Considering emptying 401K plans?
 

I am 65, still working part time. On medicare, will start pulling social security in a year or two.
I am wondering why I should not completely cash out my 401K plans. I would reinvest the money- same as it is now, but it would be out of the plans. I could spend it as I see fit. No required distributions.
Several things have me considering it, and taking the huge tax penalty now.
Help talk me out of it.
First, I doubt if income tax will ever be lower than it is right now. I would rather pay a lower tax now on all of it, than ever increasing percentages.
Since I would no longer count this money as income, the other tiered expenses would stay low. Just as an example my wife and I will pay $7200/year extra for our medicare part b due to income related adjustments. Similar extra payments on D. I expect similar payments based on income to only go up in the future. If my only reportable income is social security and dividends from my portfolio, those numbers would be much lower.
I am not a financial hotshot, but it makes sense to me on the surface.
My adviser is against it, but really does not give me any logical reasons- except for not wanting to pay a lot of tax right now. I am going to pay taxes on it eventually, and I suspect they will only go higher. I am waiting to talk to my account, who is pretty sharp.
No, I will not base my decisions on a bunch of guys on a porsche website, but there are some really smart people here. Thought it might be an interesting discussion.
Gary

I say no. At 65, you won't pay a penalty, but will pay the tax........Big difference on the tax rate if you take a large lump sum, vs smaller payments that you need for living expenses.

Example - A good friend retired 2 years ago with 700K in his IRA.......Huge withdrawals to buy a local condo, one in Mexico and also a Motor home. A year ago, he had to withdraw another $140K to pay his taxes.........This year, he has to withdraw another 50K to pay taxes on that 140K + plus his retirement income........Shortly, all 700K will be gone.......

For me, I've been taking just $1,200 a month from mine...I still have 75% of the balance I started with......YMMV.

Don't do it.

You will pay dang near half in income taxes. You can't invest the money that you just paid in taxes. You just lost half of your annual growth. Since that money is no longer in plan you could accrue taxes on the growth of the half you have left.

If your planner is worth a damn he could easily set up a spreadsheet using your exact financials that shows both scenerios.

Longevity risk, inflation risk, opportunity cost, big income tax

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Planner is doing that as we speak. Accountant also running the numbers.
Basically I would be paying 22-24% income tax taking it out in small amounts. I would pay 37% one time. As I suspect tax rates skyrocketing in the future, as well as the "penalties" of higher income if still makes me wonder.
I likely will not do anything, but always like to ponder
Gary

I see you are in Florida so you "only" lose a 1/3 of your 401k investment

Depending on the total amount and current allocations you will still be taxed on any interest or dividend that the non ira investments spin off. Being 65 you probably are being more conservative in your investment style.

Go for it...you only go around once! :)

Have you considered a Roth IRA conversion.
Small amounts over the years. That will not tip you up into the next higher Tax bracket.
Of course it's best if you have the cash already to pay the taxes.
You have till 2023 when these lower tax revert.
Unless congress votes to keep them at these lower rates.

Make a good math question or programming exercise too ... but the tax rules would need to be provided.

I wouldn’t. You never know what’s going to happen. You could have a loss in the future - golden opportunity to take a big distribution tax free, if you have anything to distribute.

Hmmm.....

By 65 you have well-developed spending/saving habits. How disciplined have you been?

My guess is that if you have been a disciplined saver you've got a nice stash, and don't need the lump sum.
On the other hand, if you have not saved wisely, and you cash this in, it will not last long.

Either way, it does not seem like the smartest way to go.

No I do not need the lump sum for anything. I was surprised at the medicare income "penalty" of over $7000 a year on medicare alone. Expect all these type income deductions to continue to escalate. Some politicians are asking for 90% income taxes, or at least increasing taxes. Just trying to plan ahead. Thanks for the thoughts.
Gary

You have to have near poor class income to slash that 7000 a year. Supplementals probably won't change.

My humble...but perhaps ignorant position. Drawing out funds while taxes are low may be a good idea if you have a specific purpose (buying a house, etc.). Especially if you do not need the funds during retirement or can save significant interest on another loan. Personally, I don't see money used to purchase tangible things like real estate or pay off a home in the same category as spending money on a car or vacation or living expenses..as homes retain a good deal of value, generally appreciate and can be sold or rented to recoup the money.

If your other taxable income is not expected to go down significantly in the future (to reduce your rate/bracket) and you want to start taking out money, it seems that the best bet is drawing out as much as you can without going into the next bracket. For example, if you are in the 24% bracket ($84,201 to $160,725) and are making about $85K...you could take out about $75K without going up to the next tax bracket of 32%.

The biggest drawback is that you lose the advantage of postponement of taxes (gain on the part that you will pay as taxes). 24% of the $75K is $18K. By drawing out the $75K this year and paying the $18K in taxes, you will not get interest/gain/etc. on the $18 that goes to IRS. Of course, if in a state that has state tax, it would work the same...usually an additional 5% or so.

That is exactly what I did, I just wish I had started earlier and been more consistent doing it (hindsight is a *****). I was already retired when I started and new my tax bracket wasn't going down and you have to pay the taxes eventually. Every year for several years I moved all I could without bumping me into a higher bracket (per Fint's example above) from my rollover IRA to my Roth IRA and paid the taxes from cash available, not from the rollover money.

This has several benefits, mainly it can reduce your RMDs, possibly eliminate inherited IRAs from estate planning, and keep you out of the increased premiums for Medicare part B and D..,

Even now when having to do RMDs I've considered continuing to move money into my Roth IRA as long as it doesn't kick me into a higher bracket.

Wait for the glorious Green New Deal, whereupon those who get all the green make all the deals! And don’t worry, all the deals will be awesome I’m sure...

What are RMD’s?

https://www.thebalance.com/what-is-a-required-minimum-distribution-rmd-2894304

Got it!

Thank you.