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AEA 401k Withdrawal

AEA 401k Withdrawal. Use What You Got.

We’re well into the fall season folks, and while we’ve been living inside of this pandemic for 8 (!) months, there’s no doubt times are as tough as they’ve ever been for professionals working in live entertainment.  To that end, if you are a member of Actors Equity Association (AEA) you may have found yourself recently considering the notion of an AEA 401k withdrawal.  Taking money out of your dedicated retirement account to help with expenses that are on the table right now.

Let’s chat through the pros and cons, and if you are considering this move I hope you’ll leave today’s post with more perspective around the decision.

For the readers out there who aren’t a member of the actors stage union, follow along!  You might have a 401k with another job already, or find yourself in a position one day where you want to consider a withdrawal from that account.  I promise there is good info ahead that will help you in your decision as well.

Try To Remember (the 401k)

Before we go directly to the subject of the AEA 401k withdrawal, this seems like a pertinent moment to take a refresher on 401ks in general.  As we discussed a few months back in Make Our Garden Grow, if you are a member of Actors Equity you do indeed have access to a 401k retirement account to which you can contribute part of your compensation on an AEA contract- and in some instances your employer will even match what you put in!  The greatest gift of all.

Get that match!

A 401k is a tax advantaged investment account for retirement.  In each tax year, whatever you contribute will be deducted from your overall tax assessment.  So let’s assume there’s no match from your employer whatsoever (most AEA contracts are not required to match, with the exception of the broader / bigger agreements like Production Contract), the most you could contribute to your 401k as an employee in a single year is $19,500 in 2020.

Let’s say our actor friend Michael Dorsey has a nice year of performing jobs, booked to the brim in different regional houses.  Michael makes $100,000 in 2019 as a performer- and over that same timeframe Michael contributes $10,000 to his 401k.  Michael at one point also tries to evade the IRS by filing his taxes under “Dorothy Michaels”, this is problematic for a number of reasons- none of which we have the time to address here today.

Mr. Dorsey made $100,000, and thus will be taxed on his gross income of $100,000.  However, because he contributed $10,000 to his 401k through AEA he will now be taxed on $100,000 minus $10,000 equaling $90,000.  Michael gets to pay less in taxes, because of these contributions to his tax advantaged retirement account.

That $10,000 (and all other monies invested previously in his 401k) will be invested and grow with compound interest.  Hopefully Michael is invested in some low-cost index funds as well!

If you are reading this and are a member of AEA and thinking to yourself- “Hey! (Look me over) I want to contribute to my 401k while working!”  Here’s a link to the form you’ll need, look no further.

Equity actors also participate in an employer sponsored pension plan through the union, and hopefully the pension and 401k together can combine to create a solid bedrock of financial freedom in your later years.  But the name of the game is always be saving, always be investing.  You are in control of where you ultimately land.

Toucha, Toucha, Toucha Toouuccch Me- I Want That Muh-uh-uh-ney!

Now let’s refocus back to present day and see where we stand.

It’s November 2020 and the Covid-19 pandemic still has a nasty grip on our industry, and overall way of life.  It’s left over 100,000 creative professionals jobless and in desperate need of support and stimulus.  Unfortunately, we cannot control how quickly our government may or may not act in saving our stages- but let’s take a look at what we can control.

It’s possible you have been an AEA actor for some months, years, decades, and have built a solid little nest egg with regard to your 401k.  Your retirement savings.

Bills are piling up from the last few months.  We have some optimism in recent news that a potential vaccine is in development and on the way- leading to the eventual return of live theater, but we’re still many months away from any kind of normalcy and sustained employment.

You are now in the process of considering an AEA 401k withdrawl.

The Cons

We simply must start with the cons in this conversation, because here at Creative Finance we want to advocate against touching your retirement savings at all cost. But no denying times is hard, sir.

That money is for later in life, when you deserve to retire and enjoy financial freedom after a life in the theater.  

