Today we’re going to talk money. I never anticipated a need to share this information, but given the events of the last few days, here I am. You can thank me later. 😀
Before we go any further, I need to let you know this: I’m not an accountant, nor do I play one on TV. Don’t use any of the information here as fact and then come back and try to sue me later. Do your own homework. Check with your own accountant/tax or retirement adviser. 😀
You may have heard about 401K accounts. You may even have one. Or, rather, your employer may have a plan that you contribute to. And, you may have a situation where your employer has some kind of matching contributions into your account.
Here’s a good place to start so, you know, you don’t think I’m lying and making this stuff up: http://www.irs.gov/Retirement-Plans/Plan-Sponsor/401(k)-Resource-Guide—Plan-Sponsors—General-Distribution-Rules.
Here’s an overview of the basic types of 401K plans: http://www.irs.gov/Retirement-Plans/Plan-Sponsor/401(k)-Resource-Guide-Plan-Sponsors-401(k)-Plan-Overview
These are the primary things to know about a 401K:
• The government actually defines these programs- there are certain requirements and restrictions that apply for ALL accounts. For example, there is a maximum amount of money that can go into them in any calendar year. According to Wikipedia, the limit right now is $17,000.
•Your employer deposits your money into your account BEFORE taxes. And then it grows until you are 59 ½ tax free when you can start taking distribution from elected deferrals from it without penalty. We’ll talk about penalties later.
• There are ways to get to your 401K money while still with your employer, but you really don’t want to have to touch it unless you absolutely have to. {There are withdrawals that count as ‘hardship’ withdrawals, but the need must meet very stringent requirements.}
• If you leave a job, you have 60 days to deal with your 401K funds without penalty. Some people leave the money alone; many opt to rollover the funds into an IRA. We’ll talk about IRAs later, too.
• Yes, you can have a privately paid (non-employer) 401K type of plan; those are called Solo 401Ks. We’re not going to talk about those at all. 😀
Because employers determine the particular {employee sponsored} plans within government guidelines, you may or may not have options available to you with regard to getting money out of your 401K.
For each plan, there may be provisions for hardship, but the requirements are very clear, and pretty stringent. Some plans don’t have any provisions, but if they do, they still have to meet government requirements.
Some plans also allow for loans from your account. Again, the particulars depend on the actual plan, but in general, here are some of the conditions:
• Can’t exceed 50% of the vested balance
• Must repay within 5 years
For plans that have matching employer contribution, because you are paying yourself back, the employer may opt out of giving a matching contribution. Over the long term, this could be a considerable chunk of change. I’ve seen plans that say employer contribution will kick back in after 6 months of a loan, so it’s important to talk to your plan adviser and have a thorough understanding of your options and the plan requirements.
Let’s say that you have taken a loan on your 401k. You’ve been paying it back, but now you find yourself not working for the company {and while it’s generally the same whether you’ve left on your own or were fired, you’ll want to ask your plan administrator this question before you take a loan} What happens next? What happens to the money you’ve borrowed and still have to pay back?
Most plans require re-payment of funds in full to be paid back within 30 days of termination of employment, or else it gets counted as an early distribution {withdrawal} and is then taxed through the nose. Not only are you charged a 10% early distribution tax, but you also have to pay taxes on the money as regular income, which can go up to 25%. Depending on the tax bracket you fall into, this means you’re looking at anywhere from a total tax of 20-35% tax on the amount taken.
Did you get that? If you take a 401K loan that is not paid back by the time you leave the job, you have 30 days to pay back the remaining funds. If you can’t pay back in full, they count it as an early distribution and you get an automatic 10% tax plus regular income (federal and state) taxes on the amount withdrawn.
The other aspect of this is that because those funds count as “income,” they may well push the rest of your income taxes into the next bracket, which can leave you with a tax bill when you file your annual income tax. This is why you really don’t want to take money out of 401K plans early. It really does defeat the purpose of having a pre-tax retirement fund.
