SAVING FOR RETIREMENT


Ways to Tap a 401(k)

My house was damaged in a big storm, and I need to make major repairs, some of which won’t be covered by homeowners insurance. Most of my savings are in my 401(k). Can I withdraw money from the account to cover the costs? --K.K., Lambertville, N.J.

SEE ALSO: The Cons of Borrowing From Your 401(k)

You generally can’t withdraw money from a 401(k) until you leave your job. But because you need the cash for home repairs caused by storm damage, you may qualify for a hardship withdrawal. The rules for hardship withdrawals vary widely from plan to plan. Some plans don’t allow them at all. Others let you take up to the amount you have contributed if you need the money to satisfy a “heavy and immediate financial need,” according to the IRS, for major expenses such as home repairs resulting from a casualty loss (which includes storms, fires and floods), a home purchase or uninsured medical expenses. Your employer may require documentation of the cost.

There are disadvantages to most hardship withdrawals. Not only are you drawing down retirement savings, but unless the money comes from a Roth 401(k), it will be fully taxed in your top tax bracket and you will also owe a 10% early-withdrawal penalty if you are younger than 59 1/2. In most cases, you must stop making new 401(k) contributions for up to six months after taking out the money (that requirement was waived for Hurricane Sandy victims).

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Instead, take a 401(k) loan. Generally, you can borrow 50% of your balance, up to $50,000, for any reason without taxes or penalty, and you have five years to repay the loan. The interest goes back into your account. One caveat: If you leave or lose your job, you usually have just 60 to 90 days to repay the loan or it’s taxed and subject to a 10% penalty if you are younger than 55.

Grandparent-owned 529s

I’d like to open 529 college savings accounts for my grandchildren. Will this affect their prospects for financial aid? --J.B., via e-mail

A 529 owned by a grandparent is not reported as either a parent or a student asset on the Free Application for Federal Student Aid (FAFSA). That can be a big advantage because parents are expected to contribute up to 5.6% of their assets toward the college bills, according to the federal financial aid formula, and students are expected to contribute 20% of assets.

But as soon as the money from the grandparent-owned account is distributed, it is considered student income, as opposed to assets, and must be reported as such on the next year’s FAFSA, says Deborah Fox, president and founder of Fox College Funding, in San Diego. Students are expected to contribute 50 cents of every dollar of income toward college bills, after an allowance of about $6,000. (Some private schools use a different institutional formula that also assesses student income but does not provide the student allowance.)

To avoid that scenario, wait to make withdrawals until after the parents have filed the last financial aid forms -- after January 1 of the student’s junior year of college. Or turn the account over to the parents, if the plan allows it.

Using an agent to buy health insurance

My husband and I work in our own business (we have no other employees), and we need to buy health insurance. Would we have to pay extra to work with an insurance agent? --T.L., San Diego

You’ll pay the same premium for a health insurance policy whether you buy it through an agent or directly from the company -- the insurer pays the commission, not the insured. Most agents can provide quotes from several insurers. You can find an agent through the National Association of Health Underwriters, or go to www.healthcare.gov for a list of individual policies available in your area.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.

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