401K, IRA and Pension withdrawals

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  #1  
Old 07-02-2011, 02:08 PM
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Default 401K, IRA and Pension withdrawals

I appreciate the wisdom and experience of those who post on TOTV, so here are some questions:

This is my situation: I have a 401K with my current employer, a rollover traditional IRA and my current employer also has a pension plan that I'm eligible for when I turn 59 1/2.

401K - Let's say I stay at my current job until I reach 60, then retire from that job. Can I take withdrawals from my former employer's 401K plan and then get another full-time job somewhere else? Would my 401K plan withdrawals be considered taxable income if the withdrawals are made after 59 1/2?

IRA Rollover - Traditional - If I keep working full time after 59 1/2, can I start withdrawing from my IRA at 59 1/2, or does a person have to be fully retired to start withdrawing from a traditional IRA? Please confirm -- I will have to pay taxes on withdrawals I make after age 59 1/2 from a traditonal IRA.

Pension - This question may have to be answered by my employer's HR department, but I thought I would ask anyway. If I retire from my current job at 60 and I take another full-time job, can I start withdrawing at age 60 from my former employer's pension plan, or do I have to be fully retired to start collecting from my former employer's pension plan?

Thanks in advance.
  #2  
Old 07-02-2011, 02:22 PM
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To the best of my knowledge (I have done some research):

A tax deferred investment (401k, traditional IRA) you can start withdrawals at 59.5 y.o. Yes you will declare this as income at tax time. They will withhold 20% at withdrawl time and give you a statement at year end. The previous statements are true regardless of current income situation. There are actually ways to take a withdrawal prior to 59.5 without the 10% penalty but I won't get into that since you didn't indicate that.

As to pension - Most likely you will earn that pension when you earn it. In other words it won't matter if you work another job. If your plan says you get paid at 59.5 then you will get paid. They will withhold taxes in the same manner as if you were still being paid by them (i.e. it might be more or less depending on claimed allowances etc. It's not auto 20% like a 401k).

If you have a ROTH IRA then the withdrawal is tax free since there was no income tax advantage when you put it in. Again this age is 59.5.

Social security (if you take early at 62) is obviously reduced and then reduced again if you have current income from employment. You should refer to the SS web site for a calculator if interested.
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Old 07-02-2011, 02:44 PM
784caroline 784caroline is offline
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Russ appears to have answered your direct questions and I agree with his responses.

However, a couple of other things you may want to think about..

1) If you are taking a defined pension from your employer and plan to get another full time job, would it be wise to start taking withdrawals from your 401K and IRA.....it will all be taxable. Your goal should be to keep your contributions and apreciation in your tax deffered accounts as long as possible before you have to make withdrawals...Over time, You will hopefully have a larger base of growing funds to work with and although you may not be making additional contributions, all appreciation would be tax deferred until withdrawal.

2) Bigger picture .....you should start planning now for when you are required to make withdrawals from tax deffered accounts and have to determine your Minimun Required Distribution (MRD). It would be best to start putting all the tax deffered assets under one umbrerlla such as an IRA because it offeres you most control and flexibility. ie transfer funds accumulated over they years in 401K, 403B, and 457 plans into one IRA.

3) are you planning you maintain Chicago or IL as your state of residence or move to TV?? Although state and local taxes should never be the reason to move certain cities and state tax policies have a big impact on your retirement income..ie NY or specifically NYC. If you are uncertain, that another reason to hold off as long as you can until you start taking withdrawls.
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Old 07-02-2011, 02:56 PM
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Quote:
Originally Posted by Russ_Boston View Post
To the best of my knowledge (I have done some research):

A tax deferred investment (401k, traditional IRA) you can start withdrawals at 59.5 y.o. Yes you will declare this as income at tax time. They will withhold 20% at withdrawl time and give you a statement at year end. The previous statements are true regardless of current income situation. There are actually ways to take a withdrawal prior to 59.5 without the 10% penalty but I won't get into that since you didn't indicate that.