The major con of an AEA 401k withdrawal, and the benefit of leaving that money untouched, is giving it the ability to enjoy growing with compound interest.  And because you can only contribute a maximum of $19,500 each year, if you withdraw a certain amount of money contributed in a previous tax year, you can never go back and contribute for that year again.

Withdrawing early will pause your investment growth.

Also, when you withdraw from your 401k before the age of 59 and 1/2, you will incur a 10% penalty on the money you withdraw.  For example, if you want to withdraw $10,000, you should expect to pay a $1,000 penalty to the IRS.

You will also typically need to pay withholding tax on any early distribution such as this instance (however we’re going to detail why this case is a bit unique given what’s going on in the world).

To be clear, I want this post to be informative and helpful in making this decision of whether or not an AEA 401k withdrawal is right for you- but my advice would be to only pursue this route if you feel you have exhausted all other options.

The Pros

Money, Money, Money!

The obvious reason you would consider an AEA 401k withdrawal is that you need the money, and you need it relatively quickly.  I get it.

The good news here is that because of the CARES Act which was passed earlier this year, there are actually a few provisions in place that can make this process less detrimental to the long-term growth of your retirement egg if the money is being withdrawn because of hardship.

Hardship here can include: You or your spouse was diagnosed with Covid-19, you were quarantined due to Covid-19 and suffered adverse financial consequences as a result, you were furloughed or laid off due to Covid-19, you had to close or reduce the hours of a business you own due to Covid-19, or you were unable to work due to lack of childcare available because of Covid-19.

I can’t think of one person working in the arts who doesn’t qualify for one of the above reasons.

You can withdraw up to $100,000 citing hardship because of the Covid-19 pandemic, and the 10% early distribution penalty will be waived.

The Fine Print

Now you might be thinking, “Oh!  I qualify for hardship!  I work in theater and it’s a pandemic after all!” 

And you’d be right!  But, there are some additional qualifiers when it comes to this hardship withdrawal.

If you make a withdrawal/distribution due to hardship, there is no mandatory 20% tax withholding (there otherwise would be), HOWEVER you must plan to repay the distribution to your plan within 3 years to avoid the tax bill.  Here’s where it gets even more tricky you little emerald wizard…

  • The distribution can be repaid to ANY retirement plan that accepts rollovers (this would include an IRA or Roth IRA).
  • The repayment can be made in one or more installments.
  • The repayment will be treated as an eligible rollover.
  • You will not be taxed if you repay the distribution.
  • If you do not repay the distribution, taxes on the distribution may be paid over 3 years.

*A wonderful time to say: this is tricky tax territory that goes beyond the scope of basic financial advice from your favorite Broadway finance blogger.  Please consult an accountant or tax professional if you’re choosing to go this route to fully understand the full picture.

Finale Thoughts

Now that I’ve given you a bird’s eye view of what it might mean taking an early AEA 401k withdrawal because of hardship due to the Covid-19 pandemic- the ball is in your court dear reader.

Again, I really feel like this should be considered as a final option in pulling out all of your financial lifesavers- but the fact of the matter remains, for some out there this might very well be your only option– and that’s OK.

There’s a reason this provision was passed in the CARES Act back in March.  People are suffering.  Our industry is suffering especially.  You might have very well exhausted all other options, and with mortgage payments, student loans, and childcare piling up, this could very well be the best way forward.

The encouraging thing here is that you can actually repay this contribution, and really not suffer much financially in the long run.  But you have to be disciplined.

There is a vaccine on the horizon.  Live theater has been around thousands of years, and will be around well into the distant and unfathomable future.

It might make sense to take an AEA 401k withdrawal, knowing we will soon return to our careers and income will start to roll back in.  If you’ve made it this far and you’re feeling pretty sure: you can contact the plan administrators at 401k@equityleague.org, and the good folks there will walk you through it.

My best advice if you do decide to go this route- live your life with a focus of frugality, and make a concrete plan to reload that money back into your account- as much of it, and as quickly as you’re able.

You might need help in the present, but please do not sacrifice your future.  But in the meantime- keep your resources in the back of your mind to take care of yourself if needed.  You Gotta Use What You Got, To Get What You Want.


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