401K Withdrawal - How To Avoid An IRS Tax Debt

ira vs 401k, difference between ira and 401k, ira rollover taxes, roth ira contribution limits, conduit ira, ira distribution rules, 401k rollover options, conversion to roth ira

Slump City: So, you're in debt and you can't pay it off. If you've got some money stashed away in a 401k, here's a few things you should know about that money.

No Taxes! When you put money into your 401k plan, you don't have to pay taxes; sounds good right? That's because income taxes must be paid on all withdrawals. The only way to avoid those taxes is if you rollover the money to another employer-sponsored plan or to an IRA. At age 59.5 you may tap into your account without a 10% early withdrawal penalty. If you leave a company and you are 55 or older, or disabled, you don't have to pay the 10% penalty.

Your Boss holds the Key! Most 401k plans only allow early withdrawal if it's for "financial hardship" purposes. Your employer determines his/her own definition of "hardship," which can be a good or a bad thing for you. Your employer may also use "safe harbor rules" which allow withdrawals for the following reasons:

1) To pay medical expenses

2) To cover down payment or to avoid eviction or foreclosure on primary residence

3) To pay college tuition

4) To cover funeral expenses for a family member.

Don't Forget, not all plans will let you borrow from your 401k. Plus, if they do let you withdrawal, you can only take 50% or less. So make sure you know your companies' 401k policies. Here are some of the rules and regulations for loans with your 401k program.

1) You must repay your loan within 5 years, unless you took out the loan to purchase your current residence.

2) The interest that you pay on your loan is subject to double taxation. That means that you pay the interest with after-tax money and it is subjected to taxes when you eventually withdraw it.

3) If/when you leave your company, you may have to pay back the outstanding balance in full. Otherwise, the outstanding amount will be subject to a possible 10% early withdrawal penalty.

4) If you default on your loan, the outstanding balance is also subject to a 10% early withdrawal penalty.

Fine Print: The most important thing is understanding the rules and regulations. If you follow them, you will never be caught off guard. Knowing the consequences can help you decide whether or not an early withdrawal is right for you. Depending on your situation, taking money out of your 401K may sound like the right idea, but it may put you in a worse spot than you were before.

Now you have the smoking gun...Use it!
Richard Close was an IRS-Hitman. He worked as a revenue officer for the IRS and his father was the head of the collections branch for 30 years; so it runs in the family. He left that behind and now he's partnered with Tax Defense Network to help thousands of Americans with their tax problems. He gives the tips and tricks for you to fight the IRS and win! Visit him at: http://irs-hitman.blogspot.com or http://www.taxdefensenetwork.com, or contact: email irs-hitman@taxdefensenetwork.com or 1-888-248-9058.

Article Source: http://EzineArticles.com/?expert=Richard_Close


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ira vs 401k, difference between ira and 401k, ira rollover taxes, roth ira contribution limits, conduit ira, ira distribution rules, 401k rollover options, conversion to roth ira
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IRA vs 401k- Rolling your 401k: Contributory IRA vs. Rollover IRA

ira vs 401k, difference between ira and 401k, ira rollover taxes, roth ira contribution limits, conduit ira, ira distribution rules, 401k rollover options, conversion to roth ira

In an ideal world you would start your working career with a great company in your early 20s, steadily climb the corporate ladder, retire at age 65, and draw a sufficient income from your accumulated 401k account to live happily ever after.

Unfortunately, that’s not how the real world works. If you are like most people, you will change careers, or at least companies, several times. Each time, you'll be faced with the question of what to do with your accumulated 401k benefits.

You will likely have a few choices: keep your 401k with your old employer (sometimes possible), roll the proceeds into your new employer's 401k plan, or put them directly into a self-directed IRA at a brokerage firm of your choice.

Since leaving your 401k with your ex-employer has no benefits whatsoever and most employers will prefer you transfer out anyway, that leaves only the last two as viable options:

1. Roll your 401k proceeds into the new employer's 401k plan of (if allowed)

This is the most painless solution and the one that does not require much decision making. While this is certainly acceptable, there is a bigger picture.

The ultimate goal of having a 401k plan is to provide you with a comfortable retirement. To accomplish this you really need a wide variety of investment choices and the opportunity to move among them in response to market variations.

Most 401ks are limited to maybe 15 mutual fund choices which rarely change, even if market behavior dictates they should. Additionally, the canned advice provided through plan sponsors is generally not terribly useful.

The only benefit to this type of rollover is that if your plan has a loan provision, you’ll be able to borrow funds easily.

2. Roll your 401k proceeds into a self directed IRA

This is the preferable solution for most people, and with it you again have two choices: roll your 401k into a “Contributory” or a “Rollover” IRA.

Contributory IRA:

Once you roll your proceeds into this type of IRA, you may still contribute annually if you qualify (check with your accountant). However, the 401k portion can no longer be rolled back into another 401k with a new employer, should you ever want to do that. So you eliminate the possibility of using the loan provision with those funds. While it is possible to borrow against an IRA, it’s more limited than borrowing against an employer 401k. Check with your tax preparer for details.

Rollover IRA:

This type of IRA allows you the most flexibility. You may roll the proceeds back into a 401k plan if you want to utilize a loan provision. However, for tax reasons you should not make annual contributions to this IRA. If making annual contributions becomes important to you, simply open another contributory IRA.

