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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10911
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My husband is leaving s employer and has a 401k plan he will

Customer Question

My husband is leaving his employer and has a 401k plan he will probably either roll over to his new employer or put into IRAs. However, we are relocating for this new job and we need to buy a new house. We could really use some money out of the 401k to use to pay for expenses and a down payment on a home. How can we do this while paying the least out in penalties etc?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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I hold J.D. (Juris Doctorate -a Doctoral degree in the law), MBA (Finance & Tax specialization), a BBA from Mercer University's Stetson School of Business & Economics, as well as CFP and CRPS (Chartered Retirement Plans Specialist) designations - I can help

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The only two ways to do this that do not create a 10% tax penalty (if your husband is under age 59 and 1/2) PLUS the amount pulled being added into taxable income for the year pulled, at your highest bracket ,are as follows:

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(1) A plan loan ... and this doesn't sound like it would work unless you borrow and paid back before leaving ... otherwise once he separates service the loan then automatically becomes a distribution under 99.99% of all plans' plan documents.

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(2) This one is likely your answer; roll to an IRA (using a direct, trustee to trustee rollover - those are unlimited - this will also allow for no forced withholding) then once in the resulting IRA exercise your one per 12 month rollover, to pull out money, (and then if you get those dollars back into the IRA wthin 60 days that will be considered a rollover and there's no tax at al)l.

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Now, if you want to pull dollars out and not replace within that short amount of time, you might consider a strategy that combines a one time distribution in 2015, another in 2016, and what's called a reg 72(t) substantially equal & periodic payout (SEPP) mothod of taking out distributions the next year and FORWARD (which will be taxable as income but the penalty is waived) ... this equal yearly payout must stay the same for 5 years or age 59 and 1/2 to continue to waive penalty.

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The reason for the two distributions (one in 2015 and one in 2016) is to spread the payments that WOULD be taxed (and penalized if under age 59 and 1/2) out over two different tax years, thereby very possibly keeping you in a lower tax bracket for both years (as opposed to pulling out that amount that you DO believe is worth paying the taxes - and possible penalty - in the same tax year)

Expert:  Lane replied 1 year ago.

But again, ANY actual distribution (from the rollover IRA) that's not redeposited back in the (or another) IRA within 60 days is a distribution

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If you're goin to do that, as we are at the end of the year here, do some just before the end of the and some after the 1st, possibly, to keep you in a lower tax bracket

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ANd there's always the substantially equal and periodic payment plan that (although taxed as ordinary income) waives that additional tax penalty ... but is not likely to be a large amount every year (essentially spreading it out over life expectancy as per the tables) ... Depending on how the numbers work out, this can be a way to access funds without the penalty, not for downpayment, but to help make the ongoing house payments without the tax PENALTY.

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Hope this has helped

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Let me know if you have questions

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If this HAS helped, and you If you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars on your screen) ... that's the only way I'll be credited with a portion of what you've paid JustAnswer.
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Thank you, ***** ***** me know...

Lane

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Expert:  Lane replied 1 year ago.

Hi,

….

I'm just checking back in to see how things are going.

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Did my answer help?

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Please let me know if you need more here

And if not, I'd appreciate a positive rating (using the stars on your screen). That's the only way JustAnswer will credit me with a portion of what you've paid them.

Thank you,

Lane

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