As the other researcher mentioned, it is impossible for us to provide
a conclusive answer for your specific plan about whether or not you
can get an early withdrawal. I can provide you with information
regarding what the financial consequences of such a withdrawal would
be and how to find out what the specific procedure for your plan is.
If you are not employed by the company that has your 401(k), then
withdrawing the money is no problem. Worst case, you roll it over to
an IRA and then take it out of there once you have control over it.
However, it sounds like you are still with the same company, which may
mean it is difficult or even impossible for you to gain access to the
money while you remain employed there.
Many 401(k) plans restrict early withdrawals (those made before age 59
1/2). The MIT 401(k) plan only allows limited withdrawals in the
event of a terminal illness ("Supplemental 401(k) Plan" MIT
http://web.mit.edu/hr/benefits/supp401k_with.html). The State of
Tennessee plan allows for hardship withdrawals, which is a
significantly broader definition, but one you may still not qualify
for ("Hardship Withdrawal Request" State of Tennessee
http://www.treasury.state.tn.us/dc/hardship.pdf).
In the case of the State of Tennessee plan, you would fill out the
form referenced above and send it to the benefits administration
company that maintains the 401(k). For the MIT plan, you contact
Fidelity Investments. So, there is no inherent need for you to inform
your employer of your desire to take an early withdrawal unless the
employer requires it, which would usually only be if it is acting as
its own benefits administrator. If you can find out if there is a
third-party administrator and how to contact them, they should be able
to tell you your plan's rules governing early withdrawals and handle
the early withdrawal for you without your employer's involvement if
you qualify.
You can find out more information about your plan, including who
administers its benefits, by reviewing the materials your employer
provided you when you opened your 401(k) or requesting the Summary
Plan Description from your employer. These materials may even be on
your company's web site or intranet. These documents would tell you
what your options are for early withdrawal, if any, along with who to
contact regarding initiating an early withdrawal. It would be
unlikely that an early partial withdrawal would affect your ability to
make future contributions or your general standing in the plan, but
you would need to consult the plan documents and/or the plan
administrator to be certain.
The financial consequences can be determined much more specifically.
If you are under age 59 1/2, you will have to pay a 10% early
withdrawal penalty in addition to income taxes on the amount withdrawn
(federal, state, and local, if applicable).
The following web site explains how you calculate the costs associated
with an early 401(k) withdrawal: "Investments in Retirement Plans "
Accounting Center (April 4, 2003)
http://www.accounting-center.com/401kearly.html.
However, the web site has not been updated to reflect the Bush tax
cuts. The current federal tax rates can be found at: "2004 Federal
Personal Income Tax Rates" Yahoo Finance
http://taxes.yahoo.com/rates.html. The tax cuts lower the costs a
little bit.
Assuming you are a "typical" American in the 25% tax bracket living in
Texas, a state without a state income tax or local income tax, an
early withdrawal of $20,000 from your 401(k) would result in the
following costs:
Early withdrawal penalty of 10%: $2000
Federal income tax of 25%: $5,000
Net proceeds from withdrawal: $13,000
You would lose 35% of your early withdrawal to taxes and penalties.
If there is a state income tax and/or a local income tax, and/or you
are in a higher tax bracket, then you lose even more. As the
Accounting Center reference notes, an early withdrawal form your
401(k) is about the worst place you can go to get money, short of a
Mafia loan shark. Not only do you pay heavy costs up front, but you
also lose the benefits of tax-deferred compounding of the money.
Sincerely,
Wonko |
