Can I take Hardship Withdrawals from my 401k?

10 09 2013

Jonathan N. Castle, MSFS, CFP

Jonathan N. Castle, MSFS, CFP

We recently had a question from a client about taking hardship withdrawals from his retirement plan. Essentially, the question was – what are they, and how do I do it? So, here is the answer we gave:

First, if you are past age 55, and are NO LONGER working for your employer – AND you have not taken the 401k and rolled it into an IRA – then you can make withdrawals from that account without the normal 10% early withdrawal penalty that typically accompanies these accounts. This is a special rule for qualified retirement plans and does not apply to IRA’s. In fact, if you roll the money to an IRA, you lose this provision and have to wait until age 59 and 1/2.

First – you must know that employers are not REQUIRED to offer hardship withdrawals – but usually they do because the plans are often “turnkey” and this feature is built in to turnkey plans. So, if you are still employed and need money from your employer retirement plan – then the simplest answer is that each plan usually has a feature to accomplish this. In many plans, you go onto the plan website, and look for “loans or withdrawals” and merely follow the procedure. If your employer plan does not have a website, or the website does is not set up to facilitate these online, then you probably have to complete a form with your HR department and/or the plan sponsor. You must certify that the Hardship withdrawal is for a purpose that falls within the allowable rules:

To buy a primary residence
To prevent foreclosure of eviction from your home
To pay college tuition for yourself or for a dependent
To pay un-reimbursed medical expenses for yourself or a dependent

Now there are also “exceptions” that do not fall into the hardship withdrawal category. They are literally as they sound – “exceptions” to the 10% penalty:

Medical debt for expenses that exceed 7.5% of your AGI
A court order for alimony or child support
You set up “substantially equal payments” for your life expectancy.

This last one – substantially equal payments – apply to IRA’s too, and are known as 72t distributions. Do not try to set this up yourself, consult with a CPA or a CFP because they are complex and the penalty for messing it up is quite harsh.

I hope this gets you onto the right path. Good luck with the obstacles you are facing!

Jon Castle

This blog is for informational purposes only. This is neither an offer to purchase nor sell any securities. All investing involves the potential of loss – including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. All information is obtained from sources deemed reliable but not guaranteed. Past performance is not a guarantee of future performance. No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256 (904) 861-0093

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements


How can I protect my 401(k) from the European Debt Crisis?

25 04 2012

Jon Castle, CFP, ChFC

What a question, huh?  This question seems to be on the minds of many investors these days.

Most economists are predicting that the European zone will suffer a period of slower than usual growth – or even short periods of shallow recession – as they try to work their way out of the debt crisis that they are currently in. Since we are, in reality, a global economy, this means that markets both here and abroad will likely be volatile and moderately stagnant for the next several years. It may well feel like we take 3 steps forward in the market, only to be followed by 2 steps backwards – for a while.

Morgan Stanley did a wonderful study called “The Aftermath of Secular Bear Markets” in which the authors of the study tracked the 19 major bear markets over the last century (only 4 were in the US). All major bear market corrections (defined as a market drop of 47% or greater) were followed by a rebound rally, (2009) then a mid-cycle correction (2010 & possibly 2011), followed by a period of 5-6 years of volatile, sideways behavior, before a new bull market started. So, based upon that historical precedent – we are about 2 years into the sideways part. (if you Google this study, you can read about it directly. Here is a link to see it visually:  Trading Range.  Note that the chart on this link was published in 2009, so the “we are here” mark is has moved 3 years to the right .  It was right on as far as predicting the mid-cycle correction(s) in 2010 and 2011.

The sideways part (the trading range of 5.6 years, on average) is the period of time where the economy heals itself, and goverments try to “unscrew” what went awry in the first place.  This is where we are now.  Likely you see daily evidence of this natural process – Democrats and Republicans squabbling over policy but not really changing anything, the Fed printing money, banks hoarding cash and trying to get their books in order, finger-pointing, governmental gridlocks, and daily predictions of great bull markets or terrible bear markets. While difficult to live through – this is actually part of the NATURAL healing process of a free-market economy. Once you realize where you are in the cycle, then it becomes much easier and far less confusing to stay the course.

