00:00:00
think that through very carefully because whatever the balance is, you’re probably only going to net like 40 uh I’m sorry, like 60% of that balance, like 30 to 40% of it at at the very least is probably going to be lost to taxes and you don’t want to do that to yourself. >> Hello, Peter. Welcome back, everyone. We’re going to start with the milliondoll question. When should you start taking money out of your 401k? A 401k, one of the most powerful savings tools available. But if you take that
00:00:34
money out too early, you could face penalties. On the other hand, if you wait too long, required minimum distributions could push you into a higher tax bracket. It all comes out to figuring out your ideal retirement income strategy. Peter, let’s start with the basics. For the most part, employees do tend to sock away their money in a taxdeerred 401k. Why is that important? Yeah. Well, I see what you did there with the million-dollar question because that’s uh what people were were shooting for.
00:01:01
And today, the 401k is most people’s largest investments or many people’s largest investment. It it used to be the house, right? But now the 401k for oftentimes dwarfs the the the value of the house even. Um but people are >> saving in the tax deferred side still. I think the Roth is catching on but many people still in the tax deferred side and Yogi Barra had a famous uh saying he had many of them but one of them was a dime is not worth a nickel anymore and not only did that speak to inflation but
00:01:36
I think he was probably uh uh kind of a a precursor here onto the value of people’s 401ks. I call it the gross planning mistake. People look at the balance and they think of retirement in the gross numbers. But that 401k like you see on the screen here with the tax deferred accounts, we deposit money pre-tax. The IRS does not forget about that. Although we would love them to, they will not forgive that tax delay and deferral and it is just a delay. Uh Tom Hegna is kind of a uh a guru in the
00:02:13
financial world talking about retirement planning and he said maybe it was Ed Slaugh. One of the two gentlemen who both of them had PBS specials says your IR is an IOU to the IRS. >> That was slot. >> We we love our acronyms, right? Yeah, I think it was slot now that I um Yeah, correct. Thanks. Um, so anyway, don’t forget about that because they won’t. And those tax deferred accounts, we we take advantage of them during our working career. They build and grow tax deferred. But when we take out the money
00:02:46
in retirement, the taxes will be due. And oh by the way, I I meet a lot of people who can tell me in pretty close uh proximity what the balance of their account is, but very few people can tell me anything close to an educated guess on how much they will pay in taxes over their lifetime on that tax deferred balance. And that’s something that we should know and plan for and and get a better understanding on how to manage in order to have more uh financial confidence into and through retirement,
00:03:21
>> right? Okay. So, let’s talk about when you’re allowed to take the money out of your 401k and if you can’t wait or maybe you just want the what what happens if you tap that money early? >> Well, you don’t want to. I mean, bottom line, these are dollars that while you were earning a paycheck, you earmarked to support your life in retirement and and you should by by all means necessary try to stick to that. I mean, if it comes down to it, push come to shove. I realize that life is hard and has
00:03:55
unexpected expenses from time to time, but by all means necessary. We want to keep those dollars working to support your future financial confidence and and self because if you pull them out early, not only on that tax deferred side, is there a mandatory tax withholding? And that the mandatory minimum is 20% out of a 401k, but most people that doesn’t even account for the taxes they’ll actually owe on it. So somewhere between 20 and 30% gets lost to taxes. But oh again uh there is an additional cost
00:04:29
that 10% penalty for pulling money out. So, if you do pull money out early um and and are forced to for whatever reason or make a conscious decision to do that, like think that through very carefully because whatever the balance is, you’re probably only going to net like 40 uh I’m sorry, like 60% of that balance, like 30 to 40% of it at at the very least is probably going to be lost to taxes. And you don’t want to do that to yourself. By the way, even in the form of a loan, don’t don’t take that
00:05:01
loan from the 401k. I know that’s tempting and they make that available and seem like it’s a piggy bank as well, but that actually you are stealing from your future self and your retirement years and setting back those those retirement goals that you might have. We need to live today. I understand that. And life is expensive and things happen, but we also need to prepare and plan for the future. So, don’t take out of that 401k. >> Right. Friendly reminder to everyone watching, just go to Peter’s YouTube
00:05:28
