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As I get closer...
Old 04-28-2010, 05:58 PM   #1
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As I get closer...

I am mostly a lurker, but I lurk a LOT. There is so much good discussion going on in here, and I really appreciate hearing about everyone's experiences.

I quit my job in 2006, and after about 10 months, they talked me into coming back part time. I work 3 days a week, and one of those days is from home. I (mostly) like what I do, so it's actually a pretty good deal. But I'm thinking that it's getting to be enough, already, so I'm planning to pull the plug early next year (I'll be 56).

I currently contribute 15% to my 401K; 4% of that is matched. We also fully fund our Roths every year. I'm thinking that as I get closer to the end, I might cut the 401K contributions back to the 4%, and take the extra in the first part of next year to stuff our Roths, put some into a muni fund (for the dividends) and some into cash for spending the first year or two. The issue that I have is that almost 80% of our stash is in 401K's and non-Roth IRA's. I see the tax man over the horizon for all of that. I'm not sure about how soon to implement this plan, since stuffing the 401K saves on taxes this year, while our income is still on the higher side. DH still works full time.

Did anyone else do something like that? Opinions? Thanks!

CJ
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Old 04-28-2010, 06:17 PM   #2
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Glad you are actively posting!

I contributed the maximum to my TSP when I was working, and will never regret doing it. It brought my taxes way down during my years of maximum income. I never worked part time like you are doing, though.

Now that I am retired, I am withdrawing equal monthly payments from the TSP. My tax rate is much lower than it was when I was working. So, I'm glad that I did it.

It seems to be a truism on the board that one should keep bonds in one's 401K or IRA due to the higher (taxable) yield, and one should keep one's equity index funds in taxable accounts since you won't be getting LTCG from them, as well as perhaps some muni bonds. So, maybe it is best to have some taxable accounts as well, especially for use before you are old enough to withdraw without penalty. Is that age 59.5? Perhaps one of our tax gurus can comment.
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Old 04-28-2010, 06:38 PM   #3
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As W2R points out, While you are working you deduct 401k/IRA money at your marginal tax bracket. When you retire, if your income is less than when working, then your retired marginal tax bracket (of which 401k/IRA withdrawals are taxed) may be significantly less.

Even if your income in retirement is the same or somewhat higher you may come out ahead. Consider someone who gets no pension and no SS. If their income consists of only 401k/IRA withdrawals then their retirement income is taxed at their average tax bracket. Notice that their average tax bracket while retired may be significantly less than their marginal tax bracket when working.

Pensions and SS bias the taxes upward, however the effect may be the same in that you still may be better off with deductible 401k/IRA accounts.

The exception, of course, is for the savers who will have a significantly higher income in retirement than when working. In that case it may not be worthwhile to fund deductible IRAs/401ks when working. In that case one may want to invest in normal index funds outside of any qualified accounts. However they still need to run the numbers to find out. The key here is the marginal tax rate of each dollar of qualified accounts upon deposit and later upon withdrawal.
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Old 04-28-2010, 06:38 PM   #4
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Thanks, W2R. About being old enought to withdraw without penalty - I'm pretty sure I can tap my 401K at 55 if I retire after I hit that mark. That will help.
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Old 04-28-2010, 06:44 PM   #5
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cj - you may also want to consider converting some of that 401k/non-Roth IRA money into roths after your tax rate declines in retirement. I know many here have done that and I'm sure will chime in with the nuances.

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Old 04-28-2010, 06:49 PM   #6
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Originally Posted by cj View Post

Did anyone else do something like that? Opinions? Thanks!

CJ
I would continue contributing for the tax and matching benefits.
If you need money you only have 3.5yrs until you can begin withdrawing from the 401K
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Old 04-28-2010, 11:06 PM   #7
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Thanks, W2R. About being old enought to withdraw without penalty - I'm pretty sure I can tap my 401K at 55 if I retire after I hit that mark. That will help.
Provided your 401k administrator allows it (I think most do, but it would be good to check).

Also, I'm fairly certain that it is "separate from service in the year in which you turn 55", so you could go on January 1 of that year at age 54.xx.

As always, check with a real professional.

2Cor521
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Old 04-28-2010, 11:55 PM   #8
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Also consider that at 56 you may have unlocked 401ks at retirement, (you would have to check based upon the part time if you are still in service, it sounds like it but checking makes it sure.) If you separate from service in or after the year you turn 55 you can withdraw without penalty (unless you roll over to an IRA at which point it becomes 59 1/2)
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Old 04-29-2010, 01:09 AM   #9
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Also consider that at 56 you may have unlocked 401ks at retirement, (you would have to check based upon the part time if you are still in service, it sounds like it but checking makes it sure.) If you separate from service in or after the year you turn 55 you can withdraw without penalty (unless you roll over to an IRA at which point it becomes 59 1/2)
One thing that is unclear to me on that. Let's say you had a 401(k) with employer A, left, and rolled that to an IRA. You now have a new 401(k) with employer B and do not roll it to an IRA and separate from service at age 56. If you withdraw do you have to pay a 10% penalty because of the earlier 401(k) that you rolled to an IRA? Or since this IRA was never rolled to an IRA does that make a difference?
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Old 04-29-2010, 08:26 AM   #10
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One thing that is unclear to me on that. Let's say you had a 401(k) with employer A, left, and rolled that to an IRA. You now have a new 401(k) with employer B and do not roll it to an IRA and separate from service at age 56. If you withdraw do you have to pay a 10% penalty because of the earlier 401(k) that you rolled to an IRA? Or since this IRA was never rolled to an IRA does that make a difference?
If you take money from the rollover IRA before 59.5 you'll pay the penalty unless you set up 72-t distributions. If you take money from the 401k from employer B there will be no penalty since you separated from employment after 55 years old. The rules for IRAs and 401ks are different.

You could take the rollover IRA (assuming it has not been commingled with non rollover assets) and roll that back into the new employer B's 401k. That would then allow you to take penalty free withdrawals at 55 from the first account.
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Old 04-29-2010, 08:32 AM   #11
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Thanks all for the input. I think I'll be fine.
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