So – to answer thequestion – the secret to being a successful 401(k) or other retirement plan investor in which you have to save money over time, and have, say,  10 or 12 or more years to retirement, would be:

1)  Build your portfolio to a risk tolerance that even if the market drops 20 or 30%, you will NOT freak out and will NOT stop investing.  That means you may have to have 30%, 50%, or even 70% of your money in the “safer” investments like government bond funds, or even cash.  A good rule of thumb is – whatever percent of your portfolio you have in the stock market – that is the percent that it will go down when the market corrects. So – if the market drops 20% (which it does every 3 years) – and 50% of your money is in stock funds – then your portfolio will drop by about 10%. (50% of 20% is 10%.)  If you can hang through a drop like that – but no more – and keep investing, then that’s your risk tolerance threshold (limit).  If your personal limit is more like 20%, you can build your portfolio more aggressively – like 70% stock funds, or maybe even a little bit more.  With 10 or 12 years to retirement, you’ve got plenty of time to make it up, so you can afford to be more aggressive.

2) KEEP INVESTING.  When the market goes down – and your portfolio goes down – but you keep investing – you are buying up shares of the funds ON SALE.  If you see a sale at a store – you wouldn’t throw away everything you bought previously, would you?  Then why do people do this with stocks or mutual funds?  If they are on sale – buy more!! Keep buying over time – during that volatile period that I mentioned above – and when the steady bull markets DO come back (they will – we just don’t know when) then you will likely be extremely pleased with your investments.

This blog post is not personal investment, financial, or tax advice.  Please consult your financial professional for personal, specific information.  Indexes mentioned are a general barometer of the stock or bond market they represent.  You cannot invest directly in an index.  Past performance is no guarantee of future results.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment adviser.

Should I Still Invest in a Crappy Economy?

20 09 2011

By Jon Castle, CFP®, ChFC®

It does not seem to matter who the potential investor is – whether they are already retired, are nearing retirement, or are a younger person with quite a bit of time until retirement… the question is often the same.  With interest rates being so low… with the markets unpredictible and volatile – what should I do?  The questions aren’t even really so straight forward as, “why should I invest my money now,” or “should I pay off debt first,” or even any of the other questions that, as a financial advisor for more than 15 years now, I’m used to getting.  The questions I am hearing now seem to have taken on the tone of confusion, despair, and a lack of direction, versus the questions I used to get such as “how should I invest,” or”what type of account – a Roth or a traditional IRA – should I have?”

Yesterday, when talking to a rather successful, nearly retired client on the telephone, she mentioned that she feels that she always has to take two steps backward for every three steps forward, and ideally, she would rather not see her account fluctuate at all once she retires next year.  “Isn’t there just something we can do with our money to earn a steady 6-8% or so with no risk?”  Unfortunately, the answer is NO.  While there might be many product salesmen out there who will try to convince you otherwise – the answer is still NO.   If there were -then all the institutions and large organizations in the world, who spend millions and millions of dollars trying to find or design such assets would have already found them.  A classic example of people and institutions trying to get outsized returns with no perceived risk is the recent mortgage debacle, and we saw how that turned out.

So – back to the original question – With the Economy on shaky footing (to say the least) and with the markets being… unusually volatile, to put it lightly – what should I do?

To answer this question, I had to turn to the history books, tenured academic research, and even some new research – but I think I found the answer.  Do EXACTLY what you have been told to do throughout the years.  Live below your means – save a portion of your income (assuming you are working and saving for retirement) and invest in a fully diversified portfolio designed specifically for your risk tolerance.  In fact – it is having the GUTS to invest during times like these that separate the winners from the… folks who wish they had as much money as the winners.

Last year, Dimensional Fund Advisors tapped into the database held at the Center for Research in Security Prices (CRSP) at the University of Chicago – the nexus of more Nobel-Prize winning research in economics than any other institution on the planet – to identify IF there was a direct correlation between a poor economy (as defined by low GDP) and poor investor returns.  In other words – SHOULD I STILL INVEST IN A CRAPPY ECONOMY?”

The Dimensional Study started by taking all of the world’s developed economies, examining their annual GDP growth from 1971 – 2008, and dividing them into two groups – High Growth, or Low Growth – for each year.  Clearly, much of what we hear on the news is about GDP growth – is our economy growing or not?  The higher the economic growth, the better – as this means reductions in unemployment, increases in personal wages, and, generally, a feeling of well-being, versus the cloud of general malaise that seems to have decended upon the world as of late.

