Simply Junior

Delaying Your 401K Withdrawal

Ideally one should not withdraw their 401K retirement money until it matures, there arises some situations when you need the money most, more so due to the lack of any other option. This makes it important for the contributor to know the 401K withdrawal rules, which are mentioned below.

- Withdrawing before you attain the age of 59 1/2 years entails taxation of the distribution amount in addition to 10 percent penalty tax. Further, the IRA also mentions some exceptions to this rule. The beneficiary receives the retirement amount in time of untimely death; if you become disables.

- You are eligible for retirement benefits if you terminate employment voluntarily on reaching 55 years old. Similarly, amount can be withdrawn for medical expenses or for ‘qualified domestic relations order’.

- 401K withdrawal rules imply losing further investment opportunities because of untimely withdrawal. Even if you withdraw a small amount, there is less chance to replenish the figure as there is a limit on annual contribution mentioned in 401K contribution rules.

- Withdrawal rules also states that one must withdraw in some situations like job loss or divorce.

It is because of the strict 401K withdrawal rules, one must consult professionals beforehand to understand the implications of tax deductions and future investment. Experts suggest taking loan against 401K if need be. Then one needs to repay within 5 years and further the time period shortens if you leave your current employment.

Further, it is not necessary to withdraw the retirement amount immediately after maturity. Annually you are required to withdraw the Required Minimum Distributions (otherwise, 50% penalty is charged according to the difference between the amount at disposal for distribution and the amount withdrawn) and delay the final withdrawal till the following year after reaching 701/2 years old. There are further 401K withdrawal rules, which a professional can make you understand intricately.

Retirement plans has changed and not in a good way. Many baby boomers are facing a unique and challenging set of retirement concerns. Financial planning for retirement annuity is becoming more and more difficult due to inflation, risky investments, and the possibility of outliving your assets. So what do you need to consider to be prepared for this “New Retirement”?

Longevity Risk
A retiree has already beaten the odds of a general life expectancy; they have made it to the age of 65 through accidents, illness, stress, and raising a family. Therefore, as they retire people need to be looking at the average longevity, which is basically a question of how much longer will you live after making it to age 65. In other words, the average lifetime expectancy of about 82 years really means nothing when it comes to retirement plans, health, heredity and life stresses are what are figured into the average longevity.

Excess Withdrawal Risk
The rate that you withdraw your savings once you retire will affect how long your money will last. Until recently, retirees held the opinion that 7 or 8% withdrawals were sustainable due to rising stock prices. With the change in the stock marked lately, many have found that to be a mistake in judgment. The more you withdraw, the less you will have to live on, and with stock dropping you may be losing some of your retirement money before you even begin drawing on it.

Inflation
The standard definition of inflation is that it is the long-term tendency of money to lose purchasing power. Essentially wages stay the same and prices go up. This can have a very negative impact on your retirement savings. As well as increasing the cost of your day-to-day living, inflation also wears down the value of your retirement assets. It is very important when planning your retirement annuity to make sure that your investment annuities outpace inflation.

Health Care Costs
With longer life spans and higher medical costs, Medicare going down the drain and less employer coverage health care expenses is a critical matter for retirees to address. Experts suggest that retirees set aside a fund just for medical expenses, including co-pays, deductibles, and supplemental insurance for anything not covered by Medicare. This may be particularly important if you do not have employer coverage. This is just addressing normal health care, retirees should also set aside money for long-term care, because it has been estimated that 50% of the people who are age 65 and over will be admitted to a nursing home at some point before death.

Social Security Benefits Commencement
With the longer life span and longevity risk today, many people are choosing not to begin their social security benefits at age 62 or 65. Delaying the commencement of benefits past the minimum age and instead opting in when you reach the age when you can receive full retirement benefits may be something to consider as this can raise your benefits significantly.

All of these challenges need to be addressed and financially prepared for before retiring.

If you have been asking questions about healthcare coverage you have definitely heard about health savings accounts (HSAs). Some people advocate that they are the next step in the domain of health coverage, while the others believe that only healthy and rich citizens can benefit from such plans. Before answering these questions it is better to learn what HSAs are in essence and how do they work.

What is a HSA?
A typical health savings account is comprised of two elements:

1) Savings account with interest bearing:
– Yearly deposits of up to $2,900 ($5,800 in case of a family) introduced to the savings account are to be taxed. The money deposited will usually roll over on a yearly basis. However, the money you withdraw from the account for healthcare purposes are tax-free. So are any withdrawals after you officially retire.

2) Healthcare coverage plan with a high deductible
– The minimum deductible amount should be not less than $1,100 ($2,200 in case of a family). That is the amount of money to be paid out-of-pocket before getting the actual benefits.

– When the annual deductible is paid the actual coverage kicks in. You will have to pay all the specified co-insurance and the plan will cover all that remains.

– The overall amount of money to be paid out-of-pocket is limited to $5,600 ($11,200 in case of a family). In other words, after you have spent $5,600 on healthiness services your insurance company will pay for all health costs exceeding that amount.

What are the pros of health savings accounts?
– Because of the fact that any money withdrawn for healthcare use is not taxed, HSAs are a good way of saving more money in your pocket.
– In case you keep the funds without withdrawing them from the account you will have more money after you retire. And since you can freely withdraw the money for any reason after you turn 65 it is a good additional source of retirement money.
– Health insurance plans with higher deductibles have lower premiums than typical plans.
– HSAs don’t depend on your working place and you will keep it the same no matter what.

What are the cons of healh savings accounts?
– Those who have substantial needs in healthcare services will find little use in HSAs since they provide main benefits when the money is kept in the account for an extended period of time.
– People with serious health issues will find it hard to get high-deductible insurance plans, especially if they were already denied of typical plans.
– Some HSAs have additional fees that in sum can make the plan quite costly for the customer.
– Because of high out-of-pocket expenses people tend to go without care, which usually results in complications and more serious and expensive health concerns.

Will a HSA be useful for me?
In case you have no serious health problems and are able to pay the required out-of-pocket expenses than HSAs will definitely be a good option for you. However, you must understand that HSAs require you to be more conscious about your medical costs and the coverage provided by these accounts is much less comprehensive and diverse than with typical health insurance plans. Having an active position in managing own healthcare is a must with HSAs, so if you’re not ready for that then it will be not of a much use to you.