Retirement Planning &
401K 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 makes your
chances of having the opportunity for long-term tax deferred wealth building
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, healso 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
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.