Outside-IN

Clients facing late-career job loss can tap 401(k)s early

The 'Age 55 rule' is a little-known strategy that provides income without the IRS penalty

Oct 27, 2017 @ 4:00 pm

By Gina Bolvin and William Bernarduci

The unemployment rate continues to tick down, close to what many economists consider the level of full employment. That's a testament to both the relative strength of the economy and business' willingness to hire.

For sure, the recovery from the financial crisis was sometimes — and, in some cases, continues to be — frustratingly slow, but the U.S. labor market is undoubtedly healthy, and post crisis it's never been easier for qualified workers to find a job.

Nevertheless, layoffs, as we all know, are a fact of life. Countless newspapers, for instance, have been forced to slash jobs in recent years, as have firms in a host of other declining industries. Even prosperous companies such as Microsoft have announced layoffs this year. When cutbacks occur, typically it's the most senior employees who feel the brunt of it, since they tend to make more money than their younger colleagues, which provides companies the best opportunity to save.

EXPENSES MOUNT

When clients are confronted with a job loss, they often look to their 401(k)s and IRAs to obtain additional income to cover their expenses. Many have saved a substantial amount but early withdrawals come with taxes and penalties. Often, a client's best option depends on their age rather than their account value.

At 59 1/2, a client can take penalty-free withdrawals from their retirement savings. However, a withdrawal from an IRA or 401(k) before that age may be subject to an additional 10% penalty – one of the last things an unemployed worker needs. There are some solutions.

For those under 59 1/2, help can be found in the so-called "Age 55 Rule," a little-known IRS exception. In fact, many advisers and even some tax specialists are unaware of it. The Age 55 Rule allows individuals who separate from their company at age 55 or older to take penalty-free withdrawals from their 401(k). That's the kicker: the rule doesn't apply if the plan participant rolls over their 401(k) into an IRA.

FLEXIBILITY

The Age 55 Rule offers employees a flexible way to cover their income needs. Under the rule, a former employee or retiree can withdraw as much or a little as they want. Notably, how an employee separates from the company doesn't matter. The rule applies whether an employee was laid off, resigned or fired. These penalty-free distributions can help a client transition to a new job or bridge the gap until they reach 59 1/2.

It's important to be well-versed in the Age 55 Rule, particularly in light of the DOL's newly introduced "best interest" standard. In many circumstances, a client may save thousands of dollars in unnecessary penalties by keeping some or all of their retirement savings in their employer's 401(k).

For advisers, this is the right thing to do – even though it likely means missing out on some opportunities to capture rollover assets. Advising clients on the benefits of this IRS exception adds significant value by providing a helpful safety net and income strategy when clients need it most.

Gina Bolvin is President of Bolvin Wealth Management Group. William Bernarduci, J.D., is a wealth adviser there.

0
Comments

What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Featured video

Events

What can advisers learn from the first female fighter pilot?

Pressure is pressure. Whether you are taking off from an aircraft carrier or dealing with the unforgiving movements of the market, you need to have a plan. Carey Lohrenz, the world's first female F-14 pilot, has some advice for advisers.

Latest news & opinion

10 most affordable U.S. cities for renters

Here are the U.S. cities that are most affordable for renters, according to Business Student.com, which compared the cost of rent to average salaries.

9 best - new - financial adviser jokes

Scroll through for nine new financial adviser laughs.

Fidelity CEO says zero-fee funds aimed at expanding its universe

Johnson says way to prosper in financial services is 'by building relationships.'

SEC advice rule contains a huge hole

Jay Clayton aims to clear up investor confusion by drawing a distinction between brokers and advisers in the agency's proposed package of revised standards. But where do dual registrants fit?

9 signs it's time to fire your client

Here are signals that a client should be asked to leave, according to experienced financial advisers.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print