Avoiding tax on your 401 (k) part two

March 10, 2022 - Douglas Myser

Avoiding tax on your 401 (k) part two. Given the governmental need for more revenue, due to the increased spending on the once in a generation health crisis, the Retirement Plans of Americans have come under scrutiny from the Congress, as a way to bridge the funding gap. And 401 (k)s are in the cross hairs like all other retirement plans. You cannot take tax free distributions, but a few ways do exist to dip into the resources of your retirement in a 401 (k) tax free. Neither of these methods are considered distributions. As distributions come under the rules for taxing a 401 (k). You don't want to run afoul of that, as many did during the Covid pandemic, who now need Tax Resolution Services, and may want to explore the IRS Fresh Start Program. Avoiding tax on your 401 (k) part two.

The way you can obtain your 401 (k) funds without the early penalty, is by taking out a loan on the 401 (k). You simply borrow money from the 401 (k) and designate it as a loan, which you will have to payback at a later date, or penalties will apply. The other method is the 401 (k) rollover. The Revenue Code allows you to rollover the 401 (k) into another investment vehicle. By doing this you can then take money out of the new account, without incurring the 401 (k) penalty associated with an early withdrawal. Both of these methods need to be done carefully, so as not to break any of the rules for doing this, otherwise you may end up with a large tax debt from the IRS and possibly a IRS Wage Garnishment.

If you are unsure about how to do this, you may want to consult with your Financial Advisor, who set the plan up for you to begin with. A bit of caution prior to doing this, and doing it right is good medicine.