We’ve known people who have taken small loans and seem to do this consistently. Not only does a person risk not getting matching employer contributions, but obviously, they don’t have the same amount of funds growing towards retirement.
Here’s more information on 401K loans: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—Loans
Now, things can get interesting, as I’ve recently learned, if you leave a job. Only then do you have the option to “rollover” your 401K funds into another retirement account called an IRA. You can also leave it right where it is without penalty, but then you continue to be subject to the plan rules with regard to distribution of funds.
There are two different IRA choices; Traditional and Roth. A Traditional IRA has mandatory distribution of funds beginning at age 70 1/2; both plans have regulations for distributions and contributions and rollover eligibility.
One thing to know about both 401K and IRA accounts is that they don’t just have a lump sum in them. {I mean, I suppose you could put all your eggs in a single basket, but by-in-large, retirement accounts are “diversified”}. This means that the overall account is a collection of individual accounts, like stocks, bonds, and other investment accounts.
When you rollover your funds, it’s not just a quicky thing. EACH account {each stock, bond, etc} needs to get rolled over.
For each account within the IRA, you have a certain amount of shares. The cost of the shares combined with the number of shares determine how much you have in that particular account. If certain stocks aren’t performing well, they can get moved into another holding- this is why you want to work with an investment firm, unless you are a stock broker and know all the ins and outs of this stuff yourself.
If you’ve had funds in a company sponsored 401K, you’ve no doubt noticed that periodically, the investment firm the company uses will send you a notice telling you that certain holdings are going to be moved into other accounts, and you have to notify them within a certain amount of time to opt out of the change.
But enough of that- we can summarize and say that that these accounts have a lot of moving parts. You can usually set up and online account to monitor what’s going on.
So, you’ve left your job and you now have 60 days to roll everything over. When this happens, you have the opportunity to move all your money from one kind of retirement account (the 401K) to another kind of retirement account (an IRA) without paying taxes on the money. If you choose to roll over only a portion of the funds, the funds that are distributed to you are taxed at the regular income tax rate in addition to the additional 10% early distribution penalty rate if you’re under 55.
You may be wondering why, if you are taxed the same, would you want to bother rolling your funds over? The difference is what you can do with an IRA in comparison to your 401K plan. Of course, there are conditions, but if you contribute to an IRA, you may be able to take distribution so long as,
• “You did not take a deduction for the contribution.
• You withdraw any interest or other income earned on the contribution. You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income earned on the contribution may be a negative amount.” {http://www.irs.gov/publications/p590/ch01.html#en_US_2011_publink1000230701}
{Again, contact your plan, tax or retirement adviser- don’t take my word for it!}
So, now you’ve rolled over all your money into an IRA. You can keep the same individual stock/bond accounts and corresponding shares, but you are going to have a new type of account with a new account number, which contains the original moving parts. {I suppose you could change them into different investments pieces-parts, but you’d have to have the plan administrator work with you on that.}
Because your IRA is a new account, there is no quarterly statement; there is no monthly statement. IT IS A NEW ACCOUNT. And it will clearly state that that it’s a rollover.
You cannot get any kinds of funds, open an IRA and have it considered a rollover. You can’t, for example, borrow a ton of money, tell someone it’s a 401K account, and then roll them over into an IRA.
A rollover is a very specific kind of transaction; as determined by the government of the United States of America. Really. I am not making it up. 😀
And honestly, you’d be stupid to open any kind of personal account, roll it over and pay penalties if you don’t roll the entire amount over. If you have the money in a savings account, you’d be better off to take it out tax-free instead of going through the government mumbo-jumbo.
Not just that, but it legally could not be CONSIDERED a rollover account. Legally {as determined, again, by the government}, it doesn’t work that way.
I spent the better part of a week trying to explain this to our mortgage lender. Apparently, the loan processor and the underwriter weren’t capable of adding up the rollover account funds to see that the balances were actually the same on those 22 pages. And then, they actually tried to tell me that they had no way of knowing where those rollover funds actually came from; that we hadn’t taken out some kind of loan {that they didn’t see on our credit report} to make it look like we had retirement funds and then as soon as we closed, we would take the give the money back to whomever we had gotten it from.
