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What to Do after You’ve Been Automatically Enrolled in Your Company’s Retirement Plan

What to Do after You’ve Been Automatically Enrolled in Your Company’s Retirement Plan

At one time, the only way you could join your company’s 401(k) plan, 403(b) plan, or 457(b) plan was to put pen to paper and sign yourself up by filling out the appropriate forms. Now, though, in an effort to help participants increase their retirement savings, some employers have begun enrolling their employees automatically. With automatic enrollment, you don’t fill out a form to opt into your company’s retirement plan; you only fill out a form to opt out of it.

At first glance, automatic enrollment sounds like a no-brainer. Without doing anything, you’re on your way to saving for retirement. But don’t just assume that the investment decisions your employer has made on your behalf are right for you. Instead, take charge of your own retirement savings right now by following these four steps.

Step 1: Get the facts on the retirement plan

If you work for a company that offers automatic enrollment, your employer will typically enroll you once you meet the retirement plan’s eligibility requirements. Then it will begin to direct a certain percentage of your paycheck (your contribution rate) into the investment fund the company has chosen as its default.

Don’t make the mistake of thinking you have to stick with the default elections your employer has chosen for you. Once you’ve been automatically enrolled, you can increase (or decrease) your contribution rate, move money from one investment option to another, or even opt out of the plan altogether. You may even have the right in some cases to request a refund of amounts automatically withheld from your pay.

Your employer is required to send you information about the plan provisions and your investment options, along with specific instructions on how to opt out if you choose not to participate in the plan. Read the documents you receive, and ask questions about anything you don’t understand before making any investment decisions.

Step 2: Consider your contribution rate

Like many people, you may be tempted to stick with the contribution rate your employer has chosen for you. But this contribution rate may be less than you need to contribute to target your retirement savings goal. Find out, too, if your company offers matching funds. Employers who offer matching funds to traditionally-enrolled plan participants must offer the same match to automatically-enrolled participants. If so, try to contribute at least enough to receive the full match. 401(k) plans with qualified automatic contribution arrangements (QACAs) are required to make a contribution on your behalf.

Step 3: Review your investment options

The most common default investment options chosen by employers are money market funds and stable value funds. Employers often choose conservative funds such as these because they offer capital preservation. But investing in a conservative fund may not be the best option for you. Depending on how much you need to save for retirement, how far away you are from retirement, and your tolerance for risk, you may want to redirect some of your contributions into more aggressive options that, although more volatile, offer the potential for long-term growth.

Step 4: Check up on your retirement plan at least once a year

Even if you’ve decided to stick with your company’s default options for now, review your investment options at least once a year, keeping in mind the following questions:

  • Are you saving enough?
  • Can you afford to contribute more?
  • Are the investments you’ve chosen still appropriate for your age and risk tolerance?
  • Do you need to redirect all or some of your contributions to better target your retirement savings goal?

As you make decisions, think about your overall retirement plan, including where your retirement money will come , the major expenses you might have, and the lifestyle you hope to lead.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Medicaid and Nursing Home Care

Medicaid and Nursing Home Care

As you enter your 60s and 70s, health may become more of an issue than it once was, and your thoughts may turn to the future. Who will take care of you when you can no longer care for yourself? If you must enter a nursing home, how will you pay for it? By learning as much as you can about Medicaid right now and planning appropriately, you may be able to resolve these issues and create a more secure future.

Nursing homes provide different levels of long-term care

You may need to enter a nursing home if you become physically or mentally incapacitated and can no longer care for yourself properly. If the services of an in-home caregiver are inadequate or unavailable, or if you require around-the-clock care, entry into a nursing home on a long-term basis may be your only option.

A nursing home is a state-licensed facility that may provide skilled nursing care, intermediate care, and/or custodial care.

  • Skilled care: This around-the-clock care, ordered by a physician and performed by skilled medical personnel, is designed to treat a medical condition.
  • Intermediate care: This involves occasional nursing and rehabilitative care provided by registered nurses and certain other medical personnel under the supervision of a physician.
  • Custodial care: This type of care is designed to help you perform the activities of daily living. It can be provided by someone without professional medical skills but is supervised by a physician.

