Aaron Weems for Fox Rothschild LLP writes: As the nation emerges from the fog of tax season, many people
who paid little attention to their taxes for the previous eleven
months just received a crash course in tax planning, either on
their own or with their tax professional. If they have a 401(k),
they dealt with their retirement account in some way, either by
having to pay tax on a distribution or looking at what they were
able to contribute over the year; perhaps they were making one last
payment before the tax filing deadline.
For many people, however, having a 401(k) plan begins and ends
with a few simple actions: sign up for a plan through your job;
contribute a pre-tax amount from each paycheck, and; never deal
with it until you retire.
Such a simplified approach is a great way to ensure consistent
savings and a retirement nest egg. It is not, however, the end of
the equation. Recently, Paul T. Murray, president of PTM Wealth
Management, wrote a blog entry on five techniques for avoiding the
10% tax penalty for an early withdrawal from a 401(k). This is
great information because it sheds light on a practical issue many
people going through a divorce or separation face: having to use
the only accessible financial account available to them – the
401(k) – before they reach the mandatory distribution
age.
Paul highlights five areas where people can avoid paying the 10%
tax penalty on an early withdrawal. Not surprisingly, they are
complicated and require significant planning to successfully
utilize. The most intriguing, in my opinion, is the one-time
withdrawal from a rollover of 401(k) funds. Many times a dependent
spouse either had no retirement account or a lightly funded
account. When the time comes for them to receive a substantial
rollover from their spouse's 401(k) to their IRA, the IRS
provides for a one-time withdrawal in any
amount. This could be a major tool for a spouse who is in a case
with little cash in the marital estate and has the immediate need
for cash. It might be the cash infusion they need to pay off a debt
or cover their expenses as they transition into their new phase of
life.
Four other techniques are highlighted and the blog entry is
worth reading. The tax code is complicated, but if you know where
to look it can also provide for some creative solutions to
financial and tax problems.
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