Author Topic: 401K or IRA Withdrawals  (Read 7601 times)

benjenn

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401K or IRA Withdrawals
« on: January 06, 2015, 07:42:58 AM »
Hey, everyone.  LOVE this forum and appreciate all responses. 

DH and I are planning to retire the end of this year.  DH is already retired from the Air Force and is already receving his pension.  He's currently employed at a large corporation but hasn't been there long enough to have a big pension but they do a 50% match on 401k contributions, so that's helpful.

I am retiring 7 years early from my job (that has a defined benefit plan) but, because of my age (I'll be 51), they count it as 11 years early because they count backwards from 62 instead of backwards from years of service (our plan is 30 years or age 62, whichever comes first).  As you can imagine, it's a HUGE hit financially.  With MMM's help, we've come to the realization that all we need is enough and we can take this huge hit and have enough - so we're going for it.

I'd been planning to take the annuity (monthly pension) until recently when we realized we could outdo that fixed amount in the markets with the lump sum option.  However, rolling that into my 401k (or transferring it to an IRA) gives us the problem of the 10% penalty for withdrawals because of my age.  We do need this money for living expenses... probably $15-17,000 per year to add to DH's pension.  This is without any part time jobs, which we will likely have after 6 months or so of enjoying the retirement.

We're starting 2016 with enough cash on hand that I can go a full year without any withdrawals so that we'll know for sure in 2017 how much we will need to withdraw to meet our expenses.

So my question for this esteemed group is... at that point, how should we make those withdrawals?  Monthy?  Quarterly?  We would probably have a good enough idea of what we need that we could set up automatic withdrawals but I'm hesitant to do that in case we should make some unexpected money and not need a withdrawal.  Does that make sense?

I had our budget all worked out for the next several years using the annuity payment we were expecting to use and now that's completely out the window.  LOL.  I love having options but, having never done this before, I'm just not sure how we should go about it.  The annuity was the easy way out but we're now convinced it's not the best option.

Thoughts?


wtjbatman

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Re: 401K or IRA Withdrawals
« Reply #1 on: January 06, 2015, 07:51:54 AM »
Double check whether the early withdrawal penalty applies if you do a rollover. I'm guessing it doesn't.

I have a pension myself, and it allows rollovers to an IRA that function like any other 401k to IRA or IRA to IRA rollover... there is nothing being withdrawn, therefore there is no penalty. I would definitely find out for sure before you commit to taking the pension as-is.

benjenn

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Re: 401K or IRA Withdrawals
« Reply #2 on: January 06, 2015, 08:07:56 AM »
I know I can roll it over into my 401k without penalties or taxes... it's getting the money OUT of my 401k that I'm really interested in knowing how to do it best.  I know there will be penalties to do that... I just have to accept that.

Louisville

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Re: 401K or IRA Withdrawals
« Reply #3 on: January 06, 2015, 08:15:41 AM »
There are tons of threads about this here.
Search this forum or google "72t" and/or "substantially equal periodic payments" and/or "sepp".
That will get you started.

wtjbatman

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Re: 401K or IRA Withdrawals
« Reply #4 on: January 06, 2015, 09:08:47 AM »
I know I can roll it over into my 401k without penalties or taxes... it's getting the money OUT of my 401k that I'm really interested in knowing how to do it best.  I know there will be penalties to do that... I just have to accept that.

Oh... duh. A couple parts of your post confused me, obviously I guessed wrong with what you meant, lol.

But yes, exactly like Louisville said. There are two primary methods of getting money out of tax advantaged accounts without paying early withdrawal penalties. Roth Pipeline and 72t/SEPP. I would do either one of those before I stuck with a pension that may not actually be a good deal in the long wrong (I don't know for sure, you didn't post any numbers or details).

Cheddar Stacker

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Re: 401K or IRA Withdrawals
« Reply #5 on: January 06, 2015, 09:31:51 AM »
The Roth pipeline won't work since you need the money after 1 year. The SEPP will be good for you. It locks you into a fixed amount until you turn 59.5, but since you won't be doing this for 2 years you'll already be 53, so that's only 6.5 years.

