The IRS collected more than $5 billion in 2011 from penalties incurred by taxpayers who withdrew money from tax-deferred retirement accounts before the age of 59 1/2. The people who pay the penalty include younger workers who switch jobs and don’t bother to roll over their accounts and older workers who believe they have no place else to turn. The cash out factor occurs among all age groups:
Time for a more liquid, IRS penalty free option?
Companies are starting to consider more liquid options. One option is a “Permanent Benefit Section 79 plan”. The element of Section 79 plans most companies are familiar with is the group term insurance. You probably have this at your company now. (People usually get 1.5 to 2.5 times their income.) But section 79 also allows you to create a benefit plan using the right type of permanent insurance that can provide cash value that is more liquid than a 401k and can be accessed before age 59.5 without penalty.
Like a 401k, the plans can provide supplemental retirement income but with the added bonus that distribution from section 79 plans can be used to provide tax free income.
Also, the life policies used in Section 79 can provide important living benefits such as critical illness coverage for things like heart attacks and cancer, chronic illness coverage for long term care medical needs and of course the life insurance benefit for protecting the family.
When an employee leaves the company, the plans are portable. This is the main time people cash out their 401ks and get hit with penalties. Depending on how long the Section 79 plan has been funded the employee could access their available cash value without IRS penalties.
However, the real goals of any retirement plan or benefit is to provide retirement income, security and protection. Since the 79 plan bundles tax free supplemental retirement income, life insurance protection for loved ones, critical and chronic illness protections – employees have strong incentives not to cancel the plan. Which is a good thing.
To learn more about the benefits and challenges of Section 79 plans you can request a free whitepaper by calling me directly at 602-326-3435 or by sending me an email here: http://wealthforlife.net/contact-us/