Drawing against your 401

First of all keep in mind you didn’t pay taxes on any of the money you put into your 401. Your W2 showed two different earnings figure, one that was gross earned income and a second which was taxable earnings. Not only that but whatever interest is earned over time has also escaped taxation. These are funds that are meant to supplement social security and any other retirement program you are entitled to through work. Pensions were the vehicles of years gone by, almost extinct except for public service jobs.

Ideally you have, besides what your social security, other investments for retirement. Some investments are tax deferred like 401 s but come due in their entirety when disposed of, like some variable annuities and all rental property gains.

If you find yourself without an income and you are under 59 ½ years of age, you can draw against your 401 balance, while incurring a 10% penalty for early retirement. There are some exceptions to the 10% penalty. There is no limit as to how much of the account you may withdraw, just whether or not the amount is penalized. Exceptions to the 10% penalty include: you left your company while you were 55 or older, if you withdraw money in substantially equal payments made at least annually over your life expectancy or of you and your designated beneficiary, if you become disabled as the Internal Revenue Code defines it, and finally a withdrawal for certain medical expenses as long as they do exceed the amount allowed as a deduction on your income tax (not all plans allow for such withdrawals). As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, all hardship withdrawals are not eligible to be rolled over therefore are subject to federal income tax withholding at the time of the withdrawal unless payee elects out of withholding. Seeking the advice of a tax advisor is recommended in such complicated issues. These are the general rules of exception to the 10% penalty.

If you’re lucky enough not to need any of the funds until later in life, you must begin to withdraw funds at 70 ½ years of age. Although, again you may withdraw all the funds if you wish, there is no maximum limit. The formula for minimum withdrawal is a complicated one. It will depend on your age at withdrawal and your life expectancy, the value of the account at that time, and if a spouse is involved, their age and life expectancy. Then there is the type of scheduled withdrawals you choose at that time, like schedules picked for amortizing assets, once chosen you’ll be expected to stay with that chose all the through the account.

These are complicated tax issues and professional advice is called for. I’m just mentioning some of the aspects that will be discussed at your meeting.