Hooper
At some point in the
future, you will no longer be working where you are. Whether it’s because you
retire, get laid off or change employers, it’s your responsibility to be
prepared. It’s a necessity -- your retirement depends on it.
That’s because when it
comes to your pension funds, you have several options open to you when you
leave your job. And if you don’t know what those options are, and choose the
wrong one, you will have the IRS smack dab in the middle of your IRA. This
means your chances of having the opportunity for long-term tax deferred wealth
building become very slim.
Option 1:
Taking a lump-sum distribution (cash out)
Off the top, you will
lose 20% of your accumulated money because your employer is required to
withhold this amount for federal taxes. Cashing out your retirement plan is
counted as receiving ordinary income, and depending on your tax bracket
(ordinary rates now reach 35%) you may end up owing even more than that 20%,
and that doesn’t include the state taxes that may apply as well.
Furthermore, if you are
younger than 59½ (age 55 in some limited cases) you will be penalized for an
additional 10% off the top. So, our old pal Uncle Sam just slashed your
retirement savings you have accumulated for your Golden Years by a third or
more!
Avoid this
entirely. (In fact, it’s difficult to even think of it as an “option.”)
For example, Dan, age 50,
left his job. He had $100,000 in his employer's 401(k) plan. Dan decided to
take the money from the plan and open a self-directed IRA account. As a result
Dan's former employer sent him a distribution check for $80,000 -- Dan's
$100,000 account balance, less 20% withholding. To avoid all income taxes and
penalties, Dan must not only deposit the $80,000 check within 60 days of the
distribution, he also must deposit $20,000 (the amount withheld
by his employer) by that same date. The $20,000 must come from sources outside
of the distribution. If Dan does not have $20,000 from other sources, that
amount will be treated as a distribution and will be subject to income taxes
and penalties.
Sure, Dan will get this $20,000 back in the form of taxes withheld when he
files his tax return, but that could take a number of months. Why go through
this hassle when using the correct transfer method will avoid the 20%
withholding and will not make you scramble to find funds to cover the
withholding amount?
Build Your Wealth and
Retire Financially Secure With Your 3 Other Options
Your other options
include (1) leaving your money with your former employer’s plan; (2) rolling
it over to your new employer; or (3) rolling it over to an IRA.
Each of these options
will help keep the IRS out of your IRA, if you choose wisely and follow all
the rules, which can be complex. However, there’s more to consider than merely
the tax implications. What about growth? Safety? The next Enron?
Retire Financially Sound or Retire With Debt – It’s Your Responsibility To
Make The Right Choice
So, in conclusion, taking
a lump-sum distribution (cash out) from your 401K means that all the money you
withdraw will be subject to income tax at ordinary income rates that now reach
35%. And don’t forget that additional penalty of 10 percent on top of the
ordinary income tax if you leave your job before age 55. This will leave you
with no tax deferred wealth building for you and your family, which means
there is a good chance you will not retire financially secure. Is that what
you want for you and your family?
Avoiding all the pitfalls
and dangers can be accomplished by choosing the right kind of rollover for
your IRA, based on your specific, individual and unique situation.
Remember, this is
your retirement nest egg. The better you can protect it and invest it,
the farther along the road to a glorious retirement you will find yourself.
About the
author:
Paul Hooper,
President of Marketracker Capital Management, Inc. can help you keep the IRS
out of your IRA. Learn how to make smarter choices with your money by emailing
paul@marketrackeronline.com to receive a FREE SPECIAL REPORT full
of ideas and tips on how to keep the IRS out of your IRA and roll it over in a
way that will lead you to a life of prosperity. Be sure to include SPECIAL
REPORT in the subject line to ensure a safe delivery.
