This week, Gail explains penalty-free withdrawals from two different retirement plans -- a 401(k) and an IRA. Attention, the rules are not the same!
I'm looking for an article that printed last summer/fall. As I recall, Gail Buckner's answer said that an employee who is 55 years old and is laid off from his company could choose to take his 401(k) without the 10% penalty.
My husband was 55 last year and was laid off from his company so the article made an impact. I checked with both our accountant and my employer's 401K administrator. Both said that they were not aware of this. Was I dreaming?
Dear Barbara —
You may be referring to my Jan. 4 column, "Avoid the Penalty Traps When Tapping Retirement." (To find a past article, try the new Search function located in the upper left-hand corner of this screen. Type in "Buckner" and you'll be able to get all Your $ Matters columns since April 2001.)
You are fully awake — it's your accountant and your husband's employer who are in Never-Never Land. Refer them to the Internal Revenue Code (IRC) Section 72(t)(2)(A)(v).
This clearly states than if an employee is "separated from service" (i.e. no longer working for his employer) and is at least age 55 in the year in which this occurs, he may take distributions from his employer-sponsored retirement plan without incurring a 10% penalty. He would still owe income tax on any money that is withdrawn.
Be careful! For this to work, your husband's money must remain in the 401(k). If he rolls over his retirement account into a traditional IRA, he then has to wait until age 59 1/2 to take penalty-free withdrawals.
I strongly suggest you implement an IRA rollover once your husband reaches age 59 1/2 because: 1) It will enable him to get his money out of his company plan where, obviously, they don't understand the rules; 2) His investment choices will be far greater than what he is currently offered in his 401(k) -- investments for an IRA account can include any of the 8,000+ mutual funds now available, as well as individual stocks and bonds.
While you're at it, get a new accountant, too. This is such a basic concept I can't believe he and your husband's employer are both unaware of it. Shame on them both!
I understand I can take money out of my IRA to pay for tuition and room and board for my kids' college education without paying the penalty (just the normal taxes).
Are there any limitation as to the amount one can take out? Or the rate at which one can take out? I have two kids in college at the same time next year and I'd like to use my entire IRA ($50,000) to pay for next year's costs. Is that possible?
I've heard that the IRA check should be written out directly to the college (and not to me) but my financial planner says they cannot do that, and insists that it must be sent to me. What else do I need to be concerned about in using my IRA to pay for my kids' college education?
Dear Ken —
Section 72(t) of the tax code lists a number of items which enable you to take a penalty-free withdrawal from your IRA regardless of your age. Paying for "qualified higher education expenses" for yourself, your spouse, a child or grandchild is one of them.
Expenses which qualify are: tuition, fees, books, supplies and equipment required to attend any eligible institution of higher education. The National Underwriter company's "Tax Facts" software also notes that if a student is enrolled "at least half-time," then room and board is also included.
Withdrawal checks from an IRA can only be made to the owner. There is no limit on the amount which can be withdrawn from your IRA for this purpose and no special IRS form where you report how the money is spent. But keep careful records as you will have to justify every dollar if you are audited.
I must say, I am dismayed that you are wiping out your $50,000 IRA for this purpose. If the investments in this account grew at just 8% per year, in 20 years it would be worth more than $230,000! That would be quite a handsome retirement nest egg.
I strongly suggest you re-consider and look into student loans instead. Rates on these are expected to drop significantly this summer. Last time I heard, there were no loans available to cover your retirement.
Think twice, dad.
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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.