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I withdrew 100K from my 401k

I know a lot of people are saying hold on to your money, the market will rebound. And it has, I must say. the 50K I lost when Coronavirus hit, I've gained back plus some. Currently, however, you can withdraw up to $100k (if you have it) from your 401k WITHOUT penalties and just pay the taxes. I am in my mid 40s and figured I wouldn't have this opportunity again for another fifteen or so years. I want to pay down 25k in debt that I have and just keep the money in a savings account for now. It feels good having liquid assets on hand. My partner and I are considering buying a home and moving to Europe. So when I get back to work, it will feel good not to have that debt burden over my head. I will double down on my 401k contribution, and will feel good about saving money to add to what I have in my savings account for a future down payment on something.

BTW, the federal takes out their percentage immediately which I was surprised was just 10%. After City and State, I'm imagining 100k withdrawal is maybe 72k after taxes.

by Anonymousreply 8806/28/2020

Ummm i would check that you don’t have to pay the penalties. Unless you’re 59 1/2 years old, you pay the penalties. DL experts out here, has that been waived due to the virus?

by Anonymousreply 105/23/2020

I did check and it is waived. It was part of the Coronavirus stimulus package.

by Anonymousreply 205/23/2020

That's the main reason why I am posting this. I am not sure how long you will be able to withdraw without penalty, but currently you can.

by Anonymousreply 305/23/2020

You can do it for the rest of 2020 without penalty.

by Anonymousreply 405/23/2020

If you can take a loan, that's actually a very good move. It will completely shield the money from being lost when (not if) the economy tanks. When you are finished paying it back, with interest, you will be in a much better place than if you just let it sit there and disappear.

by Anonymousreply 505/23/2020

Sounds like you’re left with a 301k.

by Anonymousreply 605/23/2020

There is an appeal to this - but, withdrawing that much will increase your overall tax burden for the year.

If you earn $80K and live in NYC, your effective tax rate is 29.68%. Adding on the $100K, increases your tax rate to 35% for $180K for the year.

So, you're going to have to pay close to an additional $5k in taxes on your base income. Plus 35% tax on the $100k, so your $100k withdrawal is actually going to be $60K.

That may be worth it - but I would take out a smaller amount - just enough to pay off debt. Yes, you eventually have to pay taxes on 401k money when you start to withdraw in your retirement years, but presumably at a much lower tax rate because your retirement income will be less than what you're currently making.

by Anonymousreply 705/23/2020

If you currently live in NYC, don’t do it. You will lose $12-$15k In taxes. If you wait until you get to a lower tax or no tax location - maybe in retirement - you just made 10-15% return.

by Anonymousreply 805/23/2020

[quote] BTW, the federal takes out their percentage immediately which I was surprised was just 10%.

That doesn't sound right. The 10% is likely the early withdrawal penalty which will be recoupable when you file your tax return, provided that the penalty has actually been waived. You are still responsible to pay federal taxes on it, and state taxes, if those are applicable in your state.

by Anonymousreply 905/23/2020

So can we all agree OP wasted about $20K doing this?

by Anonymousreply 1005/23/2020

R9, it’s taxes. I did a 401k withdrawal recently to buy a car, and that’s what was taken out (10 percent) before I received it. I’m over 59 1/2 so it wasn’t the penalty. It all comes out in the wash after you file your taxes for that year, but the government will always cover its ass and take some money.

by Anonymousreply 1105/23/2020

It doesn't matter how much they took out for taxes -- it's not going to be enough to cover your tax liability.

by Anonymousreply 1205/23/2020

R12 that is a non sequitur

by Anonymousreply 1305/23/2020

If you're in debt, as OP was, what he did is smart. The interest people pay on debt is much higher in many cases than what you earn leaving the money in the stock market. If you aren't in debt, the money is best left untouched for retirement. Even without the penalty.

by Anonymousreply 1405/23/2020

If the market tanks, which it will and you can't move your money, you could lose it all.

Just because you're willing to sell to reinvest in something else doesn't mean they'll be a buyer till it goes much much lower

by Anonymousreply 1505/23/2020

[quote] market tanks, which it will

You have no idea if and when the market will tank. No one does. It's all just guesses.