Since Rollover IRAs are usually set up at a brokerage firm, you’ll have access to their entire universe of mutual funds. With this type of IRA, you can also employ an independent investment advisor to manage the account for you. (Yes there is a cost for that, but an effective advisor will more than make up for that in greater returns than you would get without him or her.)

Most of my clients have found that the investment results we've obtained with their personal IRAs were far superior to those yielded by their employer 401k plans or their personal investing efforts. This has been mainly due to a combination of better choices and a methodical approach to investing which has kept my clients in the market during good times and out of it altogether during severe declines.

Bottom line: Rollover IRAs offer opportunities to maximize benefits and provide flexibility not usually available with employer 401k plans.
About The Author

Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped countless people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit: http://www.successful-investment.com; ulli@successful-investment.com

Article Source: http://EzineArticles.com/?expert=Ulli_G._Niemann

ira vs 401k, difference between ira and 401k, ira rollover taxes, roth ira contribution limits, conduit ira, ira distribution rules, 401k rollover options, conversion to roth ira
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IRA vs 401k: An Amazingly Simple Small Business Retirement Plan Decision

ira vs 401k, difference between ira and 401k, ira rollover taxes, roth ira contribution limits, conduit ira, ira distribution rules, 401k rollover options, conversion to roth ira

The question of IRA vs 401k leaps to mind when setting up a small business retirement plan. Do you know the differences between plans? What does the Internal Revenue Code allow and restrict? Why should you even care? Because if you sell fixed indexed annuities and want to capitalize on one of the hottest specialty markets going today (setting up retirement plans for small business owners with 1 to 9 employees), you'll want to brush up on IRA vs 401k and other important considerations.

First, consider that a small business retirement plan, now more than ever, is the best way to defer large amounts of tax-deductible dollars. Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), self-employed taxpayers now have unprecedented incentives to save for retirement. A business owner's decision is quite literally whether to keep company profits... or send them off to Uncle Sam.

OWNER GETS MORE

It’s no secret the allure of a small business retirement plan is directly related to benefits available to the owner. The greater the owner’s share of the overall plan, the greater the interest. Before the new tax legislation, restrictions on owner’s benefits in small plan design often resulted in even fewer benefits for the employees. But the tools are now in place to ratchet up the owner’s benefits and still create a workable plan for the employees. So, should the plan be an IRA or a 401k? Let's examine IRA vs 401k separately.

SIMPLIFIED EMPLOYEE PENSION

The simplest small business retirement plan for self-employed taxpayers and the easiest to set up and maintain is the Simplified Employee Pension (SEP). You may establish a SEP if you earn self-employment income, regardless of whether you have employees. A SEP is an Individual Retirement Account (IRA) and if maintained for more than one person becomes a group of IRAs.

All contributions to a SEP are tax deductible as a business expense. As an IRA the plan’s earnings are not taxed until they are withdrawn at retirement. As usual, withdrawals prior to age 59 ½ with this and other plans incur a 10% penalty. A SEP-IRA does not permit loans or salary deferral contributions. Also, the individual annual contribution limit for 2006 is the lesser of 25% of compensation or $44,000, and contributions may be reduced or skipped altogether in lean years.

INDIVIDUAL 401(k)

Another handy tool in the EGTRRA toolbox is the Individual or Solo 401(k). This small business retirement plan is ideally suited for businesses in which the owner or owners (and their spouses if working at the business) are the only employees. The biggest reason for opening a one-person 401(k) is the higher contribution limits allowed, plus the fact that contributions are based on revenue generated by the business.

The maximum tax-deductible employer contribution is 25% of gross eligible payroll. For 2006 the maximum effective salary deferral contribution for employer plus employee is $44,000 plus a catch-up contribution of $5,000 for individuals age 50 and over. Loans are permitted subject to limits and rules, and paperwork may be just a filing of the streamlined IRS Form 5500-EZ when plan assets exceed $100,000.

NEVER A BETTER TIME

The new tax law creates a multitude of opportunities with more than 60 new provisions to strongly encourage the startup and funding of your small business retirement plan. Variations in plan design allow opportunities to suit independent contractors, sole-practitioner professionals, small retail owners -- virtually every type of small business imaginable. Answer the question of IRA vs 401k and you're on your way.

For small business owners in search of large tax breaks, it doesn’t get any better than this. There has never been a better time than right now to convert current taxes into assets, defer tax payments, and generate large amounts of retirement income. And for you as the fixed indexed annuity specialist, this market is virtually untapped.
http://www.Free-Insurance-Leads.com Gary Le Mon is a wholesale distributor of fixed indexed annuities for Allianz, American Equity, Sun Life Financial, and ING. Author and developer of the Safe Money Seminar, a financial planning seminar for Seniors, Gary serves as guest speaker on behalf of agents and agencies nationwide. He is coach, mentor and motivator to over 700 general agents in his insurance marketing organization, InsuranStar Marketing. See also Insurance-Lead-Programs.com.

Article Source: http://EzineArticles.com/?expert=Gary_Le_Mon

ira vs 401k, difference between ira and 401k, ira rollover taxes, roth ira contribution limits, conduit ira, ira distribution rules, 401k rollover options, conversion to roth ira
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