Having money tied up in a 401k can be like walking up a
narrow canyon. Everything is great while you're building up your savings,
but at some point, you look around and wonder "How do I get
out of this?" That's exactly what we're going to talk about today.
We will talk about if and when you can take a withdrawal or
otherwise access the money in your 401k, how you do it...
Exactly, so the logistics. And then if you are at retirement,
we'll go over some of the logistics of actually taking income from your
savings. The first question is going to be, are you even allowed to
take a withdrawal? And I know that this is your money,
so you should be able to get it, but 401k plans have certain
rules that limit your access to the money. So we need to break
that into two categories here. One of them is if you are still
working with your employer or if you have left your job,
so maybe you retired or you change jobs, for example. In those cases,
it's pretty easy to do. But while you're still working, there may be
some opportunities and we're going to go over those... Just friendly reminder
that this is high level educational entertainment, and I really do suggest
that you speak with somebody who is familiar with your situation because
there may be opportunities or "gotchas" or rule changes out there.
So if you do want help, you can talk to somebody and explore
working with me. Now, when you leave your job, this is easy,
you are typically eligible to take money out of your 401k plan,
so you would just make that request through your benefits department or
if you work for a really big company or organization, you can often
contact the service provider, whoever prints your statements or wherever
the website is that you go to manage your account. You can contact
them, maybe provide the instructions verbally by phone or with an online
request, and in some cases, you're going to use a distribution request form
where you fill out your instructions. But there are some potential pitfalls
of taking money out of your 401k, so you really want to weigh
the pros and cons carefully. I do have a separate video that covers
that, but basically, you want to look at the fees and expenses of
whatever you're moving the money to versus where you're taking it from,
and then any other restrictions or features that might be important to you
as you make that decision. Then there's also a timing issue,
it can take a lot longer than we want to actually get this
done. And the reason is that your employer and a plan administrator may
need to actually approve your distribution requests, so depending on how
long it takes them to do that, it can take a couple of
days, and it can even take longer. Sometimes it's quick, but just be
aware that especially with disorganized places, it could take longer than
you hope. And if you are married, your spouse may need to sign
off on it, so depending on the logistics of that, it's something to
be aware of. Now we're going to talk about while you're still working,
and we'll get back to at the end of the video,
some pointers on actually taking income if you are retired and getting ready
to do that. When you're still working at your job. There are a
couple of ways to get money out of a 401K, but they are
typically optional features, so it depends on whether or not your employer
decided to offer these features. So it might not be available.
The first thing to do is to verify if any of these options
are even feasible for you. One of the features you might have available
as a loan, and that's where you can borrow up to $50,000 or
50% of your account balance, whichever is less, and then you repay that
typically over five years, and there are some differences here and there,
but that's the gist of it. The issue with that is that you
need to be able to keep repaying that loan, and if you change
jobs or leave your job, get fired, whatever the case may be,
before you can repay that loan, it can be problematic. That's because the
IRS might treat that as a distribution to you. And if that happens,
that is taxable, and it may have an additional 10% penalty tax on
top of the income tax you have to pay. So loans can be
nice because you get to pay the money back and there are no
tax consequences when you use them unless you don't pay the loan back
for whatever reason. The. Next option might be a hardship distribution,
and that's where you're going to actually request and apply for that distribution,
and you submit, let's say, a form to your employer where you indicate
what your reason is for taking that distribution. It might be medical expenses,
might be the purchase of a primary residence, that sort of thing.
But you have to give a reason, and there's a list of reasons,
and your employer has to approve that and agree with your reasoning.
And unlike with a loan, this is not something that you get to
repay. It's a distribution that just happens and it's done, so it's irrevocable
and it's going to be taxable income to you. So you need to
be aware of all the different potential tax consequences of taking a hardship
distribution. But it can be a nice safety valve. The next option is
an in service distribution. Again, this is an optional feature that you
might or might not have available. Typically it's available only to those
after age 59 and a half, if your employer offers it.