Over any LONG period of time (think greater than 15 years) the market has a pretty good return. That's why, unless you are paying down high interest debt, you should let the money the money sit there.

by Anonymousreply 1605/23/2020

Well if it's sitting in a savings account, it will not disappear and I don't have to pay back anything, including interest. I just really wanted access to a good chunk of change for a future down payment. And I will build my 401k back up by maxing out my contribution level.

by Anonymousreply 1705/23/2020

OP Here, I still have a sizeable amount left in my 401k. It's not like I wiped it out doing this. The additional 100K moved me up maybe 2% in the tax bracket. I am sure I am still going to owe some money to the federal, because 10% just didn't sound like enough. But I usually get a return, so hopefully that will offset some of that as well. And I will still owe state and local. But to pay off my debt and not have that over my head, constantly building interest, will free me up to really focus more on saving whatever I make. Yes, I could have continued to responsibly pay it down in huge chunks each month. But psychologically, I can take that huge chunk burden and change it into savings, which will only motivate me to be more fiscally responsible.

by Anonymousreply 1805/23/2020

Good move, OP. I think what you did was smart.

by Anonymousreply 1905/23/2020

OP - you must have been making a good income to only move up 2% with an additional 100K. And that begs the questions of why you have so much debt and you don't own a home yet?

by Anonymousreply 2005/23/2020

The $25,000 to pay off high interest credit card debt was smart. (But 25 THOUSAND DOLLARS in revolving credit card debt? ? 🙄 Now, OP, take All of your credit cards - except a basic, blue Amex and perhaps a low limit extra for DIRE emergencies - and burn them. Never apply for another card again.)

Unless you plan to retire soon, taking out the other $75,000 was not a wise move. You will pay tax on that money now, and will pay tax on any earnings it might generate for as long as you live. You should have left it in the 401k. It didn’t have to be in the market. Most plans have low risk options. And, inside the 401k you could have compounded for years without having to pay the states or Uncle Sam a single fucking farthing.

by Anonymousreply 2105/23/2020

R21, I agree. I would only take money out of my 401K if I absolutely had to--like critical health condition or homelessness. I took out 10K for grad school. Though it was only a small amount, if I could redo it, I wouldn't have. My only debt is a student loan and though I could pay it off, I make the monthly payments because the interest rate is only 1.875%.

by Anonymousreply 2205/23/2020

The one thing I learned when I was younger (and I learned the hard way) was to pay off my credit cards completely every month. No matter what. I’ve been fortunate that I’ve had well-paying jobs, which helps, but after doing the credit card merry go round (paying off higher interest cards with lower interest cards) I was done when I was around 30 years old.

by Anonymousreply 2305/23/2020

I thought you could take out the money ONLY if you’re directly impacted by the virus - either lost your job or actually contracted COVID-19.

OP. I’d start licking doorknobs now.

by Anonymousreply 2405/23/2020

r13 No, it's not. The 10% they took out is just an arbitrary number. 401(k) withdrawals are taxed as ordinary income, just like wages (which they were before you chose to defer them into a tax-advantaged retirement plan.) No one can know how much tax you will owe on that withdrawal until it's combined with the rest of your income (and adjusted for your deductions.) You can't know what tax bracket you're in until you have all of that information. If you took out that much money, you will definitely be in a high tax bracket and your tax rate will be FAR higher than 10%.

by Anonymousreply 2505/23/2020

R24 I did lose my job to COVID-19. And actually my partner GOT COVID-19. So I think I'm safe on that front.

R21 I had a high credit card debt because my partner has been out of work for the last year and half. So I have been taking care of both of us and using my credit cards as little as possible. So over the course of a 1.5 years, that is about 25k. Although I really shouldn't have to explain myself on that. I do not have a home here because I live in NYC and the homes that I want to live in would start about 1.5/2 million dollars. I just was never that pressed or in a place to save up 300k for a down payment.

You my ask, why live here then? The plan IS to move. That is why I wanted to have the extra money at my fingertips in case I need to prove a certain amount in liquid assets for either purchasing a home somewhere or an extended visa in another country.

Plus my partner has an amazing job that will allow me to save everything I make now. And once we get back up and running as a country, I will be more incentivized to save without having this huge looming debt to pay down each month. I can see myself adding the withdrawal back to my 401k and rollover IRA within two years.

But this window will probably be the one and only I will ever have to take out money without penalty for the next 15 years or so.

by Anonymousreply 2605/27/2020

Can someone answer why taking a loan against one’s 401k wouldn’t be the better option in this case? The interest on the loan, you’re paying to yourself and if the market does decline, the repayments end up repurchasing more shares of the mutual fund or stock equity.

