I'm Jammed Up and Need Money!

We all know that those "retirement accounts" are earmarked exactly for that - retirement.  And, based upon current law, retirement age is somewhere at or after age 59 and 1/2, right?  So, we can't get money out of our 401k's, IRA's, or annuities (if anyone actually buys those anymore) until age 59 and 1/2 without an additional 10% tax penalty.

But what about when LIFE doesn't play by the rules?  What if we are laid off from our work, or worse - disabled... at say... age 56?

This is a question we received recently from "Kate," who has money in a 401k, IRA, and annuity - and just got laid off from her job at age 56.  Fortunately, we were able to craft an answer:

Hello Kate,

I’m sorry you have had to struggle; I know it can be frustrating. But don’t give up!

On your accounts – the answer is “Yes and No.” And I’ll throw in an “It depends…” for good measure! But there is some good news and, because of your age, there is a simple window of opportunity, depending upon how much money you need.

The 401k is simplest answer, so let’s focus on that first. Because you left the 401k at the employer (I’m assuming that you did this, and did NOT roll it to an IRA) then you can actually make penalty-free withdrawals from the 401k starting at age 55. This is explained in the 401k Resource Guide to Plan Sponsors, provided by the IRS. Here is the link to that resource:

http://www.irs.gov/Retirement-Plans/Plan-Sponsor/401(k)-Resource-Guide---Plan-Sponsors---General-Distribution-Rules

All plan sponsors are required to provide that you can take money out from your 401k (penalty free) after age 55 IF you are no longer working for your employer, AND you did NOT roll the account to an IRA. This option is often overlooked by financial planners because the common advice is to roll 401k’s to IRA’s because of the increased investment flexibility that IRA’s provide. However, as you have found out – that may be offset by life circumstances, which is exactly why the law allows early withdrawals in a case like yours.

So, just call your 401k plan provider or visit your benefits website and make the withdrawal. It is generally easy, depending upon the infrastructure of the retirement plan. They will have to withhold 20% in taxes, however, that is not optional.

The IRA and the Annuity are more difficult. You can, in fact, make penalty-free early withdrawals from IRA accounts, but they must either be for certain penalty exempt purposes (education, first time home purchase, medical bills, etc). This is Topic 557 in the IRS Code. Here is the link:

http://www.irs.gov/taxtopics/tc557.html

You can also set up a recurring income stream (called “Substantially Equal Periodic Payments) from an IRA. This series of withdrawals is called 72T distributions because it falls under IRS Code 72(t). In this case, I DEFINITELY suggest you work with a financial advisor familiar with the strategy, or a CPA - to do it right, because if you do it incorrectly, the penalties are VERY painful – early withdrawal penalties (and taxes plus penalties and interest). There are 3 separate methods of 72 T distributions, each with their own calculation formula. Here is the link that explains it all – but again, this is NOT a do-it-yourself strategy. Get help.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments

On the Annuity, I would just call the insurance company or the agent assigned to the annuity and ask. The short answer is yes, there is a way to get the money out, but it typically requires an income stream (annuity) or substantially equal payments similar to that of an IRA.

Best wishes,

Jon Castle

Paragon Wealth Strategies
10245 Centurion Pkwy N. Ste. 106 Jacksonville, Florida 32256
Phone: (904) 861-0093