As to pension - Most likely you will earn that pension when you earn it. In other words it won't matter if you work another job. If your plan says you get paid at 59.5 then you will get paid. They will withhold taxes in the same manner as if you were still being paid by them (i.e. it might be more or less depending on claimed allowances etc. It's not auto 20% like a 401k).

If you have a ROTH IRA then the withdrawal is tax free since there was no income tax advantage when you put it in. Again this age is 59.5.

Social security (if you take early at 62) is obviously reduced and then reduced again if you have current income from employment. You should refer to the SS web site for a calculator if interested.
Russ Boston godd summary. I would only add that the tax implications should be explored as well as the drawbacks at such an early age.

for example I have an aftertax mutual fund. I took my *****on from my second employer as a lump sum and reinvested. I then took monthly payments from this mutual fund until the market started to tank. I suspended the payments and allowed the fund to build again. Had i kept drawing on it I would have depleted it too quickly....just saying
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Old 07-02-2011, 04:24 PM
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Not knowing very much about finances we listen to our broker. He said that we should start drawing SS as early as we can, age 62, even at the reduced amount. He said that it takes many years on the other end to make up the difference by waiting for full retirement. Because we retired so early me, 55, my honey 50, we have to be careful but so far our broker has been right on all his calls and we have actually increased our holding rather substancually. That is why we are moving to TV instead of staying here in NM.

In a nut shell get a good broker that you can trust and listen to his advice.
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Old 07-02-2011, 09:01 PM
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Thank you to all who have replied. If I move to TV that is still a few years away, but I doesn't hurt to start thinking about these things now. In answer to 784Caroline's question: Are you planning you maintain Chicago or IL as your state of residence or move to TV?? If I do decide to move to TV (or another warm weather locale), I will be a full-time resident. I don't think financially or time wise I would be able to maintain both a home in Florida and a home in Chicago.
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Old 07-02-2011, 09:28 PM
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The way you ask the questions it implies that you will need the money from the pension and 401k now. If true then I would think you stand a good chance of running out of money in retirement. If it does not make economical sense to stay in your current job and you save the pension that could be a different story. Be sure your budget includes health care expense and annual adjustments for inflation.
Search the internet for discussions on SWR (safe withdraw rate). In general you can spend 4% of your assets each year and be OK. When you do the research you will see that 4% is probably too high for you if you start drawing now.
Also look at starting SS at age 70. If you are assuming a long life then it pays to wait if you can. Spend your assets down to get to age 70. If you are married one of you should start collecting at your normal full retirement age.
This is a complicated area so look for a financial planner to make up a plan for you. Probably cost a few hundred dollars. You want a planner and not a stock broker. The planner's duty is to give you the answer that is best for you. The broker does not have that duty and can sell you products that may not be in your best interest but are in his.
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Old 07-02-2011, 09:41 PM
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Quote:
Originally Posted by rjm1cc View Post
In general you can spend 4% of your assets each year and be OK. When you do the research you will see that 4% is probably too high for you if you start drawing now
Well that really depends on what your invested in doesn't it? For example my 401K has a fixed (yes I said fixed) rate choice that is currently 5.77% guaranteed to next June. So even if I took out 5.77% it wouldn't even lower the amount of principal.

The 4% is a very safe conservative number to use but everyone needs to look at their total amount, what they earn for returns, and what amount of cash they need every year.
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Old 07-02-2011, 09:44 PM
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Default Tax accountant

