Author Topic: Add to 401K?  (Read 6230 times)

aconway76

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Add to 401K?
« on: July 28, 2012, 12:11:11 AM »
How do you pull funds invested in a 401K out if you are planning to retire early/become FI?

Won't you be penalized?

Does it make more sense to invest in dividend stocks, re-invest dividends, and then start taking the payments upon early retirement?

Thanks!



arebelspy

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Re: Add to 401K?
« Reply #1 on: July 28, 2012, 08:34:17 AM »
Google SEPP and 72(t).

It's a way to access funds in your 401k early without penalty.

But yes, you'll likely want to have some other funds available too (Roth principal that can be accessed penalty free, money in taxable accounts, etc.)

But no, the 401k money isn't completely inaccessible.
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velocistar237

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Re: Add to 401K?
« Reply #2 on: July 28, 2012, 05:02:25 PM »
Roth rollover pipeline.

aconway76

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Re: Add to 401K?
« Reply #3 on: July 31, 2012, 12:28:00 AM »
Thanks for the tips, here is a link for those interested

http://en.wikipedia.org/wiki/Substantially_equal_periodic_payments

velocistar237

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Re: Add to 401K?
« Reply #4 on: July 31, 2012, 06:47:31 AM »
I was wondering how high the 72(t) distribution could be, so I looked up a calculator. At age 35, with $1M invested, you can get distributions up to $27K/year if you start this month (using 1.1% as the 120% Mid-term Applicable Federal Rate). The mid-term rate fluctuates, and right now, it's at a 10-year low, so waiting for it to go up might be a good idea. A person with the same stats as above starting 72(t) distributions in September 2006 could have chosen a distribution amount up to $64K/year (6.09% mid-term AFR).

Pylons13

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Re: Add to 401K?
« Reply #5 on: September 30, 2012, 08:29:24 PM »
If you roll into a Roth IRA, 5 years later you can pull the rollover amount out tax and penalty free.  So once you're retired, roll one year's expenses into Roth every year, and pay little to no income taxes (as long as your income is very low).  After 5 years, you can pull each year's living expenses out of the Roth tax-free.

This gets you an extra 30%-40% return on your money (you saved 30-40% combined fed and state taxes on the money when put into the 401k, but since you're in the 0% bracket when you roll the money over, you don't pay any taxes then.)

It's a great boost, but it takes some time as the max you can contribute is $17,500 annually.

bo_knows

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Re: Add to 401K?
« Reply #6 on: October 01, 2012, 09:02:55 AM »
If you roll into a Roth IRA, 5 years later you can pull the rollover amount out tax and penalty free.  So once you're retired, roll one year's expenses into Roth every year, and pay little to no income taxes (as long as your income is very low).  After 5 years, you can pull each year's living expenses out of the Roth tax-free.

This gets you an extra 30%-40% return on your money (you saved 30-40% combined fed and state taxes on the money when put into the 401k, but since you're in the 0% bracket when you roll the money over, you don't pay any taxes then.)

It's a great boost, but it takes some time as the max you can contribute is $17,500 annually.

So, when I theoretically quit my job, my 401k rolls into a "Rollover IRA" which is essentially a T-IRA, right? Then you would start rolling over chunks of $17.5k to a Roth IRA every year, and withdraw this amount each year after the 5th year?

grantmeaname

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Re: Add to 401K?
« Reply #7 on: October 01, 2012, 04:47:54 PM »
Yeah, pretty much.

joer1212

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Re: Add to 401K?
« Reply #8 on: October 02, 2012, 02:07:42 PM »
Quote
If you roll into a Roth IRA, 5 years later you can pull the rollover amount out tax and penalty free.  So once you're retired, roll one year's expenses into Roth every year, and pay little to no income taxes (as long as your income is very low).  After 5 years, you can pull each year's living expenses out of the Roth tax-free.

This gets you an extra 30%-40% return on your money (you saved 30-40% combined fed and state taxes on the money when put into the 401k, but since you're in the 0% bracket when you roll the money over, you don't pay any taxes then.)

It's a great boost, but it takes some time as the max you can contribute is $17,500 annually.

I don't quite get this. Won't you still have to pay taxes on the money you roll over from your 401k to your Roth IRA, anyway? Where are the savings???

Zaga

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Re: Add to 401K?
« Reply #9 on: October 02, 2012, 02:09:40 PM »
Quote
If you roll into a Roth IRA, 5 years later you can pull the rollover amount out tax and penalty free.  So once you're retired, roll one year's expenses into Roth every year, and pay little to no income taxes (as long as your income is very low).  After 5 years, you can pull each year's living expenses out of the Roth tax-free.

This gets you an extra 30%-40% return on your money (you saved 30-40% combined fed and state taxes on the money when put into the 401k, but since you're in the 0% bracket when you roll the money over, you don't pay any taxes then.)

It's a great boost, but it takes some time as the max you can contribute is $17,500 annually.

I don't quite get this. Won't you still have to pay taxes on the money you roll over from your 401k to your Roth IRA, anyway? Where are the savings???
You pay the taxes, yes, but avoid paying the penalties!  Those are 10%.

joer1212

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Re: Add to 401K?
« Reply #10 on: October 02, 2012, 08:41:52 PM »
Quote
You pay the taxes, yes, but avoid paying the penalties!  Those are 10%.

Oh, are you you're talking about being able to withdraw money from your 401k before age 59 1/2 without the 72(t) rule?
Personally, I'm just going to use the 72 (t) rule, unless there is something I'm missing.

Pylons13

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Re: Add to 401K?
« Reply #11 on: October 02, 2012, 11:22:23 PM »
No no the key is you DON"T roll over to a Roth while working, you do it after you're retired in a lower income bracket.  I'll use real numbers so it makes sense.  Here are some approx. tax brackets for a single person (off the top of my head):

$0-8,000 10%
$8001 - $16000 15%
$16001-$36,000 15%
$36,001-$86,000 25%
Note: These brackets are for taxable income, which is your income less your deductions.  Everyone gets $5,800 and $3,700 in deductions automatically (standard deduction and exemption, respectively). So really the 15% bracket doesn't kick in until $16,000 of income.

You put $17,500 per year into your 401k while working, you're in the 25% tax bracket, so you save $4375 per year in taxes. 
You work for 10 years, so right before retirement your situation looks like this:

401k balance $175,000 (17,500 x 10 years)
Cash balance $43,750 (4,370 x 10 years)

You quit work in year 11, and roll $8,000 into a roth ira.  You live off of $8,000 cash this year. The standard deduction and exemption bring your taxable income below zero. You pay no taxes on the Roth IRA conversion because your taxable income is so low.  The next 4 years are exactly the same, and at the end of 5 years you have:

401k balance       $143,000
Roth IRA balance  $32,000
Cash balance       $11,750

You can now pull out $8,000 out of the Roth IRA tax and penalty free this year (the 5 year anniversary of your first rollover), you can also roll $8,000 more out of the 401k tax free this year.  Repeat until the 401k is completely transferred to Roth.  You got $43,750 in free money.