Ways to Roll Your 401(k) for the Best Tax Benefits

When you’re planning to make a major purchase or investment, or paying down debt, it can be tempting to pull funds from a retirement plan. A 401 (k) retirement plan has its own set of rules. That’s why you need to know whether your early distribution will come with a tax penalty or not.

 

General Tips for your 401(K) Retirement Funds Distributions

You could be facing a 10% tax penalty for withdrawing money from a 401(k) prior to reaching age 59 ½.  However, in some situations, a rollover of your 401k funds into a Traditional IRA is an available option to avoid the penalty. Consider rolling over your 401(k) into an IRA prior to early distribution in these situations:

  • You are using your retirement funds to pay for qualified higher education expenses

  • You are using up to $10,000 of your retirement funds to buy, build, or rebuild your first home

  • You are using your retirement funds to pay for medical insurance while unemployed

In all three situations, you would save the 10% early withdrawal tax by rolling the funds into an IRA first before distributing the funds to pay for these specific expenses.

 Obviously working with an experienced financial advisor can help you assess the best course of action for managing your money. Knowing some of the basics now, though, can help you prepare for those conversations.

 

Additional Retirement Plan Tips

 Some other quirks with the tax code are the minimum required distribution rules at age 72. Currently, the rule states that age 72 is the starting point for those distribution requirements. Your minimum distribution requirement applies to a 401(K) and a Roth 401(k). However, it does not apply to a Roth IRA. If you roll your Roth 401 (k) funds to a Roth IRA, then you are no longer subject to the minimum distribution rules.

 The more you know, the better. Collaborating with both a financial advisor first and your local accounting firm can help set you and your family up for success. We all want to plan for the future. And there are specific steps that can help make those steps more lucrative. If you have any questions or want to schedule a tax planning consultation for a deeper dive, please don’t hesitate to reach out to our team. We’re always happy to connect!