What's the best question you asked your CFP / Investment Advisor

[bobandsherry]

Quote:

Originally Posted by jazz4cash I think you are mixing some concepts that you should really get a handle on before you move forward.... The term RMD has nothing to do with the "rule of 55". The rule of 55 allows withdrawals from 401k under certain situations (as you describe), but it applies only to 401k, not to IRA. So, if you do a 401k to IRA rollover, you would no longer be able to use the "rule of 55". I do not think there are any restrictions on the amount or timing of distributions from a 401k using the rule of 55 exception. You can get early distributions from an IRA without penalty under a 72t plan (also known as SEPP- Series of Equal Payments Plan). The SEPP is the one that requires you to draw for the longer of 5 yrs or age 59.5. There are limitations on the amount you can distribute from your IRA using SEPP. I think I generally follow your desire to have access to both taxable and tax deferred savings, but as another poster suggested make sure you are not losing any benefits (such as the rule of 55 and/or access to a Stable Value Fund) if you do an IRA rollover. I am in a similar situation, myself.

Yep, my bad it's SEPP under the 72t plan. So it's conversion of 401K to IRA that provides this ability.

Thanks

[bobandsherry]

Quote:

Originally Posted by skibum The opportunity in the tax code available to those retiring in the year they turn 55, or older, is the ability to withdraw funds from the 401k of that company without penalty. I would consider this the "55 rule" you refer to, a critical component of my ER plans. Most 401K plans have this option as allowed in the tax code, you should confirm. The penalty free withdrawal WILL NOT be available if the proceeds are rolled over into an IRA, and do not apply to 401k funds from any prior employer. It may desirable to roll other 401k or IRA proceeds into the 401k plan from your final employer to access these funds at will. Another option to avoid early withdrawal penalties is under the 72t plan, which involves an RMD type calculation, and requires min 5 years of withdrawals. The penalty free 401k withdrawal provides much more flexibility and is an excellent option for ER. There is rarely any incentive for financial advisers to recommend this approach, most prefer to roll proceeds into and IRA they can manage for a fee. Being ER'd with minimal regular income and the ability to draw on both taxable and tax deferred income provides some excellent tax savings opportunities. Sadly, there are few incentives or knowledgeable financial advisers to help with this. Typically, the optimal strategy is to convert tIRA to Roth IRA up to the top of the 15% tax bracket each year, or withdraw from tIRA/401k to this limit, or harvest capital gains. Another income ceiling to obtain ACA tax credits is typically slightly less than the top of the 15% bracket, (referred to as the ACA Cliff at 400% of the poverty level) and can provide additional tax savings. After working for decades and paying taxes on steady income, it's difficult to grasp the tax saving opportunities in ER. There are many knowledgeable folks and posts here on the ER forum for these strategies. Perhaps some have found financial advisers or CPAs who can provide guidance like this for maximizing wealth in ER, I have not. I've spent the last year educating myself in preparation for ER. I encourage you to understand these strategies, and be sure any CFP or adviser would acknowledge (hopefully recommend) keeping 401k for penalty free access from 55- 59.5 (assuming the plan is not terrible), and provide Roth conversion projections similar to i-orp to minimize taxes and optimize wealth. The Boglehead post below opened my eyes to the new financial frontier of ER. Second link from Kitces illustrates the zero percent tax on qualified dividends and long term capital gains in the 15% bracket. After you understand these concepts, the same strategies apply for the MAGI ceiling to receive ACA tax credits. If you find a professional who understands and will help execute these strategies for a reasonable cost, consider it. Otherwise, save the $15k annual cost and many thousands more in tax savings. https://www.bogleheads.org/forum/viewtopic.php?t=87471 https://www.kitces.com/blog/understa...p-up-in-basis/

Thanks, this is exactly the strategy I was referring to. Walking this tightrope to get it done right, minimize costs and any penalties for incorrectly setting up this account, and all while keeping more $$ in my pocket is one of my goals. If CFP that I interview can't or won't address this it will be a quick interview with them. I'll check out the links as well.

[jazz4cash]

Quote:

Originally Posted by bobandsherry Yep, my bad it's SEPP under the 72t plan. So it's conversion of 401K to IRA that provides this ability. Thanks

No!!!!