Plus, there’s no change in your tax liability.

by Anonymousreply 2705/28/2020

r27, I didn't want to trade one monthly payment for another monthly payment. I wanted to put it all behind me and move forward. I want to be free and clear to work and save and not have to budget for monthly credit card debts, or repayment of a 401k loan on top of the insurance premiums I'm going to have to pay back on top of the taxes on my unemployment.

by Anonymousreply 2805/28/2020

That makes sense in a way, and it fits what you wanted to achieve. I was just curious about a different strategy, not knowing you were more motivated to eliminate the monthly payment.

But speaking from past experience, follow the advice upthread and Chris those credit cards!!!

by Anonymousreply 2905/28/2020

I wonder about the jobs that many of are banking on doing in our 60's and 70's--will AI take over and there will be no jobs to fight over. I work in a non-technical role for a tech company and was selected to be laid off. My manager fought it and went to various upper management executives with justification on why I should stay. One of the executives asked why they couldn't just have AI do my job. Luckily, I have expertise in a very niche non-technical field and management reversed its decision. But give it a few years and I'm sure AI will be doing most of my work. My expertise won't be needed because my counter-parts' jobs will also be done by AI. My institutional knowledge and relationships/contacts won't matter.

by Anonymousreply 3006/12/2020

oops, wrong financial thread!

by Anonymousreply 3106/12/2020

Taking a loan against your 401(k) to pay off credit card debt could be a good idea IF:

1. The interest rate on your 401(k) loan repayment is substantially lower than the credit card interest rate;

2. You are pretty sure your job will last long enough to allow you time to make the repayment (any unpaid portion must be repaid immediately upon job termination or Uncle Sam will consider it to be a taxable, penalizable, distribution; and

3. With one exception, you destroy each and every credit card as soon as it’s paid off (and never revolve anything on that one exceptional card ever again).

by Anonymousreply 3206/13/2020

I would do it as a last option, OP. You really need to leave that money alone and let it grow. There are some great boards online to show you strategies for paying off credit card debt. You can use a snowball effect where to you pay the minimum on the card with the highest interest rate then once that is done move on to the next card.

If you take the money out of your 401k and pay off the credit cards you won't feel the burn as much and you might just go back to racking up more debt.

How did you get $100k in debt in the first place?

Do you have a budget to follow? Get serious about this because at some point you will want to quit working or you may be forced out. Retirement really rocks, OP.

Good luck with what ever you decide.

I'm linking to Dave Ramsey's site. I've heard his advice on getting out of debt and managing money is good, but his investment advice sucks.

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by Anonymousreply 3306/14/2020

how's that working out for you?

by Anonymousreply 3406/25/2020

I know a Goldman Sachs MD and all those guys are nervous about the economy. They’re all contacting realtors to see how much they can get for their houses in the Hamptons.

by Anonymousreply 3506/25/2020

I hope you spent it at Tiffany's.

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by Anonymousreply 3606/25/2020

The 10 percent is a penalty. The tax liability will be decided when you file your taxes in April 2021. That’s 24 percent if you made no other money, unless you have a lot of deductions. Plus state taxes. Generally, people lose half the value. Enjoy!

by Anonymousreply 3706/25/2020

Dear OP,

Don't leave your money in a savings account. The interest on a savings account is not going to keep pace with inflation. Move it to a Money Market account. You could even use a portion of it to purchase a high performing CD if you know you won't need it for a year or so.

Also, the financial institution managing your 401K account should be able to provide customer support. They have experts there you can talk to, who can offer expert free advice. You're foolish if your are trying to figure all this out on your own.

by Anonymousreply 3806/25/2020

[quote]I know a Goldman Sachs MD and all those guys are nervous about the economy.

Goldman Sachs has doctors?

by Anonymousreply 3906/25/2020

R39, MD stands for “Managing Director”.

by Anonymousreply 4006/25/2020

You should give that money to a black family, preferably one that’s suffered from generation poverty. You’re bound to make the money back in some other white privileged way.

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by Anonymousreply 4106/25/2020

Thanks for the info, OP.

OP reminds me, and this may not matter to him, but FYI: Most 401k plans contain a money market fund of some kind. If you want to get out of the “Stock market”, you don’t need to withdraw from your 401k, usually. You can just sell your investments, then put the proceeds into the money market fund, all within the 401k and with no tax consequences. .

