Dear 401(k) Hotline,

I am a 35-year old married woman with three kids. Due to downsizing, I recently got laid off. Fortunately, I've been lucky enough to find another job.

Since I was employed for over 7-years with my previous employer, I have accumulated over $12,000 in my 401(k) plan. It hasn't been easy, but I've managed not spending of it.

My question is: My husband and I have been discussing the possibility of cashing in my 401(k) plan to purchase a minivan. Each time we cram our softball equipment into my car's trunk, we dream of a new minivan. But if I take the money now, I would have to pay taxes on it, right? And I've been told there would be penalties, right? I've worked hard to save what I have and would like to avoid paying taxes as long as possible. What to do?

--Karen

The question you need to ask yourself is "What do you want to do?" "Do you want to take the money now or invest the money for later and defer taxes?"

Although the minivan sounds like a great idea, an individual your age could potentially loose a large chunk of your savings to federal income taxes and penalties. By electing a lump-sum distribution, your previous employer would be required to withhold 20% of your distribution towards taxes. And because of your age, the IRS will impose a premature distribution penalty of 10%. Of course, this is in simplistic terms, but I'm sure you get the idea. Please consult your financial and/or tax advisor prior to making any decisions.

If you are looking to defer taxes and allow your savings to continue to grow tax-deferred for retirement, then I suggest considering a Rollover IRA. This way you avoid the withholding and penalty previously mentioned if processed properly.

--Jonathan Beitler, 401(k) Hotline

Steve

Dear 401(k) Hotline,

   I am a 50-year old hardware store manager who has taken advantage of my employer's early retirement offer. I've been given a choice of taking a $100,000 lump-sum distribution or receiving regular monthly payments for the rest of my life. My question is: For some time now, I've been thinking about starting my own business. Should I take the $100,000 lump-sum or monthly payments for life? What should I do?

--Steve

Dear Steve,

You probably want to use some of this money as income while you are starting up your new business. That might make monthly payments from your employer's plan look attractive. But remember, if you get the same amount every month for the rest of your life, the effect of inflation means every month it buys a little bit less.

You may want to consider transferring that money directly to Rollover IRAs to get the most flexibility. Yes, IRAs. By opening several IRAs and taking advantage of IRS code 72(t), you can create the income needed while your business gets on its feet. The reason for opening several IRAs is because once you've started receiving periodic payments, you must continue the schedule for a period of 5-years or until you turn age 59 ½, whichever comes last. Any modification can result in having to pay the 10% premature distribution penalty, plus income taxes. Of course, this is in simplistic terms, for specifics please consult your financial and/or tax advisor prior to making any decisions.

--Jonathan Beitler, 401(k) Hotline.

Rosie

Dear 401(k) Hotline,

I am a 65-year old librarian who has spent much of the last 40-years helping children, at the local elementary school, find books and reference material to do their homework. Now during retirement, I would like to relax and maybe try writing children's books.

My question is: I don't plan on going back to work, so I'll be needing my savings to work for me as well as provide me with a retirement income stream. I also want to be able to have access to the money in case needed for publishing a book. What should I do?

--Rosie

Dear Rosie,

Since you are not returning to work, you can put your money right into your regular IRA in order to have your investments continue with their tax-deferred basis. And because you are over age 59 ½, you can start taking distributions out right away if you want or need, with no penalties. Please keep in mind that distributions will be subject to federal income taxes.

--Jonathan Beitler, 401(k) Hotline