by Insurance Maze » Thu May 08, 2008 04:08 pm
Let's suppose a client came into your office and advised you that he/she had $150,000 in 401(k) funds which he/she left with a previous employer.
The client further explained to you that these funds could not be left with the previous employer, but had to be moved.
The client is thinking about just taking the money to invest in his own insurance agency, but just can't decide what to do. The client is 45 years old.
What advice would you give your client?
Maze
The client further explained to you that these funds could not be left with the previous employer, but had to be moved.
The client is thinking about just taking the money to invest in his own insurance agency, but just can't decide what to do. The client is 45 years old.
What advice would you give your client?
Maze
Posted: Fri May 09, 2008 05:01 pm Post Subject:
I the person buys a home and it's his primary residence then he probably qualifies for a hardship withdrawal and would not pay the early withdrawal penalty but as Lori mentioned, he would owe income tax on the money.
First of all, I want to say right up front, borrowing money from a 401(k) plan is not the best idea in the world, but . . .
If the choice comes between taking a "hardship withdrawal" and making a "loan", take the loan.
A person can borrow up to 50% or $50,000 (whichever is less) of vested funds and have up to 5 years to repay the loan. If the loan is for the purchase of a "first home" the re-payment period can be longer.
As long as the loan is being re-paid, there are no early withdrawal penalties and the loan amount does not have to be declared as income for state and federal income tax purposes. If the loan is not repaid then it's income and an early withdrawal.
If a person chooses a "hardship withdrawal" (before 59 1/2), then it's an early withdrawal and the 10% withdrawal penalty comes into play and the amount must be declared as income for tax purposes.
I hope InsTeacher will get back in on this one.
We really still haven't come up with an appropriate response to this client's concerns.
Maze
Posted: Fri May 09, 2008 05:21 pm Post Subject:
I know we are not supposed to post to our own posts, but Teach we were evidently working on this at the same time. We say almost the same thing.
How about that?
If this person took a temporary pay cut to change employers, would that qualify as a hardship?
Maze
Posted: Fri May 09, 2008 05:39 pm Post Subject:
"The following items are considered by the IRS as acceptable reasons for a hardship withdrawal:
Un-reimbursed medical expenses for you, your spouse, or dependents.
Purchase of an employee's principal residence.
Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
For funeral expenses and repair of a primary residence. "
Keep in mind also that the employer is not required to allow this type of withdrawal. It's just allowed by the IRS.
Posted: Fri May 09, 2008 05:50 pm Post Subject:
OK, so do we all agree that when we advise our client, we can tell him that he has several options?
OPTION #1: If allowed, move the 401(k) funds to his new employer's 401(k) plan.
OPTION #2: Rollover the 401(k) funds into another qualified annuity(IRA).
OPTION #3: If the reduction in income has caused him to default on house payments and he runs the risk of foreclosure, he may qualify for a "hardship withdrawal".
OPTION #4: He may be able to borrow up to $50,000, without penalty, if the loan is repaid.
If the client decides to do a rollover, would you recommend a qualfied indexed annuity, a traditional deferred qualified annuity, a 401(k) plan which can be set up under his insurance agency or something else?
Maze
Posted: Fri May 09, 2008 08:24 pm Post Subject:
OK, the only plans that accept "transferred" dollars are either to transfer into the new employer's 401k (if allowed by the plan, and not all plans do allow this) or into an IRA; self-directed or traditional. No non-qualified annuity will qualify for transfer dollars and keep the tax-structure of the 401k in place. Now, if the participant wants to roll the funds into anything else, remember- it's their money and they can do whatever they want with it. Again, just remember that they are gonna pay the piper with penalties prior to age 59 1/2 plus taxation on the entire amount withdrawn.
The only tax-qualified annuity that will accept transferred dollars, if I'm right (and I'll be the first to admit that I certainly don't know everything by any stretch of the imagination), would be a 403b tax-sheltered annuity. This, under current rule (they change in 2009) is only available for employers that file under sections 501 (c) (3) of the Internal Revenue Code. This is for non-profit employers only.
If anyone has anything further (tcope???) please respond!
InsTeacher 8)
Posted: Fri May 09, 2008 08:59 pm Post Subject:
No non-qualified annuity will qualify for transfer dollars and keep the tax-structure of the 401k in place.
Agreed.
The only tax-qualified annuity that will accept transferred dollars, if I'm right (and I'll be the first to admit that I certainly don't know everything by any stretch of the imagination), would be a 403b tax-sheltered annuity.
No, Teach. Most traditional tax deferred annuites or equity indexed annuities can be qualified plans and will accept qualified rollovers.
Maze
Posted: Mon May 12, 2008 02:06 am Post Subject:
No, Teach. Most traditional tax deferred annuites or equity indexed annuities can be qualified plans and will accept qualified rollovers.
But only if they're installed within a qualified plan, agreed? Individual non-tax qualified annuities aren't within this structure.
InsTeacher 8)
Posted: Mon May 12, 2008 02:15 am Post Subject: 401(k)
Not all plans allow for withdrawls.... check the plan documents. It's up to the employer and how he/she set the plan up.
Posted: Mon May 12, 2008 02:43 am Post Subject: insurance
Ok...........yep, alittle 'insurance stupid', again. IRA VS. 401 (K). Whats' the 'benefit' difference? What amount do you need to start EACH one?
Posted: Mon May 12, 2008 10:16 am Post Subject:
I don't think you need a certain amount to 'start' either...But there is (I think) a limit to how much you can put into both per year...(I contribute plenty, but husband handles all of that ! :roll: boring money saving/investing stuff :wink: )
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