Question: JS in Adams County: I’m 53 and have just heard that my company allows people to make money from their 401 (k) starting at age 55. Could this be right?
ONE: Although this sounds like it may not be true, it is! Usually, if you withdraw from a 401 (k) before the age of 59,, you will have to pay a 10% early withdrawal penalty. But there is an exception to this rule called the “Rule of 55” – and it sounds like your employer allows it. This is how it works.
If you have a “separation of service” from your current employer in the calendar year you turn 55 or older – either due to retirement, dismissal, dismissal or resignation – some employers allow you to withdraw from 401 (k) (or 403 (b) )) without having to pay the early withdrawal fine. (Note: If you are a qualified public security officer, this rule usually applies during the year you turn 50.) Just remember, however, that you still have to pay regular income taxes on withdrawals. This rule of 55 essentially simply removes the penalty.
And we want to highlight two really important points that may be easy to overlook: First, this rule only applies to the 401 (k) (or 403 (b)) that belongs to the employer you are leaving. Not valid for old 401 (k) with previous employers. And second, only the calendar year you turn 55 or older is possible – you can not, for example, leave at 54 and try to make withdrawals the following year.
It should also be noted that this rule of 55 does not apply to IRAs. Therefore, if you decide to take advantage of this rule, do not consider transferring your 401 (k) to an IRA unless you are already at least ½ 59. You will cancel the rule by doing this.
Here’s Allworth Tip: If the time is right, the 55 rule can be a convenient way to access your retirement money without penalty before the age of 59. Of course whether or not it is another matter. You need to ask yourself if you are financially – and mentally – ready to retire early. A trusted financial advisor can help you with this decision.
Q: Beth in Colerain Township: My son will probably maximize his federal student loans this year, so he is considering getting private loans as well. Would you recommend this?
ONE: As college costs rise and more undergraduates reach the federal student loan limit of $ 12,500 per year, many are now turning to the private student loan market. In fact, this market has grown by more than 70% in the last decade to more than $ 130 billion, according to the Student Borrower Protection Center. However, we recommend caution before resorting to private student loans.
First, private loans, unlike federal student loans, are not accompanied by forgiveness schemes or any kind of mortgage relief. In this case, the current pandemic for student loan payments due to the pandemic only applies to federal borrowers – not to private borrowers. It’s just that private student loans are less flexible and come with less protection.
In addition, private student loans can be more expensive. The latest figures from Bankrate show that a direct federal undergraduate loan is currently set at 3.73%, while private loan interest rates could be fixed or variable and currently range between 0.90 and 12% ( or even higher).
Allworth’s advice is that if possible, your son should look for other ways to supplement his college expenses, perhaps through scholarships, grants, or even part-time income. But we understand that this may be easier said than done. Therefore, we will also warn that his difficult position may mean that he is over-indebted and / or goes to a school that is out of budget.
Each week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend or family member have a problem or problem with money, you can send these questions to firstname.lastname@example.org.
The answers are for informational purposes only and individuals should consider whether any general recommendations in these answers are appropriate for their particular circumstances based on their investment objectives, financial situation and needs. To the extent that a reader has any questions about the applicability of any particular issue discussed above to their individual situation, they are encouraged to consult the professional advisor of their choice, including a tax advisor and / or lawyer. Retirement planning services offered through Allworth Financial, an SEC-registered investment advisor. Securities offered through AW Securities, registered stockbroker / trader, member of FINRA / SIPC. Call 513-469-7500 or visit allworthfinancial.com.