Author Topic: Dumb Question About 401Ks  (Read 3672 times)

oldtoyota

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Dumb Question About 401Ks
« on: October 16, 2014, 08:22:19 PM »
The spouse asked me tonight about how we actually spend our 401K when the time comes. I realized I am so busy saving that I've never given much thought to how I access the money when the time comes.

When I reach a certain age, am I free to:

1. Take it all?
2. Take some?
3. Set up a distribution plan?
4. Something else?

How does it work?


Cheddar Stacker

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Re: Dumb Question About 401Ks
« Reply #1 on: October 16, 2014, 09:13:14 PM »
Any of those options. Consider a rollover to an IRA which can have better investment options and lower fees. Anything you take out of a 401k/IRA is taxable income, so taking it all at once has a huge tax burden.

JoanOfSnark

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Re: Dumb Question About 401Ks
« Reply #2 on: October 17, 2014, 05:11:05 AM »
another dumb question about 401K:

I was transfered from the main branch of a multinational company to a daughter-branch overseas. This involved a whole new contract of employment and everything, as well as being paid in a different currency. Am I now able to roll over the 401K I had previously in the US to an IRA? Or since I'm still with the same parent-company (sort-of), can I still contribute? What can I do with it?

oldtoyota

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Re: Dumb Question About 401Ks
« Reply #3 on: October 17, 2014, 05:52:03 AM »
another dumb question about 401K:

I was transfered from the main branch of a multinational company to a daughter-branch overseas. This involved a whole new contract of employment and everything, as well as being paid in a different currency. Am I now able to roll over the 401K I had previously in the US to an IRA? Or since I'm still with the same parent-company (sort-of), can I still contribute? What can I do with it?

That is tricky. Have you spoken with your HR department at your "new" company? I wonder if they have run into this question with other employees.

oldtoyota

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Re: Dumb Question About 401Ks
« Reply #4 on: October 17, 2014, 05:52:53 AM »
Any of those options. Consider a rollover to an IRA which can have better investment options and lower fees. Anything you take out of a 401k/IRA is taxable income, so taking it all at once has a huge tax burden.

Thanks! Is rolling the 401K over into an IRA how the "backdoor ladder" idea people talk about here works?

teen persuasion

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Re: Dumb Question About 401Ks
« Reply #5 on: October 17, 2014, 06:06:35 AM »
Any of those options. Consider a rollover to an IRA which can have better investment options and lower fees. Anything you take out of a 401k/IRA is taxable income, so taking it all at once has a huge tax burden.

Thanks! Is rolling the 401K over into an IRA how the "backdoor ladder" idea people talk about here works?

Yes and no.  You are converging multiple ideas here.

There are Roth and traditional versions of both IRAs and 401Ks.  You can roll Roths into Roths and traditional ones into the other traditional accounts without triggering tax issues.  If you convert a traditional account to a Roth IRA, you would be taxed on that amount converted, as regular income.

  If you have low taxable income, it is possible to convert limited portions for little to no tax, depending on your situation.  This is the ladder.  Five years after conversion, that amount acts like a contribution and can be removed tax free.  Convert a portion every year, withdraw a portion every year starting five years later. 

The backdoor is a method for funding a Roth IRA if you are over the income limits.

catccc

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Re: Dumb Question About 401Ks
« Reply #6 on: October 17, 2014, 08:25:17 AM »
Like others have noted, you can convert portions of the 401K to a Roth.  Start this about 5 years before you are planning to draw down funds for spending.  Google "Roth Pipeline" for more info.  Or ladder, as others have noted.  I usually call it a pipeline because ladders make me think of CDs, but whatever, I suppose it's the same method.

The way I understand it, you can always take your Roth IRA contributions (but not earnings) out tax free, and so you basically make your conversions the contributions, but then this 5 year waiting period applies to conversions.  So for contributions directly made to the Roth, you can take them out whenever.  For conversions, you can take them out after 5 years.  Any earnings need to wait until 59.5 to be withdrawn w/o penalty.  If you have some direct contributions, or older conversions, you don't need to plan out 5 years in advance.  I mean, the rule still applies, but you'll already have some direct contributions you can take and some conversions that have already satisfied the 5 year rule.  The nice thing about conversions is you can basically name your taxable income for the year, giving you lots of control over what you pay in taxes.

You can also access your 401K directly and without penalty before 59.5 with IRS rule 72T, (aka SEPP or substantially equal periodic payments.)

Cheddar Stacker

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Re: Dumb Question About 401Ks
« Reply #7 on: October 17, 2014, 08:37:00 AM »
OT - once you reach 59.5 years old all this laddering and pipelines and tricky business isn't as necessary. I don't know how old you guys are so I just thought I'd throw that out there.

If you stop working long before 59.5 all these strategies become very important. 1 - because you need access to the money and 2 - because it's important to begin spreading the tax burden out as soon as possible.

@Joan - +1 to OT's comment above. HR will be able to help you more than we will. I'll just say if the payee on your checks and/or FEIN on your W-2 (The payer ID #) has changed there is a good chance you would be able to roll the 401k into an IRA since your employer changed.

JoanOfSnark

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Re: Dumb Question About 401Ks
« Reply #8 on: October 17, 2014, 12:53:23 PM »
I'll give them a shout after the weekend. Trick about the W2 is, I'm outside the US. So, no W2 anymore.