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