Misperceptions of the 401(k)

Initially, the 401(k) was designed as a supplement to traditional pension plans, but it later became a primary retirement savings vehicle.

Ted Benna created the 401(k). He was a benefits consultant who, in 1980, used a provision in the U.S. tax code (Section 401(k)) to create the first employer-sponsored retirement savings plan. The purported goal was to offer employees a tax-advantaged way to save for retirement while also reducing taxable income, which appealed to both employees and employers. However, tax deferred means taxed later, meaning most people are in a higher tax bracket when they retire, potentially increasing their tax liabilities at retirement age.

Withdrawing money from a 401(k) can incur taxes and a 10% early withdrawal penalty if you’re under age 59½. To mitigate these costs in order to fund a whole life insurance policy for banking, consider these strategies:

Strategies:

1. Direct Rollover to an IRA: Roll over the 401(k) funds into an IRA without tax penalties. You can then withdraw gradually or set up systematic withdrawals.

2. Use a 401(k) Loan: Borrow from your 401(k) without triggering taxes or penalties, then use the loan amount to fund the policy.

3. Wait Until Age 59½: If possible, wait until you reach 59½ to avoid the early withdrawal penalty.

4. Consider the Rule of 55: If you’ve left your job and are at least 55, you can withdraw from the 401(k) without the 10% penalty.

5. Use Substantially Equal Periodic Payments (SEPP): Withdraw using SEPP to avoid penalties, though taxes will still apply.

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