channel and search don’t take a loan from your 401k. >> Yeah. >> For all the reasons not to do it. >> There were a number of reasons. >> Yes. However, when you are 59 and a half, you are allowed to tap those qualified retirement accounts. So, how are withdrawals taxed and how can those withdrawals affect your tax bracket? Well, from the tax deferred side, a withdrawal is going to be taxed as income and added on top of whatever other income that you have and worked into your tax return as income. So,
00:06:01
moving you on up those tax brackets. However, at 59 and a half, that is the age that I think most people are aware of that we can take withdrawals without the 10% penalty. That 10% penalty goes away at 59 and a half. However, not everybody who takes money out of their 401k is actually making a withdrawal. Uh very often they are rolling over that 401k and taking control of the money but not actually taking a withdrawal. It’s not coming to them. It’s not a taxable event. You can basically just transfer
00:06:41
it from your left pocket to your right pocket. But once it’s in an IRA, you’ve got more control. You’ve got more choices over how to invest the money. You can begin to manage the tax implications. So there are a lot of reasons why more and more people are looking at that age 59 and a half as one of the key opportunities that we have as a financial milestone in our progress because we can do that inservice distribution. So if you’ve got an older 401k, you’re no longer at the job. I
00:07:12
think most people know we should tidy our house, we should consolidate, we should bring those dollars with us so they don’t get ignored or forgotten about. But even if we are still working at a company and plan to for several more years and still plan on contributing to and participating in the 401k, it is actually a great opportunity at 59 and a half to build in a little bit more pre-preparation and control over our retirement outcome by taking control of the dollars that we have saved to that point. to taking the the
00:07:47
life savings that we’ve built up and taking control of it into an IRA. That’s called an inservice distribution. So, it’s just one of the ways that we can actually access the money inside of a 401k. But this one importantly is not a taxable event. Um, no penalties involved here and you can continue to contribute and capture the match from your your company’s contributions. >> Also, Peter on your YouTube channel just search inservice rollover. I think we just dissected that one recently, too,
00:08:17
right? >> Yeah, we we’ve done a few videos on a >> while. Yeah, I think we’ve covered it all. >> There is a library there, folks. Go subscribe and great information while you’re zooming around town. Maybe not the the the podcast for the long trip to the beach, but as you’re running errands, great way to get some financial education there. >> I know. I think it’s fine even going to the beach. Okay, so let’s talk about when the government starts requiring
00:08:39
those withdrawals. Those are known as required minimum distributions, RMDs. when do they start for most people? >> Yeah, and we’ve got an episode on that one as well. It is a bit of a moving target here. And oh, by the way, most people are taking withdrawals from their IRA anyway, so they might already be meeting this requirement. But if we are not if we’re not taking money out of tax deferred accounts, if you are 73 or are turning 73 this year, then you need to know about these RMDs. You need to take
00:09:16
the RMDs. And I know that in in in past uh age bands, it has been 70 and a half. It has been 72. Now it is 73. And for everybody who it was 70 and a half or 72, they are already at least 73 or above. However, if you were born in 1960 or later, you get an additional couple years. Your RMDs don’t start until 75. But remember, ladies and gentlemen, uh the chart on the screen there, that is the requirement. That is the IRS’s plan for your money on how they get to collect. Deferring and defaulting to the
00:09:56
IRS’s plan for your money might not be the plan that is in your best interest. And I would argue very seldom is it the plan in your best interest. You probably want to be a little bit more proactive than that. And uh uh to to bring Ed Slott up again here on the program, Ed Slott says that the age between 59 and a half and your RMD age is the window of opportunity. Uh and Ed Slott has been named America’s leading IRA expert by the Wall Street Journal. um he knows his stuff on this and the reason why that
00:10:33
window 59 and a half to your RMD age is such an opportunity is that you can begin to control your own taxed destiny. Uh and the the more that we save on taxes, the more that we get to keep of our own money. Being efficient with taxes again as effective as shooting for higher returns oftentimes but with far less risk. You can do things that are are well above the gray area, not even close to it with the IRS, but you can control your ultimate tax bill. And doing that in that window of opportunity is is just, I
00:11:11
think, one of the smartest things, one of the the the best financial moves people can really look at right now. Now, I’m not saying it’s for everybody. I’m not saying it’s a shoein, but defaulting to the IRS’s plan for how to collect is in very few people’s best interest. You need your own plan on how to minimize control those taxes. >> Right. Okay. So, for retirees who want to make their savings last, what strategies can help them decide how much to withdraw from their 401k each year?
