The following is a guest post by Scott who understands how the 401k works in the U.S.
Do You Feel Lucky Today? Investing with 401k Funds. Your employer 401k is designed to gradually build a retirement fund that can ensure you maintain your standard of living after your career…but that isn’t good enough for you, is it? No, after 40 or more years of the daily grind, you may want more to show for your decades of hard work. Perhaps you’d like to be able to afford a beautiful high-end car or an extended vacation abroad in your golden years, and to be frank, the slow and steady approach is probably not going to place you on a Tahitian beach for a few months after your last day of work.
Many people dream of a more immediate way to build wealth, but some actually have viable ideas and investment prospects that could earn them the funding they need for the retirement of a lifetime in a much shorter time than a 401k fund. Unfortunately, not all of these savvy visionaries have the capital on hand to fund their initial investment. However, there is a way for such individuals to obtain the money they need at present by borrowing from the future: by withdrawing money from their 401k fund. You can consult Suncorp if you need help planning for your retirement, they will be able to let you know how much you need to retire, the best use of your retirement fund & provide peace of mind for your future.
Most types of 401k fund allow the holder to withdraw money from their 401k, but the funding comes at a heavy price. All money withdrawn from a 401k is considered taxable income and is taxed at your income rate. Many withdrawals also include a 10 percent IRS penalty, the exception being individuals over the age of 55 at the time of withdrawal as long as they separated from their employer during the same year.
All told, a withdrawal could lose well over 30 percent of its value to taxes and fees regardless of age. Obviously, a withdrawal decreases the amount of your 401k fund as well, limiting its full growth potential. If you are unsure you’ll be able to restore the funds to your account, a withdrawal for investing makes your entire nest egg little more than chips on the table.
There is a way to avoid many of these taxes and fees when borrowing money from your senior citizen self for investment purposes. Money can be taken from your 401k account tax free as part of a series of SEPPs, or “”substantially equal periodic payments.” However, this comes with its own set of difficulties. You cannot choose the amount you receive; it is calculated using a standard formula based on the amount in your account and your life expectancy before being issued as equal payments.
In order to avoid the tax penalty, you must take money from your account at least once every year until the age of 59 ½. The account associated with the SEPPs is also effectively frozen, and you cannot make any further withdrawals or deposits to it for 5 years or until age 59 ½, whichever is longer. You are free to transact with other accounts, and you can also establish an account specifically for SEPP withdrawals by transferring money from other funds so that your primary fund is not affected.
If you modify or cancel your SEPP payments, the tax penalty will be applied to all previous payments with interest. This means that if you find that hot new investment at 29, you should be prepared to drain your 401k for the next 30 years. You should also hope your investment is all that it seems, because th
e only ways out without penalty are death and disability. If your income situation changes during this time and you no longer need the payments, investing them elsewhere is a much better option than canceling the plan.
Your 401k is one of the best benefits most employers provide, but it is meant for much later days. If you have a surefire investment plan that just can’t wait until then, your 401k can be an excellent source of capital…you’d just better be sure about it.