ETA: And congrats on realizing you have enough, and on your retirement!

benjenn

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Re: 401K or IRA Withdrawals
« Reply #6 on: January 06, 2015, 09:54:09 AM »
Question on the SEPP... you don't get to choose how that money is invested, right?  Is that why you have to choose an interest rate?  How does that work?  I have my 401K money pretty aggressively invested and would hate to lower the earnings by that much on the money I'd need for 8 years.

wtjbatman

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Re: 401K or IRA Withdrawals
« Reply #7 on: January 06, 2015, 10:03:03 AM »
Question on the SEPP... you don't get to choose how that money is invested, right?  Is that why you have to choose an interest rate?  How does that work?  I have my 401K money pretty aggressively invested and would hate to lower the earnings by that much on the money I'd need for 8 years.

How the money is invested has nothing to do with it. You invest your money however you want. SEPP, or Substantially Equal Periodic Payments, is a concept where the IRS uses a formula based on an interest rate and your life expectancy, combined with your account value, to determine how much money you have to withdraw each year from that account. Once the process starts it goes for a minimum of either 5 years or until you turn 59 1/2.

I saw another blogger who was using SEPP to access his retirement account early. With the IRS formula, he was withdrawing something like 3.x% each year from his IRA. The actual money in his IRA was invested in Vanguard index funds and he was "earning" significantly more than that.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments

Cheddar Stacker

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Re: 401K or IRA Withdrawals
« Reply #8 on: January 06, 2015, 10:04:51 AM »
Admittedly I need to read more on the SEPP, but I think you might be confusing some facts. The "interest rate" is more of a withdrawal rate. It allows you to slowly pull the funds out at a rate that won't deplete the balance before you reach normal retirement age. So you are allowed to pull out 3.47% (just a random example, not real) of your total portfolio balance each year. Maybe that rate is adjusted each year, maybe not, again I need to read more about these even though I don't plan to use one.

But that rate is not an investment return, it's a maximum amount you can take out. I believe the IRA (after rolling it from the 401K) funds can be invested however you want. Although, since you truly need this money I would suggest reading a bit about the sequence of returns risk. You might want to consider being a bit less aggressive for a few years if you just barely have enough. But since you are already in your 50's, social security is not far behind so that should add a nice safety margin if the market has a rough patch after you retire.

boarder42

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Re: 401K or IRA Withdrawals
« Reply #9 on: January 06, 2015, 10:17:40 AM »
Ok so Cheddar.  I know we've talked this before.  And i know the reason for going Ladder if you have the roth principal/ Taxable money is because of the flexibility.  Where as SEPP requires you take the distribution.  Can you not reinvest what is not needed/Used from the SEPP in an IRA to avoid the taxes on it.

nereo

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Re: 401K or IRA Withdrawals
« Reply #10 on: January 06, 2015, 10:27:43 AM »
Quote
So my question for this esteemed group is... at that point, how should we make those withdrawals?  Monthy?  Quarterly?  We would probably have a good enough idea of what we need that we could set up automatic withdrawals but I'm hesitant to do that in case we should make some unexpected money and not need a withdrawal.  Does that make sense?

In terms of the frequency of making withdrawals, it makes no difference. Monthly, Quarterly, weekly.... same same.  If your budget is consistent why not make it simple and make withdrawals quarterly or bi-annually? SEPP payments are a good idea to avoid all fees, but from what I hear its often insufficient to live off of alone, and you might need to make other withdrawals and/or use taxable accounts.  If you set up SEPPs right off the bat you might be able to stretch your taxable-accounts for 2+ years (you said you had enough in savings to make it through the first year).  Setting up a Roth pipeline when you retire IS a good idea, even though you won't be able to access that money for 5 years without penalty - at 51 you will be 56 when the first year's pipeline becomes available to you. 

