When You Might Avoid the 401(k) Early Withdrawal Penalty

401kThe rule for tapping a 401(k) without incurring the 10% early-withdrawal penalty requires that you are at least age 59½, but there's an exception. If you leave your employer in the year you turn 55 or older, there's no penalty. Even so, you'll still owe tax on the withdrawal. As a result, a $10,000 payout at a 25% tax rate will cost you $2,500. However, there's no $1,000 early-withdrawal penalty tacked on to this.
It doesn't matter how you separate from service. In fact, retiring, being laid-off, or even termination will spare you the penalty. Provided you're 55 by the end of the year you leave the job, the rule applies, says the Kiplinger's article, "When You Can Tap a 401(k) Early With No Penalty."
If you were to leave your job in January and turn 55 in December, the 401(k) payouts anytime during the year are penalty-free. However, if you retire in December and turn 55 the next January, you'd be hit with the penalty until age 59½.
Reaching age 55 or older in the year you leave is the trigger, not just your 55th birthday. So if you were to leave a job at age 50, you couldn't tap that 401(k) penalty-free until you reach age 59½. But if you leave an employer at age 55 to work for another company and then leave the second position at age 57, you could withdraw from both 401(k)s penalty-free. You left both companies in the year you turned 55 or older.
This exception may come in handy for some early retirees who need to use the funds in their 401(k) for living expenses. But remember: this exception from the penalty is lost if you rollover your 401(k) to an IRA. Once the money goes into the IRA, the earliest age for penalty-free withdrawals is back to age 59½.
An IRA, in contrast, has more investment options than a 401(k). One could split the 401(k) for a better result. For example, if you were to retire at 55 with $1 million in your 401(k), and you want to withdraw $50,000 annually for the next five years, you could leave $250,000 in the 401(k) to take advantage of the penalty exception and rollover $750,000 into an IRA to take advantage of other investment choices.
Ask your benefits manager for the details and rules of your 401(k), as there are some plans that don't allow partial withdrawals or periodic distributions.
Reference: Kiplinger's (May 2016) "When You Can Tap a 401(k) Early With No Penalty"


Middle-Class African Americans are Optimistic but Face Investing Challenges

Bigstock-Extended-Family-Relaxing-On-So-13907567Money's article, "The Hidden Retirement Crisis," says that middle-class African Americans are more optimistic about the state of the U.S. economy and are more likely to be invested in the stock market than ever before. However, when it comes to investing for retirement, they still lag white Americans. According to a recent survey, 67% of African Americans are invested in stocks or mutual funds, compared with 86% of whites. Part of the reason for this is that African Americans have different attitudes and challenges around saving for retirement. Here are some of those financial hurdles and some advice on how to overcome them.
A persistent wealth gap. The most recent federal data shows that the difference in net worth between the typical black family and the typical white family at $131,000. Black neighborhoods weren't subject to federally backed mortgages until the late 1960s, so those property values were lower. The wage disparity is still present, with black men making 75 cents on the dollar. To close this wealth gap, the knowledge gap must be closed by discussing investing in the stock market, buying appreciating assets, using homeownership as a wealth creator, and starting businesses that create a legacy for families.
401(k)s. While African Americans have as much access to qualified employer-sponsored plans as whites, not everyone of either race does themselves the favor of taking advantage of the benefit: 74% of blacks currently contribute vs. 85% of whites. Many of those who do contribute do so below the employer match. They claim that their income isn't high enough. However, not getting the employer match is like leaving free money on the table. If your company offers a 401(k) plan, contribute at least up to the matching company funds.
Overspending. All of us need to try to get a good handle on our debt, live well within our means, and make sacrifices. Spend less and save more!
The first step to a secure retirement is to set a savings goal. People who commit to a financial plan save more than twice as much as those without one. Saving for retirement means putting the proper tools to work as soon as you can.
Reference: Money (March 16, 2016) "The Hidden Retirement Crisis"


Beneficiaries…What Are Those?

Kids in grass"When was the last time you updated, or even thought about, the beneficiary designations listed on your retirement accounts, life insurance, or annuity contracts?"

If you don't remember when you last checked your beneficiaries, it's definitely time to review!

Beneficiary designations allow certain assets owned by an individual to transfer efficiently at her or his passing. These include retirement accounts like IRAs, Roth IRAs, 401(k)s, 403(b)s, 457(b)s, and pensions, as well as life insurance death benefits and the residual value of annuities.

These types of assets with designated beneficiaries will transfer automatically, despite anything written to the contrary in a person's will or trust. These assets with designated beneficiaries are also excluded from the decedent's probate estate unless the "estate" is the designated beneficiary.

Owners can designate both primary and contingent beneficiaries. The primary beneficiary inherits the asset, but if he or she dies before the owner, then the contingent beneficiary will be the new owner. If you don't name a contingent beneficiary, the asset will go into your general estate for distribution, which is what you're trying to avoid in the first place by naming beneficiaries.

There are no restrictions on how many beneficiaries can be designated to inherit an asset. You can split your 401(k) 50-50 if you have two children, or 60-40 or 90-10. You can also name a charity as your beneficiary, which can be a nice way to transfer assets to a special organization at your passing. Charities don't pay income tax, so they would get 100% of the value of the asset. If an individual inherits this asset, he or she will be liable for income tax right away or as funds are distributed.

A trust can also be designated as beneficiary to provide control over the asset to someone other than the inheritors. Many times it's used when minor children or individuals with disabilities are to be the ultimate beneficiaries. You should work with an estate planning attorney if you go this route, as the tax and distribution rules are complex.

Review your current beneficiary designations now to be sure they reflect your desires. You also should look at them whenever life circumstances change, like a marriage, birth, divorce, or death. You can change a beneficiary designation at any time.

Since assets with beneficiary designations transfer automatically, make sure that beneficiary designations complement your estate documents. A qualified estate attorney can assist you with how beneficiary designations should be stated to mesh with your overall estate plan.

Reference: Inside Indiana Business (February 29, 2016) "Who Are Your Beneficiaries?"

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