Medicaid can help you pay for nursing home care

Medicare (Part A), Medigap insurance, and Medicaid can each provide some assistance in paying for long-term care. However, Medicare and Medigap provide only short-term coverage for skilled care at nursing homes. Only a certain number of days per year are covered. Also, they do not provide coverage for intermediate and custodial care in nursing homes.

In contrast, Medicaid will pay for skilled care and intermediate care in nursing homes, and for custodial care at home. The bottom line is that most nursing home residents are left with only three alternatives for paying their nursing home bills. Medicaid, their own assets, and long-term care insurance (LTCI).

Although an LTCI policy may be an ideal solution, you may not be able to purchase such a policy later in life if you’re uninsurable for health reasons. Or, if you find the premiums too high. If you don’t want to spend your life savings on nursing home bills and can’t afford LTCI premiums, qualifying for Medicaid may be your best bet. With proper planning, you may be able to qualify for Medicaid. Also, you may protect your healthy spouse, and even leave some assets to your loved ones after you’re gone.

You must satisfy several requirements to qualify for Medicaid

Medicaid is a joint federal-state program that provides medical assistance to various low-income people, including those who are aged, disabled, or blind. It can pay for a number of costs, including hospital bills, physician services, and long-term care. Medicaid is the single largest payer of nursing home bills in America. It is the last resort for people who have no other way to finance their long-term care. Eligibility rules vary from state to state. Federal minimum standards and guidelines must be observed.

In addition to you meeting your state’s medical and functional criteria for nursing home care, your assets and monthly income must each fall below certain limits if you are to qualify for Medicaid. However, several assets and a certain amount of income may be exempt or not counted.

Although many people are ineligible for Medicaid when they first enter a nursing home, several states allow elders to enter. Then, they spend down their income and assets on nursing home bills to become eligible. This can be a great advantage. On the downside, though, you may have to kiss your life savings good-bye.

That’s where Medicaid planning comes in. In determining your eligibility for Medicaid, a state may count only the income and assets that are legally available to you for paying bills. You can make assets unavailable by giving them away or by holding them in certain trusts. However, in some cases, such transfers may create a period of ineligibility before you can collect Medicaid. To engage in proper Medicaid planning, you should consult an experienced elder law attorney.

Choosing the right nursing home takes research

Because nursing homes have long waiting lists, you should research the nursing homes in your area before an emergency arises. If you plan on using Medicaid to pay for your nursing home care, make sure that the facility you select accepts Medicaid. Not all nursing homes do. Many others restrict the number of Medicaid “beds” in the nursing home. Also, be aware that if Medicaid will be paying for your nursing home care, you will not be entitled to a private room.

You should consider several factors when choosing a nursing home

  • Level of medical care: Some homes provide mainly custodial care. If you think that you may need skilled nursing care in the future, don’t choose a home that offers only custodial care.
  • Cost of care: You will pay less at some facilities than at others. Compare the cost of each facility with the quality of care and the services provided.
  • Recreational opportunities: Consider whether the nursing home organizes outside or in-house recreational activities for its residents.
  • Appearance of grounds and facilities: The nursing home should be clean and well maintained. A bad smell is one sign of a poor-quality nursing home.
  • Resident/staff ratio and interaction: Determine if the resident/staff ratio meets or exceeds state and federal requirements. Also, notice how staff members treat residents.

When you find a nursing home that you like, you should find out if a bed will be available for you. Or, if you can add your name to a waiting list. And remember, Medicaid planning should be done well before the need for a nursing home arises.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Medicaid Planning Basics

Medicaid Planning Basics

The best time to plan for the possibility of nursing home care is when you’re still healthy. By doing so, you may be able to pay for your long-term care and preserve assets for your loved ones. How? Through Medicaid planning.

