Good news, he’s just like us! Bad news, he’s just like us. Sen. Marco Rubio, R-Florida, made headlines in late May by cashing out his 401(k) account. He said he needed the money for new home appliances, paying his children’s tuition and to help fund his presidential campaign. He withdrew about $68,000, according to a financial disclosure from he filed.
It probably didn’t hurt (and might have even helped) his objective of connecting with the average voter, and therein lies the problem. Retirement plan advisors know firsthand the frustration that comes with plan participants cashing out early, and Rubio didn’t make their jobs any easier.
Withdrawals from 401(k) plans are, of course, subject to automatic 20 percent tax withholding. So quick math reveals that Rubio would have received a net amount of $54,000. As CBS News MoneyWatch columnist Ray Martin notes, it’s safe to assume his income tax bracket is higher than 20 percent, and he’ll therefore owe more taxes when he files his 2015 tax return. Also, because Rubio hasn’t yet reached 59 1/2, he’ll also have to pay the additional 10 percent penalty of about $6,800. So, after income taxes and penalties, Rubio will walk with$40,000 of the $68,000.
Ouch.
“I’m not saying what Rubio did was a financial mistake,” Martin concedes. “I’m sure he thought about it carefully and was likely well advised. Also, given that his well-publicized action makes him look like just another member of the middle class experiencing the same day-to-day financial struggles as any growing family, I’d say more than just financial matters were involved in his decision. It was good PR.”
However, Rubio might have been better served by first rolling over his 401(k) into an IRA, and then taking the money from there. Martin notes that “three types of IRA withdrawals may be exempt from the 10 percent early withdrawal penalty tax, including withdrawals for qualified higher education expenses, for qualified first-time home buyers (up to $10,000) and for paying health insurance premiums while unemployed. Rubio could have considered this for the withdrawal for his children’s college costs.”
Unlike 401(k) plans, IRA withdrawals also aren’t subject to an automatic 20 percent tax withholding. If the participant’s income puts them in a lower tax bracket, taking a withdrawal from a 401(k) plan will result in overpaying the amount of taxes due, and they’ll have to wait until they file their 2015 return to get the money back.
But if they still want taxes withheld from the IRA withdrawal (which Martin typically suggest), they can direct the IRA custodian to do so, and can specify the percentage or dollar amount they want withheld.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
