At Ivy Ridge Asset Management, our financial planners understand how important your 401(k) is to you. When you make a point to invest in your retirement savings plan, it allows you to save a piece of your paycheck before taxes are taken out which can lead to beneficial tax breaks and employer contributions. While a 401(k) can help you save, there are a variety of restrictions and caveats that can result in costly penalties and fees. To ensure you avoid the 401(k) tax tsunami, our team of experienced financial advisors has compiled a list on how you can work to bypass unnecessary and costly 401(k) fees.

Early Withdrawalsdreamstime_xxl_12880616

If you’ve been saving money in your 401(k) consistently over the long term, you’ve probably already accumulated a large sum of money in your retirement plan. This money is meant to be a nest egg for your retirement, and it is often discouraged that you tap into these funds prematurely to ensure financial security down the road. If you face an emergency and find yourself dipping into these funds before the appropriate retirement age of 59.5 years old, the Internal Revenue Service will assess a 10 percent penalty for your early withdrawal. In order to avoid these fees, there are a few workarounds you should consider before taking money out of your retirement plan.

Hardship Withdrawal

Hardship withdrawals are one of the only ways to take money from your 401(k) distribution before you reach retirement age. Despite its name, this type of withdrawal can still be subject to a 10 percent penalty, in addition to income taxes owed, except for a few small circumstances. Some of these special circumstances can include things such as medical expenses, funeral expenses, college tuition and even a downpayment on a home. If you lose your job at the age of 55 or later, you won’t be required to pay the 10 percent penalty on withdrawals from the 401(k) associated with that career.

If you receive a hardship withdrawal, your financial institution will send you a 1099-R form that will show the amount of your 401(k) taken, indicating the reason for a penalty waiver in box 7. If you find that you are eligible for a waiver and the 1099-R does not indicate an exception code, you may need to file Form 5329 to claim the exception. Once everything is taken care of, your withdrawal will be reported as income on your federal and state tax return forms.

Rollover To IRA

If you find yourself in a financial hardship due to changing jobs, you can move money out of your 401(k) by transferring the funds to an IRA. When you rollover your 401(k) balance to an IRA, it’s important that you transfer your savings directly from the 401(k) to the main custodian of the new account. If the check from your former employer is made out to you, twenty percent of the total will be withheld for income tax. If you don’t submit the entire sum of your savings into a new retirement account or IRA within 60 days, including the twenty percent being withheld for income tax, any missing portion will be considered a distribution and you may be stuck with an early income tax penalty and withdrawal penalty down the road.

At Ivy Ridge Asset Management, we’ve helped hundreds of people successfully rollover their 401(k) to a new retirement plan or IRA. Since this process can be extremely complicated, any missteps may trigger expensive penalties and taxes. Instead of trying to figure out everything on your own, contact our experienced financial planners today.


If your 401(k) plan allows you to take loans from your retirement savings account, you may have the option of repaying the money back over a certain period of time, with interest that you pay to yourself. While this type of loan may seem appealing to many people, there are some downsides to it. A major problem with a 401(k) loan is that if you leave your current employer for any reason while the loan is being paid back, the entire loan generally becomes due and payable within a very short amount of time. If you don’t have the funds to pay the remaining amount of your loan in full, you may end up paying both taxes and penalties on the outstanding loan amount.

dreamstime_xxl_1822591Substantially Equal Payments

According to Section 72(t) of the income tax code, you’re allowed to withdraw money from your retirement savings plan before retirement age under certain conditions. You must take substantially equal payments over a certain period of time, with the minimum being five years. While you are still required to pay taxes on each withdrawal, you can avoid unnecessary penalties and fines. This is a great option for those who want to retire early and need the additional income to monthly pay bills. You may also have the option of structuring your withdrawals over your entire life expectancy to avoid fees and penalties.

First Time Homebuyers

At Ivy Ridge Asset Management, we’ve worked with hundreds of first time homebuyers to successfully put a down payment on a home. The IRS allows many first homebuyers to take money out of their 401(k) to use as a down payment on a home, without having to worry about paying the 10 percent early withdrawal penalty.

Medical Expenses

If your medical expenses exceed 7.5 percent of your adjusted gross income or you’re a permanently disabled, the 10 percent penalty for early withdrawal of your 401(k) will be waived by the IRS. While you’ll still have to pay any tax owed on the distribution, you’ll be able to deduct finances from your retirement account at your own will to a certain extent.

Ivy Ridge Asset Management is proud to be a leader of financial planning services in Rhinebeck. If you need assistance when it comes to making sound financial decisions regarding your 401(k), contact our financial advisors today!