When to start withdrawing from 401k
Take the penalty-free 401k withdrawal that the CARES ACT allows?
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hey Dustin tivity a financial adviser
which as wealth managers I got a quick
one for you here today you know a couple
weeks ago the government passed a what's
known as the cares Act and inside of the
cares Act one of the things was taking
money from your 401 K early so let's say
you weren't of retirement age could you
take money from your 401 K penalty-free
and withdraw that money we you know
without paying a penalty and so
basically they just eliminated that and
they said tell you what if you're
falling on hard times here you could
take money early from your 401k or
prematurely take money out of your 401k
without paying that 10% penalty you
still to pay taxes on it but basically
they just kind of wave that and gave you
a little extra time to do it we'll cover
that in a second but it didn't really
come up nobody really asked that well
now we're getting towards a little
deeper I would say into the shutdown
here people were going holy cow I need
some money man I've spent through the
money I have I maybe had family members
you helped or whatever and so I'm
getting the question more and more so we
take money out of the 401k not only to
obviously support yourselves or your
family but maybe to do some crafty
things with it as well because the money
comes out without paying the penalty so
let's address a few things here so the
first thing is I'll explain a few other
questions that I get and then I'll share
some data with you try to help you out
there who's eligible to take out the 401
k loan prematurely for our not loan 401k
withdrawal prematurely if you want to do
it and it's basically anybody if you've
been affected financially if you've been
affected with you get yourself getting
the virus a family member getting out of
the virus a family member maybe got the
virus and you helped take care of them
or that made you want to quarantine or
something like that and you couldn't
work or your job fired you whatever and
for load you or whatever then you're
eligible you can actually self certify
that you are eligible for the withdrawal
you don't actually need to really prove
anything so basically everybody is
eligible it's kind of on the honor
system whether you take that money out
or not the next question I get is is it
alone and it's not alone there's two
differences here you could take a loan
from your 401k and there's actually some
commentary to
dressed that in the carers act but this
is talking about the withdrawal from
your 401k it's not a loan at you just
don't pay the penalty you owe taxes on
it so if you take them on let's say you
take $10,000 out you wouldn't owe the
10% penalty on that amount that is
waived and you have three years to pay
the taxes on that amount so $10,000 can
be spread the taxes can be spread over
three years you also have the ability to
pay it back here's how this works if you
pay the money back let's say you paid
back half of it five thousand goes back
in well that money counts as a rollover
contribution meaning it's just they
pretend like it's money that rolled over
from an old 401k plan and that's how
you'll see it on your transaction
history if you happen to pay money back
if you do pay money back then whatever
tax would be owed on that you can still
stretch out over the remaining three
years you just won't know tax on the
full amount another question I get if I
take ten thousand dollars out and two
years goes by could I wait until the
third year to pay all the taxes and
that's not clear as it stands now the
taxes are spread evenly over the three
years so everybody's working on the
assumption and it basically says you're
gonna spread it out over the three years
but it doesn't say you have to put it
all in the first year or the last year
just says spread it out so you're
basically just paying the taxes on the
money as you have it if you pay the
money back whatever taxes left it would
be owed right now basically
now the question I get you don't have to
take your 401k distribution so if you're
of retirement age or you have an
inherited IRA and you're normally
supposed to take a distribution a
required minimum distribution or an RMD
as they say you don't have to do it in
2020 and the question I get is should I
anyways I mean should I take the money I
maybe maybe it helps I need it or
whatever the answer is if you don't have
to don't do it at all and there's one
reason why I haven't seen anybody else
mentioned this before but there's one
reason you don't want to do this if in
2020 you're trying to take your require
minimum distribution it's actually based
on the end of 2019 s value of the
account right so in 2019 what happened
the end of the year if you had a
$100,000 account that was probably at
its higher point that it's ever been we
go into 2020 and we went up a little bit
and then the virus hit and we fell apart
so you're taking money out of your 401k
down here but their IRS is calculating
the amount you have to take out based on
up here all right so you're taking out
more money than you have to and I've
heard nobody mentioned that but bottom
line is if you don't need that money
there don't take it out absolutely and
then I get the question should I do it I
don't know that I need the money I just
see it's an option to me should they do
it and buy a house or buy a car pay this
off or do whatever I want to run a
scenario buy up Joe do it real quick and
we'll get out of your way this assumes
that you're not able to put the money
back for six months and you're not
contributing so this is just one way to
look at it's not direct but I put your
income there I put if you make a five
percent contribution because maybe
you're laid off or something but you
don't really need the money five percent
contribution that's how much it would
have added up to at the end of six
months based on your income if you got a
match I don't know if you got a match I
threw it in there five percent match at
the end of six months there's your total
on the right hand side there how much
money you would have accumulated in
terms of deposits now what we did is we
looked further out we said what are you
actually sacrificing by taking that
money amount so now our that money out
so we've got the contribution amount on
the left we went ten years out I just
said 6% net return right this is a net
return not saying oh seven percents the
average return no I'm saying six percent
net after however you make your money in
your 401k because they get a little
something out of the mutual funds
there's a fee in maybe you pay something
for help or I don't know whatever you
pay 6% net there's the value ten years
later your money would have multiplied
by one point seven nine times so use
this number right say oh if I'm gonna
take money out yeah I lost my job or
whatever I could take the money out I'm
not contributing to the 401k I'm
thinking about paying off my car buying
my car use that number to see if it's
worth it ten years from now one point
seven nine times the amount you would
have contributed twenty years from now
it's 3.2 times what you would have
contributed if you make a 6% average net
return and 30 years from now you've
almost sextuple him out of the of your
money twenty-five hundred dollars thirty
years from now is fourteen thousand
three hundred fifty eight dollars and
you could see you go through the
the kind of charts there so that's that
just wanted to share that with you you
keep that in mind
right the compounding interest thing is
there's another way to look at it other
than just ran a bunch of numbers and see
what happens one last thing
can you still contribute to your 401k
let's say you don't care about taking
out the money
can you still contribute to your 401k if
you're furlough right and the answer is
kind of so if you have sick leave that
you want to cash in medical leave or
something that they've given you that's
not technically income but they're
paying you and it's coming to you yeah
technically you can use that money
there's nothing that says you can't I
don't know a lot of people that may be
in that position but the idea is you
have to have earnings of some kind if
you're cashing out paid time off or
something like that well that counts as
earnings so you could still technically
contribute to your 401k all right so
that's it that is the taking a look at
the questions about the early withdrawal
from the 401k given the rules in the
cares Act of this year so if you're
thinking about taking that early
withdrawal from the 401k you don't have
to worry about the penalty you do got to
worry about the taxes maybe check that
out see if it's something you have to do
and by all means if you have to stay
afloat and this is going to help you
don't let anything scare you away you
got to do what you got to do but at
least no way you're getting into and
know now that you don't have to pay the
penalties and how the taxes work if I
helped you in some way hit the subscribe
button to appreciate and have a great
rest of your day and I'll get out of
your way see you later why should you
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