Once the economies were divided into High Growth and Low Growth – the performance of their stock market indices was compared to their GDP Growth.  The question:  Does a poor economy (low GDP Growth) accurately predict poor investor returns?  The question was not – can an investor perform poorly during low-growth times (of course, we know that is possible) – but is there a clear and determinable correlation between a bad economy and a bad investor experience?

Oddly enough – the answer is NO.

                              AVG GDP                      AVG RETURN              Risk (Std Dev)

High Growth               0.92                             12.90%                          23.07

Low Growth               -4.02                            13.52%                          23.04

The data for Emerging Markets was similar, but quite honestly, the data for Emerging Markets only went back to 2001, and I felt this was just too short a time period to draw any reasonable conclusions.

When I first saw the data, I thought… well… this might be a sales pitch just to keep investors invested… we are still looking back only as far as 1971.  What about other periods of lousy growth?  And what about for the US in particular?  I wanted to check the data myself.  So, I delved into the CRSP database myself, using the French and Fama indices that go back as far as 1926, and to the Bureau of Economic Analysis (BEA.GOV) and compared hypothetical investor returns to the GDP growth (or lack thereof) during the 1970’s and during the Great Depression.

One particular period of interest to me was the years from 1972 to 1982.  Yes, this was after 1971, but I wanted to look at it further and in more depth from a portfolio manager perspective instead of just looking at the stock market.  How did it feel?  Remember the oil embargo?  Our defeat in Vietnam? The Cold War?  Carter’s “Misery Index?”  Double Digit Inflation?  During this period of time, the average GDP Growth was only 2.7% – well below the historical average of 3.4%.

The second period of interest was the period of the Great Depression.  Now the Great Depression itself lasted from 1929 to 1941 – but for this particular exercise, I wanted to look at the period starting about 2 and a half years AFTER the crash – starting with the summer of 1932 until the attack on Pearl Harbor, or December 1941 – the long, grinding years of the Depression.  During that period of time, our average GDP Growth was only 2.0% – the longest and weakest period of below-average growth on record for the United States.

My question was – how could today’s investors, using a properly designed, diversified portfolio,  have done during that time?  Were these two periods of time – arguably the worst periods (economically) in the past hundred years – a bad time to be invested?

Assume a relatively simple, domestic portfolio:  T-Bills (15%), 5-Year Treasuries (15%), US Large Stocks (11%), US Large Value, or underpriced, dividend paying stocks (21%), US Small Value Stocks (18%), US Small Stocks (10%), and Very Small, or Micro-Cap Stocks (10%).

Looking at the indices only (remember – there were VERY few mutual funds at the time of the Depression, and certainly no ETF’s,) we can get an idea of how an investor might have done.  The following numbers do NOT account for any fees, commissions, taxes, etc – but we can still draw conclusions.

From the period of 1932 – 1941, the above, simple, diversified portfolio (indices only) would have achieved an AVERAGE ANNUAL return of… wait for it… 19.29%!!  In fact one dollar invested as described above in the summer of 1932 would have grown to about $4.50 by December of 1941.  During the Great Depression!!

From the period of 1972 to 1982, the above, simple, diversified portfolio (indices only) would have achieve an AVERAGE ANNUAL return of… 14.82%!!  One dollar invested as described above in December of 1972 would have grown to about $3.49 by December of 1982.  During the Carter Years and the Misery Index!!

Were there periods of volatility, market corrections, and even stagnation in the investor’s portfolio?  Absolutely – in particular, a sharp market correction in 1936 would have scared out many undisciplined investors, and a particularly unpleasant 18 month bear market from 1973-1974 would have tested investor mettle.  But the facts remain – a fully diversified, properly balanced investor would have been able to achieve significant returns during those times.  In fact – there are a number of economic theories that suggest that investors who have the GUTS to invest (and remain invested) during these uncertain times are the ones who enjoy the GREATEST rewards.  These are the riskiest, most emotionally draining times to invest – as a result, the Capital Markets reward those investors more readily and more predictibly than the comparatively “timid” investors who only remain invested during the “good” times.

