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401k options after age 59.5, Help Needed.

post #1 of 9
Thread Starter 
Mods, sorry if this is posted in the wrong area but I didn't see any other appropriate area to post it in.

I have a family member who just got laid off of work and will be riding on unemployment for a while and eventually retire. The person is over the age of 59.5 so the 10% early withdrawl for 401k's does not apply to them. They have about 45k in their 401k. Most people we talk to say not to cash out because you have to pay taxes (around 20%) now but this doesn't make sense as they will have to pay now or later.

I was thinking since taxes might be higher in the future, it might be smarter to cash out and pay the tax now and since they will get a good sized check, the husband and wife can throw 24k into a Roth IRA (12 last year, 12 this year) and buy some gold or oil investments. Money is not really a problem for them now so they don't really need a cash infusion.

It seems the financial folks in our family didn't have anything to say when I posed this question so I'm thinking its the best way to go. A person at work mentioned something about creating an estate with annuities but it was complicated. He essentially said you could get all the money without paying any tax but over a long 5+ year time frame.

Any help or advice would be appreciated.
post #2 of 9
Rolling into a roth ira sounds like the right thing to do.
post #3 of 9
I could be wrong but isn't a 20% hit if you withdraw early? After retirement age you are taxed at the rate of ordinary income which could be less or more depending on your net income, marital status, deductions etc.
post #4 of 9
Thread Starter 
Quote:
Originally Posted by Will_Penny View Post
I could be wrong but isn't a 20% hit if you withdraw early? After retirement age you are taxed at the rate of ordinary income which could be less or more depending on your net income, marital status, deductions etc.
It's not necessarily a "withdraw early" scenario because the person is over age 59.5. Before this age you pay the 10% extra tax fee for early withdrawl along with your normal taxes depending on your net income for that year as you mentioned.

Since both husband and wife are not working any longer and its 2009, their net income is low and I told them to take the entire distribution which should be 35k after the 20% tax hit. 24k of that goes to a Roth IRA and the rest into a safe CD or something.
post #5 of 9
I could be wrong here, but won't they be taxed when they withdraw from the
401k and then be taxed again (up front) on the Roth IRA? I would just withdraw from the 401k as needed. Maybe 10k here and 10k there and try to maximize investments while they still have something left in it.
post #6 of 9
Thread Starter 
Quote:
Originally Posted by whinny View Post
I could be wrong here, but won't they be taxed when they withdraw from the
401k and then be taxed again (up front) on the Roth IRA? I would just withdraw from the 401k as needed. Maybe 10k here and 10k there and try to maximize investments while they still have something left in it.
They will only be taxed once for cashing out the 401k. The tax rate is what they fall under for year 2009 tax table and since they are not working this year, it will be pretty low (~20%).

Roth IRA contributions are post-tax (taxed already) so they don't have to worry about that. I called my broker and asked more questions and found out they can withdraw their original contribution amount any time from the Roth and not pay any penalty except on the interest earned before the 5 year vesting period. This means, their 24k can be removed at any time and they only pay tax on the interest that would have accrued through a money market account or something similar. It seems to be the best of all worlds.

The only problem now is the question of the government taking over peoples retirement funds in the coming depression. Damn, just when you thought you had it all figured out...
post #7 of 9
I am by no means a financial expert but maybe these ideas could help them out.

1) Make sure they don't qualify from an exemption of the penalty. Usually, if you support the cause of a serious health issue, you can avoid the variable 10% penalty of early withdrawal and any other taxes(income) that might be involved(since its is going to be taken out as a gain).

2) You could also advise them to directly rollover their 401K into an IRA, that way you the administrator cannot withhold their income tax and they could avoid that pesky penalty(but as you pointed out, its probably not the best idea since the gov't might seize those funds with the way things are going).

3) a)You could tell your relative that they can rollover their 401K into a CD-type deffered annuity. The interest rate is fixed for the entire period of the contract(again, not the best in real(inflation weighted) terms but another possibility). b) You could also roll that money over into an equity-indexed annuity as your friend pointed out or even better yet, c) roll that money over into an immediate income annuity, where monthly payments are made to them shortly after the money is deposited(*the older the person, the higher the interest rate).

Note: Rolling over the 401K into an immediate income annuity is not a form of taxable distribution.

4) Last but not least, you could tell them to pay taxes, get it over with and invest the money in hard assets. This is the only way to make sure that their money will have value later on.
post #8 of 9
ROTH IRA is the way to go .. no tax
post #9 of 9
There's a number of questions regarding the person's personal financial situation such as time horizon, specific tax situation etc. which would need to be answered in order to offer specific advice.

One item to consider is whether or not it might be worth waiting until next year and spreading the tax over a period of two years (one time window in 2010) in order to minimize taxes currently (call accountant). If you are real meticulous, you could even take into consideration opportunity costs as well.

I do hold my CFP fwiw.
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