Profile image
By The Daily Reckoning (Reporter)
Contributor profile | More stories
Story Views

Now:
Last Hour:
Last 24 Hours:
Total:

5 Steps To Retiring Rich (Step 2)

Tuesday, November 14, 2017 12:50
% of readers think this story is Fact. Add your two cents.

(Before It's News)

This post 5 Steps To Retiring Rich (Step 2) appeared first on Daily Reckoning.

Dear Rich Lifer,

About a year ago, my wife and I were invited to a neighborhood barbecue.

The various meats, prepared by the Argentinean husband, were ridiculously good. The wine, locally-grown grenache, was flowing freely. And then the conversation turned to my status as a well-known financial guru …

“Okay, let me see what you think of what WE just did,” says the hostess proudly.

The short version is that they cashed out the husband’s 401(k) to buy the house we were currently sitting at.

Wine. Lips. Gulp.

About ten adults are all looking at me for a learned response, presumably a supportive one.

Before I can say anything, the wife follows up with all the rationalizations. The house will keep going up. They will always need a place to live. So on and so forth.

It’s not COMPLETELY faulty logic, and I emphasize those threads of truth in my eventual response.

But inside, my mind is doing the actual math …

The house is worth about a million.

So let’s say they cashed out $200,000 for the downpayment.

Federal taxes probably took up at least 20% of that amount. Possibly much more since the lump sum would probably shift them into a higher overall bracket. Still, let’s be conservative and call it $40,000.

Then there’s also that 10% early withdrawal penalty. Kiss another $20,000 goodbye.

And since we’re in California where a six-figure income will easily push you beyond 10% in state income taxes (our top marginal rate is actually 13.3%), they’ll end up paying at least another $20,000 or so to Sacramento.

That $200,000 withdrawal just shriveled to $120,000. Again, under pretty conservative assumptions.

I’ve had a good amount of wine and this is back-of-the-envelope math but this house is going to need to appreciate an awful lot just to make up the money handed over to various government agencies.

“So, sure,” I conclude. “You could have definitely done worse things than that.” I simply refrain from naming what those things are.

In short, I consider early 401(k) withdrawals to be a terrible idea. It is the first, and worst, option you have when it comes time to leave an employer.

Even if you’re at least 59 and a half and actually retiring — or even taking advantage of the “Rule of 55” I mentioned in our primer on these plans — a large lump sum withdrawal isn’t the best idea.

Sure, you can simply withdraw the money penalty free and use it as you see fit.

But your employer will keep 20% of the proceeds for taxes.

What’s more, taking out a large amount of money in one lump sum could still end up bumping you into a higher overall bracket.

So you might still want to consider spreading out your withdrawals over a longer schedule to help minimize the tax implications.

You can even keep all the money invested until required minimum distributions begin at 70 and a half.

Which brings me to other choices that everyone has when it comes to handling 401(k) plans once they’ve decided to leave a company …

In addition to cashing out, you can also leave the money in the current plan.

Odds are good your old employer will be happy to keep your money, though some plans have minimum balance requirements.

You might consider doing this if your employer’s plan has very low costs, great investment options, or some other unique advantage.

Otherwise, it is the second worst option.

Why?

Practically speaking, it will be another account you have to keep track of. Another batch of paperwork to mind. And often, another forgotten corner of your financial life.

If you’re moving to a new job, you should probably consider bringing your 401(k) money with you instead …

Not all plans will allow this, but most will.

As long as the plan has reasonable expenses and solid investment choices, it’s a fine option.

The primary benefit? It will be easier to manage a bigger chunk of your overall retirement assets.

However, this still isn’t my favorite option.

In fact, whether you’ve reached retirement age or not, my primary recommendation is always moving 401(k) assets into IRA accounts whenever possible.

There are a few potential downsides.

First, there’s still that idea of having one extra account to keep track of.

You also CANNOT use the rule of 55 with IRAs.

And some states may offer more asset protections for 401(k)s than IRA accounts.

However, for most people, the advantages of IRAs outweigh those minor disadvanages by a country mile.

For starters, you have a wider array of investment choices.

No longer are you limited to whatever mutual funds or options your plan administrator offers.

You can invest in individual stocks, exchange-traded funds, mutual funds, CDs, and a million other choices. You can even start selling options to generate extra income on top of your holdings.

Plus, you can also keep your expenses as low as possible.

By moving your money to a no-fee IRA, preferably one at a low-cost brokerage house like Fidelity or Vanguard, you can completely eliminate hidden fees and other costs imposed by your company 401(k) plan.

If you go this route, it’s typically better to keep the assets in a separate rollover account even if you already have an existing IRA.

You should also make sure you do a direct rollover, also known as a trustee-to-trustee transfer. That will avoid any taxes being levied or withheld.

To roll a 401(k) into an IRA account, it’s just a simple form and a little setup work.

But the end result is maximum freedom and minimum cost while preserving all the tax protections.

To a richer life,

Nilus Mattive

Nilus Mattive
Editor,The Rich Life Roadmap

The post 5 Steps To Retiring Rich (Step 2) appeared first on Daily Reckoning.

This story originally appeared in the Daily Reckoning . The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.



Source: https://dailyreckoning.com/5-steps-retiring-rich-step-2/

Report abuse

Comments

Your Comments
Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

Top Stories
Recent Stories
 

Featured

 

Top Global

 

Top Alternative

 

Register

Newsletter

Email this story
Email this story

If you really want to ban this commenter, please write down the reason:

If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.