Today, the Fed and the International Monetary Fund (IMF) are projecting the US economy’s GDP growth to be about 2.7% for the next two years.  The media harps daily on the miserable shape of our economy, and politicians are using the economy as opportunities to further their agendas.  These are things that we must endure as a people, or change with our votes.

However – it is critical to SEPARATE our concerns about the economy – from our own INVESTMENT POLICY.  The two are NOT necessarily correlated.  A miserable economy – historically – does NOT mean miserable returns for an investor who is disciplined, creates a sound, diversified, low-cost investment STRATEGY with strict risk controls, and then implements it with courage and discipline.  In fact – it is EXACTLY these types of investors who have historically been the winners over the long term.


This blog article does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific information.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services provided by Paragon Wealth Strategies, LLC., a registered investment advisor.

How to own a property or business in an IRA?

8 02 2011

Occasionally we get this question – how can I use my IRA assets to buy a rental property or a business of some sort?  Many people over the years have accumulated assets in their company 401(k) and rolled them to an IRA,  or saved money in their IRA throughout their working years, but may have not accumulated any assets in other accounts – accounts not directly considered retirement accounts, and as such, not subject to all the special rules that govern retirement accounts.  As a result, they find it difficult to to invest in rental property or to finance a business startup because of a lack of readily accessible funds. 

So, the question is – how can I use the money in my IRA to buy these types of assets?  Can I?  The answer is – sort of.

The laws governing an IRA are designed to limit IRA’s to saving for retirement – but in exchange for following these sometimes burdensome rules, IRA’s allow for investors to accrue funds while enjoying some significant tax advantages.  Since retirement is the primary purpose of IRA accounts, IRA rules intentionally make it difficult to use IRA funds for any other purpose without suffering a 10% early withdrawal penalty (for withdrawals prior to age 59 and 1/2) and income taxation on funds withdrawn from the IRA.

There are specific exemptions from the 10% early withdrawal penalty, such as the exemption that allows an investor to use up to $10,000 for a first-time home purchase or for education purposes.  However, these exemptions typically do not really allow an IRA owner to finance a business or to buy a real estate as an investment tool.

Fortunately – for savvy investors – there ARE ways to get the job done.  As long as the IRA does not engage in “prohibited transactions,” or own “disallowed” investments – then an invesor can use IRA funds to start a business or to buy investment real estate – if he or she does it correctly.

First – the following transactions are considered prohibited within an IRA:

  • Borrowing money from your IRA
  • Selling your own property to your IRA
  • Using your IRA as security for a loan
  • Buying property within the IRA for personal use

Any of these transactions could result in your IRA being disqualified by the IRS – resulting in a forced distribution of the IRA with all taxes and early withdrawal penalties becoming immediately payable! So, first and foremost, an investor needs to carefully play by the rules governing IRA’s to avoid running afoul of the IRS.

Secondly – certain types of investments cannot be held within an IRA:

  • Collectibles (such as art, antiques, most coins, stamps, etc)
  • Life insurance contracts
  • Derivatives (other than covered calls on stock owned within the IRA)
  • Real Estate from which YOU directly benefit (ie – receive rents directly)

So – back to the original question – How can I use my IRA assets to buy rental property or finance a business startup?  The key to success is to remember that anything purchased by the IRA – and any benefits (such as rental income or appreciation) derived by investments within the IRA –  must be owned by the IRA and remain inside the IRA, lest it be considered a distribution from the IRA.  

So – in order to buy rental property or a business with your IRA – here is what you must do:

  1. You must find a custodian that allows these types of transactions, and has expertise in getting these transactions done effectively and legally.  Most custodians (ie – brokerage firms) do NOT handle or allow these transactions.  You must choose a custodian that specializes in these types of transactions to hold your IRA.  Additionally, you should expect to pay top dollar for their services; you will not get a “free” IRA at one of these firms.  Expect each transaction to have a significant fee, and expect an annual fee on the account.
  2. Once you choose your investment, the custodian of your IRA will then direct your IRA to purchase the investment property or the business within the IRA.  Therefore, the investment property or the business effectively becomes an investment within the IRA itself, and is considered a part of the IRA portfolio.  As long as it is not a prohibited investment – then it is allowable.  Remember – as far as real estate being a prohibited investment – the prohibition is against YOU getting a direct benefit from the property (such as having rental checks made out to you directly).   The prohibition is NOT against your IRA owning a rental or investment property as an investment in an arms-length transaction.
  3. Any mortgages on the property, repair costs, or financing for your business, must be conducted within the IRA itself.  Therefore, the mortgagee on the property bought within the IRA is NOT you – but your IRA.  Any business loan to the business is made to your IRA – not to you.  Generally custodians that specialize in these type of IRA transactions can assist investors in finding lenders who have experience loaning funds to IRA-owned businesses, or for the purposes of repairs or rehab operations on properties owned by IRA’s.  Do not expect these loans to be particularly competitive. 
  4. Essentially – the IRA – under the supervision of a custodian who specializes in these types of transactions – becomes a legal entity conducting business for itself.  Your IRA can even loan money for investment purposes (ie – make “hard-money loans” to other real estate investors), finance the rehab of homes for later resale, and own the business within which you work. 

