August 5th, 2010 will be 2 years for My Journey to Millions! To put that in perspective:
- High School was 4 years
- College was 4 Years
- Law School was 3 years
- I have been Married 2 years and 2 months
For the next couple days I am going to re-post some REALLY old posts. Today is the re-post of my first post ever picked up by a main stream media site. I have added some new links were applicable.
My First Post Ever Picked up by Main Stream Media (MSN.COM)
Leave Your Retirement Accounts Alone
I often check the online personal finance section of the Wall Street Journal; many times I find interesting articles which range from the topics credit card debt all the way to macroeconomic theories, but in all honesty, today’s top headline frightened me!
The title of the article is, “Investors Pull Money Out of Their 401(k)s” written by Jennifer Levitz. As the title indicates, the article provides actual (and recent) statistics of people raiding their 401(k)s despite the 10% penalty tacked on by Uncle Sam by those under the age of 59 1/2.
Publication 560 written and published by the IRS gives the simplest of explanations of this penalty and trust me this is a HUGE penalty.
If a distribution is made to an employee under the plan before he or she reaches age 59½, the employee may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that the employee must include in income.
As with everything there are exceptions to this rule, I will highlight a few, but that is not the purpose of this post. Some of those exceptions include:
- Made to a beneficiary (or to the estate of the employee) on or after the death of the employee.
- Made due to the employee having a qualifying disability.
- Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.)
- Made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.
- Made to an alternate payee under a QDRO.
- Made to an employee for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the employee itemizes deductions).
- Timely made to reduce excess contributions under a 401(k) plan.
- Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).
- Timely made to reduce excess elective deferrals.
- Made because of an IRS levy on the plan.
- Made as a qualified reservist distribution. A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period.
I will prepare a separate post truly exploring these exceptions (often cited as “Hardship exceptions), as well as explore the option of a 401(k) Loan, but the point of this post is that – raiding your qualified plan is the same as putting a piece of gum on a leaking damn…it does not fix your cash flow problem.
It is mostly the generation above me (considering very few people around my age have had the opportunity to save that much in their qualified plan) that have previously raided their home’s value and need more liquid dollars. THIS IS ME ASKING, FIX YOUR CASH FLOW!
Ms. Levitz provides the following statistics,
T. Rowe Price Group Inc. in Baltimore saw a 14% increase in hardship withdrawals in the first eight months of this year, compared with the same time last year. Boston-based Fidelity Investments says the number of workers with hardship withdrawals rose 7% from April through June, compared with the same time period a year earlier. Principal Financial GroupInc., in Des Moines, Iowa, says that requests for hardship withdrawals are up 5% this year through Sept. 18, over last year, and that the withdrawal amounts are larger.
Then there are those individuals who don’t bother asking for tax help,
Massachusetts’ Secretary of State William Galvin says his office received numerous calls from people who were in a “panic state” and liquidated portions of their 401(k) accounts last week when the market tumbled, not realizing they triggered tax penalties. Mr. Galvin, the state’s chief securities regulator, is urging Congress to eliminate the 10% penalty on such withdrawals — which comes on top of regular tax rates — for investors who may have acted without knowing the consequences.
I have no idea why congress would eliminate this excise tax, considering they are allowing people to save with no taxes, but Mr. Galvin’s argument seems to be that since the U.S. Government is helping out institutions we should help out those who need to access this money asap. This contention holds zero water with me – by putting money into qualified accounts you made a contract with the government – you won’t pay taxes on realized gains or dividends in exchange for strict tax rules. But with the events of the past 3 weeks who knows what is going to happen.
While Ms. Levitz explains that,
Jill Schlesinger, a Providence, R.I., fee-only registered investment adviser who manages 401(k) plans for clients, says, “If it’s the best of the worst options, you should do it. I’d certainly prefer you do that than lose your house or get into some kind of terrible loan situation with your credit-card company.”
I couldn’t disagree with Ms. Schlesinger with more, and in fact, she provides me with a perfect conclusion…maybe that person can’t afford that house or that person needs to stop using their credit card.
Before I get angry comments/emails I took a strong stance here and there are obviously situations that raiding a qualified account must be done, but it should be done with great caution and not because you need to hold on to your 2 luxury automobiles and McMansion.