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Cut back wife's 403b while I draw down 401k?
Old 04-06-2011, 05:17 PM   #1
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Cut back wife's 403b while I draw down 401k?

I retire this July 1 at age 55. Wife is 50 and will continue as a teacher for 5 - 7 more years. Our after-tax annual expenses are about 90K and she takes home about 40K so we need to crack the piggybank for about 50K / year.

Lump-sum pension is rolling into a Vanguard IRA. Can't touch that until I'm 59.5 but ~100K of it is my after-tax contributions, which I assume I can grab right at 55 without taxes or penalty (right?)

I understand that I can tap my 401k at age 55, paying taxes but no penalties. I'm keeping the Fidelity 401k because I need the dough between 55-59.5 and for conservatorship diversification (IRA is 1.9M, 401k is 600K). We have another 80K in after-tax accounts. Wife gets 28K COLA'd annual pension upon retirement & my SS is supposed to be about the same at age 66.

By force of habit we max out her 403b (currently 22K/year). Her 403b is in an equity-indexed fixed annuity which has early-surrender penalties for another 8 years (I was young and stupid). Since I need to dip into my 401K, should we cut out her contribution so she takes home 22K/yr more (before taxes)? Is it a wash tax-wise if her effective income goes up 22K or if I make up the difference with 401k withdrawals? Should I burn through all our after-tax funds first?


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Old 04-06-2011, 05:57 PM   #2
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If I recall correctly after-tax and before tax money in 401ks come out proportionally. If I recall you take some money out then you'll get some of both (before and after tax money) and will pay taxes proportionally. I believe though that there is a way (a loophole) around this using a Roth IRA conversion for the after tax money. I suggest you speak to the people who hold your IRA (Vanguard ?)

If you throttle back the wife's payments into her 401K you lose both the income deduction on the payments and any company match. Without the company match reducing her contributions is kind-of equivalent to taking money out of your 401k (ignoring penalties).

Look into 72-t withdrawals from IRAs. That is one way to take (some) money out of an IRA without penalty (income taxes still due). here's a link to Fidelity's calculator

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Old 04-06-2011, 07:19 PM   #3
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Originally Posted by bob boag View Post
..............Lump-sum pension is rolling into a Vanguard IRA. Can't touch that until I'm 59.5 but ~100K of it is my after-tax contributions, which I assume I can grab right at 55 without taxes or penalty (right?)..........

There is a way to separate your pre and after tax contributions that is outlined on the Fairmark site, that takes advantage of some fuzzy guidelines from the IRS. You end up having to front 20% tax withholding and then get it back the following year.

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