You know, not to mention you can’t do *anything* with a new IRA for at least 30 to 60 days. Or, not to mention if you did that, you would then be subject to the early distribution penalty of 10% plus taxes unless you meet certain conditions.
Ya. I honestly do not remember the last time I was that angry and frustrated. This process has been a nightmare. The required paperwork- despite getting it in writing- has kept changing from day to day, and it’s not what was required in the beginning.
I realize mortgage rules have changed drastically. I get it. But to basically accuse someone of lying and fabricating documentation of funds- even though they called the investment firm {and somehow came away with information that wasn’t actually something that could legally be done}– is not acceptable; especially when it concerns actual governmentally restricted programs that actually CAN’T be forged, fabricated, or artificially manufactured.
It took me telling him that if they weren’t able to understand and accept the legal documentation provided to them that he needed to tell me *today* so I could secure another lender. Enough is enough.
It also took me copying and pasting from the documentation I had sent him earlier to physically show him that he already had the required documentation.
Maybe I would have been more patient if this was the first time he decided he needed something more. We had gone around and around over my other mortgage information.
Apparently, seeing my actual mortgage statement/bill showing what amounts went where- to principal, to interest, and into escrow- wasn’t enough. It also wasn’t enough to show what amounts went out every month in other documentation.
Nope. It took me sending him *2 years* worth (including the schedule for 2013) of monthly statements of money going into escrow- and an explanation that there was physically nothing else I could send to him- that he finally relented. And that was after changing what he needed numerous other times, on other various pieces of documentation.
I’ve never felt, up to this point, that I was being set up to fail to get a mortgage. First he needed the offer letter- then, two weeks later he said he couldn’t use it because it wasn’t signed.
“Well, no, it wasn’t signed because he’s working there. What- you need me to print it out and have him sign it and fax it to you, even though you can see on his paycheck that he’s being paid according to what was offered?”
Then it was, no, we can’t use a partial check- it has to be a full month of checks, when before it was a ½ check combined with the offer letter were enough. Then it became, ok, we don’t need the ½ check; we have the one check with current employer {paying as documented in the offer letter}, but now we need the old paystubs from your previous employer.
Um, why? What’s the point? The only benefit to that, as I pointed out to him, was that they actually HAD the documentation to show funds being paid into the company sponsored 401K account. Gee, seems he forgot about that. Guess that really does show we didn’t crap out fake money for an account and try to bamboozle them into thinking we had retirement funds when we didn’t. 🙄
So, fine. He’s got all that now. I’m just waiting for him to send me something else telling what strange thing he needs now. But at the very least, he knows I have other lenders on backup and have no problem using them.
I’m a very patient person {hahahahaha, no really, when it comes to this kind of stuff, I understand there are a certain amount of hoops to jump through- and I always have all my ducks in a row- because it’s too important not to}. I understand logic and reason. I cannot understand sheer laziness and incompetence in being able to add numbers and being able to look at and use information provided to you.
I cannot understand the distrust of people who have all the required documentation, as dictated by the US government, but yet because you either can’t add or aren’t otherwise familiar with those retirement plans {And really? It’s not like they aren’t new concepts and haven’t been around for years and years} you basically accuse them of lying.
I understand the need for proof. But let me tell you- there are other people who actually do understand these programs who are thrilled to get my business. Trust me- you are not the only fish in the pond. You aren’t doing me a favor- you should be happy to be getting my business in this market.
And now that I’ve put you to sleep, I’ll let you get back to your regularly scheduled programming.
As for me, I’m hoping my blood pressure-induced headache will relent and that I have a tangle-free day. I am tired of fighting.
Because life is a soundtrack, I’m leaving you with yesterday’s theme song: Bang Your Head by Quiet Riot.
[youtube:http://www.youtube.com/watch?v=vJChh7ghGnE%5D
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Some found cattle that were buried and barely alive. So they kept digging, trying to get sunlight on hide to help warm them up.
