Should I Take Money From My 401k Plan

Should I Take Money From My 401k?

“Should I take money from my 401k to help me get through these tough times?” That’s a question we received from a listener.  The CARES Act made some changes to these distributions.  But there are still some things you should consider. Let’s dig into the answer. (Read more below)

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It’s a tough time right now. We’re all trying to stay healthy. That has led to some very extreme measures. And those measures have created some financial hardships for people.

Mark sent us a question. He asked, “should I take money from my 401k to help me get through these tough times?”

How the CARES Act changed 401k distributions

Recently the federal government passed the CARES Act. It is a $2 trillion stimulus designed to help Americans weather this storm created by the Covid-019 virus.

One of the provisions of this act was to provide some tax relief for distributions from 401k plans and other retirement accounts like IRA’s.

Should I Take Money from my 401k

Normally, if you are under age 59 1/2 there is a 10% penalty for early distributions. The CARES Act now waives this penalty for those early withdrawals up to $100,000.

The act also allows you to spread the taxes from any of those distributions over 3 years.

Lastly, you can return those distributions to your IRA or 401k inside the three-year period as well.

Check Your With Your Employer!

Not every 401k plan allows for in-service distributions. Please check with your employer.

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But, should you take money from your 401k?

Now, this doesn’t answer Mark’s question. It shows that it is an option. Should you tap into your 401k (or IRA) to help you through these tough times?

Here are some things to consider?

Should I take money from my 401k

Your distribution is taxable…

The distributions are still taxable. Even though you can spread the tax bill over three years, and there is no penalty, there are still taxes due. Think of it this way, for every dollar you take out, at best you’ll only keep 85 cents.

You’re selling at lower prices…

The stock market is down significantly. Selling now, means you’re going to lock in those losses.

There is a future cost…

You worked hard to save it. Taking those funds from your account not only has a current cost, it has a potential future cost as well. You’ll miss out on the future growth. Over time that could be significant.

A last resort…

Withdrawing from retirement accounts should be a last resort. Unfortunately, a lot of people could reach those extreme situations. The government has at least provided a little relief if it gets that far.

Make sure you dig into your numbers before you make these tough decisions. If you need some guidance, talk to a financial planner.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    

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Death of the Stretch IRA: Should You Convert to a Roth IRA?

Death of the Stretch IRA: Should You Convert Your IRA to a Roth IRA?

The SECURE Act killed the Stretch IRA. This could mean a nice tax bill for someone you care about. The big question that has come from this: “Should you convert your IRA to a Roth IRA?”

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Death of the Stretch IRA

In December, the federal government passed the SECURE Act. And one of the biggest provisions of that bill was the elimination of the Stretch IRA. This impacts non-spouse beneficiaries of your IRA, 401k or other retirement plan accounts. That means your kids, grandkids, etc. It doesn’t affect spouses.

Under the old rules, your kids could spread out the distributions from an inherited IRA over a long period of time. Now, your kids will have to liquidate those accounts within 10 years.

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Do you have a question? Would you like to talk about how we can help you plan for a better retirement?
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Converting Your IRA to a Roth IRA

One strategy you can use to address this is to convert your IRA to Roth IRAs. This means you pay taxes on the amounts you convert now, and the money then grows tax-free. And when certain conditions are met, your kids won’t pay any taxes on their distributions.

Should you convert your IRA to a Roth IRA? The answer is very complicated and will be different for everyone. Here are the key considerations

1. Who Pays Higher Taxes?

Who has the higher tax rate? Converting your IRA to a Roth IRA means you pay the taxes. You have to understand who has the higher tax rate. If your tax bracket is the same as your kids, the conversion may not be worth it. But, if your kids pay taxes at a higher rate, the math changes.

State taxes also matter in this.  If your kids live in Florida where there is no state income tax, that needs to be considered.  Likewise if they live in a high-tax state—like New York—it changes the math.

2. Watch the Hidden Taxes

Pay attention to the hidden taxes? Converting your IRA could impact the taxes on your Social Security benefits. It could also trigger taxes on your Medicare premiums due to the income related adjustments. You’ll want to look at those elements too.

3. Can't Convert Your Required Minimum Distributions

If you are older than 72, you have to be careful. The rules won’t allow you to convert your required minimum distributions. You have to satisfy those before you convert.  This may make it more expensive than you think.

4. Know the Total Costs

Look at the total cost of your strategy. There are some complex strategies you can use to preserve some of the “stretch provisions.” They use some advanced trust planning. You have to weigh the cost of the trust, plus the tax costs of setting them up.

Should you convert your IRA to a Roth IRA? It’s a good question to ask and consider in your plans. But there are a lot of complexities. You should talk to a tax expert and a financial planner to help you look at all aspects.

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What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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