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How to Take Control of Your 401(k) and Avoid Common Rollover Mistakes
By Doug Martini Published: 08/10/2009
For several years now the IRS has allowed 401(k) participants the opportunity to take what is known as an "in-service non-hardship withdrawal" from these retirement accounts. But just because they allow it doesn't mean your plan administrator does.
A growing number of plans are beginning to give in to the demands of participants. Especially in light of the increasing number of complaints about high fees, lack of investment advice and the limited investment choices available in these plans.
This new withdrawal option is especially welcome during the current economic downturn. Instead of being locked in to the limited choices, high fees, etc. of your employer's plan, you can withdraw funds and roll them into an IRA which has an almost limitless variety of choices. These choices will give you more control, more flexibility.
To find out if your plan allows this option, consult with your adviser and review your Summary Plan Description or check with the employee benefits department at work. Just because it isn't currently available doesn't mean that they won't change the rules. And even if you take advantage of this option you can still participate in the plan and continue getting your employer's matching contributions. There may be certain conditions and restrictions that apply.
Assuming you are able to take this withdrawal, you must follow the IRS rules to avoid unnecessary penalties and taxes if not done properly. The first mistake to avoid is doing what many refer to as a rollover. A rollover means that the plan makes the check out to you and you have 60 days to roll it into another qualified plan, usually an IRA.
If you do a "rollover", the plan is required to withhold 20% for taxes. And if you are not 59 ˝ years old you will have a 10% penalty for early withdrawal. And you will have to pay taxes on the 20% that was withheld as well. All of this can be avoided if you work with an adviser that specializes in these types of transactions.
That in itself sounds painful but the real pain comes if you do not put the funds back into another qualified account within the 60-day window. If for some reason you don't, the entire amount loses its tax sheltered status, becoming fully taxable as income in the year of the withdrawal and no more tax deferred growth.
But don't let these obstacles prevent you from taking advantage of this In-Service Non-Hardship Withdrawal. It is actually easier to do it the right way, if you are working with an adviser familiar with the process. And once it is completed, you have more control, more flexibility and a lot more choices.
Doug Martini is a financial adviser providing income and retirement planning for his clients specializing in IRA and 401(k) growth and distribution strategies. Other income and retirement strategies include:
-How to Generate Tax Free Supplemental Retirement Income
-How To Maximize Your Pension For You and Your Spouse
-How To Provide Tax Free Benefits From Your IRA or 401(k)
-How To Generate Tax Free Income For Your Heirs
-How To Maximize Charitable Contributions
For additional information, visit his website at http://SaveYour401kNow.com.
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