Eligibility for Medicaid depends on your state’s asset and income-level requirements

Medicaid is a joint federal-state program that provides medical assistance to various low-income individuals, including those who are aged (i.e., 65 or older), disabled, or blind. It is the single largest payer of nursing home bills in America. It is the last resort for people who have no other way to finance their long-term care. Although Medicaid eligibility rules vary from state to state, federal minimum standards and guidelines must be observed.

In addition to you meeting your state’s medical and functional criteria for nursing home care, your assets and monthly income must each fall below certain levels if you are to qualify for Medicaid. However, several assets and a certain amount of income may be exempt or not counted.

Medicaid planning can help you meet your state’s requirements

To determine whether you qualify for Medicaid, your state may count only the income and assets that are legally available to you for paying bills. That’s where Medicaid planning comes in. Over the years, a number of tools and strategies have arisen that might help you qualify for Medicaid sooner.

In general, Medicaid planning seeks to accomplish the following goals:

  • Exchanging countable assets for exempt assets to help you meet Medicaid eligibility requirements
  • Preserving assets for your loved ones
  • Providing for your healthy spouse (if you’re married)

Let’s look at these in turn.

You may be able to exchange countable assets for exempt assets

Countable assets are those that are not exempt by state law or otherwise made inaccessible to the state for Medicaid purposes. The total value of your countable asset will determine your eligibility for Medicaid. Under federal guidelines, each state compiles a list of exempt assets. This list includes such items as the family home, prepaid burial plots and contracts, one automobile, and term life insurance.

Through Medicaid planning, you may be able to rearrange your finances so that countable assets are exchanged for exempt assets or otherwise made inaccessible to the state. For example, you may be able to:

  • Pay off the mortgage on your family home
  • Make home improvements and repairs
  • Pay off your debts
  • Purchase a car for your healthy spouse
  • And prepay burial expenses

Irrevocable trusts can help you leave something for your loved ones

Why not simply liquidate all of your assets to pay for your nursing home care? After all, Medicaid will eventually kick in (in most states) once you’ve exhausted your personal resources. The reason is simple: You want to assist your loved ones financially.

There are many ways to potentially preserve assets for your loved ones. One way is to use an irrevocable trust. Property placed in an irrevocable trust will be excluded from your financial picture, for Medicaid purposes. If you name a proper beneficiary, the principal that you deposit into the trust will be sheltered from the state and can be preserved for your heirs. Typically, the trust must be in place and funded for a specific period of time for this strategy to be an effective Medicaid planning tool.

For information about Medicaid planning trusts, consult an experienced attorney.

If you’re married, an annuity can help you provide for your healthy spouse

Nursing homes are expensive. If you must go to one, will your spouse have enough money to live on? With a little planning, the answer is yes. Here’s how Medicaid affects a married couple. A couple’s assets are pooled together when the state is considering the eligibility of one spouse for Medicaid. The healthy spouse is entitled to keep a spousal resource allowance that generally amounts to one-half of the assets. This may not amount to much money over the long term.

A healthy spouse may want to use jointly owned, countable assets to buy a single premium immediate annuity to benefit himself or herself. Converting countable assets into an income stream is a plus. This is because each spouse is entitled to keep all of his or her own income, in contrast to the pooling of assets. By purchasing an immediate annuity in this manner, the institutionalized spouse can more easily qualify for Medicaid. The healthy spouse can enjoy a higher standard of living.

Beware of certain Medicaid planning risks

Medicaid planning is not without certain risks and drawbacks. In particular, you should be aware of look-back periods, possible disqualification for Medicaid, and estate recoveries.

When you apply for Medicaid, the state has the right to review, or look back, at your finances for a period of months before the date you applied for assistance. In general, a 60-month look-back period exists for transfers of countable assets for less than fair market value. Transfers of countable assets for less than fair market value made during the look-back period will usually result in a waiting period before you can start to collect Medicaid. If you give your house to your kids the year before you enter a nursing home, you’ll be ineligible for Medicaid for quite some time.

Also, you should know that Medicaid planning is more effective in some states than in others. In addition, federal law encourages states to seek reimbursement from Medicaid recipients for Medicaid payments made on their behalf. This means that your state may be able to place a lien on your property while you are alive. Or, seek reimbursement from your estate after you die. Make sure to consult an attorney experienced with Medicaid planning and the laws in your state before taking any action.

