How Do I Avoid a 401k Withdrawal Penalty?

The 401k plan began in the early 1980s. It is a fully funded endowment insurance system established by employees and employers to jointly contribute. The regulations were recognized by law in 1979, and additional implementation rules were added in 1981. The rapid development in the 1990s gradually replaced the traditional social security system and became the main social security plan for many American employers. For private for-profit companies.

401k retirement plan

According to the plan, companies set up special 401K accounts for employees ^[1]

The 401k retirement plan is flexible for employees of private companies in how much money is invested each month. Employees can rely on their own

Despite the great success of the 401 plan, it also faces some problems.

(One)

First, the state should plan at a higher level

As early as around 2004,

Social insurance benefits originated during the Great Depression of the late 1920s and were established by President Roosevelt. All company-employed employees are compulsorily involved, giving a percentage of pre-tax income (currently 6.2%) to the US government. The FICA (Federal Insurance Contribution Act) Tax on everyone's paycheck is this one. FICA Tax has an upper limit. In 2014, only up to $ 117,000 of personal income was taxable, and excess income was not taxed. This ceiling is adjusted for inflation, and the 2015 ceiling was $ 118,500. Participants will receive corresponding retirement benefits after retirement after paying a certain period of time. This period is currently 40 quarters, or 10 years. It is very similar to the domestic payment of 15 years, but the United States allows interruptions in the middle, and the total payment quarter is 40. The problems facing social insurance benefits in the United States are similar to those in China, and they are becoming more and more unable to make ends meet. According to current trends, the social insurance benefits mechanism will either go bankrupt, or the age of retirees receiving benefits will be delayed, or the benefits of retirees Will be greatly reduced. Therefore, if you want to live comfortably after retirement, you must not just rely on social insurance benefits.

Corporate and government pensions are easy to confuse with 401K, but the difference between the two is very clear. First, pensions do not require employees to contribute, while 401K requires employees to deposit their own income. Secondly, the benefits of the pension are borne by the company, which is paid after the employee retires. If the company goes bankrupt or runs poorly, then the payment of the pension is easy; the funds in the 401K account belong to the individual employee, even if the company Failure to close or employees to change jobs are not affected.
In the United States, retirement benefits are not a company's obligation. As pension benefits are a heavy burden for the company, and retired employees do not want their pensions to be unavailable after a company problem, more and more companies are reducing or not providing pension benefits to new employees. And 401K Match (that is, the employee saves a sum of money in his 401K account, and the company deposits the same amount of funds) as retirement benefits.

Originally, the Social Security Benefit and Pension Plan did not require employees to participate in the management themselves, and the monthly benefits after retirement were also determined, but as the Social Security Benefit became more difficult to make ends meet, and the company government Both tend to reduce the Pension Plan. For the younger generation who are still working, they can only rely on two types of pension plans: 401K and IRA.
401K and IRA are respectively divided into Traditional and Roth. The account funds are deposited first, and then taxed (Pre-Tax) when withdrawing later is the traditional type; the tax is paid first, and then deposited (After-TAX), and it is Roth that does not pay tax when withdrawn. Therefore, we actually have four choices: traditional 401K, Roth 401K, traditional IRA, and ROTH IRA. Here, let's take a look at what these pension plans are all about, and then compare the differences and similarities.
401K (Corporate Retirement Benefit Plan) is a deferred tax account plan created by the United States in 1981. Because the relevant provisions are in Article 401 of the National Tax Law, it is commonly known as 401K. 401K only applies to employees of private companies, provided by the company, as long as you are a company employee can participate. Non-profit organizations, such as schools, also provide similar benefits, called 403B. Since the two are very similar, we collectively refer to them as 401K.
IRA (Indlidual Retirement Account) is another common account category for Americans to manage pensions besides 401K. In the case of an IRA account, any individual with Earned Income can open an IRA account.
4. Similarities between 401K and IRA First of all, 401K and IRA have a cap on the annual deposit. The 2015 401K cap is $ 18,000, and if you are 50 or older, the cap is $ 24,000. IRA's 2015 deposit limit is $ 5,500 for those under 50 and $ 6,500 for those over 50. The cap is adjusted annually based on inflation.
Another similarity is that funds are usually free to withdraw until retirement, otherwise there is a fine. Exceptions (exceptional illness or down payment on purchase of first home, etc.) are exceptions.
Finally, and most importantly, both 401K and IRA are Tax Advantage accounts. It should be noted here that the so-called tax incentives do not require income tax (Income Tax), but rather capital gain tax and dividend tax. Compared to general investment accounts, 401K and IRA (both traditional and Roth) do not need to pay capital gains tax and dividend tax. The benefits of this tax benefit will continue to accumulate in your account.

First of all, a 401K account can usually only invest in funds, not individual stocks, unless some companies will allow 401K to invest in the company's stock. In general, there are 10-20 different funds to choose from in 401K. The IRA account can be invested in a much larger range, basically the stock bond fund that the general securities investment account can invest in.
Second, 401K usually has a company's Match plan. For example, if you deposit up to 5% of your monthly income into 401K, the company will deposit the same amount of money into your account. If you deposit more than 5% of your monthly income with 401K, some companies will not Will deposit the same amount of money. Some companies will set a Vest Period, which means that the money deposited by the company will not be owned by you until you work for a certain period of time. For most people, the company's 401K Match cap is reasonable. And IRA as an individual retirement account, of course, does not have any company benefits.
Third, the tax deductable of traditional IRAs has an income limit, while 401K does not. If your personal annual income is greater than $ 71,000 or your household income is greater than $ 118,000, then the funds you deposit into the IRA are not tax deductible (Non Deductible).
Since the money deposited in the IRA at the time of tax declaration cannot be deducted, and the tax will be paid when the money is withdrawn from the IRA in the future, at this time, the money should be deposited into Roth IRA first. But if your income is greater than $ 131,000 or your household income is greater than $ 193,000, you cannot deposit funds directly into Roth IRA. So, for families whose annual household income is more than 193,000 US dollars, can't they enjoy the benefits of IRA? IRS has a Roth Back Door here. You can deposit funds into Roth reasonably and legally as follows: first, open a traditional IRA and deposit the funds; second, convert this traditional IRA account to Roth IRA or transfer the funds inside To an existing Roth IRA. This may sound funny, but that's what American law says. If you save trouble and deposit money directly into Roth IRA, IRS will come to trouble. IRS has not closed this back door so far, so you can use it with confidence.

Both the Roth 401K and Roth IRA trace their origins to a 1997 bill, the Taxpayer Relief Act. The name Roth comes from the senators who promoted Roth IRA legislation. Taking IRA as an example, the biggest difference between traditional IRA and Roth IRA is when the money deposited is taxed. Traditional IRA does not pay tax when it is deposited, and pays when it is withdrawn; while Roth IRA first pays tax when it is deposited, withdraw No need to pay when. 401K Similarly, the following IRA examples are also applicable to 401K.
Another difference is when you can withdraw money. Except for special cases such as serious illness, the funds in the traditional IRA cannot be withdrawn until the age of 60, otherwise there will be an additional 10% fine. Roth is better. After opening an account and depositing for 5 years, the principal in the account can be withdrawn without penalty. Of course, it cannot be deposited after being taken out. Roth is also free to withdraw funds after turning 60.
Another difference is when you must withdraw money. Traditional IRAs must withdraw a portion of their funds each year after they reach 70.5 years of age and cannot deposit any more. Roth IRA does not have this restriction. Another point is that Roth IRA can be directly inherited by the children of the spouse and does not need to withdraw funds. The funds in the traditional IRA must be withdrawn and paid before they can be distributed to children.