I don't think IRAs are tax free, rather tax deffered. So, they'll get their money back any. Question is how much it'll be in 30yrs. To me roth IRA is a better option.
401K withdrawal
- Thread starter parshisa
- Start date
Yes, make sure you consider the tax and penalty implacations.
Do they take that out before cutting your check?
I have never done this, but I recall others doing so and taking the hit.
Good luck.
Do they take that out before cutting your check?
I have never done this, but I recall others doing so and taking the hit.
Good luck.
Look up CRD (cares act). Essentially you're allowed to claim eligible distribution in 3 equal portions in 3 tax returns (20-22). Up to 100K
you can open roth IRA with any a financial institution and fund it yourself on whatever basis (up to 6K, also limited by income). So essentially tax cleared money coming in, and you can take them out penalty free. Any gains are subject to term and conditions (age and minimum 5yrs account history)
True.
Check your statement carefully, though, how much was withheld from the check you got?
IRS rules, pre-Cares, require that the fiduciary withhold 20% for the IRS.
So, liquidate, as you did, and you have to add all that you got (80% of total) plus the 20% that was withheld to avoid paying taxes on the distribution. Sure, you’ve deferred taxes under Cares, and didn’t get hit with the penalty, but that tax bill is coming unless you roll over 100% of the value of the 401(k).
Which means, you’re going to have to contribute in a lot more than you got in your check to your Roth.
It’s a trap, and people fall into it all the time. That’s why a direct roll over from fiduciary to fiduciary is the recommended course for most folks.
Exactly. I have consolidated several 401K accounts to Schwab. The 401K check goes directly to Schwab; I never see it.
The tax man doesn't mess around.
I understand that additional taxes (besides those already withheld) are due on my text return, and I know exactly (well, not to a penny but pretty close) how much. And I have no problem paying those taxes as it is inevitable (right now or later). Your advice would be applicable If one would go traditional IRA again. Which I personally don't have plans for at the moment
The tax free part I was referring to are the annual gains such as capital gains and dividends that mutual funds spit out every year. You don't pay taxes on those until you actually withdraw the money from the IRA. So you get compounded growth that you won't get in a regular taxable account.
Try playing with this calculator. A tax deferred account like an IRA would probably have 70% more money it in over 30 years than one that is taxable. Over 100% more if it was in a tax free account like a Roth, but you do pay taxes on that initially so hard to really calculate properly.
Taxable Versus Tax Deferred Calculator From AARP
Use this simple calculator to compare a normal taxable investment to a tax-deferred investment, plus earn AARP Rewards points.
www.aarp.org
Those taxes would have been completely avoided if you did a fiduciary to fiduciary roll over.
By taking a check, you made them inevitable.
You're arguing tax law, financial planning, and market timing, all in one thread, and I'm not certain that you actually have a firm grasp on any of them.
Good luck.
The tax free part I was referring to are the annual gains such as capital gains and dividends that mutual funds spit out every year. You don't pay taxes on those until you actually withdraw the money from the IRA. So you get compounded growth that you won't get in a regular taxable account.
Try playing with this calculator. A tax deferred account like an IRA would probably have 70% more money it in over 30 years than one that is taxable. Over 100% more if it was in a tax free account like a Roth, but you do pay taxes on that initially so hard to really calculate properly.
Taxable Versus Tax Deferred Calculator From AARP
Use this simple calculator to compare a normal taxable investment to a tax-deferred investment, plus earn AARP Rewards points.
People underestimate the power this has on gains. Compare two scenarios with one in a tax deferred account and the other in a personal taxable account. The difference is shocking.
It's one reason I started investing early. If you change the term from 30 years to 20 years, the difference is pretty big. The earlier you start, the more you make later or the less you have to initially save.
