What do you suggest to your clients? 401K withdrawal question

[Pacun]

Your sister, 56 years old, comes to you and tells you that she has one million in her 401k and she wants to quit her job next month (November 2024).  She wants to live with $50K yearly and hopes that her principal will not be touched for the next 10 years. Since she will not continue to work, she has to roll over, move her money or pay a lot of fees to Fidelity. 

What are her options and tax consequences? 

 

 

[kathyc2]

Age 55 and separated from service, amounts she cashes out of 401K will not be subject to penalty.  I had a client try that several years ago and the plan was set up such that if she took any money out, she needed to take it all out.  She needs to make sure she understands all the fine print of her plan. 

[Lee B]

In this situation, a Certified Financial Planner would be very helpful.

[Medlin Software, Dennis]

"Your sister"

I do not get into or offer advice on family member's personal finances. I might recommend a qualified professional if it is a family member I am close to. I was asked for advice by three extended family members in the last two weeks.

I likely could REALLY help one, but then again, I would then know too much detail, which would likely hurt the relationship. I also do not loan to family, any money I part with to a family member may be a "loan", but I never expect to get it back, and I absolutely do not want to be involved with their finances lest I get snippy because of what they spend my "loan" on.

[jklcpa]

"Your sister"

Knowing this poster's history of mostly posing hypothetical questions, I suspect that this is another one.  In this context, "sister" could be replaced by any other name, especially with the title asking how we would advise clients on their options and tax consequences.

[mcbreck]

She can roll to an IRA without penalty or tax (most likely). She could keep the money in the 401k. I've never seen a firm require you move money from your 401k to an IRA.

Substantially Equal Periodic Payments (SEPP) can be set up to avoid the 10% penalty but she'll still owe taxes. She MUST set up the SEPP with the firm and can't just take a distribution. The 1099 gets coded to avoid the penalty if you set it up officially.

At a 40 year retirement and a 75% stocks / 25% fixed income portfolio and a 5% withdrawal rate, historically speaking she has a 36% chance of running out of money. (if adjusting the $50k for inflation each year) If you don't adjust for inflation you aren't being honest. I have no clue if she qualifies for SS at 62 and if so how much. That would need to be considered.

Medical insurance is going to be a major cost she likely isn't including in her financial needs.

 

Everyone needs to adjust their expectations and timeline based upon their health situation and life expectancy. As an example a friend of my mine retired at 55 because he's about 100 lbs overweight, exceptionally high blood pressure, uncontrolled cholesterol, has had cancer 2x and is diabetic. The odds of him living to be 65 are slim. He retired at 55 and is going to have it all spent by the time he's 70. 

 

[Pacun]

Let's admit it, there is nothing similar to 401k in the banks and that's why there is no many suggestions or straight answer.  Technically, after you are off your work and out of your 401k,  you might as well fork out the taxes and invest the other half left in stocks. 

I have seen $50K IRAS making $200 in a year, which is much less that COLA or inflation. So it might not be a good idea to have the money rolled over to an IRA.

Sometimes I feel that we are stuck with working until retirement and then we can enjoy your money when 90% of the foods will not be welcome by your organism.  se la vie.

[Lion EA]

If you're going to invest half in stocks, why not stocks within her IRA instead of in a fully taxable investment account? Same returns but tax deferral. Or pay taxes on half to convert to a Roth IRA and the other half rolled to a Traditional IRA. Or, 1/3 - 1/3 - 1/3  Roth, TIRA, taxable account, maybe even some in an emergency fund in something very liquid like a MM.

Does she own her home; is she likely to sell and downsize? Is she likely to get a part-time job or start a biz? Do you think her tax bracket will increase or decrease during her retirement?

You know the tax consequences of all her possible choices.

Brainstorm with your client and her financial advisor about all her options to move her funds.

[Jim Oh Bkkr]

14 hours ago, mcbreck said:

Substantially Equal Periodic Payments (SEPP) can be set up to avoid the 10% penalty but she'll still owe taxes. She MUST set up the SEPP with the firm and can't just take a distribution. The 1099 gets coded to avoid the penalty if you set it up officially.

72t?  I had client with this situation (750K) in the '90's.  His broker set the whole 750 up as 72t.  Three years into it, he took an extra 10K to buy a car.  This nullified the 72t, and forced penalties on ALL funds taken since the beginning.  It's been a long time since I looked at the rules for this sort of thing, so YMMV!

My broker's advice was that the "whole" should NEVER be set up under 72t for this very reason.  Some should be kept in a regular IRA for cars and other unexpected needs, and the 72t left alone for the, (at the time?), 10 year period.

 

[mcbreck]

7 hours ago, Pacun said:

I have seen $50K IRAS making $200 in a year, which is much less that COLA or inflation. So it might not be a good idea to have the money rolled over to an IRA.

 

Is this supposed to be a joke?

[Sara EA]

One investment choice that 401ks have that IRAs don't is a stable value fund (essentially insurance contracts that pay a nice rate of interest and can't lose money).  In my experience, Fidelity has very knowledgeable agents and they are not paid on commission so really do look out for their clients.  Your sister should start there.

[Donald Hughes]

We have worked in this field since 1974.

[Donald Hughes]

We use EIA's - Equity Indexed Annuity's, Great Return, No Loss regardless of market activity, Lifetime Income available that you cannot outlive with Beneficiary benefits. Since 1974, no client has lost money due to the market adjustments. Safe!!  

[jklcpa]

32 minutes ago, Donald Hughes said:

We use EIA's - Equity Indexed Annuity's, Great Return, No Loss regardless of market activity, Lifetime Income available that you cannot outlive with Beneficiary benefits. Since 1974, no client has lost money due to the market adjustments. Safe!!  

Interesting answer, not that I agree or disagree with it. For anyone interested in discussing, I'm going to start a separate topic with the idea of this type of investment in retirement plans.