Episode #303 — You’ve got a solo 401(k). It’s got money. You need money. But you’re not allowed to withdraw from it until you’re 59 ½. What do you do? Never fear, my friends. I have the answers for you. I’m Bryan Ellis. This is episode #303 of Self-Directed Investor Talk.
Hello, Self-Directed Investor Nation! Welcome to the broadcast of record for savvy self-directed investors like you, where in each episode, I help you to find, understand and profit from exceptional alternative investment opportunities.
Today’s episode is sponsored by the Self-Directed Investor Society, about which you can learn more at SelfDirected.org.
In the last episode of this show, I told you all about the ramifications of withdrawing from your IRA before you reach the magical age of 59 ½… both the taxation ramifications and the investment ramifications… and it’s not a pretty picture. If you missed that, check it out from the link on today’s show page, SDITalk.com/303.
Today we take a the same look at 401(k)’s generally and solo 401(k)’s specifically. The picture is, unfortunately, more complicated but also more flexible.
To join in today’s discussion, you’re welcomed to call in toll-free at (833) SDI-TALK, to email me at feedback@SDITalk.com, or to leave your thoughts in the comments area of today’s show page at SDITalk.com/303.
Ok, onward to getting money out of your 401(k).
There are two ways you can do that. One of them is to borrow from your 401(k) – which is provided to some degree by most, but not all 401(k) plans – and the other way to do a normal withdrawal.
If you borrow the money, you’ll have to pay it back like any other loan. If you have the wherewithal to repay the loan, then taking a loan from the 401(k) is almost certainly smarter than withdrawing from it, because the withdrawal is a loan and therefore not subject to income tax, and because it means you’ll be able to return the money to your 401(k) rather than taking a permanent reduction in your balance.
But if you can’t, or choose not to take a loan from your 401(k), you can make a withdrawal any time you want. The question is whether your withdrawal will be penalized as an “early withdrawal”, and whether you’ll have to pay income taxes on the money.
The question of whether you’ll have to pay income taxes is pretty simple. Let’s say you’re withdrawing $10,000 from your 401(k). If it is taxed as a Traditional account, then you’ll pay income taxes on the whole withdrawal. If the 401(k) is a Roth account, you won’t pay income taxes on that withdrawal, as long as you’ve contributed at least $10,000 to the IRA. If you haven’t contributed at least the amount of money you’re withdrawing, you’ll pay income taxes on the difference.
So that takes care of whether you’ll be paying income taxes on your withdrawal. The other consideration is whether you’ll have to pay early withdrawal penalties if you withdraw prior to age 59 ½.
The simple truth is that this is in part defined by law, and in part defined by the specifics of your 401(k) plan, so you’ll need to confirm all of this with your 401(k) plan administrator. But generally speaking, here are the rules:
Once you get to 59 1/2, you’re basically home free. No more early withdrawal penalties after that point.
Before that, it’s a little less clear.
Some plans will allow you to begin withdrawing at age 55. Sometimes that’s a function of whether you’re still working, and maybe also a function of when you actually stopped working. The best advice there is usually to wait until at least age 55 before you retire or otherwise terminate employment, because that will give you the most flexibility when it comes to early access to your 401(k) savings.
Below age 55, and you’re definitely looking at early withdrawal penalties.
So basically it works out like this:
Before age 55, you’re definitely paying early withdrawal penalties.
Between age 55 and 59 ½, you may or may not pay early withdrawal penalties, and only your plan administrator can tell you for sure.
After age 59 ½, yo’re free of early withdrawal penalties.
Again, this is a generalization. The best advice is, again, to speak with your 401k plan administrator to confirm all of this stuff.
And just like with IRA’s, I want to stress to you: Be exceedingly careful about making early withdrawals from your 401k. Some circumstances dictate it, yes, I understand. But if there’s any flexibility in your situation, it’s best that you view early withdrawals as very nearly theft from yourself… not just of money, but of TIME… because you can never have the time restored that would be necessary to remake-those contributions you’re withdrawing.
Now my friends, we’re going to transition back to some self-directed-specific content in the next episode of this show, and I think you’re going to love it… particularly for those of you who feel the itch to begin building some serious real estate cash flow and wealth using the money currently held in your employer’s 401(k) plan… I’ll tell you all about in next episode!
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My friends, invest wisely today, and live well forever!