Tax Assessment and Retirement Plans
When you first earn money within your 401k, it is not taxable. Taxes will not be assessed and due until money is taken out of your 401k. This usually occurs at retirement. One of the most important mistakes you should avoid making is the assumption that you will be in a lower tax bracket when you retire. Your income might have decreased significantly at that point, but the size of your 401k investment, Social Security benefits, other retirement plans, inflation and increases in tax levels could render you with a larger tax burden after retirement. Keep this in mind when you consider the next part of the changes to 401k policy: money taken out before retirement.
It is not usually a good idea to make withdrawals from your 401k prior to retirement. Age 59 ½ is set as the standard, and prior to this time, any money withdrawn from your 401k, in addition to being subject to federal income tax, will be reduced via a 10% excise tax. However, there are certain exceptions to these restrictions, in the form of hardships. Hardships include:
- The purchase of a primary residence; mortgage payments NOT included.The
- Avoidance of foreclosure or eviction from your primary residence.
- Secondary Education payments for you, your spouse, or any dependents. Must be payments incurred in the past 12 months.
- NonInsured medical care for you, your spouse or any dependents. Must be essential care normally deductible for federal taxes (no non-essential cosmetic surgery, etc.).
- Funeral expenses for the death of parents, spouse, children or dependents. Death must have occurred following December 31, 2005.
- Essential home repairs; damage must have occurred after December 31, 2005
Make sure when considering which 401k to invest in that not all of these provisions are constant. Your employer can disallow any of these provisions as well as other components to the plan when setting up your 401k.
How can I find out more?
- You can start by visiting our online Learning Center to review the basics of how a 401k rollover works and what it can do for you.
- Use our Contact an Agent form to request a rollover for your 401k plan.
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