Quote
I am retiring 7 years early from my job (that has a defined benefit plan) but, because of my age (I'll be 51), they count it as 11 years early because they count backwards from 62 instead of backwards from years of service (our plan is 30 years or age 62, whichever comes first).  As you can imagine, it's a HUGE hit financially.  With MMM's help, we've come to the realization that all we need is enough and we can take this huge hit and have enough - so we're going for it.
Um...only if you choose to look at it that way I guess.  Sure you'll get far less than if you stayed until 30yrs/age 62, but that just seems like a pessimistic way of looking at it.  For example, I know I could break the $10M mark if I just kept working until age 67 and invested everything i could (and avoided layoffs and kept getting raises), so retiring in my 40s will be a 'huge hit financially' to me as well, costing me over $9M.  See how silly that sounds? It's both obvious and counterproductive to keep track of money "lost" if you had just kept working for many more years. 

Cheddar Stacker

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Re: 401K or IRA Withdrawals
« Reply #11 on: January 06, 2015, 10:34:17 AM »
Ok so Cheddar.  I know we've talked this before.  And i know the reason for going Ladder if you have the roth principal/ Taxable money is because of the flexibility.  Where as SEPP requires you take the distribution.  Can you not reinvest what is not needed/Used from the SEPP in an IRA to avoid the taxes on it.

You can if you have earned income of some kind; distributions from retirement accounts are not earned income. My issues with doing the SEPP in my circumstance are:

1) You are limited to what the IRS calculates. Maybe it turns out to be $30K. Maybe I want to take out $65K because I need the cash, or because I want to fill up the 15% tax bracket.

2) During FIRE I might have taxable income of $10K one year, then $45K the next year. If I have to take out $30K in a SEPP that puts me at $40K AGI one year and $75K AGI the next. I don't like that.

So it's less about what to do with the funds after I have them, and more about manipulating taxable income to be more efficient.

It can be good for many people, including benjenn it seems, but I don't plan to use it as of now. If you plan accordingly and line up non tax deferred funds for use during the first 5-7 years, the Pipeline appears to me to be the better choice.

benjenn

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Re: 401K or IRA Withdrawals
« Reply #12 on: January 06, 2015, 02:57:09 PM »
So now DH and I are thinking that we will take the lump sum, roll it into the 401k and plan NOT to make withdrawals unless we absolutely have to.  We'll just let it grow.  We can coast for a good year and a half or so with neither of us bringing in extra money but I just don't see that happening.  And how easy will it be to bring in $1,500 a month?  Pretty darn easy between the two of us...  I like the idea of no penalties and I like the idea of watching it grow until we turn 59 1/2.  Thanks for your help, everyone!  I will look further into the SEPP in case we decide to go that way... that interest rate it gave just confused me.

Cheddar Stacker

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Re: 401K or IRA Withdrawals
« Reply #13 on: January 06, 2015, 03:07:27 PM »
So now DH and I are thinking that we will take the lump sum, roll it into the 401k and plan NOT to make withdrawals unless we absolutely have to.  We'll just let it grow.  We can coast for a good year and a half or so with neither of us bringing in extra money but I just don't see that happening.  And how easy will it be to bring in $1,500 a month?  Pretty darn easy between the two of us...  I like the idea of no penalties and I like the idea of watching it grow until we turn 59 1/2.  Thanks for your help, everyone!  I will look further into the SEPP in case we decide to go that way... that interest rate it gave just confused me.

If you're income is low enough, consider rolling some of it from the 401k into a Roth IRA. Letting it grow there instead of in the 401k/Traditional IRA will allow for less taxes overall. You don't have to use it if you don't want to, just move it over annually at an amount that keeps taxes low.

benjenn

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Re: 401K or IRA Withdrawals
« Reply #14 on: January 07, 2015, 07:25:05 AM »
So now DH and I are thinking that we will take the lump sum, roll it into the 401k and plan NOT to make withdrawals unless we absolutely have to.  We'll just let it grow.  We can coast for a good year and a half or so with neither of us bringing in extra money but I just don't see that happening.  And how easy will it be to bring in $1,500 a month?  Pretty darn easy between the two of us...  I like the idea of no penalties and I like the idea of watching it grow until we turn 59 1/2.  Thanks for your help, everyone!  I will look further into the SEPP in case we decide to go that way... that interest rate it gave just confused me.