I was a tax accountant for over 30 years and there is very good advice here.
Plan a budget on what you think you need to retire and add 3% for inflation for an average of 30 years. The question is not do you have what you need to retire now. The question is do you have enough to pay all your bills 35 years from now.
Here is a trick missed by many professionals. My wife can claim 1/2 of my SS when she turns 62 allowing hers to go up 8% per year until she turns 70. At 70 she can flip from claiming 1/2 of mine to 100% of hers and gain the increase on her SS. Vice versa works also. I can claim 1/2 of hers etc.
Keep reverse mortgages in mind for later years. They can be good in the right application. Not all of them are good.
  #10  
Old 07-02-2011, 09:53 PM
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Quote:
Originally Posted by rjm1cc View Post
The way you ask the questions it implies that you will need the money from the pension and 401k now. If true then I would think you stand a good chance of running out of money in retirement. If it does not make economical sense to stay in your current job and you save the pension that could be a different story. Be sure your budget includes health care expense and annual adjustments for inflation.
Search the internet for discussions on SWR (safe withdraw rate). In general you can spend 4% of your assets each year and be OK. When you do the research you will see that 4% is probably too high for you if you start drawing now.
Also look at starting SS at age 70. If you are assuming a long life then it pays to wait if you can. Spend your assets down to get to age 70. If you are married one of you should start collecting at your normal full retirement age.
This is a complicated area so look for a financial planner to make up a plan for you. Probably cost a few hundred dollars. You want a planner and not a stock broker. The planner's duty is to give you the answer that is best for you. The broker does not have that duty and can sell you products that may not be in your best interest but are in his.

Thank you for the advice about getting a financial planner. I believe I will contact my credit union about that when I return from my upcoming visit to TV. I'm still working full time now, so I don't need the money from the 401K, IRA and pension at this time. Some years down the road if I do decide to move to TV, I will still need to work, probably at least 30 hrs. per week, but I know that salaries in the TV-Ocala-Leesburg area are not as high as in the Chicago area, so I would need to start withdrawals from my pension, IRA and 401K (let's just say at age 60) to supplement any income from a job. As I won't have a mortgage payment by the time I move to TV, I believe my expenses should go down quite a bit, as my mortgage payment is by far my largest expense. Yes, I did some research about what percentage you can withdraw and 4% annually was the figure that most web sites mentioned.

When my dad reached 70 1/2 11 years ago, he still hadn't touched the money from his IRA, but he then had to start taking withdrawals from it each year since then. Not sure what he was waiting for...but I guess he had his reasons.
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Old 07-03-2011, 08:43 AM
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Either Dad did not need the money from his IRA or he really understood the principle of allowing your money to grow in a tax deferred environment for as long as you can. I think your dad knew what he was doing...and one of his reasons could have been you!
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Old 07-03-2011, 10:33 AM
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Quote:
Originally Posted by Russ_Boston View Post
To the best of my knowledge (I have done some research):

A tax deferred investment (401k, traditional IRA) you can start withdrawals at 59.5 y.o. Yes you will declare this as income at tax time. They will withhold 20% at withdrawl time and give you a statement at year end.

I believe the 20% withholding only applies to the 401k, not IRA distributions.
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Old 07-03-2011, 10:56 AM
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Quote:
Originally Posted by 784caroline View Post
Either Dad did not need the money from his IRA or he really understood the principle of allowing your money to grow in a tax deferred environment for as long as you can. I think your dad knew what he was doing...and one of his reasons could have been you!
That does sound like what dad may have been doing. Perhaps spending down personal savings (advised) which reduces federal and state tax liability, and letting the IRA grow until it's needed for income.
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Old 07-03-2011, 12:23 PM
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There is a wealth of information here along with some very sound advice.

One of my biggest concerns is inflation and how it will impact our standard of living if the future. With that in mind, having access to a good financial planner is very important - for most, if not, all of us.
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Old 07-03-2011, 09:35 PM
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Quote:
Originally Posted by iaudit View Post
I believe the 20% withholding only applies to the 401k, not IRA distributions.
Yes you are correct.

http://www.research401k.com/401k-direct-rollover.html

But let's remember - it is just a withholding. Since you will probably have some tax due on the withdrawal amount it doesn't hurt to have some tax withheld. But nobody wants Uncle Same using their money
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