And, while its true that an employee cannot withdraw from an IRA, it can be confusing to learn that an employee may withdraw the post-tax money invested in a Roth IRA or use an SDIRA for real estate investing
With the cost of living continuing to increase, and many wanting to take advantage of a real estate market that may be moving towards peak prices, Employees may be wanting to access some of their retirement funds, rather than take loans. While financial advisors may caution employees away from loans, it could be helpful for plan sponsors to know what information is out in the media making rounds. By doing so, plan sponsors can help dispel myths and create education materials for their employees on this important topic.
The first important element for plan sponsors to know is what employees are hearing about how the laws have changed. Employees may borrow against a 401(k) so long as they repay the 401(k) within a certain time frame. A new law allows employees to have more time to repay those loans. Currently, employees who leave or are terminated from their jobs must repay the balance of their loan within 60 days to avoid having the amount they withdrew treated as a taxable distribution. Now, the employee has until the date of their tax return on the year they left the job, which could be many months longer.
Additionally, employees may be confused about which accounts they can borrow from. While retirement laws allow for loans from 401(k) accounts, they do not allow for loans from Individual Retirement Accounts (IRA). Only distributions are allowed from IRAs under Internal Revenue Service rules. The IRS treats a withdrawal without subsequent deposit into qualified account as a distribution. In other words, if an employee takes money out of an IRA and don’t move it directly to another account, that employee could be hit with a significant fine.
Except, of course, for the exceptions. The IRS does allow for loans from IRAs for funds used for the first time purchase of a home. The IRS also allows for loans from an IRA for use in paying tuition (and books) for children and grandchildren.
And, while its true that an employee cannot withdraw from an IRA, it can be confusing to learn that an employee may withdraw the post-tax money invested in a Roth IRA without penalty so long as the employee puts the same amount as contributed in a tax year. Employees may be reading articles about how to use Roth IRAs as emergency funds.
And what also might be confusing for employees is the concept of a self-directed IRA. A self-directed IRA involves accounts that are administered by custodian who takes direction from the account holder. SDIRAs allow for a broader range of investments, including real estate and LLCs. If this was conveyed simplistically, it could sound like an employee could buy a house with funds from an IRA (instead of investing in real estate through an SDIRA). In the case of an SDIRA, purchases of real estate have to be arm’s length – meaning, no family members can use it or live in it.
While withdrawing from a 401(k) may be disfavored, there are circumstances that may warrant cashing some retirement funds in. The IRS allows for a hardship withdrawal under some circumstances. The circumstances that allow for hardship withdrawal are usually in the plan documents. Employees should know that even if the plan document allows for withdrawals, the IRS may still impose penalties for withdrawals. And if an employee misses a payment, the IRS may consider the remaining balance on the loan to be a distribution and treat it as such for tax purposes. Loans from 401(k)s also make sense when the alternative is to continue revolving high interest credit card debt.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.get xpress proposal