It's conversion of 401k to IRA that prevents this ability.

[robertf57]

Quote:

Originally Posted by jazz4cash No!!!! It's conversion of 401k to IRA that prevents this ability.

Seems a bit of confusion remains:

1) IF THE PLAN ALLOWS, you can withdraw from the 401K of the employer you left at age 55. Carefully review the plan and talk to administrator if you plan on doing this! Not all plans have the same provisions.

2) You can SEPP (or 72t) out of an IRA as previously described.

First step is to review the 401k plan and speak with the administrator to understand the options in the plan. I concur with most everyone here that a CFP is generally unnecessary and adds costs.

[pb4uski]

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Originally Posted by bobandsherry If I can get enough knowledge from DIY I'm all for it. I believe I'm pretty well versed in finance, having my education in Accounting and Finance. I've been working for a large financial company for almost my entire careeer. I started doing my own taxes years ago after I found an error in the tax return that my preparer did. I think my primary concerns are: 1. Is rollover of 401K to IRA a good decision 2. Should I set up my IRA then with RMD and if so how do I do this correctly 3. How should I structure this investments to provide the best benefits for medical coverage (e.g. subsidy) 4. Any ideas that I haven't thought of to invest the funds (mix of tax free and taxable investments) for now and the future. I've found lots of great info here with lots of great users. Several months to go and hoping to pull it all together. What I guess the biggest unknown is knowing what I don't know or even considered.

Given your background you are a great candidate to read, learn, ask questions and DIY.

Unless you have sufficient taxable assets to cover your expenses from when you retire at 55 until you are 59 1/2 then the 401k is valuable as you can use it for penalty free withdrawals if you leave after you are 55. As robert suggests, you need to find out the details of what your 401k plan allows... some only allow one withdrawal a year, etc. Also, if your 401k has a stable value fund that pays a good interest rate then it would be valuable as SV funds are not available in an IRA. The other often mentioned reason to keep a 401k is that they are better insulated from creditors than an IRA depending on what state you live in but I don't find that reason particularly compelling as I have a large umbrella insurance policy.

Please refrain from using the term RMD as you are using it... you're just adding confusion. RMD (required minimum distributions) are where you are required to make certain withdrawals after you are 70 1/2. I think when you mention RMD you are really talking about SEPP (substantially equal periodic payments). While SEPPs are useful if you need them, they are complicated and restrictive so I would avoid them unless you have no other choice.

I found that the value of the health insurance subsidy was not compelling compared to the value of lower taxes by doing Roth conversions. Google "tax torpedo" in the google search box at the top of the page. I can convert about $60k a year and pay 8% now vs 25% if I didn't do any conversions so I save about $10k a year in taxes. The value of the subsidy if I did no Roth converisons is only about $5k a year... so I'm better off forgoing the subsidies. However, YMMV depending on your circumstances.

If you browse around you will find that other members have posted some of their details and asked for input and suggestions.

[samclem]

What many of us could use is some software that lets us optimize the very things discussed here:
- Roth conversions
- Spending order from each pot
-ACA subsidies
- SS claiming decisions

i-orp does some of it, but the individual aspects of each situation require a more detailed set of inputs, akin to the tax software many of is use. There's money to be made in a product like this, I think. I'd buy an add-on module for Taxcut that did this stuff.

[bobandsherry]

Quote:

Originally Posted by jazz4cash No!!!! It's conversion of 401k to IRA that prevents this ability.

Hmmmm... My plan allows me to take my 401k balance with me. They provide option to transfer account to another investment or account. Given that I would think that I can then establish IRA with 72t, providing my IRA administrator provided that service. Is there something else I should verify first? Like I said earlier, not knowing what I don't know is the biggest unknown. Thanks!

[bobandsherry]

Quote:

Originally Posted by robertf57 Seems a bit of confusion remains: 1) IF THE PLAN ALLOWS, you can withdraw from the 401K of the employer you left at age 55. Carefully review the plan and talk to administrator if you plan on doing this! Not all plans have the same provisions. 2) You can SEPP (or 72t) out of an IRA as previously described.

^^^^^ this is what I want to do and my company allows me either leave funds or one time transfer to another administrator.

