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Featured Advisor

Ed Meek
CEO/Investment Advisor

Edge Portfolio Management


State: IL

At Edge, a low client to advisor ratio allows for personal and customized service for each individual.  Our goal is to work as a team for each client to provide not only portfolio management but wealth coordination and financial planning.  We make every effort to have frequent communication with our clients and to provide timely response to calls and emails.  I also enjoy spending time with my wife and three kids, playing and following basketball, playing golf, and participating as an advisory board member for Breakthrough Urban Ministries.

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Economic Woes Force Plan Participants to Dip Into Retirement Savings

Taxable withdrawals from 401(k)s meet immediate financial needs, but at what price?

Part of the American dream is having a secure retirement, but the prolonged economic downturn has been a rude awakening for investors who have been compelled to take a taxable withdrawal from their 401(k) retirement plan. A new Millionaire Corner study, “The IRA Rollover Market 2011,” found that 18 percent of investors have withdrawn some or all of their plan balance.

More than half of these said they need the money to meet day-to-day expenses, while 16 percent said they were hit with an unexpected large expense. The study is comprised of surveys of 940 individuals with at least $5,000 saved in an employee-sponsored retirement plan and were leaving their jobs. 

Of these individuals, two-thirds taking a taxable withdrawal were changing jobs, while 67 percent were between the ages of 35-49. Not surprisingly, 56 percent had the least net worth of those surveyed (between $5,000 and $24,000).

Taxable withdrawals pack a double-whammy. There is the more immediate tax bite and there is the long-term impact on retirement savings in the form of a decreased balance that will not grow as much.

One alternative for those in an employer-sponsored 401(k) is, if allowed, to take a loan from the plan. Borrowed 401(k) funds are not taxable because they are paid back. This option, though, is only available to current employees and not to those who have left their 401(k) in their former employer’s plan. Some experiencing this financial crunch may also have trouble paying back the amount borrowed.

If they feel they must dip into their retirement plans, individuals who also have a Roth IRA are advised to tap into this account first as withdrawals are tax and penalty free.

Another alternative is a so-called hardship withdrawal that an employee can take from his or her 401(k). The IRS defines a hardship withdrawal as one used for “an immediate and heavy financial need” for an employee, the employee’s spouse or dependent. The amount “must be necessary to satisfy the financial need.”  

Expenses the IRS deems “immediate and heavy” include certain medical procedures, the purchase of a principal residence, tuition and related educational fees and expenses, payments to avoid eviction or foreclosure, burial or funeral expenses, and repairs for damage to the employee’s principal home. The purchase of a boat or television, the IRS adds, does not qualify.

A hardship withdrawal will cost you. If you are younger than 59 ½, the IRS imposes a 10 percent early withdrawal penalty and other penalties.