That is all.

by Anonymousreply 4206/25/2020

Fuck off R41 - no need to be an asshole

by Anonymousreply 4306/25/2020

OP, seems like you made a wise move for your personal situation.

Perfect? Maybe not as the tax implications and opportunity cost in the long may make that $100k more like $60k.

But, if you can maximize whatever you do have left over you'd still be better off than most Americans who don't have 1,000 in savings.

Don't accrue any more debt or spend it on stupid shit.

by Anonymousreply 4406/25/2020

OP, how much do you have in your 401? I wouldn’t ask if this board wasn’t anonymous.

by Anonymousreply 4506/25/2020

PUT IT BACK NOW!!!

I do taxes and have heard nothing of this "no penalty" rule. I think you may be misunderstanding something.

Even if it's true, you just lost about 25%-30% of your money like that! Say you will earn $80,000 next year. Now that entire $100,000 will be added to that as income, and you are almost in the 24% bracket on last dollar earned, so the entirety of your 401-k money will be taxed at 24%-33%, or even higher if you are already earning more that they hypothetical $80,000 or have other earned income. You just watched over 25% of your money just vanish. it's always the worst move EVER!

by Anonymousreply 4606/25/2020

I think he is wise but is he moving or not?

by Anonymousreply 4706/25/2020

I hope r41 is someday, boiled in acid.

by Anonymousreply 4806/25/2020

[quote] There are also relaxed rules around early distributions and flexibility for loans from certain retirement plans. Individuals who would normally incur the IRS’ 10% penalty on early distributions from a 401k or IRA are exempted for ‘coronavirus-related distributions’ of up to $100,000 of distributions in 2020. While the 10% penalty is waived, distributions may still be considered as ordinary income. This ordinary income can be spread over 3 tax years, lowering the tax impact. Individuals also have 3 years from the date of the distribution to repay all or a portion of the distribution taken if they so choose. Additionally, loan repayments from workplace retirement plans may be delayed for one year (in effect through the end of 2020).

I found the above on a random website. One really should look on the IRS site to verify.

by Anonymousreply 4906/26/2020

Here is something that might interest you. It’s called a Backdoor Roth Conversion. If it does interest you, the company (Fidelity, for example) that manages your IRA accounts should help you do it.

If your employer allows you to transfer a portion of your 401k money out, then take a chunk and roll it over into a [italic] Rollover IRA. [/italic] After you’ve done that, you can convert (move) all or some of the money from the Rollover IRA account, into a Roth IRA. The last act, the conversion, is a taxable event, but there is no penalty. The downside is that you can’t withdraw this money from the Roth for 5 years or you get a penalty. You can withdraw other Roth money, if you’ve kept good track of your lifetime Roth contributions.

I do this every year I can to raise my income to the top of my expected tax bracket It took me a decade to move $100.000, but I like having less in my 401k and more in my Roth.. It’s explained in detail at the link.

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by Anonymousreply 5006/26/2020

OP, that 10% that the Feds took is not all the tax they plan on taking. It will be adjusted when you file your taxes. According to R48, you’ll get to spread the taxation of the $100,000 over three years, so it looks like it is only adding $33,333 to your yearly income for three years, if you like..

I asked how much you had in your 401k, earlier, because it is possible to so much in a 401k plan that it is no longer advantageous to keep aggressively depositing into it. But I’m not going into details if It doesn’t apply to you.

by Anonymousreply 5106/26/2020

[quote]It’s called a Backdoor Roth Conversion

Make sure you pre-lube.

by Anonymousreply 5206/26/2020

How much is too much?

by Anonymousreply 5306/26/2020

R53, “too much” depends on the sum, your age, and rate of return.

When you reach are 72, the IRS will require every year that you take the 401k value at the beginning of the year, divide it by your life expectancy, and make a minimum withdrawal of that amount. They have a chart for life expectancy. To make an exaggerated example:

Suppose you are 50 with $1 million in your 401k, and you expect to make 7% per year. (At that rate, your principle doubles every decade. So by the time you are age 60, you’ll have $2 million, and by age 70, you’ll have $4 million. So, let’s say you have $4 million at age 72, and your life expectancy is 20 more years. $4 million divided by 20 is a required minimum withdrawal of $200,000. But, you’ll have earned $280,000 on the $4 million that year, and you’ll have to take out much of that, too. Let’s say $200,000 more, on average, per year as an estimate, for a total withdrawal of $400,000 per year.