If you’re thinking of starting your medicaid planning, contact one of our advisors today

At Sterling Group, we offer complimentary financial consultations. Our advisors can review your current financial plans and help you plan for the future. Contact us today for your complimentary review!

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Evaluating an Early Retirement Offer

Evaluating an Early Retirement Offer

In today’s corporate environment, cost cutting, restructuring, and downsizing are the norm, and many employers are offering their employees early retirement packages. But how do you know if the seemingly attractive offer you’ve received is a good one? By evaluating it carefully to make sure that the offer fits your needs.

What’s the severance package?

Most early retirement offers include a severance package that is based on your annual salary and years of service at the company. For example, your employer might offer you one or two weeks’ salary (or even a month’s salary) for each year of service. Make sure that the severance package will be enough for you to make the transition to the next phase of your life. Also, make sure that you understand the payout options available to you. You may be able to take a lump-sum severance payment and then invest the money to provide income, or use it to meet large expenses. Or, you may be able to take deferred payments over several years to spread out your income tax bill on the money.

How does all of this affect your pension?

If your employer has a traditional pension plan, the retirement benefits you receive from the plan are based on your age, years of service, and annual salary. You typically must work until your company’s normal retirement age (usually 65) to receive the maximum benefits. This means that you may receive smaller benefits if you accept an offer to retire early. The difference between this reduced pension and a full pension could be large, because pension benefits typically accrue faster as you near retirement. However, your employer may provide you with larger pension benefits until you can start collecting Social Security at age 62. Or, your employer might boost your pension benefits by adding years to your age, length of service, or both. These types of pension sweeteners are key features to look for in your employer’s offer–especially if a reduced pension won’t give you enough income.

Does the offer include health insurance?

Does your employer’s early retirement offer include medical coverage for you and your family? If not, look at your other health insurance options, such as COBRA, a private policy, or dependent coverage through your spouse’s employer-sponsored plan. Because your health-care costs will probably increase as you age, an offer with no medical coverage may not be worth taking if these other options are unavailable or too expensive. Even if the offer does include medical coverage, make sure that you understand and evaluate the coverage. Will you be covered for life, or at least until you’re eligible for Medicare? Is the coverage adequate and affordable (some employers may cut benefits or raise premiums for early retirees)? If your employer’s coverage doesn’t meet your health insurance needs, you may be able to fill the gaps with other insurance.

What other benefits are available?

Some early retirement offers include employer-sponsored life insurance. This can help you meet your life insurance needs, and the coverage probably won’t cost you much. However, continued employer coverage is usually limited or may not be offered at all. This may not be a problem if you already have enough life insurance elsewhere, or if you’re financially secure and don’t need life insurance. Otherwise, weigh your needs against the cost of buying an individual policy. You may also be able to convert some of your old employer coverage to an individual policy, though your premium will be higher than when you were employed.

In addition, a good early retirement offer may include other perks. Your employer may provide you and other early retirees with financial planning assistance. This can come in handy if you feel overwhelmed by all of the financial issues that early retirement brings. Your employer may also offer job placement assistance to help you find other employment. If you have company stock options, your employer may give you more time to exercise them. Other benefits, such as educational assistance, may also be available. Check with your employer to find out exactly what its offer includes.

Can you afford to retire early?

To decide if you should accept an early retirement offer, you can’t just look at the offer itself. You have to consider your total financial picture. Can you afford to retire early? Even if you can, will you still be able to reach all of your retirement goals? These are tough questions that a financial professional should help you sort out, but you can take some basic steps yourself.

Identify your sources of retirement income and the yearly amount you can expect from each source. Then, estimate your annual retirement expenses (don’t forget taxes and inflation) and make sure your income will be more than enough to meet them. You may find that you can accept your employer’s offer and probably still have the retirement lifestyle you want. But remember, these are only estimates. Build in a comfortable cushion in case your expenses increase, your income drops, or you live longer than expected.