If you're income is low enough, consider rolling some of it from the 401k into a Roth IRA. Letting it grow there instead of in the 401k/Traditional IRA will allow for less taxes overall. You don't have to use it if you don't want to, just move it over annually at an amount that keeps taxes low.

Thanks for the input, Cheddar Stacker.  We don't have a Roth IRA (our income is too high) or even a traditional IRA at this point.  We've talked about opening a traditional IRA this year (although we won't be able to deduct it) but haven't really looked at a Roth.  If we roll over the 401k into a Roth, we have to pay taxes on what we roll over when we roll over, right?  We'll be in the 15% bracket after we retire and I can't see us withdrawing enough in any one year to push us over that even from the 401k.  Am I missing something?

Cheddar Stacker

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Re: 401K or IRA Withdrawals
« Reply #15 on: January 07, 2015, 08:12:35 AM »
So you have a big chunk in a 401K, let's use $400,000 for a concrete example. Here's what you do:

Retire.

Roll the 401K into a T.IRA.

Roll $30,000/year from the T.IRA into the R.IRA creating income (this will add to your husband's pension income, and any other income you make) and you will be able to take the standard deductions and exemptions against that. If Pension + Part-Time Work = $40,000 you have $70,000 gross income - $20,000 deductions/exemptions = $50,000 taxable income x 10%/15% = about $6,575 federal taxes.

Rolling $30K/year will deplete your $400,000 T.IRA in about 13 years without considering growth. It will obviously not stay at $400,000 unless it's sitting in cash. If you factor in 7% growth it will take a lot longer than 13 years, but hopefully you get the idea. You pay tax on the value rolled over, so if the market (or any particular stock/mutual fund) tanks one year roll over a bigger chunk and take the tax hit. It will be worth it to move it into the Roth and let it recover over there.

Once it's in the Roth no more tax, ever. You can take it out and it won't add to your income.

If you leave it in a 401K/T.IRA to grow, you will end up paying substantially more in taxes over the remainder of your life.

benjenn

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Re: 401K or IRA Withdrawals
« Reply #16 on: January 07, 2015, 08:23:55 AM »
Wow... thanks for that suggestion!

Cheddar Stacker

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Re: 401K or IRA Withdrawals
« Reply #17 on: January 07, 2015, 08:31:20 AM »
Wow... thanks for that suggestion!

No problem. It's what we were referring to above as the Roth Ladder. It's discussed widely around here, and written about by many people around the web. Here's a great example: http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

The main problem with this is you can't access the funds for 5 years, which is why it's called a ladder. The funds you roll over in year 1 can't be withdrawn until year 6, and each year you add to it, and each year you take away as needed. That's why it wasn't suggested to you above based on how you framed your scenario. Since you stated you planned to use the funds after 1 year it didn't fit. But if you plan to leave the money alone for a while it's perfect.

benjenn

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Re: 401K or IRA Withdrawals
« Reply #18 on: January 07, 2015, 02:00:31 PM »
Okay.... so I've got a question on the Roth ladder idea.  You have to leave the money alone for 5 years after you convert it.  Is that even after you turn 59 1/2?  For instance, I've calculated starting this process in 2016... can withdraw that in 2021, right?  Then 2017, withdraw in 2022... 2018, 2023...  I will turn 59 1/2 in 2023.  If I convert money in 2020, will I still have to wait until 2025 or can I withdraw it any time after 59 1/2?  I don't think I'd need to withdraw it any sooner, I was just wondering about the 5 year rule after turning 59 1/2.

Thanks again for the great idea!

Cheddar Stacker

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Re: 401K or IRA Withdrawals
« Reply #19 on: January 07, 2015, 02:09:26 PM »
59 1/2 clears all rules. You can do whatever you want then. You still have to pay taxes on Traditional withdrawals, but there will never be any penalties or restrictions once you reach that age.

benjenn

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Re: 401K or IRA Withdrawals
« Reply #20 on: January 08, 2015, 07:05:44 AM »
Awesome!  Thanks so much for the great advice.  I think that's what we'll do.