This close to withdrawing 27K...

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stltodaycom
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Joined: Fri Dec 08, 2017 4:33 pm

This close to withdrawing 27K...

Post by stltodaycom » Fri Dec 08, 2017 5:06 pm

Hi everyone -
I have $27,000 in a qualified money market account through my bank. It's earned about $2.05 so far this year.
(long story how it got here over a year ago)

Anyway, I could really use this money for my business. I'm self-employed (no employees),
and this money would be like a small angel round. Most of the money would be used for
development and marketing. I really think this amount could take my business to the next level.
Certainly make more than $2.05!

All of the "experts" seem to frown on this choice because of the 10% penalty, plus remaining amount
will be applied towards income. And of course (since its a qualified IRA) the general consensus seems to be, "retirement,retirement,retirement.."

I have a completely separate Vanguard IRA account (former 401k from employer) that I am dedicating to "retirement"..for the most part.

What are some opinions about the following:
- withdraw the amount in 2017 or 2018?
- anybody know a way around that 10% early penalty?
- ideas on how to minimize tax liability because of this windfall?

Thanks!
DK

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whatusername?
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Re: This close to withdrawing 27K...

Post by whatusername? » Fri Dec 08, 2017 5:30 pm

I would leave the money in the account and invest it in something other than a money market fund. The big advantage that those funds have is the tax shelter offered by being in a qualified account. Once you lose that tax-advantaged space, you don't get it back. Without knowing more about your financial situation, including your future retirement plans, horizon, etc., it's hard to offer any more specific advice than "retirement is important" though.

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JDCarpenter
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Re: This close to withdrawing 27K...

Post by JDCarpenter » Fri Dec 08, 2017 5:44 pm

whatusername? wrote:
Fri Dec 08, 2017 5:30 pm
I would leave the money in the account and invest it in something other than a money market fund. The big advantage that those funds have is the tax shelter offered by being in a qualified account. Once you lose that tax-advantaged space, you don't get it back. Without knowing more about your financial situation, including your future retirement plans, horizon, etc., it's hard to offer any more specific advice than "retirement is important" though.
+1 on general rule. OP, here is a link to the IRS publication on exceptions to the 10% penalty: https://www.irs.gov/retirement-plans/pl ... tributions

Questions/answers that could support a different move than normal: how old are you? How much do you have in other deferred accounts? When do you want to retire (if you know)? What other investments do you have (assume none outside of the business and the IRAs)? Have you approached other potential investors in your business--if so, what did they say? 2017 v. 2018--what is your other income each year, which will determine the tax you'll owe above and beyond the 10% penalty? What is the reasonable upside for the business? Is this your first business? Do you have a second income/spouse to support the household and add to other retirement accounts? What is 27K in your big scheme of things?

Myself, I'd not touch the money other than to invest like whatusername suggests. But, like many on this board, I wasn't an entrepreneur ....
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mega317
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Re: This close to withdrawing 27K...

Post by mega317 » Fri Dec 08, 2017 11:15 pm

Welcome to the forum.

The gospel here is never touch your retirement accounts, but I don't know. If you are otherwise on track for retirement I wouldn't rule it out. If this money was in a taxable account, would you even hesitate? If you have a strong business that you know well and are confident you will get a return on this, then it may be a relatively small price to pay. Of course it's a risk, but you didn't start a business without taking risk. (If this is a business you have already being putting money into with little to show for it, then I'd be a lot more suspect.)

Traveler
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Re: This close to withdrawing 27K...

Post by Traveler » Sat Dec 09, 2017 1:43 pm

If it is in a retirement account, why is it sitting in a money market account? You say it's only made $2.05 this year but it easily could have made $4000 in a low risk index fund.

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Earl Lemongrab
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Re: This close to withdrawing 27K...

Post by Earl Lemongrab » Sat Dec 09, 2017 4:29 pm

I assume this is a solo 401(k). If not, you need to make clear what you have. You can get access to some of the money through a loan, although not all i401(k)s offer that.

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arcticpineapplecorp.
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Re: This close to withdrawing 27K...

Post by arcticpineapplecorp. » Sat Dec 09, 2017 4:53 pm

Traveler wrote:
Sat Dec 09, 2017 1:43 pm
If it is in a retirement account, why is it sitting in a money market account? You say it's only made $2.05 this year but it easily could have made $4000 in a low risk index fund.
Sorry, have to take issue with this statement. Here's why:

A $4000 gain on a $27,000 investment is a 14.8% return. That doesn't sound like "low risk to me". That sounds like "high return" which means "high risk"...you know, as in risk and return are inextricably linked. A 14.8% return is what the small cap index fund has earned so far this year. I'd hardly call that a "low risk index fund".

Low risk usually means low returns. As in high quality short to intermediate bonds. You know, like the Vanguard total US bond market index fund. That's up 3.44% ytd as of this writing. Which an investment of $27,000 would have yielded $928.80. A far cry from $4000.

Index funds are neither risky or safe in and of themselves. The type of index fund, that is, whether it is a stock index fund or a bond index fund tells you what level of risk you're taking.

Just clarifying so the OP doesn't assume all index funds are low risk. Nor that s/he thinks s/he can earn $4000 on his $27,000 in a low risk bond fund for example. You know how the S&P500 index fund performed in 2008, right?
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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