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“Large” cash withdrawal ???
Old 11-05-2020, 07:51 AM   #1
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“Large” cash withdrawal ???

We retired 2 years ago and live a pretty frugal life while still traveling and having the things we need. Now I have decided that I want a New truck and New camper. I will need about 100k to get these things. Here is the question. How do I remove this money from my 401k?
1) take it out and pay the taxes
2) take out 1/2 in December and the other 1/2 in January so that my income level is not so high for one year
3) Finance the truck and camper and only take out what it takes to pay the payments
4) some other ideas?

I have the money and can afford to do this but it is very hard for me to make a decision on this . My current truck and camper are certainly useable and I can live without the new ones but hey. Why not?
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Old 11-05-2020, 07:59 AM   #2
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Good for you! Are you just trying to minimize income taxes on the withdrawal, or are you also trying to manage your income for ACA subsidies?
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Old 11-05-2020, 08:02 AM   #3
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Originally Posted by Dynaflash View Post
We retired 2 years ago and live a pretty frugal life while still traveling and having the things we need. Now I have decided that I want a New truck and New camper. I will need about 100k to get these things. Here is the question. How do I remove this money from my 401k?
1) take it out and pay the taxes
2) take out 1/2 in December and the other 1/2 in January so that my income level is not so high for one year
3) Finance the truck and camper and only take out what it takes to pay the payments
4) some other ideas?

I have the money and can afford to do this but it is very hard for me to make a decision on this . My current truck and camper are certainly useable and I can live without the new ones but hey. Why not?
100K is a large amount and likely to move you up a bracket (or two). You could run these scenarios though Turbotax (or whatever) to see the tax implications. I've sold a large holding w/much LTGC over two years for this same reason. (I would have stretched it longer but the company was being acquired so this was the best I could do.)

As you mention, an option might be finance it which might be better as long as the interest rate is low. When I bought my truck in Jan 2016, I intended to use cash but ended up using credit union financing as they wanted to give me money at 0.9%...which I couldn't resist. A hybrid approach might be required as the interest rate on a new truck purchase is likely to be lower than the trailer...so perhaps cash for the trailer (maybe spread over 2020/2021 years) and finance the truck?
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Old 11-05-2020, 08:02 AM   #4
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While I hate touting my own work, take a look at this post and thread https://www.early-retirement.org/for...-a-101090.html to see how the lump withdrawal may affect your marginal income tax rate, capital gains tax rates, taxation of social security, and Medicare IRMAA surcharges (or, even more crucially, ACA subsidies). Compare those increased costs to the financing costs.

P.S. - I am currently working on an updated post for 2021.
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Old 11-05-2020, 08:24 AM   #5
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Good for you! Are you just trying to minimize income taxes on the withdrawal, or are you also trying to manage your income for ACA subsidies?
Mostly just trying to keep taxes at a good level. I do not have ACA. I use Christian Share for my medical insurance so that is not an issue.

One other thing is that I have always had excellent credit but when I retired I had to cancel 2 credit cards that were in my name but my company was also involved. I could not believe it but canceling these 2 cards sent my credit into a dive. Still good but not excellent. I think that credit agencies don’t like it when you pay cash for everything. I have no loans and no credit card dept except my house and even it is quite low
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Old 11-05-2020, 08:27 AM   #6
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I like #2 over #1, to spread the withdrawal over two years. Taking a loan seems valid too if you can get a good rate.
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Old 11-05-2020, 08:28 AM   #7
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Originally Posted by Gumby View Post
While I hate touting my own work, take a look at this post and thread https://www.early-retirement.org/for...-a-101090.html to see how the lump withdrawal may affect your marginal income tax rate, capital gains tax rates, taxation of social security, and Medicare IRMAA surcharges (or, even more crucially, ACA subsidies). Compare those increased costs to the financing costs.

P.S. - I am currently working on an updated post for 2021.
That looks like some great info. I will study your post later tonight. Thanks a lot for your hard work
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Old 11-05-2020, 08:29 AM   #8
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P.S. - I am currently working on an updated post for 2021.
Yay! I’ll be looking for it as 2021 will be a year of change for us.
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Old 11-05-2020, 08:32 AM   #9
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I really despise the idea of a loan but I see it has some merit. If the world keeps going the way it is now, I can make more money in the 401k than the interest on the loan will cost me. That is for sure a good thing but man I sure would rather have no loan and keep my monthly expense low.
I have not checked on a loan yet and am not ready to make the purchase. Just doing some serious thinking
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Old 11-05-2020, 08:43 AM   #10
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I did the same when I retired, bought a truck and a camper. I financed both at what was a blended good rate; 1.9% on the truck and 5% on the camper. The truck was 6 years finance, the camper 10 years. I compared the loan interest rate against leaving the money to grow if I moved that amount to an equity fund that tracked the S&P500. I ended up taking the loan and leaving my money to grow and I ended up better for my net worth. Thinking back, I probably should have also looked into an equity loan on my paid-off home. You mentioned your own home equity is substantial, so run the numbers that way as well.

