Tag Archives: Employer Retirement Accounts

Michele Clark in the News: US News and World Report

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I was interviewed by US News and World Report recently about 401(k)s.  My thoughts appeared in an article on their website this week entitled “10 Strategies to Maximize Your 401(k) Balance.”

When Emily Brandon from US News and World Report called me I shared with her an idea for making it easier to save more in your 401(k), and we talked a bit about the new fee disclosure rules in 401(k)s and what that means for employees.  We also talked about the importance of adjusting your investment portfolio as you get closer to retirement.

If you would like to read the results of our conversation, and how she interwove it with the conversation she had with two other advisors, you can read the article here: 10 Strategies to Maximize Your 401(k) Balance.

Retiring Early: One way to avoid the 10% early withdrawal penalty tax

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You might have heard that you need to keep your money in your retirement accounts until you are 59½ in order to avoid the 10% early withdrawal penalty tax, but did you know that if your money is in a work retirement plan, like a 401(k), that the you can take it out earlier and still avoid the penalty?

Exception to the rule

To quote directly from the IRS website explaining this exception to the 10% early withdrawal penalty tax:

“Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50”

55 and separation from service

If you wait until the year you turn 55, then leave your employer, you can take money out of your 401(k) or 403(b) without the 10% early withdrawal penalty tax.  You will still pay income taxes of course; Uncle Sam wants that part of your retirement account.  And be careful, depending on the other income you have, the amount of income taxes you owe could be even more than has been withheld, so be sure to calculate quarterly estimated taxes so that you are not caught by surprise.

If you roll your 401(k) over to an IRA rollover account, you lose this “age 55 separation from service” exception, because it only pertains to employer plans, not IRA rollovers.

50 if you are a fireman or policeman

If you are a qualified public safety employee of the state or local government, such as a police or fireman, the age is even lower – 50 years old.

Retire early?

In general most folks need to work and continue saving their money until their mid to late 60s so that they can save enough to retire.  But for those that have been strong savers and have learned to live well beneath their means, an early retirement is a possibility.

For a lot of folks who retire as early as 55, they have resources besides retirement accounts that they tap into, for example; from the sale of a business or money they have put into regular brokerage accounts over the years after they put the maximum contributions into their retirement accounts.  If you don’t have money in non-retirement accounts that can get you through to age 59 ½, then the “age 55 separation from service” exception might be the solution for you.

Run the numbers

Only in a few situations would it make sense to tap into the retirement accounts as early as 55 years old.  One situation that comes to mind, is in the case of someone who has maxed out their contributions in their work plan since the time they started working, and they have a balance in their current employer’s retirement plan that is large enough to live off of for a four or more years.  They have run the numbers and have enough retirement assets to live off of, however they do not have enough in non-retirement accounts to live off of until they turn 59 ½, perhaps due to putting kids through college or paying off the mortgage.

Really check your numbers to make sure that you can afford to retire at 55, taking the impact of inflation into account.  Inflation has a significant impact on retirement planning.  Consider that starting to spend down your portfolio at such a young age, when you could easily live another 35 or 45 more years could jeopardize your financial future.   However, if once you have done the analysis you can afford to retire early, then you deserve to enjoy what you have worked so hard for and this “age 55 separation from service” exception to the 10% early withdrawal penalty tax is one way to help you do that.   

2012 Contribution Limits: Employer Retirement Accounts

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How much should I put in my retirement account each year?
The answer of course, depends. For example, some clients tell me they love working and they want to work until they are 70, some tell me they plan to work until 65, others tell me they want to retire yesterday. The earlier you retire, the more you need to save. Some people spend $60,000 per year, some spend $160,000 and some $260,000; and they want to maintain a similar lifestyle in retirement. Obviously, the more you want to spend in retirement the more you need to save now. There are other variables to consider as well, such as pensions, social security, current investment holdings, assumed rates of return, any plans for bequests, and large purchases in retirement, etc. So how much you need to put in your retirement account will be different for each family.

So where do you start?
A good place to start is with your company’s retirement plan and knowing the maximum amount that you can put into the plan. There are different types of retirement plans, dependent upon the type of company for which you work. And consider, if your company says the maximum percentage is for example, 10%, and you make $60,000 then your maximum is $6,000 even if the IRS says the maximum dollar amount is higher.

401(k), 403(b), 457, and SARSEPs
The 2012 maximum contribution limit is $17,000. If you are 50 or turning 50 in 2012 you have the opportunity to add additional money to your retirement plan each year in the form of the Catch-up contribution, that amount for 2012 is $5,500.

SIMPLE plan
The 2012 maximum contribution limit is $11,500. If you are 50 or turning 50 in 2012 you have the opportunity to add additional money to your retirement plan each year in the form of the Catch-up contribution, that amount for 2012 is $2,500.

It’s on your To-Do. Let’s get it To-Done!
1) Already have your plan set to max? Better double check it! 2012 is the first year since 2009 that the maximum contribution has been raised for 401(k), 403(b), 457, and SARSEPs because it is tied to inflation. Catch-up contributions remain unchanged. SIMPLE plan contributions and SIMPLE plan Catch-ups remain unchanged as well.
2) Not yet taking advantage of your employer’s match? Want some inspiration; pick up a calculator and figure out how much free money you are not taking from your employer each year! Then, each time you get a raise, increase your 401(k) contribution by 1%, you will not even feel it, because it is money you never had in your hands. Or have you been putting it off because you have been busy or unsure how to start? Give your HR department a call today.