If you don’t think you can afford early retirement, it may be better not to accept your employer’s offer. The longer you stay in the workforce, the shorter your retirement will be and the less money you’ll need to fund it. Working longer may also allow you to build larger savings in your IRAs, retirement plans, and investments. However, if you really want to retire early, making some smart choices may help you overcome the obstacles. Try to lower or eliminate some of your retirement expenses. Consider a more aggressive approach to investing. Take a part-time job for extra income. Finally, think about electing early Social Security benefits at age 62, but remember that your monthly benefit will be smaller if you do this.

What if you can’t afford to retire? Finding a new job

You may find yourself having to accept an early retirement offer, even though you can’t afford to retire. One way to make up for the difference between what you receive from your early retirement package and your old paycheck is to find a new job, but that doesn’t mean that you have to abandon your former line of work for a new career. You can start by finding out if your former employer would hire you as a consultant. Or, you may find that you would like to turn what was once just a hobby into a second career. Then there is always the possibility of finding full-time or part-time employment with a new company.

However, for the employee who has 20 years of service with the same company, the prospect of job hunting may be terrifying. If you have been out of the job market for a long time, you might not feel comfortable or have experience marketing yourself for a new job. Some companies provide career counseling to assist employees in re-entering the workforce. If your company does not provide you with this service, you may want to look into corporate outplacement firms and nonprofit organizations in your area that deal with career transition.

Note: Many early retirement offers contain noncompetition agreements or offer monetary inducements on the condition that you agree not to work for a competitor. However, you’ll generally be able to work for a new employer and still receive your pension and other retirement plan benefits.

What will happen if you say no?

If you refuse early retirement, you may continue to thrive with your employer. You could earn promotions and salary raises that boost your pension. You could receive a second early retirement offer that’s better than the first one. But, you may not be so lucky. Consider whether your position could be eliminated down the road.

If the consequences of saying no are hard to predict, use your best judgment and seek professional advice. But don’t take too long. You may have only a short window of time, typically 60 to 90 days, to make your decision.

If you are presented with an early retirement offer, let us help

At Sterling Group, our motivation is helping you meet your financial goals. Contact us today for your complimentary financial review. Our expert advisors can help you make the best decision for your financial future and determine if early retirement is possible for you.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Health Insurance in Retirement

Health Insurance in Retirement

At any age, health care is a priority. When you retire, however, you will probably focus more on health care than ever before. Staying healthy is your goal, and this can mean more visits to the doctor for preventive tests and routine checkups. There’s also a chance that your health will decline as you grow older, increasing your need for costly prescription drugs or medical treatments. That’s why having health insurance is extremely important.

Retirement–your changing health insurance needs

If you are 65 or older when you retire, your worries may lessen when it comes to paying for health care. You are most likely eligible for certain health benefits from Medicare, a federal health insurance program, upon your 65th birthday. But if you retire before age 65, you’ll need some way to pay for your health care until Medicare kicks in. Employers may offer extensive health insurance coverage to their retiring employees, but this is the exception rather than the rule. If your employer doesn’t extend health benefits to you, you may need to buy a private health insurance policy. Or, extend your employer-sponsored coverage through COBRA.

But remember, Medicare won’t pay for long-term care if you ever need it. You’ll need to pay for that out of pocket or rely on benefits from long-term care insurance (LTCI). Or, if your assets and/or income are low enough to allow you to qualify, Medicaid.

More about Medicare

As mentioned, most Americans automatically become entitled to Medicare when they turn 65. In fact, if you’re already receiving Social Security benefits, you won’t even have to apply–you’ll be automatically enrolled in Medicare. However, you will have to decide whether you need only Part A coverage (which is premium-free for most retirees) or if you want to also purchase Part B coverage.

Part A, commonly referred to as the hospital insurance portion of Medicare. It can help pay for your home health care, hospice care, and inpatient hospital care. Part B helps cover other medical care such as physician care, laboratory tests, and physical therapy.