Many people ask about using their IRA for purposes such as these – but few people ever actually do so because of the complexity of the planning required.  From a financial planning standpoint – conducting these types of investments within an IRA can be profitable – but are also considered to be quite risky, as they introduce additional types of risk (such as liquidity risk, default risk, and business risk) that most investors do not wish to see within their IRA’s.  Additionally, owning a business within your IRA can subject your IRA to what is called “UBTI,” – Unrelated Business Taxable Income.   It is for these reasons that you should always consult with tax and financial planning professionals who are completely familiar with your particular situation, risk tolerance, investment experience, tax situation, and financial goals before actually trying this. 

Many custodians who specialize in these types of transactions advertise how “easy” it can be, and how profitable it can be – but in my experience, few investors whom I have seen actually try these types of strategies have been overly pleased with their results.  Most of them have not significantly improved their financial situation above and beyond what their situation would have been had they merely practiced good financial planning behaviors and invested their IRA funds in a fully diversified, properly constructed portfolio that was appropriate for their risk tolerance.

Information in this article does not constitute a recommendation or solicitation for any product mentioned.  Mutual funds may only be sold by prospectus.  Past performance is no guarantee of future performance.  All investing – including the investing discussed within this article – involves risks of loss.  Consult your financial advisor for specific recommendations.

What Health Care Debate?

11 11 2009

Mike Carignan, CRPC®by Mike Carignan, CRPC

Recently, if you’ve been watching any form of the news, you’ve seen the ongoing debate over health care reform.  Now, I am not about to comment on which side is right or wrong, because with this debate it’s not just right or left…it seems to be a full perimeter. Even the individual parties can’t seem to agree amongst themselves.

Now, however, with the passage of the health care reform bill this last weekend many people are thinking that health care insurance isn’t going to be a concern in the future. “Now I’ll be able to get coverage regardless of previous conditions or employment status,” some may be thinking. That may be the case in the future, but not yet.

My point is going to be much simpler than the overall healthcare debate. I am addressing the here and now and one of the biggest health care concerns if you are thinking about retiring early. MAKE SURE YOU HAVE HEALTH CARE INSURANCE!

I hope that was clear enough.

We see clients, frequently, that have put a great deal of thought into where they will spend their retirement, how much money they’ll need for the vacations or the second home, but don’t plan for where they will get health insurance. Many clients take for granted the ability to qualify for individual health insurance, especially if they have been working for a large corporation with group benefits.

Some clients have the ability to continue their health care insurance benefits after leaving a long-term employer, but more often we see a need for individual health care coverage if they are retiring earlier than age 63 1/2. What questions then need to be answered if you are thinking about retiring early?

1. Will I be able to continue my group health care coverage?

2. If not, then will I get coverage from a private insurer? (We often suggest clients to go through underwriting before actually retiring to make sure.)

3. How much will it cost until Medicare?

4. Does that cost affect when I can start my retirement?

If you haven’t answered these questions then you are taking a HUGE risk in retiring before you have covered this significant risk factor of a secure retirement. Planning ahead for the potential risks in retirement is the best way to live a stress free and happy retirement.


This blog is for informational purposes only.  This is neither an offer to purchase nor sell any securities.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  All information is obtained from sources deemed reliable but not guaranteed.  Past performance is not a guarantee of future performance.  No tax or legal advice is given nor intended.

Investment advisory services provided by PARAGON Wealth Strategies, LLC, a registered investment advisor. 

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256   (904) 861-0093