And with that, you could potentially just take money out, again,
that's going to be taxable, or what you can do is move that
money into an IRA, if, for example, you're unhappy with your 401K plan's
investments. Maybe they're expensive, maybe they don't do very well. Whatever
the case may be, the in service distribution may be an option for
you. And another thing that a lot of people don't know about is
if you have rollover money in your 401k, you can potentially take that
right back out. So that would be the case if you had,
let's say, a previous job's 401K and you rolled it into this job's 401k,
that's rollover money that you might have access to at any time for
any reason if you want... But again, the question is, what do you
do with it? You might have taxes due on it... You
just to have to be very careful with what you do with the
money. Now, just a couple of tips that are always helpful to know
as you navigate, this one is going to be about tax withholding.
If you get a direct payment to you, then there may be 20%
mandatory tax withholding, so be aware of that. This isn't with loans for
example, but let's say you took rollover money back out and they pay
it directly to you because you're going to spend that money,
you may have 20% withheld automatically, and that might be more than you
need withheld, it might be more than you want withheld. So you need
to be careful about how exactly you do this. If you move the
money to an IRA instead, you can typically dodge that 20%
withholding, so if you're in a much lower tax bracket or you really
need all of that money at once, then consider moving it through an
IRA first. Next, people often ask about Roth savings. So if you have
some Roth 401k money in addition to your pre tax money or your
employer money, how does that work? Well, typically you're going to roll
your Roth 401k savings into a Roth IRA, so that way you keep
it like to like money. And again, you may not have to pay
taxes when you take those withdrawals, as long as you satisfy all of
the IRS rules. Something to be aware of is that you don't necessarily
have to take the whole chunk all out at once. If you don't
need to spend all of that money right now or in this tax
year, consider taking it out more slowly, the reason is if you take
out, let's say a couple hundred thousand dollars, you might bump yourself
up into quite a bit higher tax rate. That could also impact whether
or not your Social Security is taxable, it could impact how much you're
paying for healthcare, even Medicare, it's a couple of years down the line,
or it might affect if you qualify for subsidies. So it's really important
to be careful about how much you take out and how quickly,
so if you don't need it all at once, then consider slowing it
down. And once again, I want to remind you that it can take
longer than you want, so just be prepared for that and maybe ask
how long you should expect to wait. Now, let's talk about what happens
when you want to actually take income. Let's say you're retired and you're
going to start spending this money to live. The way most people do
this is they move the money over to an IRA that they control,
and. That way, you can set up let's say monthly distributions to yourself
on to replicate your paycheck. Or you can take out lump sum distributions
as needed, but you don't have to wait for all the signatures and
go through the 401k and your employer. So that's what most people do
because it's easiest. Some 401k plans don't allow for that kind of flexibility,
so they might say You have to take it all out at once,
so doing those combinations of, let's say the one time and the lump sum
isn't going to work from a 401k, but you can always ask.
Then. Comes the question of how do you actually spend down the money?
And there are a couple of approaches here. One is what you might
just call a withdrawal strategy, so you take the money, you invest it
in a way that's appropriate for you. Maybe that's a mixture of investments
and then you take withdrawals from that portfolio. Some people call that
the 4% rule, for example, and I've got other videos on that,
and maybe 4% isn't the exact perfect number, but it's the general idea
that you're taking a small amount from your savings each year and maybe
adjusting that for inflation. Other. Approaches include using guaranteed
income, so that might mean annuities, and there are a lot of pros
and cons of doing that, but it does allow you to sort of
take some things off your plate. Just be very careful and be sure
you understand all of the advantages and disadvantages. You can also consider
bucketing strategies where you say, I've got this, my cash for the next
couple of years, and then a relatively safe bucket, and then a higher
risk bucket that I'm not even going to touch for the next 10
years, so I can go ahead and invest it and ignore it.
Again, that has pros and cons. It tends to be a little bit
cash heavy. And you can always use a combination of strategies,
so you don't have to pick just one. You can do a little
bit of withdrawal strategy, maybe do some guaranteed income or bucking.
But the point is, you don't have to pick just one.
You can customize something that fits exactly what you need. Then as you're
going through all of that, you want to be mindful of taxes,
and I've got some videos that talk about taxes. You can find those
down in the description, but the point is, you might have taxes withheld
from every distribution you get, or you might find some other way to
pay those taxes. By the way, if this information is helpful,
please leave a quick thumbs up. That lets me know that this information
is useful to people like you, so... Thanks. And take care.