Quote:

Originally Posted by robertf57 I concur with most everyone here that a CFP is generally unnecessary and adds costs.

appreciate everyone's input.

[jazz4cash]

Quote:

Originally Posted by bobandsherry Hmmmm... My plan allows me to take my 401k balance with me. They provide option to transfer account to another investment or account. Given that I would think that I can then establish IRA with 72t, providing my IRA administrator provided that service. Is there something else I should verify first? Like I said earlier, not knowing what I don't know is the biggest unknown. Thanks!

I think the number one thing is to understand how much you need from the 401k funds. If the amount and timing of your needs are consistent with the limitations of a 72t plan, that could be a reasonable option. The age 55 exception does not limit you in terms of amount or timing as long as you meet the separation from employer guidelines.

As suggested by other posters, I was also under the belief that not all 401k plans have the Age 55 Exception but I have been unable to document whether it is optional for the Plan Administrator to offer it as a feature of the Plan. In fact, everything I have found implies that it IS a feature of 401k's in general.

Early 401k Distribution Options Including 72(t) - 401khelpcenter.com

You should really try to get your hands on a copy of your 401k Summary Plan Description (SPD) and familiarize yourself with the details of your plan. It should confirm if your plan offers the Age 55 Exception. Unfortunately, many of us have found that our Plan Administrators are not always up to speed on the nuances of the plan so it's up to us as DIY'ers to make it our business to understand our details.

An excellent resource for you would be 72t on the Net | SEPP, 72t, and 72q Distributions | IRC Section 72(t). They have a calculator that lets you quickly determine how much you can withdraw using 72t guidelines.

Regards

[RetireAge50]

I don't know...I usually try not to talk to myself.

[bobandsherry]

Quote:

Originally Posted by jazz4cash I think the number one thing is to understand how much you need from the 401k funds. If the amount and timing of your needs are consistent with the limitations of a 72t plan, that could be a reasonable option. The age 55 exception does not limit you in terms of amount or timing as long as you meet the separation from employer guidelines.

Our post tax investments would be able to support our needs ($80K/yr) until I would reach 59.5. However, being conservative I'd like to keep funds available for an emergency. So my initial thought is to fund us with SEPP from 72t and then make up difference with post tax investment withdrawls. I'd was figuring $35-40K from SEPP (which thanks to calculator you provided is well within the ballpark for us) and remainder from other investments. Unless my informtion is incorrect taxable income would then be minimized and keep our effective tax rate low. And if correct our future income stream would be generally the same for many years allowing access to ACA subsidy. I was looking at alternatively we could draw from non-retirement investments but later we'd pay much more in taxes as we'd be drawing $80K (adjusted for inflation) from our retirement account later. This would then put us in a higher effective tax rate. I think my info is reasonable but open to input from someone much wiser than me.

Quote:

Originally Posted by jazz4cash An excellent resource for you would be 72t on the Net | SEPP, 72t, and 72q Distributions | IRC Section 72(t). They have a calculator that lets you quickly determine how much you can withdraw using 72t guidelines. Regards

Thanks for sharing, that confirms what I was expecting based on the balance in my 401K. I am fortunate that my 401K balance is from one employer, having worked my entire carrer with one company.

[bobandsherry]

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Originally Posted by RetireAge50 I don't know...I usually try not to talk to myself.

What then might be one question you wish you would have asked yourself then

[bobandsherry]

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Originally Posted by skibum Another option to avoid early withdrawal penalties is under the 72t plan, which involves an RMD type calculation, and requires min 5 years of withdrawals.

^^^ Yes, this is what I was referring to, though appears my terms have been wrong. I've been with same company for my career so only one 401K to be concered with.

Quote:

Originally Posted by skibum After working for decades and paying taxes on steady income, it's difficult to grasp the tax saving opportunities in ER. There are many knowledgeable folks and posts here on the ER forum for these strategies.

I'm hopefully a quick learner and one day will be able to grasp the pebble from those with that wealth of knowledge, and more importantly, those who have experienced same.