You may also choose to enroll in a managed care plan or private fee-for-service plan under Medicare Part C (Medicare Advantage). This is if you want to pay fewer out-of-pocket health-care costs. If you don’t already have adequate prescription drug coverage, you should also consider joining a Medicare prescription drug plan. This can be offered in your area by a private company or insurer that has been approved by Medicare.

Unfortunately, Medicare won’t cover all of your health-care expenses. For some types of care, you’ll have to satisfy a deductible and make co-payments. That’s why many retirees purchase a Medigap policy.

What is Medigap?

Unless you can afford to pay for the things that Medicare doesn’t cover, you may want to buy some type of Medigap policy when you sign up for Medicare Part B. There are 12 standard Medigap policies available. Each of these policies offers certain basic core benefits, and all but the most basic policy (Plan A) offer various combinations of additional benefits designed to cover what Medicare does not. Although not all Medigap plans are available in every state, you should be able to find a plan that best meets your needs and your budget.

When you first enroll in Medicare Part B at age 65 or older, you have a six-month Medigap open enrollment period. During that time, you have a right to buy the Medigap policy of your choice from a private insurance company, regardless of any health problems you may have. The company cannot refuse you a policy or charge you more than other open enrollment applicants.

Thinking about the future–long-term care insurance and Medicaid

The possibility of a prolonged stay in a nursing home weighs heavily on the minds of many older Americans and their families. That’s hardly surprising, especially considering the high cost of long-term care.

Many people in their 50s and 60s look into purchasing LTCI. A good LTCI policy can cover the cost of care in a nursing home, an assisted-living facility, or even your own home. But if you’re interested, don’t wait too long to buy it–you’ll need to be in good health. In addition, the older you are, the higher the premium you’ll pay.

You may also be able to rely on Medicaid to pay for long-term care if your assets and/or income are low enough to allow you to qualify. But check first with a financial professional or an attorney experienced in Medicaid planning. The rules surrounding this issue are numerous and complicated and can affect you, your spouse, and your beneficiaries and/or heirs.

Are you nearing retirement? Talk with an advisor today about your health insurance options

We welcome the opportunity to sit down with you and review your current financial situation. We can discuss what plan works best for you and your unique retirement goals. Set up a complimentary consultation today with one of our financial advisors!

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Borrowing or Withdrawing Money from Your 401(k)

Borrowing or Withdrawing Money from Your 401(k)

If you have a 401(k) plan at work and need some cash, you might be tempted to borrow or withdraw money from it. But keep in mind that the purpose of a 401(k) is to save for retirement. Take money out of it now, and you’ll risk running out of money during retirement. You may also face stiff tax consequences and penalties for withdrawing money before age 59½. Still, if you’re facing a financial emergency–for instance, your child’s college tuition is almost due and your 401(k) is your only source of available funds–borrowing or withdrawing money from your 401(k) may be your only option.

401(k) Plan loans

You need to find out if you’re allowed to borrow from your 401(k) plan and under what circumstances. Check with your plan’s administrator or read your summary plan description. Some employers allow 401(k) loans only in cases of financial hardship, but you may be able to borrow money to buy a car, to improve your home, or to use for other purposes.

Generally, obtaining a 401(k) loan is easy–there’s little paperwork, and there’s no credit check. The fees are limited too. You may be charged a small processing fee, but that’s generally it.

How much can you borrow?

No matter how much you have in your 401(k) plan, you probably won’t be able to borrow the entire sum. Generally, you can’t borrow more than $50,000 or one-half of your vested plan benefits, whichever is less. An exception applies if your account value is less than $20,000. In this case, you may be able to borrow up to $10,000, even if this is your entire balance.

What are the requirements for repaying the loan?

Typically, you have to repay money you’ve borrowed from your 401(k) within five years by making regular payments of principal and interest at least quarterly. However, if you use the funds to purchase a primary residence, you may have a much longer period of time to repay the loan.

Make sure you follow to the letter the repayment requirements for your loan. If you don’t repay the loan as required, the money you borrowed will be considered a taxable distribution. If you’re under age 59½, you’ll owe a 10 percent federal penalty tax, as well as regular income tax on the outstanding loan balance. This is other than the portion that represents any after-tax or Roth contributions you’ve made to the plan.

