Sept. 1, 2009 — Excuse me if I’m repeating myself.
But the longer I write this column, the extra I discover frequent themes and points among the many questions readers pose to me. Favorite subjects embrace retirement plan guidelines, Social Security, student loans and different types of debt.
That tells me there are some points I can by no means focus on sufficient which explains the questions and solutions beneath could sound acquainted in the event you learn this column regularly.
Looking for monetary recommendation? Click right here to ship David your questions they usually would possibly find yourself as a subject for his subsequent column.
Q: I’m a 26-year-old feminine. I used to be laid off by my present employer. My 403(b) remains to be on the firm and I’m within the means of turning it over to a mutual fund at my bank. My query earlier than I do that is: Will it profit me to take the $7,000 I’ve saved within the retirement fund and pay a student loan that I’ve at the moment in compensation? I’m making an attempt to get the loans placed on maintain resulting from unemployment but it surely has been taking a while and I can now not afford the month-to-month funds.
– A.C., Trumbull, Conn.
A: The quick reply isn’t any, A.C. Pulling the cash out of your retirement financial savings to pay down the student loan won’t profit you. In truth, it would value you greater than you could possibly think about.
The motive is the taxes and penalties you’d pay on the $7,000 withdrawal from the 403(b) plan are prone to exceed the financial savings on curiosity costs you’d understand by paying down the loan. By my calculation, that $7,000 withdrawal would possible value $2,100 in taxes and penalties.
Early Retirement Withdrawals: Stiff Tax Penalty
That $2,100 determine assumes you might be within the 15 p.c federal tax bracket and the 5 p.c Connecticut state tax bracket and that you’d be paying to the IRS a ten p.c early withdrawal penalty.
And you would want to give you that $2,100 once you file subsequent 12 months’s tax return in the event you elected to don’t have any taxes withheld from the fee. If you are still unemployed subsequent April, the place is that cash going to return from?
One different factor to bear in mind: The eventual financial savings on curiosity costs stemming from early compensation of the student loan are unlikely to be as nice as you assume. Student-loan curiosity is deductible up till you attain increased earnings ranges.
That means a 6.8 p.c price loan (the present price for unsubsidized Stafford loans) could also be costing you simply 5.78 p.c, once more assuming you might be within the 15 p.c federal tax bracket.
Finally, there is a chance value to yanking out the $7,000 you have collected in retirement financial savings. The best benefit a younger investor such as you has is time, which turbo costs the facility of compounding. Once misplaced, that point – and the potential earnings – can by no means be regained.
Now that I’ve advised you what to not do, let me counsel a special plan of action.
First, I’d persist together with your efforts to acquire a deferment on funds whilst you stay unemployed. Keep calling your student-loan lender till you get a passable reply. Don’t allow them to off the hook simply.
While you await a solution, squeeze your price range as a lot as potential to make funds.
If you determine it is completely obligatory to attract out of your retirement financial savings, then switch the 403(b) to a rollover IRA after which withdraw solely the quantity wanted to make a selected month’s fee. Better to pay taxes and penalties on a $200 early withdrawal relatively than the complete $7,000.
One other thing: I’d think about shifting the 403(b) funds right into a rollover IRA at a low-cost, on-line dealer relatively than a bank-sold mutual fund, which is prone to be extra pricey.
Contributing to 401(ok) After Age 70
Q: I turned 70 June 16, 2009. I personal my very own firm and nonetheless work right here. My query is ought to I proceed contributions to our 401(ok), and should I take funds from my 401(ok) on April 1, 2010?
– V.C., Bellmawr, N.J.
A: Unless you want the cash, V.C., there is not any motive to cease contributing to your 401(ok) plan. There’s no age restrict on contributing to an employer-sponsored retirement plan so long as you proceed to work and gather a paycheck.
Any quantity you contribute will likely be shielded from federal and state taxes and can get pleasure from the advantages of tax-deferred progress.
As a enterprise proprietor, nonetheless, you can be unable to keep away from start making required minimal distributions out of your 401(ok) account. IRS guidelines do enable people who proceed to work to delay their required withdrawals whereas nonetheless employed if their explicit plan guidelines enable it.
But there’s one exception to that rule that applies to you, V.C.
The IRS says that anybody who owns a 5 p.c or better share of the enterprise sponsoring the 401(ok) plan could not wait to take their required minimal distributions past the same old deadline. As you accurately observe, the traditional deadline for taking the primary distribution is April 1 of the 12 months after reaching age 70½.
Assuming you personal no less than 5 p.c of your online business, meaning, V.C., you actually might want to take a required distribution subsequent 12 months. But that does not imply it’s best to cease contributing to your organization’s 401(ok) plan.
Most possible, the quantity you might be required to withdraw from the plan will likely be small in comparison with what it is possible for you to to contribute (at the moment $22,000 for somebody over age 50).
So my recommendation is max out your contributions, withdraw what you could and proceed to build up financial savings till you determine you are able to get pleasure from a well-deserved retirement.
This work is the opinion of the columnist and by no means displays the opinion of ABC News.
David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He beforehand labored as a monetary author and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members present monetary recommendation to shoppers on an hourly, as-needed foundation. Contact McPherson at [email protected]