Monday, February 27, 2006

Defined Contribution Plans: 401K's and IRA's

Some companies have attracted public notoriety by not allowing employees to sell shares of company stock in their 401Ks, a factor in the tremendous losses suffered by some employees in a few corporate scandals and collapses.

Generally, one can start 401K withdrawals without penalty after age 59-1/2. However, if one wants a periodic “systematic withdrawal option” many times the periods are limited to rather long payouts, either five or ten years. One can often roll over the fund into a pension IRA which is likely to offer a faster withdrawal (such as three years). Once the withdrawal is started, it may not be possible to stop it. This could lead to higher tax brackets for the retiree if he or she (perhaps unexpectedly) finds a high paying job or other major taxable income sources in the immediately following years. This would also effectively raise the tax rate on social security payments should they be started early (up to the maximum 85%) since the withdrawal income would be added to the social security income before determining the rate.

For a retiree with no work income, the amount of withdrawal might matter to retirees who need to demonstrate “income,” for example, in qualifying for an apartment. Property managers vary in their attitudes towards seniors who may have varying saved asset amounts but limited ability to earn more money through conventional work.

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