We all plan and prepare for what lies ahead of us, but can we
truly know what our future holds?
In all of our planning, we never seem to account for that Mack
truck barreling down the freeway, out of control and on a
direct path for our vehicle.
MEET THE MACK TRUCK
Following is a real life example of someone whom I will refer
to as Jane.
In March of 2000, the Mack truck hit Jane in the form of the
Dot Com Crash. Through no fault of her own, her dreams came
crashing down around her.
Jane is a well-educated woman, who had planned her future well
and was living the dream. She went from flying high in the Dot
Com frenzy, pulling in a cool six figure income, to crashing
into the hard reality of unemployment.
WHAT ABOUT THE SAFETY NET?
In times past, Jane had managed to bounce back from adversity to
continue living the dream. Yet, this time around was different.
An astute planner, she curtailed her family spending to cushion
the fall. Still, it was not enough. The mortgage, insurance and
car payments were taking their toll on her savings.
Six months into unemployment, Jane decided to start her own
consulting company. Although she was able to pick up a few
clients, the income she generated simply was not enough to
pay the bills.
For the first time in her life, she was delinquent paying her
bills. She feared losing the lights and even her home.
THE LAST STRAND OF HOPE
A year had gone by, her credit was maxed out and her savings
depleted. Jane's 401(k) account had become her final hope.
Would her 401(k) savings be enough to get her back on her feet,
allowing her to keep her home, her car, and to keep her dream
alive? Or would she lose everything?
WHAT ABOUT YOU?
What would you do if you were in Jane's shoes? Would you have
been able to pull out of the dive and save your life's work
and dreams?
THE HARD TRUTH ABOUT EARLY WITHDRAWAL
With a 401(k) program, the money that we contribute is
tax-deferred until we withdraw the money. Because the 401(k)
is a retirement savings program, the government frowns if we
withdraw our money early.
In fact, if you were to withdraw your money prior to the age
of 59 1/2, then you will pay to Uncle Sam not only your
regular tax rate, but also pay a 10% early withdrawal penalty
tax. Ouch!
A HYPOTHETICAL EXAMPLE
Hypothetically, you could pay a combined total of 40% in
federal, state and local income taxes plus the 10% penalty.
A $50,000 withdrawal would cost $25,000 between taxes and
penalties.
That is definitely a big OUCH! It pains me to realize what Jane
had to give up to find the money she needed to get her through
her most difficult time.
Your tax or legal professional can advise you as to what tax
rate you could expect to pay.
FAST FORWARD TO 2002
In 2002, new tax laws made it advantageous for retirement plan
providers to introduce the self-employed 401(k). A self-employed
401(k) is available to you if you are in business for yourself
or with your spouse and have no employees.
Under the current tax code, you can rollover your IRAs or 401(k)
to a self-employed 401(k) plan. Some plans allow you to borrow
up to 50% of your account balance for a maximum loan amount of
$50,000.
If only Jane could have survived until 2002 without tapping her
retirement savings, then her present financial picture could
have been much different.
Let me explain.
Had this option been available and taken advantage of, Jane
could have taken a loan for the full $50,000, against which no
taxes or penalties would have been levied. And her retirement
savings would have remained intact.
A 401(k) DEFENSIVE STRATEGY
It is my hope that you can avoid the Mack truck altogether,
but the truth is that not one of us can foresee what might
lie ahead in our paths.
With the self-employed 401(k) loan feature securely in place,
you will get the ability to use your retirement savings as a
rainy day fund, without the fear of having to pay any taxes or
penalties for the use of your own money provided you repay the
loan by the prescribed time.
If you are now self-employed or expect to be in the future,
please explore the self-employed 401(k) option now. Be sure to
ask about any fees to establish and invest in a self-employed
401(k).
It is your money! Protect it from the uncertainties of tomorrow!
www.investsafe.com contains information about a self-employed
401(k) plan with the loan feature.
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