This will be taxed at regular income tax rates. If you are single, and the rates don’t change from today, the rate will be at least 35%. Don’t forget that your social security income will be added into regular income, too.

If you are younger, you can have a smaller sum in your 401k to get the same result. If you are older, you’d need a larger 401k sum to get the same result.

In my particular case, until age 45 I was putting 10% of my salary into my 401k, and had, maybe $400,000 in there. I thought that was too much, so I reduced my contribution to 6%, because that got me the full company match, and that is free money that you should never pass up.

Off the top of my head, I’d estimate that $200,000 at age 30, $400,000 at age 40, and $500,000 at age 50 is “too much”. You should always do what is required to get the employer match, but not put more in the account above that. If you want to invest more, open up an after-tax brokerage account. The federal tax rate on gains held there, for over a year, is 0%-20%, so it’s not like it’s a terrible sacrifice.

If you’re on the border, create a spreadsheet and figure it out for yourself, or hire a tax guy who will do the math for you. There are articles on this but they can be hard to find.

Capeesh?

by Anonymousreply 5406/26/2020

Nope. Don’t understand.

Why would you need to take out $200,000 of the $280,000. 1/20 of the $4,000,000 is $200,000. 1/20 of the earned extra $280,000 is $14,000 (BTW is everyone earning 7% this year?). That’s a total of $214,000 taxable dollars.

If I’ve got $4M in my 401(k) I’m probably accustomed to living on more than $214,000 (minus tax) anyway; and the only reason I was able to accumulate it was because I was contributing $20+ thousand dollars, tax free, over most of my working career.

So no, I don’t capeesh.

by Anonymousreply 5506/27/2020

Hi R55, I’ll try to explain. Please bear in mind that these are rough numbers for Illustration purposes and may not be precise, I use the 7% gain per year to make the math easier, because that rate will double your investment in a decade. More discussion on the rate of return later.

Let’s say you are 72 and you have $4 million in your 401k at the beginning of the year, and are earning a steady 7% in the 401k. Your life expectancy is 20 more years. The IRS requires you make a withdrawal of $4,000,000/20 = $200,000. The balance of you account at the end of the year is therefore $4 million; plus that years gain, (7% x $4 million = $280,000); minus your withdrawal of $200,000. That comes to a year end balance of : $4,080,000. This effectively becomes the beginning of the next year balance.

The second year, the account value begins with $4,080,000. Earnings are 7%. Live expectancy is now 19. This means your earning for year 2 is $285,600, and your required withdrawal is $214,737. That comes to a year end balance of $4,150,862. It continues like this.

You see that your end of year balance initially increases, but the IRS methodology is designed for you to completely exhaust the balance of your 401k by the end of your life. This means that at some point, the required withdrawal will start to exceed the gain for the year. In this example, when you are age 78, with 14 years life expectancy, the required yearly withdrawal has started to overtake the yearly earnings. It continues like that. The linked picture of the spreadsheet shows that happening. I didn’t complete the spreadsheet through to the end of your life, because it’s tedious, but I promise that your account gets exhausted your life expectancy is 0.

The spreadsheet does illustrate that, given the assumptions, the required monimum withdrawal will be $200,000 per year or more, even much more. That will put you into a higher tax bracket that you’d like if you can avoid it.

When I did this math for yesterday, to simplify further, I just assumed that the yearly withdrawal is equal to the (beginning balance divided by life expectancy) plus an arbitrary portion of that year’s earnings. That was just too make the math easier. You can see from the spreadsheet the the required minimum withdrawal starts to balloon as you get older, l

Does that clear it up?

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by Anonymousreply 5606/27/2020

R56 All those numbers make my head hurt. Can you explain it like I'm retarded?

by Anonymousreply 5706/27/2020

R55, as for the expected rate of return, the 7% average return is an arbitrary number for illustration purposes. It is intended to be the average return you achieve with your investments annualized over the 20 year period. I have often heard the 7% number to be a fair number, which flattens out the bears and bulls. The concept works regardless of your expected rate of return. If you’re more comfortable using 4%, that’s your prerogative.

by Anonymousreply 5806/27/2020

R57, are you R55, or a new person?

by Anonymousreply 5906/27/2020

Linked is a decent explanation of the issue, from Money Magazine. You can just google “can you have too much money in 401k?”

The investment industry is geared towards the more common problem, that people don’t have enough invested for retirement, and this is considered a “luxury problem”. Still, it’s a problem, A middle-class problem, and people from modest means who know how to save need advice, too.