Quote:

Originally Posted by skibum The Boglehead post below opened my eyes to the new financial frontier of ER. Second link from Kitces illustrates the zero percent tax on qualified dividends and long term capital gains in the 15% bracket. https://www.bogleheads.org/forum/viewtopic.php?t=87471 https://www.kitces.com/blog/understa...p-up-in-basis/

Thanks for sharing, those both have provided useful information that I hadn't considered fully.

[nwsteve]

"So my initial thought is to fund us with SEPP from 72t and then make up difference with post tax investment withdrawls. I'd was figuring $35-40K from SEPP (which thanks to calculator you provided is well within the ballpark for us) and remainder from other investments. Unless my informtion is incorrect taxable income would then be minimized and keep our effective tax rate low."
I think you probably have a good grasp of this so my comment maybe stating the obvious for you. In making your estimates you are treating all 401k withdrawals as ordinary income and taxable--correct?
There is a good article in the Nov Kiplinger pg 38 that goes into detail on what you want to do as well as some the pros and con of converting to 401k to TIRA--"Can I take regular withdrawals from my 401k when I retire." I looked for a link for you but it does not look like Kiplinger has posted yet. Most libraries carry the magazine so give it a view.
Nwsteve

[bobandsherry]

Quote:

Originally Posted by nwsteve I think you probably have a good grasp of this so my comment maybe stating the obvious for you. In making your estimates you are treating all 401k withdrawals as ordinary income and taxable--correct?

With exception of the portion in my 401K that I funded as a Roth, to the best of my knowledge any withdrawls from my 401K would be taxable. So yes, I'm including all withdrawls as ordinary income. But hey, I could be wrong and always willing to learn more.

Quote:

Originally Posted by nwsteve There is a good article in the Nov Kiplinger pg 38 that goes into detail on what you want to do as well as some the pros and con of converting to 401k to TIRA--"Can I take regular withdrawals from my 401k when I retire." I looked for a link for you but it does not look like Kiplinger has posted yet. Most libraries carry the magazine so give it a view. Nwsteve

Thanks, I'll look for that article.

[skibum]

Quote:

Originally Posted by pb4uski I found that the value of the health insurance subsidy was not compelling compared to the value of lower taxes by doing Roth conversions. Google "tax torpedo" in the google search box at the top of the page. I can convert about $60k a year and pay 8% now vs 25% if I didn't do any conversions so I save about $10k a year in taxes. The value of the subsidy if I did no Roth converisons is only about $5k a year... so I'm better off forgoing the subsidies. However, YMMV depending on your circumstances. .

FWIW, our circumstances are family of 4 in California with modest itemized deductions filing married. Top of the 15% bracket is $74,900 in taxable income, roughly $108k AGI for this return. ACA cliff at 400% FPL is $97K MAGI. Staying under the ACA ceiling of $97k allows significant tIRA to Roth conversions for us, an additional $11k could be converted annually if we increased from ACA MAGI limit to the top of the 15% bracket. These additional conversions would generate annual tax savings of approximately 25% - 8% x $11k = $1,870. By staying under the ACA cliff we receive a tax credit of $945/mo = $11.3k annually. For us, the $11k tax credit is better than an additional $11k conversion opportunity. I hope this provides additional insight, of course YMMV depending on circumstances...

[pb4uski]

I can see for a family of 4 that it might be different since 400% of FPL is $97,000 vs $63,730 for a couple.

[Sarah in SC]

Just a quick note on credentials:

CFC isn't much.

CFA is the biggie, though you won't find those folks in the regular investing business very often. They are analysts, through and through. My brilliant and motivated young coworker completed her final CFA exam this year and it is a huge undertaking.

CFP is what I have, and it is very comprehensive, and you could certainly expect to find someone willing to be paid by the hour for a review and/or plan. Some planners with this designation are salespeople, of course, so be skeptical, always.

CPAs who carry the PFS designation can offer far more tax planning to the mix and have gotten the equivalent to the CFP in general planning.

[Happyras]

Quote:

Originally Posted by bobandsherry ^^^ Thanks for sharing, those both have provided useful information that I hadn't considered fully.

I really got a lot out the reviewing the actual returns of the 8 portfolio models included in the following study.

2014 Update: Real-Life Retiree Investment Returns

Since most CFP's want to put you in active managed MF or use the MPT method for allocation, you can see some real life results favoring a simple model as outlined.