Originally Posted by
Nightflyer
Are there any tax implications to this?
In other words, can you take out only the money you have already paid taxes on?
Several years ago, one guy told me you could. Another guy told me they had changed the rules, and you had to take out a mixture of after tax money (what you had put in after taxes) and earnings on that money. You would then be liable for the taxes on the earnings.
Also, is this a "borrow against your 401k" situation? Or can you just take out money and not put it back in?
I am thinking this might be a good way for some of us to save money for our kids' college.
Good idea or not?
Talking about your After Tax Contributions to the FedEx 401(k) which is called the Federal Express Corporation Pilots' Retirement Savings Plan:
Today, you can no longer specify the type of money you take out contributions versus earnings. Your contributions are tax free, but your earnings are not. And, if you're under 59 1/2 you will suffer a 10% IRS penalty on the earnings (not the entire withdrawal).
You are free to make up to two withdrawals a year of After Tax Contributions. (You can take loans out against your 401(k) itself, but this money must be repaid. You will suffer tax consequences if you don't repay a loan and you can suffer early withdrawal penalties if the loan wasn't done for a hardship.) But, in our case, we're talking about a withdrawal of money from your After Tax Savings--this money doesn't have to be repaid. You can log into Vanguard and go to the Employer Plans--Manage My Money--Manage My Loans and Withdrawals area. There you can see the amount of the After Tax Contributions you've made that are withdrawable.
Let's say you have made $20,000 of contributions over the years to After Tax Savings. And, during these years, you've made a $5000 gain. Your account would show you have $25,000 available to withdraw. Let's say you decided to take $12,500 out and send it to your bank account. There is no way to specify contributions versus earnings to be withdrawn, so Vanguard will assume (this is simplified, but the numbers are close) $10,000 is non taxable and $2,500 is taxable. You will receive a 1099 at the end of the year for your tax return. The catch here is that while the contributions are not subject to tax or penalty, the EARNINGS are. You will pay tax at any age and a 10% penalty on the earnings if you take them out prior to 59 1/2. As part of this process you must choose how much withholding to take on your distribution with an IRS required federal minimum of 20% on the earnings. You aren't required to make a minimum withholding on state. Therefore, taking out $12,500 of $25,000 After Tax Savings will result in $2,500 of taxable income and a 10% penalty on the $2,500 = $250 if you're under 59 1/2. You must take a minimum 20% withholding on the earnings which is $500. Therefore, your amount deposited in your bank account is $12,500 - $500 = $12,000. At tax filing time, you'll have to pay/account for the penalty of $250 if you're under 59 1/2. You could also avoid a penalty by rolling over your After Tax Savings withdrawal within 60 days into an IRA, or doing it directly on the Vanguard site.
If you're over 59 1/2 then After Tax Savings acts like a savings account in some ways. If you're under 59 1/2 when you make withdrawals, be aware of tax penalties on the EARNINGS.
Standard disclaimer: I am not a tax professional or attorney, if you have questions talk to one, or Vanguard.