How to Avoid Penalties for Early Retirement Withdrawals
Check if your plan allows loans., Identify how much you need., Call your plan administrator., Make repayments.
Step-by-Step Guide
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Step 1: Check if your plan allows loans.
The law allows employer-sponsored retirement plans to extend loans, but it is up to the plan whether or not it wants to allow loans.
Accordingly, you should check to see if your plan allows loans to be made.
If the plan administrator agrees to give you a loan, then you can take it without the 10% penalty.
Some plans might allow you to take a loan but limit what you can spend the money on.
For example, a plan might allow you to take a loan only to pay for educational or medical expenses.You can also take a short-term loan from an IRA. -
Step 2: Identify how much you need.
In a calendar year, you can generally borrow up to 50% of the vested balance in the retirement account, up to $50,000.You will have to pay interest on the loan.
Although rates will vary, it is common to have to pay the “prime rate” plus one percent.
You can find the current prime rate in the newspaper.
Some plans have a minimum amount, so you must take at least that much out in a loan. , You should check with your plan administrator whether or not you can take out the loan.
The administrator should be able to tell you whether you qualify for a loan and supply you with the necessary forms. , Loans must be paid back.
If you borrow from an IRA, then you must pay the loan back within 60 days.If you borrow from a 401(k), then you must pay back all of the loan before you terminate employment.
If you don’t, then the unpaid balance will be considered income, which is subject to both income tax and the 10% penalty.Think about whether or not you are planning to leave your job or if there’s a chance the company might be laying people off.
If you lose your job, then you may have only 60 days to pay back the balance otherwise you will be hit with the penalty.
Also check how close you are to retirement.
You might want to take early distribution if you are 55 or older. -
Step 3: Call your plan administrator.
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Step 4: Make repayments.
Detailed Guide
The law allows employer-sponsored retirement plans to extend loans, but it is up to the plan whether or not it wants to allow loans.
Accordingly, you should check to see if your plan allows loans to be made.
If the plan administrator agrees to give you a loan, then you can take it without the 10% penalty.
Some plans might allow you to take a loan but limit what you can spend the money on.
For example, a plan might allow you to take a loan only to pay for educational or medical expenses.You can also take a short-term loan from an IRA.
In a calendar year, you can generally borrow up to 50% of the vested balance in the retirement account, up to $50,000.You will have to pay interest on the loan.
Although rates will vary, it is common to have to pay the “prime rate” plus one percent.
You can find the current prime rate in the newspaper.
Some plans have a minimum amount, so you must take at least that much out in a loan. , You should check with your plan administrator whether or not you can take out the loan.
The administrator should be able to tell you whether you qualify for a loan and supply you with the necessary forms. , Loans must be paid back.
If you borrow from an IRA, then you must pay the loan back within 60 days.If you borrow from a 401(k), then you must pay back all of the loan before you terminate employment.
If you don’t, then the unpaid balance will be considered income, which is subject to both income tax and the 10% penalty.Think about whether or not you are planning to leave your job or if there’s a chance the company might be laying people off.
If you lose your job, then you may have only 60 days to pay back the balance otherwise you will be hit with the penalty.
Also check how close you are to retirement.
You might want to take early distribution if you are 55 or older.
About the Author
Frank Young
Creates helpful guides on lifestyle to inspire and educate readers.
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