Key Retirement Account Rules to Remember

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Oct 01, 2019

While the definition of retirement may change from person to person, qualified retirement savings plans are centered around three key terms. Knowing them and what they mean to you BEFORE you retire are some of the keys to a successful retirement.

Catch-up contributions. When you are age 50 or older, you can choose to make additional contributions to your retirement plans above the usual annual limits. For 2019, maximum catch-up contributions are:

  • $6,000 when you participate in a 401k, 403b and 457b
  • $3,000 for your SIMPLE IRA or SIMPLE 401(k)
  • $1,000 for traditional or Roth IRAs

Planning tip: Each year is a separate savings opportunity. If you fail to take advantage of the catch-up contribution this year, the tax opportunity is lost forever. To help find the money to take advantage of catch-up contributions, track your monthly expenses and identify where you can save a little money. Use this extra savings to fund your catch-up contribution.

Hardship withdrawals. The IRS defines a hardship withdrawal as taking money from a qualified retirement account for immediate and heavy financial need such as medical or funeral expenses. While hardship withdrawal is defined by the IRS, the availability of the distribution still resides with the program administrator and the rules of your plan. This is your employer with 401(k)s and 403(b)s. It is important to note that hardship withdrawals are separate from the early withdrawal penalty. The amount you withdraw is not a loan, so you will not be able to pay the money back to your account. Instead, hardship withdrawals are income to you and may be subject to an early withdrawal penalty. They may also limit your ability to make contributions to your account for some time after taking the hardship distribution.

Planning tip: There are several exceptions to the 10 percent penalty that may or may not align with the reasons for hardship withdrawals. For instance, you might be able to avoid the penalty on early distributions from a 401(k) to pay emergency medical expenses, but not to pay your child’s college tuition for the upcoming school year.

Rollover. A rollover is a transfer of assets from one retirement plan to another. To keep the transaction tax-free, you generally must deposit the assets into the second plan within 60 days. Not all withdrawals are eligible for a rollover. Hardship withdrawals are an example of rollover-ineligible funds.

Planning tip: Consider a direct rollover to avoid taxes and penalties. An indirect rollover (when you request a lump-sum distribution and then take responsibility for completing the transfer, rather than instructing your assets to be sent directly to your new employer) typically has harsh tax consequences.

Questions about how any of this relates to your retirement accounts? The accountants and investor advisor representatives at Terry Lockridge & Dunn and World Trend Financial are ready to assist you. As always, feel free to reach out to them should you have any questions or concerns regarding your situation