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by Anonymousreply 6006/27/2020

[quote] It is possible to have too much in a 401k?

R56, re-read R54. The investment industry and government are focused on the bigger problem of getting people to save anything at all. But this is still a problem for good-savers/investors. In simpler terms:

You should always invest enough in a 401k to get the employer matching money, if they offer it. That’s free money and a 100% return on your investment. If you save more than that in your 401k, and its balance grows very large, you should consider dropping your contribution back down to the level to just get the employer match

Your 401k withdrawals in retirement are taxed at regular income tax rates, and the government forces you to make withdrawals at age 72+, so if you have “too much” in the 401k, it could throw you in a very high tax bracket.

So what constitutes “too much”? Talk to a financial planner who understands this. I can’t pick a number that works for everyone, who though I did.

[italic] “Off the top of my head, I’d estimate that $200,000 at age 30, $400,000 at age 40, and $500,000 at age 50 is “too much”. [/italic] meaning, at those points, see a financial planner.

R56: does that make sense?

by Anonymousreply 6106/27/2020

For a 401K, are before tax or after tax contributions better? I know before tax lowers your overall tax liability, but I can't get a clear answer on after tax benefits.

by Anonymousreply 6206/27/2020

R62, I think it depends on your overall situation, which I don’t know. If poorness is a main descriptor, then I would lean towards pretax 401k contributions, which will not hit your pocketbook too much, today,

I also like the idea of splitting the conundrum. Maybe contribute half and half, into each? Again, I don’t know your situation, so I can’t say.

The important thing is to get started.

by Anonymousreply 6306/27/2020

Thank you, Taxidermist Now I see. It’s truly a first world problem.

However, as I suggested at the end of my post, if I’ve spent much of my career earning a couple hundred thousand dollars/year - so as to have the extra $25,000+ available (after living expenses) to stuff into a 401(k) (done to reduce my lifetime taxable income taxes), the likelihood is the continuation of my lifestyle is going to entail spending even more than the couple hundred thousand a year required minimum distribution anyway, especially if there’s inflation (and elderly medical costs).

But I now see what you’re proposing could work for some.

by Anonymousreply 6406/27/2020

thanks R63....not actually poor just feel that way living in NYC. Still relatively young (31) and make decent money. But I agree, starting early cannot be emphasized enough. Did multiple scenarios for this in b-school, and if you start later but pour huge sums into a 401k, it's still not enough to make up for not starting early (everything else being equal).

Compound interest is powerful.

by Anonymousreply 6506/27/2020

Cool, R64.

Yeah, R65, when I was 30, it occurred to me that I’d never save enough if I only saved 6% of my salary, so I upped it to 10%. When I was 45 and starting a new job, I realized I could drop the amount saved. I dropped it back to 6% again. It was like I got a 4% raise!

Back in 2011, I took about $100,000 out of my 401k and put it into a rollover IRA (non-taxable event). I’ve been transferring it into my Roth in small pieces so the tax is only 15% on it, and it took me a decade to do so. I just finished last year.

by Anonymousreply 6606/27/2020

Let’s get realistic - 401k over the next 5 years is at best going to earn 2-3%. And very likely you will lose money in the next 2-3 years. It drives me crazy when people use absurd rates of return - based on a few years. Every DL thread all the eldergays say “I made a great return in the past 10 years - which will continue into perpetuity. I’m so smart”. Ugh.

by Anonymousreply 6706/27/2020

New question, again please 'splain with an assumption I am an idiot...

Why would one be in a higher tax bracket when forced to withdraw after 70 (or whatever)???

Is it because of the total value in the 401k?

I thought one was taxed based on what they withdrew?

Again, assume I am an idiot please.

by Anonymousreply 6806/27/2020

I max out my 401K every year and when my income was low enough, I would also max out my IRA. For the last few years, I've been maxing out my Roth IRA. Money going into the 401K doesn't get taxed. Bird in hand, I'll deal with future taxes...in the future. Who knows what is going to change or stay the same. As R66 mentioned, there are ways to transfer some of your 401K to Roth status, which lowers your tax hit. I may decrease or stop 401K contributions near retirement.

My company also allows me to invest up to 10% of my income into a post-tax 401K account. No tax exemption, but I transfer this account into a Roth account. I can't touch any gains for 5 years, but at 59.5, I can withdraw gains tax free. Roth contributions can always be accessed (because taxes were already paid). Look into mega backdoor Roth. It starts with whether your company offers a post tax 401K option.