Regarding the credit cards; I was able to swing both credit cards I had for work to new cards that retained their rating to my credit score. It wasn't difficult, I just called the credit card company and requested new credit card numbers for me, that the old cards were strictly work related and I didn't want to loose their credit score value to my rating. I rarely use those cards but they show up on my credit rating as 38+ years each and are a significant reason my credit rating is above 820
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Old 11-05-2020, 09:02 AM   #11
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One other thing is that I have always had excellent credit but when I retired I had to cancel 2 credit cards that were in my name but my company was also involved. I could not believe it but canceling these 2 cards sent my credit into a dive. Still good but not excellent. I think that credit agencies don’t like it when you pay cash for everything. I have no loans and no credit card debt except my house and even it is quite low
I was able to keep my credit cards at retirement- both purely personal- and have never carried a balance. My mortgage balance is about $68,000. My credit is also very good but probably not in the top 5%; I don't really care. I think that having the really high scores qualifies you for the best car loan deals and lower interest rates on your credit cards. Neither matters if you never intend to go into debt for those. You may want to keep a credit card or two around and use them but pay in full every month. The rewards are nice!
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Old 11-05-2020, 09:48 AM   #12
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I was able to keep my credit cards at retirement- both purely personal- and have never carried a balance. My mortgage balance is about $68,000. My credit is also very good but probably not in the top 5%; I don't really care. I think that having the really high scores qualifies you for the best car loan deals and lower interest rates on your credit cards. Neither matters if you never intend to go into debt for those. You may want to keep a credit card or two around and use them but pay in full every month. The rewards are nice!
Credit scores are also sometimes used in other areas, such as insurance pricing, some hiring decisions and obtaining and maintaining security clearances. So it is generally a good idea to tend to it, even if you never want to borrow.
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Old 11-05-2020, 10:09 AM   #13
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Originally Posted by Dynaflash View Post
We retired 2 years ago and live a pretty frugal life while still traveling and having the things we need. Now I have decided that I want a New truck and New camper. I will need about 100k to get these things. Here is the question. How do I remove this money from my 401k?
1) take it out and pay the taxes
2) take out 1/2 in December and the other 1/2 in January so that my income level is not so high for one year
3) Finance the truck and camper and only take out what it takes to pay the payments
4) some other ideas?

I have the money and can afford to do this but it is very hard for me to make a decision on this . My current truck and camper are certainly useable and I can live without the new ones but hey. Why not?
If it was me, I'd choose #2!!! But whatever you'd prefer is the best choice. Enjoy your new truck and new camper!
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Old 11-05-2020, 10:16 AM   #14
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One more option is to spread the taxable withdrawal out over even more years, 3 or 4.
Withdraw one quarter of the amount, and borrow the rest. Then payoff 1/4 more the next three years. This may keep you in the 22% bracket. Maybe even 12% depending on your spending.
If you can get a 2% loan, I might just keep the money in the 401k, assumes the future growth will be good.
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Old 11-05-2020, 10:40 AM   #15
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Christian Share is not medical insurance. It is medical cost sharing, and is not associated with any ministry.
https://www.christianhealthcareplan.com/

As to OP's need for cash, either take a low cost loan (less likely as got rid of Credit cards and didn't replace them), or spread the withdrawal over 2 tax years.
Since we are so close to the end of the year, it would be silly to take it all out in 1 yr.

As to OP's credit score, If OP has zero credit cards. OP could simply sign up for a couple of credit cards, put them in a drawer, and take them out once per month to buy gas/groceries, and pay off the bill in full each month. This would help with credit reporting.
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Old 11-05-2020, 11:21 AM   #16
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Originally Posted by Gumby View Post

P.S. - I am currently working on an updated post for 2021.
Hurry up, will ya?
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Old 11-05-2020, 11:32 AM   #17
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4) some other ideas?

Long shot here: Were you affected by Covid in a manner that would allow you to withdraw $100k under the CARES Act? You could then spread the tax bite over 3 years, rather than two.

https://www.irs.gov/newsroom/coronav...ns-and-answers
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Old 11-05-2020, 12:36 PM   #18
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Do the models you are looking at have 0% financing deals available? I suspect if you make the terms shorter than 5 years you are more likley to get one. If so at zero percent financing considering the net present value of the stream of payments vs paying all cash today, you would have a lower net present cost of the cars if you financed.
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Old 11-05-2020, 12:38 PM   #19
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If you have a Roth, you can use that $ tax free. Then you pay back the Roth from the 401K (assuming you can make partial withdrawals) at whatever tax efficient schedule that works for you. If partial withdrawals are an issue with your 401K, you can rollover the 401K to an IRA and then do whatever withdrawals whenever you care to and pay the taxes accordingly. Further, if the IRA and Roth are held in the same provider such as Fidelity, that transfer can be done essentially on the same day. This is assuming you meet the requirements for penalty free withdrawals.

Definitely check if you can get 0.0% financing. You can usually get a lower price on the vehicle by doing so. Then you could, if you choose, pay off the loan after a month or two.
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Old 11-05-2020, 02:28 PM   #20
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Dynaflash, to change the topic somewhat--I assume you are buying a large truck and some sort of pull behind trailer or a fifth wheel. Have you had experience driving a truck and pulling a trailer? It is not as easy as it looks. Have you had experience camping and staying in a trailer? I ask these questions because I know several people that bought their campers, went camping a few times and hated it. I have owned trailers and motorhomes--it is a lot of work and not for everyone. Some people love it and some hate it. We sold our motorhome about 5 years ago (it just got to be too much for us) and now we rent AirBnBs when we travel. Much easier and probably cheaper in the long run. You also say you want a "new" truck and camper. Have you looked into buying something a few years old to bring your costs down? RVs depreciate rapidly. The last motorhome we bought was about 3 years old and we got it for about 50% of what a new one cost.
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