October 07, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to email@example.com
Carl from Lawrenceburg: I’m 56 and hoping to retire soon. Will I be penalized for taking money out of my 401(k) early?
Answer: As you allude to, the general rule for withdrawing money from your 401(k) penalty-free is that you must be at least age 59 ½. Otherwise, you have to pay a 10 percent penalty. But of course, as they say, there’s an exception to every rule.
If you leave your employer in the year in which you turn 55 (or older), the government allows you to take withdrawals from that sponsoring employer’s 401(k) plan penalty-free (you’ll still have to pay ordinary income tax on the withdrawals). This is called the “separation from service” rule, and it applies no matter if you retire early, are fired, or laid off.
(Note: if you’re a qualified public safety employee using a qualified governmental benefit plan, you can withdrawal money penalty-free if you leave your job in or after the year you reach age 50.)
However, if you roll over your 401(k) into an IRA, you lose access to this special rule. IRAs don’t come with leniency, meaning the earliest age in which you would be able to withdraw money without penalty would climb back up to 59 ½. So, if you would like to take advantage of the separation from service rule, be sure to keep your money in your company’s 401(k) plan.
Given your situation, it would also be a good idea to work with a trusted financial advisor, such as a CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Consultant®. He or she can help you figure out if it’s even worthwhile to tap this 401(k) money now. Maybe prioritizing a different income source first would make more sense, especially from a tax standpoint.
Here’s The Simply Money Point: If you’re retiring early, you should be able to get access to your 401(k) money at your current employer without penalty via the separation of service rule. If you decide to go this route, be sure to check with your 401(k) plan administrator to make sure you’re following all the proper rules.
Chris in Fairfield: I just saw that credit freezes are now free. If I go ahead with this, will my current credit lines be affected? And what do I do if I want to take out a loan?
Answer: For years now on our Simply Money radio show, we’ve been huge proponents of credit freezes. They’re one of the easiest – and now cheapest – ways for you to proactively protect your personal information from identity thieves.
As a refresher, a credit freeze is a way for you to ‘lock down’ your credit file so identity thieves can’t open new accounts in your name. Before September 21, 2018, you had to pay a fee to all three credit bureaus (TransUnion, Experian, and Equifax) to do this, and fees varied by state. But now, thanks to the ‘Economic Growth, Regulatory Relief, and Consumer Protection Act’ Congress passed in May, all credit freezes, no matter the state you live in, are free.
The concern you mention is one of the myths about credit freezes we hear time and time again. So, let’s set the record straight: placing a credit freeze on your credit file does not impact any current lines of credit you have open, such as credit cards.
Once you place a freeze at each credit bureau, you’ll receive a PIN from each bureau. Do not lose these! If you plan on taking out a loan at some point, you need to use each respective PIN to ‘unfreeze’ your credit (this is now also free) so the lender can run the credit check. Just be sure to re-freeze your credit once the lender is finished approving you for the loan.
The Simply Money Point is that while credit freezes aren’t going to stop all types of identity theft, they’re a great start for better protecting your information. And, now that they’re free, there’s no excuse not to put them in place. Visit TransUnion.com, Equifax.com, and Experian.com to get started.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or firstname.lastname@example.org.