Lastly, if you have access to a HSA--consider it. You can contribute up to 3,500 and that total is exempt from taxes, even Medicare. HSA is meant to pay for medical expenses, but I just pay my medical bills out of pocket and not touch my HSA and let it grow. Like Roth, withdrawals in retirement are tax free. Just keep your receipts as there isn't a time limit on when you can submit them. Plus, in retirement, you're likely to have more medical bills anyway. You'll have receipts to submit and pull funds from your HSA--tax free.

by Anonymousreply 6906/27/2020

R68, when you reach age 72, the government [italic] requires [/Italic] that you take a minimum required withdrawal (MRW). If your 401k is very large at that age, your MRW could be huge. That could push you into a higher tax bracket.

How old are you and how much is in your 401k? Maybe you don’t have to worry.

by Anonymousreply 7006/27/2020

R69, reminds me of FSA accounts. I know [bold] they have changed [/bold] since I last used them, but here is something that someone might find useful. A FSA, or [italic] Flexible Spending Account, [/italic] is a way to pay for medical bills with pre-tax dollars through an employer plan. That’s boring, but you can really cleanup if you are savvy.

Each year, you elect to put a certain amount into an FSA, up to $2750 for 2020 (I think it used to be $5000). They take one-twelve of that sum out of your paycheck each month. If you don’t have medical expenses that cost as much as you chose for the year, you lose the balance for that year. But here is how you clean up, for example.

The FSA reimburses you for your out of pocket medical costs if incurred while employed. If you expect to leave your job in January, you will pay 1/12 of the yearly premium. If you spend $2750 on medical costs in Jan, the FSA plan will reimburse you for the entire yearly amount, even though you’ve only contributed 1/12 of the yearly premium, or (1/12 x 2750= $228). In other words, up you get out more money than you put in.

This is because the FSA plan is not a savings plan. It is a kind of insurance plan. Just like, if you bought fire insurance on Monday, and your house burns down on Tuesday, your fire insurance plan will still pay you. I once had two jobs in one year, and cleaned-zip by doing this twice in one year, while employed by both of them.

Also, what constitutes a medical expense is pretty liberal. Aside from standard things like co-pays and deductibles, you will also be reimbursed for unusual things, if advised by your doctor, Such as, air fare to a medical conference, taxis to and from the airport, an conference registration fees. Also; a new mattress; taxi fair to an AA meeting; massages if needed for a valid medical reason and not illegal. If you rebuked you’re bathroom ti accommodate an illness, that’s covered, too.

by Anonymousreply 7106/27/2020

Correction,

I wrote:

If you don’t have medical expenses that cost as much as you chose for the year, you lose the balance for that year. But here is how you clean up, for example.

It should be;

If you don’t have medical expenses that cost as much as you chose for the year, you lose [bold] what you’ve paid in while employed .

by Anonymousreply 7206/27/2020

Another typo in R71 due to a misfire:

“If you [bold] rebuked.you’re [/bold] bathroom to accommodate an illness, that’s covered, too.“

I meant:

‘If you [bold] refurbished your [/bold] bathroom to accommodate an illness, that’s covered, too, at least in part.”

This is how the law was written and up its perfectly ethical and honest. Companies do not lose money on their FSA accounts,

by Anonymousreply 7306/27/2020

Smart move, r66.

Retirement is worth the effort it takes to achieve. Take care of your health along with your finances.

by Anonymousreply 7406/27/2020

Thank you, R74.

One has to earn ~$1.50 to save $1,00, due to taxes. I believe people should make as much effort in managing their savings/investments as they do at their job. Well, maybe not that much, but much.

by Anonymousreply 7506/27/2020

[quote]when you reach age 72, the government requires that you take a minimum required withdrawal (MRW).

They're called REQUIRED MINIMUM DISTRIBUTIONS (RMDs.)

by Anonymousreply 7606/27/2020

[quote]At that rate, your principle doubles every decade.

Oh, dear.

by Anonymousreply 7706/27/2020

Thank you, R76, R77.

by Anonymousreply 7806/28/2020

r70 Thank you Taxidermist! I feel I am in the don't need to worry camp...

44 years old. Currently have $220k in current employer 401k equivalent that I have been maxing out for 5 years now, $70k in my only other 401k that I rolled over into an account to which I no longer contribute. $110k in a Roth IRA I continue to max out.

