Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
The perpetual 401(k) question
Old 02-23-2011, 06:38 PM   #1
Confused about dryer sheets
 
Join Date: Feb 2011
Location: North Las Vegas
Posts: 7
The perpetual 401(k) question

Greetings to all like-minded souls. I retire in April at age 57, quickly pass to 58. I'll be 59 1/2 in October 2012.

I have a 401(k) and a cash balance defined benefit account. My employer shot themselves in the foot when they negotiated the minimum rate for interest credit on the CB, setting it at 5.27%. That rate can be renogotiated after I leave, but unless and until that happens, I'm leaving the CB money in place and I'll rely on the 401(k).

My plan allows for a split distribution, but only once. A penalty-free cash distribution can come to me, but the balance has to be rolled into an IRA. I need to withdraw enough for living expenses for 9 months each in 2011 and 2012. My conundrum is that the large amount I'll withdraw in 2011 will make my income and associated FIT bill very high, and the small amount I withdraw in 2012 will make the FIT bill small for that year.

Is there any way to "average" or levelize the income over the two year period? Can I still carry back to a prior tax year if my deductions in 2012 are greater than my tax liability? I believe that could happen due to the effect of rental R/E depreciation. Aside, I know there's no provision for income averaging in the tax code, that's my term.

Thanks for any help and let me know if I need to clarify any of that. I'm looking forward to joining you in the life of Reilly.
__________________

__________________
Maynard is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 02-23-2011, 06:55 PM   #2
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
This is a question for the tax experts over on the message boards at the fairmark forum. (www.fairmark.com).

I believe that 5-year tax averaging was ended in the late 80's.

Would a 2011 self-funded loan from the account paid back in 2012 work ? Check with the fairmark crowd on this.
__________________

__________________
MasterBlaster is offline   Reply With Quote
Old 02-23-2011, 06:56 PM   #3
Thinks s/he gets paid by the post
Katsmeow's Avatar
 
Join Date: Jul 2009
Posts: 3,399
I don't understand why you are withdrawing a small amount in 2011 and 2012. You say you need to withdraw 9 months of expenses in 2011 and 9 months of expenses in 2012. Why will that be a large amount in 2011 but not 2012?
__________________
Katsmeow is offline   Reply With Quote
Old 02-23-2011, 07:02 PM   #4
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Quote:
Originally Posted by Katsmeow View Post
I don't understand why you are withdrawing a small amount in 2011 and 2012. You say you need to withdraw 9 months of expenses in 2011 and 9 months of expenses in 2012. Why will that be a large amount in 2011 but not 2012?
Could it be that at the present burn rate, the after-tax money exhausts in 2011. Then funding is needed from the qualified accounts until Social Security kicks in at 62 ?
__________________
MasterBlaster is offline   Reply With Quote
Old 02-23-2011, 07:31 PM   #5
Confused about dryer sheets
 
Join Date: Feb 2011
Location: North Las Vegas
Posts: 7
Masterblaster, isn't there a limit of $50K for a loan? Thanks for the referral.

Katsmeow, I may not have made it clear that the entire penalty-free amount I need for living expenses has to be withdrawn in 2011. This split distribution and its limitations were news to me. Word to the wise, don't wait to learn about the fine print. To clarify, I hope, any money not taken as a distribution to me in the split distribution has to be rolled into an IRA. Then I lose the penalty-free exemption for withdrawals before 59 1/2.

I'll have three months earnings in 2011, so need nine months living expenses for the rest of the year. In 2012, I won't turn 59 1/2 until October, another nine months, so need living expenses for that period.

Clear as mud?

Thanks all, keep it coming.
__________________
Maynard is offline   Reply With Quote
Old 02-23-2011, 08:24 PM   #6
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
The loan probably won't work unless your plan allows you to take a post retirement loan. Otherwise, your retirement likely will cause the loan to be a deemed distribution which would be a taxable event. (FWIW, there may be a 60 day window post retirement to payoff the loan and roll the money into an IRA).

You can't income average. However, maybe you can pay various expenses for the rental property or other deductible expenses so they fall in 2011 rather than 2012. You might talk to a tax advisor about that.

See my signature.
__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Old 02-23-2011, 09:23 PM   #7
Confused about dryer sheets
 
Join Date: Feb 2011
Location: North Las Vegas
Posts: 7
Martha, no post-retirement loan. Once the split distribution is made, there's no longer a 401(k) from which to obtain the loan; penalty-free cash distribution to me and a rolled-over IRA are what I'll have as a result of the split. Yes, an unpaid loan at time of distribution would be a taxable event. Nix on that. The 60 day window wouldn't help with an 18 month horizon.

That's a good idea to bunch my R/E expenses, and all other deductibles as well.

I may be trying to invent something here. Absent a change in the code before the end of the tax year, I expect I'll have to take my lumps this year and slide next year.

But I'm still listening if anybody's reading this after you got back from vacation and your mind is clear.

Thanks, all.
__________________
Maynard is offline   Reply With Quote
Old 02-24-2011, 11:03 AM   #8
Recycles dryer sheets
 
Join Date: Aug 2009
Location: westerville
Posts: 242
May want to look at another type of loan such as a Line of credit on real estate for short term cash needs rates are low compared to higher income tax rates and possible penatlties. Work with a tax advisor to determine lowest tax plan the raise the cash you need .
Just a thought.
__________________
Trawler is offline   Reply With Quote
Old 02-24-2011, 11:46 AM   #9
Thinks s/he gets paid by the post
Katsmeow's Avatar
 
Join Date: Jul 2009
Posts: 3,399
Quote:
Originally Posted by Martha View Post
The loan probably won't work unless your plan allows you to take a post retirement loan. Otherwise, your retirement likely will cause the loan to be a deemed distribution which would be a taxable event. (FWIW, there may be a 60 day window post retirement to payoff the loan and roll the money into an IRA).
Bear in mind that this depends upon the plan. Some plans (not most) don't require repayment if you leave. When DH was getting ready to retire he did take a loan for the purpose of spreading out taxation over 5 years rather than 1 year. He was able to do that as his employer's plan does allow a pre-retirement loan to stay in place after retirement.
__________________
Katsmeow is offline   Reply With Quote
Old 02-24-2011, 05:40 PM   #10
Confused about dryer sheets
 
Join Date: Feb 2011
Location: North Las Vegas
Posts: 7
I wish mine were that way, but it's not. They didn't even put this in the fine print. Even so, it would only be $50K for me, whether that's a plan limit or tax code.

That R/E loan idea merits some thought. I think I'm going to find that the fees associated with a short term equity loan will make it a non-starter, but can't hurt to investigate. Might take a part of what I need as a short-term loan, write off the expenses, and take the rest of what I need as a penalty-free distribution.

This is a great place to get your creativity going.

Thanks all, and still listening if you have other ideas.
__________________

__________________
Maynard is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Tranfering 401(k) to IRA back to 401(k) dennisbaker Young Dreamers 14 09-23-2009 01:28 PM
Where have all the Perpetual Travellers gone? DangerMouse Life after FIRE 60 08-30-2009 08:45 AM
Perpetual Renter RetiredGypsy Life after FIRE 31 04-08-2008 04:07 PM
Perpetual travel JamesInSanJose Life after FIRE 48 11-25-2007 11:11 PM
Perpetual Travel Questions Surfs_Up Life after FIRE 10 10-08-2004 06:34 PM

 

 
All times are GMT -6. The time now is 04:31 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.