The perpetual 401(k) question

[Maynard]

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.

 

[MasterBlaster]

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.

 

[Katsmeow]

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?

 

[MasterBlaster]

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 ?

 

[Maynard]

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.

 

[Martha]

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.

 

[Maynard]

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.

 

[Trawler]

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.

 

[Katsmeow]

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.

 

[Maynard]

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.