00:11:41
Because, as you were mentioning, this is a delicate balance, right? let the money grow, create a bigger nest egg, but at the same time, you are then creating a bigger tax burden. >> Yeah. Right. And the IRS figured that one out a long, long time ago. That’s why they keep pushing this RMT age back. I I feel like it’s it’s not out of the goodness of their hearts, ladies and gentlemen. Um, but I think there are a few strategies. Number one, everyone should have a mapped out retirement
00:12:09
income plan that talks about order of operations. Which accounts are most efficient and effective to tap into first, second, last? How should we create that income? How should we coordinate social security with the withdrawals that we might be making? And then looking at our income after we’ve met our life expense expenses and where does that income place us within the progressive tax brackets? Is there room in a current bracket that we could actually pull out more and do some Roth conversions? A fantastic strategy. I
00:12:45
call it maximizing your tax bracket. It’s kind of like playing uh Bob Barker the price is right with taxes. We want to get just up to that next bracket, but a penny less so that we’re not paying any more than we have to pay paying the taxes upfront on the conversion. And then Aaron, to your point about the growth, yeah, the growth is great, but if it’s growth I have to share with the IRS versus if it’s growth I get to keep all of, I would personally opt for growth that I get to keep all of as
00:13:15
being the better option. So you don’t want to cost yourself any more than is necessary. But a lot of times if we look at somebody who is subject to RMDs, not only is this going to be a lifetime of forced taxation, but it’s also going to be a lifetime of increased Medicare premiums because we’re encountering Irma when we don’t necessarily have to. And if we bring that into a shorter time span, which we can calculate out for folks, um then ultimately we are saving on not only the lifetime tax liability,
00:13:47
we’re getting the tax-free growth on those accounts. Uh for for health care, we might be able to control that Irma. For widows, we might be able to put them in a more tax advantage situation when otherwise they would be subject to the widows penalty of bumping up into higher tax brackets. And for beneficiaries, we can leave them as the largest recipient rather than leaving the large lion share of our inheritance to the IRS. So multiffold benefits from this, >> right? And you know, while this sounds
00:14:18
like a conversation that maybe you have when you are in or closer to retirement, you and I have talked about the benefits that come with even contributing to the Roth portion of your 401k while you are young and employed. And so I’m sure Peter, somebody who’s younger could benefit from that conversation because then this whole conversation is almost moot. You’re not subject to those RMDs, >> right? Yeah. Uh, you know, I I I think that there’s almost always a time, place, space, age that you could say
00:14:49
some discussion about Roths is appropriate. And by the way, there is never an age that you’re eliminated. Almost everyone of every income has the ability to get some money into a Roth. It’s just which strategy are we going to implement and employ? And uh the the first step, Erin, is you’ve got to take control. So inside of your 401k, while that’s your money in there, you are technically a participant in your company’s plan. So the first step is you’ve got to roll those funds over to
00:15:22
an IRA. Now, this is not a hard process, but it is one that you don’t want to get anything wrong on. And so, we’ve created a website, 401kdistributions.com. 401kdistributions.com. If you go there and put in your information, uh, basically a little bit about your situation and why or when or how you’re planning on taking a 401k distribution, whether you’re rolling it over or consolidating or you want income from it. Uh it it actually generates a customized guide and report for you. So
00:15:56
401kdistributions.com. We’ve got a a couple several of the the the more common scenarios and and specific guides for those scenarios on how not to make any mistakes. And then we of course help guide people through this process all the time and and get in better shape, get get things better positioned for the next phase in retirement and beyond with those retirement dollars. And I I meet a lot of people, Aaron, who sort of are kicking themselves right now for saving up this large tax deferred balance.
00:16:26
Don’t do that, ladies and gentlemen. Saving that money has not been a mistake. And the Roth hasn’t been around forever and ever. Not nearly as long as the 401k. Plus, taxes have come down. It’s just that right now we are in a historically low tax environment. So now is the time to look at managing that tax bill. So don’t kick yourself for saving this tax deferred balance. you’ve done a great thing. It’s just now is the time to look at managing that. And part of that is that distribution from the 401k
00:16:54
so you can begin to control it. 401kdistributions.com. If you’re thinking about taking money out of a 401k at all, there’s a customized guide on there for you. So 401kdistributions.com. >> Great. Peter, thanks for your time today. >> Always a pleasure, Erin. Good to see you. Thank you. Hey folks, Peter Rashan here with Rashan Planning. So glad that you are enjoying the podcast Planning Matters Radio. You know, one of the tools that we’ve put out there that people really seem to
00:17:26
appreciate and really are are finding of value is at 919.com. It is your retirement tax bill calculator. If you’ve got any kind of retirement account, your tax deferred 401k or IRA, this is the website. This is the resource where you can go, you can plug in your own numbers, your information. You can slide the the the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be if you default and defer to the IRS’s plan versus what you could potentially bring
00:18:05
that tax bill down to. A lot of times it is a very significant savings. So if you have not yet, go to the website 919retired.com. Run your numbers on the retirement tax bill calculator. >> This has been planning matters radio. >> The content of this radio show is provided forformational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax, or legal advice from an independent professional adviser. Any investments and/or investment strategies
00:18:37
mentioned involve risk, including the possible loss of principle. Advisory services offered through Brooks Capital Management, a registered investment adviser. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management, while insurance products pay a commission, which may result in a conflict of interest regarding compensation.