FWIW, I'm with the federal govt. and do not see myself leaving. Too much job security in these most uncertain times and I'm only going to get older and less hireable. Plus I am looking forward to a pension based on 25+ years of service at a six figure annual salary (so I am planning on that income source too at retirement).

by Anonymousreply 7906/28/2020

R79, Wow, you’ve done well! It seems to me, though, that you could reduce your 401k-like (403b?) or similar contribution, if you’re still maxing you’re contribution, and give yourself a take-home raise. But that’s your business, and I won’t nag you further. 🤗

by Anonymousreply 8006/28/2020

R79 reminds me of another thing. We are always advised to diversify our investments. Besides diversifying across asset classes, it’s wise to diversify across taxable accounts. By that, I mean, have money in a 401k (pretax account); a Roth account (post tax account); and a brokerage account (taxable account). The rules are different for all three. My own savings are split between the three types of accounts and real estate.

by Anonymousreply 8106/28/2020

100K = 6 months of cocaine and rent boys in a condo in Miami! Live for the moment!

by Anonymousreply 8206/28/2020

R82,I knew a guy who worked for Goldman Sachs and was a wonder boy there. He retired young, maybe age 40. He got a much younger boyfriend and moved to Hawaii. He burned through all his money on his boyfriend, cocaine, and booze over about 10 years. He and his boyfriend broke up. He moved back to NYC with nothing. He picked-up a guy with Down’s syndrome and went to prison for it. He’s out now. He still drinks, believing he’s learned how to drink responsibly. Now that is just sad.

by Anonymousreply 8306/28/2020

r79, I retired as a GS-13 on my 56th birthday with 20 years of service. I postponed my pension and medical until age 60 so I didn't take a reduction in my FERS pension. I love being retired, I haven't been bored for a second.

by Anonymousreply 8406/28/2020

Taxidermist, R79 here. Yes, I have the tiered strategy you speak of, including the HSA as mentioned by another poster above.

I'm concerned about investing too much for the future---REALLY. I feel I should be investing more, and your comments suggest I may be on to something.

by Anonymousreply 8506/28/2020

R79 and R85 here... Meant investing more in stocks and less in retirement funds. I'm thinking of switching contributions to meet our Thrift Savings Plan match minimum and moving the difference in stocks. For the next 2 or 3 years. I'm optimistic the market will improve.

R84 Sounds lovely! It isn't always easy to see the light at the end of the tunnel, but as many who have retired have told me - don't think about it. The day will come when it does! Enjoy yours...

by Anonymousreply 8606/28/2020

[quote][R79], I retired as a GS-13 on my 56th birthday with 20 years of service. I postponed my pension and medical until age 60 so I didn't take a reduction in my FERS pension. I love being retired, I haven't been bored for a second.

I'm 67 retired as a GS-14 at 58 with a CSRS (old Federal retirement system) pension and 37 years of service. It's adjusted for the COLA every year. Right now it's nearly $110,000/year. But no Social Security. I also have over $400K in the TSP (401(k) equivalent) and have never touched it and am not planning to. I'm glad they raised the RMD age to 72.

by Anonymousreply 8706/28/2020

401-k contributions are "pre-tax" money, they are not "untaxed" when you withdraw them. A Roth IRA is funded by your own already-taxed income, and you don't pay taxes on the compounded interest part of your withdrawals. You do not get a tax deduction on a Roth IRA contribution the way you might from a Traditional IRA contribution. The deduction is income based, so although you may always contribute to a Traditional IRA you may or may not see a deduction depending on your overall income each year.

My warning about taking 401-k money early is that you are still working and earning, so the amount you take out is all taxed at "last dollar" percentages and will likely be higher than if you took a mandatory 1/20th of it in retirement where your other main income source would be Social Security, which can be (but not always) mostly or partially untaxed, so the 401-k withdrawal would likely be taxed at a lower rate once you're retired, depending on your overall earnings. Of course there is usually the 10% penalty for an early withdrawal of pre-tax retirement funds on top of that.

I work in a tax office, all I see are these horror scenarios, and they are mainly all caused by not knowing how progressive taxation, or retirement funds operate at all.

HSAs are set up to make sure you do NOT use them as tax free savings accounts. You may incur a penalty fee for an over-contribution. The IRS is on to that so I wouldn't try to game that system.

by Anonymousreply 8806/28/2020
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