100% agree. I wish I've started earlier
You're correct that you'll eventually pay taxes on it when you withdraw it but, in most cases if a person is retired and needs the money to live on it's likely he's going to be in a much lower tax bracket than when he's working. Most years since 2005 when I became disabled with only my wife working and using tax deferred IRA's and her 401K contributions we've been able to totally wipe out our tax liability and get back every penny she's paid in throughout the year on both federal and state tax. KY just rewrote their tax laws a couple years ago and we're having to pay a small amount of state tax now but, I was still able to eliminate our federal tax liability for 2019. A person isn't required to start withdrawing from IRA's and 401K's until age 70 1/2. In our case if my wife works until she's 65 and retires she will retire in 2030 which will decrease our income to nearly nothing. I will turn 70 1/2 in 2030 so even with minimum yearly distributions we'll likely have little if any tax liability. My mom retired when when my dad did I think she was 59 and is 89 years old now. She's living off social security, interest from money her and dad put back years ago and funds from her IRA. I think her tax liability is only somewhere around $1K a year.
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I absolutely do not argue neither one of three. rollover would be from one retirement savings account to another. Roth IRA exists to utilize those tax benefits (on capital gains and dividends). If and when I get another job, granted employer provides one, I'll certainly opt for a retirement account (if matched by employer).
That is interesting. Thank you for sharing your particular experience on this subject
@parshisa , I'm still wondering what vehicle you are planning to use to get back in on any future dip. You won't have that 401K. IRAs have limits to contributions per year. You can't rollover cash. I am genuinely asking the question. How will you taking the presumed gains from avoiding loss during the upcoming downturn and getting them back into the market?
That would be individual brokerage account in the form of low cost tax efficient ETFs
From what I understand, I believe you can just stick the money back into an IRA once you get a job without penalty due to the Cares act within 3 years. You can just pay taxes on whatever you don't put back and you can file an amended return for any taxes you end up paying if you put the money back. Even though you took the money directly, it's still considered a trustee to trustee transfer when paying it back. But you have some time before that runs out. A regular IRA and a Roth IRA both don't pay taxes on dividends and capital gains that get kicked out every year. The difference is that you pay taxes on the regular IRA when you take the money out. You don't on a Roth. So a Roth would be better if your income is lower this year due to the layoff and you're in a lower tax bracket. Standard investing practice is to get whatever match you can in a 401k, then a Roth IRA if you qualify, then max out a 401k, then regular investing.
Coronavirus-related relief for retirement plans and IRAs questions and answers | Internal Revenue Service
Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, provides for special distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from certain retirement plans.
It's basically a rollover IRA. So there's no IRA limit on contributions per year. Once the account is opened, it would be in a regular cash account or money market account and then you can just buy or sell shares whenever you want and it can all be done online. Normally you would do a trustee to trustee transfer but because the CARES act treats putting the money back in as a trustee to trustee transfer, there's no downside to doing it that way aside from missing the gains/losses while the money is out of the market.
Or I suppose just a regular cash account in a brokerage account. But dividends and capital gains would be taxed every year unlike an IRA or Roth. I don't think that puts you ahead over the long term even though you avoid the 10% penalty. Best to just spend what you need and then put the rest back within 3 years.
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Yes Sir. To the best of my knowledge all of the statements above are very accurate.From what I understand, I believe you can just stick the money back into an IRA once you get a job without penalty due to the Cares act within 3 years. You can just pay taxes on whatever you don't put back and you can file an amended return for any taxes you end up paying if you put the money back. Even though you took the money directly, it's still considered a trustee to trustee transfer when paying it back. But you have some time before that runs out. A regular IRA and a Roth IRA both don't pay taxes on dividends and capital gains that get kicked out every year. The difference is that you pay taxes on the regular IRA when you take the money out. You don't on a Roth. So a Roth would be better if your income is lower this year due to the layoff and you're in a lower tax bracket. Standard investing practice is to get whatever match you can in a 401k, then a Roth IRA if you qualify, then max out a 401k, then regular investing.
Coronavirus-related relief for retirement plans and IRAs questions and answers | Internal Revenue Service
Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, provides for special distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from certain retirement plans.www.irs.gov
