401(k) Loan Better Than Cashing In
Q: I want to buy my first home. Can I tap my 401(k) account for a down payment without facing a penalty? I thought I read that this was now allowed.-- M.S.E .
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A: You may be allowed to tap your 401(k) account for your down payment, but you will still face a penalty. Congress has indeed talked for years about eliminating the penalty for first-time buyers, but no action has been taken.
Here’s the way things stand: In general, the government allows hardship withdrawals for unreimbursed medical expenses; purchase of a principal residence; college tuition for you, your spouse or children, and payment of household rent or mortgage where eviction or foreclosure is threatened. Your company’s plan may accept additional hardship claims such as funeral expenses, legal bills and loss of income caused by disability or a spouse’s layoff.
However, even if you have an accepted hardship case, taxpayers under age 59 1/2 who withdraw funds from their 401(k) plans are, with limited exceptions, still subject to the 10% federal and state early withdrawal penalties. (In California the penalty is 2.5%.) Buying a home, whether or not it’s your first, is not one of the penalty exceptions. In addition to the penalties, hardship withdrawals are now subject to 20% automatic income tax withholding by the federal government.
If you still want to make an early withdrawal, your first step should be to contact your employee benefits office to learn how your company handles hardship withdrawal applications. Be prepared to be told that your application could take two or more months to process.
You should also expect to explain the need, provide detailed family financial data and certify that you have no other financial resources to cover this hardship.
Why not consider, instead, a loan against your 401(k)? It’s probably a better alternative than an outright withdrawal. Check with your employer to determine if your company permits such loans; not all do.
There are limits to how much you can borrow against your 401(k) account before the loan is considered a taxable withdrawal. In general, the IRS and the Department of Labor allow you to borrow 50% of the account balance, to a maximum of $50,000. Unless the loan was taken out to purchase a home, it must be repaid within five years.
Methods of determining the loan’s interest rate should be detailed in the description of your company’s plan, which your employee benefits or human resources department should be able to give you.
For more information about 401(k) plans, consult Internal Revenue Service Pub. 575. To order, call (800) 829-3676.
How to Make Contact With Investor Group
Q: How can I reach the National Assn. of Investors Corp.?-- T.R .
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A: This organization, which has overseen the creation of thousands of individual investment clubs across the nation, can be reached by calling (810) 583-6242. Or write to 711 W. 13 Mile, Madison Heights, Mich. 48071.
Spousal Benefits Await Age Limit
Q: My mother is seven years older than my father and never worked outside the home. Consequently she is unable to collect Social Security on her own earnings.
How can she qualify for spousal benefits? Must she wait until my father reaches retirement age, or may she begin collecting when she turns age 62 or age 65?-- P.H.
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A: Spousal Social Security benefits are available only when the taxpayer on whose account the benefits are drawn actually begins receiving benefits. Until your father begins drawing benefits, your mother is ineligible for spousal Social Security benefits. However, once your father turns 62, your mother is eligible to register for Medicare coverage on his account. For Medicare coverage, the wage earner need not be drawing benefits.
By the way, if your mother had her own benefits to claim, she could begin drawing them as early as age 62. She could then switch to spousal benefits, if those were larger, when your father begins drawing Social Security. If she began drawing her own benefits at 62, she would not be entitled to collect the full 50% spousal benefits when your father enrolled. If she waited until age 65 to begin drawing her own benefits, she could switch to full 50% spousal benefits upon your father’s enrollment.
Job Does Not Affect IRA Withdrawal Rule
Q: I am about to reach age 70 1/2 and must soon begin making mandatory withdrawals from my individual retirement account. At the same time, I plan to continue working.
Is the amount I must withdraw affected in any way by the fact that I am really not retired?
Also, when I do retire, may I withdraw more from my IRA? -- B.R.S .
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A: The fact that you continue to work does not in any way change the minimum amount you must withdraw from your IRA. That minimum is determined by the system of disbursement you have chosen as well as by your age and that of any beneficiaries on your account.
Because the mandatory disbursement is only a minimum amount, you are generally allowed to increase your withdrawal at any time without penalty. (Disbursements of $150,000 and up could face penalties.)
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Money Talk normally appears on Sundays. Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
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More on Buying Government Bonds
* Unsure how to buy and sell U.S. Treasury securities? Times on Demand has prepared a compilation from the Money Talk column of answers to the most-asked questions about T-bills, T-notes, T-bonds and Savings Bonds. The package includes estimates from Econday on treasury sale dates. To order, call (800) 440-3441. Order Item No. 2838. To order by mail, send a check to Times on Demand, P.O. Box 60395, Los Angeles, Calif. 90060. Cost: $4 plus $1 delivery. Please allow two weeks for mail delivery.
