401k Rollover Questions

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Frequently Asked Questions

 

    ● When can I take a distribution from an IRA without penalty?
    ● What is a 72(t) distribution?
    ● How long do I have to roll over a retirement plan distribution?
    ● What are Required Minimum Distributions?
    ● What will happen to my Social Security benefits?
    ● Can an IRA be rolled over into a qualified retirement plan such as a 401K?
    ● Under what circumstances can a participant take a hardship distribution?
    ● Are hardship distributions allowed from an IRA?
    ● Can I withdraw funds penalty-free from my 401(k) to purchase my first home?
    ● Can I roll over my 401(k) and use the money to purchase my first home?
 
 
 

  When can I take a distribution from an IRA without penalty?

You are eligible to take a distribution without penalty from an IRA, 401(k), 403(b), etc. at age 59 1/2. There are seven exceptions to this rule. They are:

1.    death
2.    disability
3.    first-time home purchase
4.    higher education expenses
5.    health insurance
6.    medical expenses
7.    72(t) distribution

          What is a 72(t) distribution?

Section 72(t) of the Internal Revenue Code allows you to begin receiving money from your retirement accounts before you turn age 59 1/2 without the normal 10% premature distribution penalty. The rules for 72(t) distributions require you to receive Substantially Equal Periodic Payments (SEPP) based on your life expectancy to avoid a 10% premature distribution penalty on any amounts you withdraw. Payments must last for five years (the five-year period does not end until the fifth anniversary of the first distribution received) or until you are 59 1/2, whichever is longer. The SEPP can be calculated in one of three IRS-approved ways, and the rules surrounding 72(t) distributions are very complex. It is best to contact us to further discuss taking an early distribution under Internal Revenue Code Section 72(t). We can be reached at 1-800-434-4015.

  How long do I have to roll over a retirement plan distribution?

You must complete the rollover by the 60th day following the day on which you receive the distribution. The IRS may waive the 60-day requirement where failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. However, we strongly recommend a "direct rollover," where the 401(k) custodian sends the check directly to the IRA custodian so that the check is not lost or misplaced. There is no 60-day period, and mandatory tax withholding doesn't take place.

  What are Required Minimum Distributions?

The IRS requires that you withdraw at least a minimum amount, known as a Required Minimum Distribution, from your retirement accounts annually, starting the year you turn age 70 1/2. The amount of the distributions is based on your life expectancy and can be obtained from the appropriate IRS Tables. It's very important to calculate your Required Minimum Distribution correctly, as the penalty is 50% of the amount that should have been distributed.

  What will happen to my Social Security Benefits?

On September 24, 2007, the Bush administration released a report that stated the Social Security is facing a $13.6 trillion shortfall. (Source: U.S. Dept. of the Treasury, Issue Brief No. 1 Social Security Reform: The Nature of the Problem, 24Sep2007)

The shortfall will have to be made up somehow. Of course, taxes will have to be raised and/or Social Security benefits will have to be cut or the payments delayed. Either way, individuals planning for retirement will have to consider future tax increases and/or reduced retirement benefits from the government when they plan.

In anticipation of higher tax rates in the future, it may make sense to consider a Roth IRA, which is funded with after-tax money. If you believe tax rates will be higher in the future, a Roth IRA can hedge against higher tax rates down the road. Unlike a Traditional IRA, distributions from a Roth IRA are tax-free.

  Can an IRA be rolled over into a qualified retirement plan such as a 401(k)?

An IRA can be rolled over into a qualified retirement plan, assuming the qualified retirement plan permits such rollovers.

  Under what circumstances can a participant take a hardship distribution?

A retirement plan may, but is not required to, provide for hardship distributions. A hardship distribution is one that is made while the participant is still an active employee. The employee must have an immediate and heavy financial need, have exhausted all other income sources, and use the distribution to satisfy the need.

If a 401(k) plan provides for hardship distributions, it typically limits the reason for the distribution to the IRS safe harbors: medical fees, purchase principal residence, educational expenses, and to prevent eviction or foreclosure. In determining the existence of a need and of the amount necessary to meet the need, the plan must specify and apply nondiscriminatory and objective standards. While a hardship provision does provide flexibility, participants must be aware that these distributions are assessed income tax and a 10% penalty and contributions to the plan must cease for six months following the distribution.

  Are hardship distributions allowed from an IRA?

Not exactly. There is generally no limit on when an IRA owner may take a distribution from his or her IRA, although there may be unfavorable tax consequences, such as an additional 10% tax on early distributions. However, for certain distributions from an IRA, those being death, disability, first-time home purchase, higher education expenses, health insurance, medical expenses, and 72(t) distributions, the 10% penalty is waived.
 

  Can I withdraw funds penalty-free from my 401(k) to purchase my first home?

Depending on the rules for your 401(k) plan, you may be able to borrow money from your 401(k) plan to purchase your first home. Your plan administrator can tell you if the plan has a loan policy and should have written information that explains when you can borrow funds from your 401(k) plan as well as other plan rules.

  Can I roll over my 401(k) and use the money to purchase my first home?

Yes, if you are receiving a distribution from a 401(k) that is eligible to roll over into an IRA and you meet all of the qualifications for an IRA distribution for a first-time homebuyer. The most important qualifications being that you had no present ownership interest in a principal residence during the two-year period ending on the date of this acquisition, the distribution is used directly for the cost of acquiring the property and the aggregate lifetime limit is $10,000.

 

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