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AXA Advisors, LLC - Southtowns Office

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3656 Abbott Road
Orchard Park, NY 14127
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Need to Tap Your 401(k)? Proceed with Care

Everyone faces challenges, and some challenges require more cash than you have readily available. If you find yourself in that position, you might eye your 401(k) balance and consider using those funds to meet your present needs. That’s a natural response, but it’s usually not a good idea.

Taxes and Lost Growth

If you are younger than age 59½, you generally cannot withdraw funds from your employer’s retirement plan while you are still employed, unless you qualify for a hardship distribution (explained later). If you are older than 59½, some plans may allow an in-service distribution. Even if you are eligible, all distributions from a traditional 401(k) are subject to ordinary income tax, and a 10% federal income tax penalty generally applies to withdrawals before age 59½. If you are in the 22% federal income tax bracket, a $10,000 withdrawal might put less than $6,800 in your pocket ($10,000 minus $1,000 penalty, $2,200 federal income tax, and any state income tax).

That’s a significant deterrent in itself, but the greater penalty could be the loss of future savings growth needed for retirement (see chart).

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Consider a Loan

If you really need to tap your 401(k) funds, a loan might be a better option, as long as loans are allowed by your plan and you anticipate staying with your employer long enough to pay the loan back. Under IRS rules, loans are limited to the lesser of $50,000 or 50% of the vested account balance. Loans must be repaid within five years (longer terms may be allowed for a home purchase). However, each plan is allowed to set its own interest rates and repayment policies. The good news is that even though the plan is required to charge interest, the interest is paid back to your own account.

Of course, borrowed money isn’t pursuing investment returns, so your retirement savings goals may be interrupted as long as the loan is outstanding. If you leave your employer, you have until October of the following year (the federal income tax extension deadline) to put the borrowed money back into the old plan, a new employer plan, or an IRA. Failing to repay on time means the outstanding balance may be treated as a distribution and subject to ordinary income tax and the 10% early-withdrawal penalty.

Hardship Distributions

Although not required to do so, a plan may allow participants to take hardship distributions limited to the amount necessary to meet an “immediate and heavy financial need.” Before taking a hardship distribution, you must take advantage of all other available distributions, including loans. The employer can make its own determination as to hardship, but the IRS considers the following situations to meet the definition:

  • Medical expenses for the employee, the employee’s spouse, dependents, or beneficiary
  • Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments)
  • Tuition, related educational fees, and room and board expenses for the next 12 months of post-secondary education for the employee or the employee’s spouse, children, dependents, or beneficiary
  • Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence
  • Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary
  • Certain expenses to repair damage to the employee’s principal residence

Keep in mind that, as with other withdrawals, a hardship distribution is subject to ordinary income tax and a potential early-withdrawal penalty.

 

Information provided has been prepared from Broadridge Advisor Solutions sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is provided for informational purposes only, and is not intended for solicitation or trading purposes. Broadridge Advisor Solutions is not an affiliate of AXA Advisors, LLC. Please consult your tax and legal advisors regarding your individual situation. Neither AXA Advisors nor any of the data provided by AXA Advisors or its content providers, such as Broadridge Advisor Solutions, shall be liable for any errors or delays in the content, or for the actions taken in reliance therein. By accessing the AXA Advisors website, a user agrees to abide by the terms and conditions of the site including not redistributing the information found therein.

Securities offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products offered through AXA Network, LLC and its subsidiaries.

Securities offered through AXA Advisors, LLC (212-314-4600), member FINRA/SIPC. Investment advisory products and services offered through AXA Advisors, LLC, an investment advisor registered with the SEC. Annuity and insurance products offered through AXA Network, LLC and its insurance agency subsidiaries. AXA Network, LLC does business in California as AXA Network Insurance Agency of California, LLC and, in Utah, AXA Network Insurance Agency of Utah, LLC. AXA Advisors and its affiliates do not provide tax or legal advice. Individuals may transact business and/or respond to inquiries only in state(s) in which they are properly registered and/or licensed. The information in this web site is not investment or securities advice and does not constitute an offer.

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