What are the advantages of borrowing money from your 401(k)?

  • You won’t pay taxes and penalties on the amount you borrow, as long as the loan is repaid on time
  • Interest rates on 401(k) plan loans must be consistent with the rates charged by banks and other commercial institutions for similar loans
  • The interest you pay on borrowed funds is generally credited to your own plan account; you pay interest to yourself, not to a bank or other lender

What are the disadvantages of borrowing money from your 401(k)?

  • If you don’t repay your plan loan when required, it will generally be treated as a taxable distribution.
  • If you leave your employer’s service (voluntarily or not) and still have an outstanding balance on a plan loan, you’ll usually be required to repay the loan in full within 60 days. Otherwise, the outstanding balance will be treated as a taxable distribution. You will owe a 10 percent penalty tax in addition to regular income taxes if you’re under age 59½.
  • Loan interest is generally not tax deductible (unless the loan is secured by your principal residence).
  • You’ll lose out on any tax-deferred interest that may have accrued on the borrowed funds had they remained in your 401(k).
  • Loan payments are made with after-tax dollars.

Hardship withdrawals

Your 401(k) plan may have a provision that allows you to withdraw money from the plan while you’re still employed. This is if you can demonstrate “heavy and immediate” financial need. As well, you have no other resources you can use to meet that need. For example, you can’t borrow from a commercial lender or from a retirement account and you have no other available savings.. It’s up to your employer to determine which financial needs qualify. Many employers allow hardship withdrawals only for the following reasons:

  • Paying the medical expenses of you, your spouse, your children, your other dependents, or your plan beneficiary
  • To pay the burial or funeral expenses of your parent, your spouse, your children, your other dependents, or your plan beneficiary
  • Pay a maximum of 12 months worth of tuition and related educational expenses for post-secondary education for you, your spouse, your children, your other dependents, or your plan beneficiary
  • Pay for costs related to the purchase of your principal residence
  • To make payments to prevent eviction from or foreclosure on your principal residence
  • To pay expenses for the repair of damage to your principal residence after certain casualty losses

You may also be allowed to withdraw funds to pay income tax and/or penalties on the hardship withdrawal itself. This is if these are due.

Your employer will generally require that you submit your request for a hardship withdrawal in writing.

How much can you withdraw?

Generally, you can’t withdraw more than the total amount you’ve contributed to the plan. This is minus the amount of any previous hardship withdrawals you’ve made. In some cases, though, you may be able to withdraw the earnings on contributions you’ve made. Check with your plan administrator for more information on the rules that apply to withdrawals from your 401(k) plan.

What are the advantages of withdrawing money from your 401(k) in cases of hardship?

The option to take a hardship withdrawal can come in very handy if you really need money and you have no other assets to draw on, and your plan does not allow loans (or if you can’t afford to make loan payments).

What are the disadvantages of withdrawing money from your 401(k) in cases of hardship?

  • Taking a hardship withdrawal will reduce the size of your retirement nest egg. The funds you withdraw will no longer grow tax deferred.
  • Hardship withdrawals are generally subject to federal (and possibly state) income tax. A 10 percent federal penalty tax may also apply if you’re under age 59½.
  • If you make a hardship withdrawal of your Roth 401(k) contributions, only the portion of the withdrawal representing earnings will be subject to tax and penalties.
  • You may not be able to contribute to your 401(k) plan for six months following a hardship distribution.

What else do I need to know?

  • If your employer makes contributions to your 401(k) plan you may be able to withdraw those dollars once you become vested. Tthat is, once you own your employer’s contributions. Check with your plan administrator for your plan’s withdrawal rules.
  • If you are a qualified individual impacted by certain natural disasters, or if you are a reservist called to active duty after September 11, 2001, special rules may apply to you.

Before you borrow or withdraw from your 401(k), speak with an experienced advisor

No matter what your situation is, know that there is help here at Sterling Group United. We work closely with our clients to find the best level support for you. Contact us today for a complimentary consultation.

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.