Cash out 401K

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Randee
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Joined: Thu Jul 12, 2018 5:22 am

Cash out 401K

Post by Randee » Thu Jul 12, 2018 5:25 am

I retire in six months after 31 years of work and have a modest 401K. Since the market is pretty high at the moment I would like to cash out the 401K(less tax and projected income tax) to a 2% savings account to protect the capital in the event of a coming market correction. I'm 63 and plan to live off of savings distributions plus a part time job. At age 66 social will kick in. Medical insurance is affordable for the two years till medicare is available. What do you think of this?
Randy

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Pajamas
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Re: Cash out 401K

Post by Pajamas » Thu Jul 12, 2018 6:48 am

People have been saying that the market is "pretty high" for several years. It's very difficult to time the market.

https://www.macrotrends.net/2324/sp-500 ... chart-data

Still, it is a good idea to reduce risk as you move into retirement in general and to have some near-cash as a buffer to help bridge you from 63 to Social Security in particular. You might even consider delaying Social Security for a higher benefit.

However, it's hard to give specific advice without more information about your total assets, 401(k), expected SS benefit, spending needs, etc.

For instance, if you have a taxable account, it might be better to spend from that before the 401(k) and you will have to take RMDs from the 401(k) and any traditional IRAs at 70 1/2.

BrooklynInvest
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Re: Cash out 401K

Post by BrooklynInvest » Thu Jul 12, 2018 6:53 am

Hi OP

I'm unable to time the market. Had I tried I would have probably lost a lot over the years.

Don't know the amounts involved bout could you not allocate your 401k conservatively (stocks + bonds + cash) and withdraw from there over your usage horizon? Might reduce the upfront tax burden.

RickBoglehead
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Re: Cash out 401K

Post by RickBoglehead » Thu Jul 12, 2018 7:05 am

401k assets can be rolled into IRA and then sold, and put into CDs, zero taxes.

Jack FFR1846
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Re: Cash out 401K

Post by Jack FFR1846 » Thu Jul 12, 2018 7:12 am

RickBoglehead wrote:
Thu Jul 12, 2018 7:05 am
401k assets can be rolled into IRA and then sold, and put into CDs, zero taxes.
That's a MUCH better action. Cashing out a 401k will cost you tax money. Simply changing how your 401k.....or a rolled into IRA is invested gives you the same investments without the tax due.
Bogle: Smart Beta is stupid

alter
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Re: Cash out 401K

Post by alter » Thu Jul 12, 2018 12:24 pm

RickBoglehead wrote:
Thu Jul 12, 2018 7:05 am
401k assets can be rolled into IRA and then sold, and put into CDs, zero taxes.
OP could convert it to a regular IRA after retiring, then while income tax bracket is very low between 63 and 66, convert the IRA balance over to Roth IRA.

Cashing the 401k is just a bad idea and a waste of money. Even just re-allocating it all into the stable value fund would be better than cashing it. I would either go the IRA/Roth IRA conversion route, or re-allocate.

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220volt
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Re: Cash out 401K

Post by 220volt » Thu Jul 12, 2018 12:47 pm

Randee wrote:
Thu Jul 12, 2018 5:25 am
I retire in six months after 31 years of work and have a modest 401K. Since the market is pretty high at the moment I would like to cash out the 401K(less tax and projected income tax) to a 2% savings account to protect the capital in the event of a coming market correction. I'm 63 and plan to live off of savings distributions plus a part time job. At age 66 social will kick in. Medical insurance is affordable for the two years till medicare is available. What do you think of this?
Randy
That's probably THE worst thing you can do with 401k. As many have said, roll it over to a regular IRA tax-free and put it in conservative assets there (MM, CD, bonds etc...). You can then periodically take some cash out as needed and if your income is low enough you will pay 0% taxes. I do that with my parents 401k. Works great,
"If I had only followed the advice of financial analysts in 2008, I'd have a million dollars today, provided I started with a hundred million dollars" - Jon Stewart

WhiteMaxima
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Re: Cash out 401K

Post by WhiteMaxima » Thu Jul 12, 2018 1:01 pm

No need to cash out 401k. You can do Roth conversion up to you tax target. if you think the current market value is too rich. Switch some % into fixed income. Emerging market and international is not as over valued as domestic, you might add more position. Don't do 401k cash out, it will cost you a lot of tax and possible penalty.

Randee
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Re: Cash out 401K

Post by Randee » Fri Jul 13, 2018 5:40 am

Thank you all for your great advice. The plan now is to rollover 401K at retirement, age 63.5 in December. Then maybe invest part of that in CDs. The 401K is $285K right now, and also $20K emergency savings. Retirement needs to be soon for health reasons and why the projected expectancy about 78. Want to withdraw $30K (after retirement begins) for cheap RV and live in it for one or two years then go to a 55+ retirement community in Fla. Will need to live off of 401K for one or two years or until tired of RV living- expenses may be $2K/month. Retirement community (renting) expenses about $3K/month. Will have a part time job when there and will begin drawing SS at age 66. Does that sound realistic?
Randy

Crisium
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Re: Cash out 401K

Post by Crisium » Fri Jul 13, 2018 8:04 am

$3k per month on $305k is an 11.8% withdrawal rate. I wouldn't even consider that safe for the 14.5 year retirement you are projecting (if I interpreted what you said right).

What is your projected Soc Sec, and what will you make in your part time job? This would be critical for making it last for 14.5+ years.

Randee
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Joined: Thu Jul 12, 2018 5:22 am

Re: Cash out 401K

Post by Randee » Sun Jul 15, 2018 5:59 am

The part time job beginning at age 66 (three years) will probably be about $800/month and social security at retirement 63.5 is $1525. I'm confused about this- SSA says delaying claiming SS until FRA age 66.5 increases to $1850 however if I retire at 63.5 and don't claim SS until age 66.5 ( live off of 401K only during that time) does it still pay $1850?

Randy

Dottie57
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Re: Cash out 401K

Post by Dottie57 » Sun Jul 15, 2018 6:11 am

Randee wrote:
Thu Jul 12, 2018 5:25 am
I retire in six months after 31 years of work and have a modest 401K. Since the market is pretty high at the moment I would like to cash out the 401K(less tax and projected income tax) to a 2% savings account to protect the capital in the event of a coming market correction. I'm 63 and plan to live off of savings distributions plus a part time job. At age 66 social will kick in. Medical insurance is affordable for the two years till medicare is available. What do you think of this?
Randy
I think it is a better idea to adjust your asset allocation. I just retired at 61. I’ve moved to 50/50. Part of the FI is in savings account which could bring me through a bear market. The rest of FI is ina stable value fund and bond funds.

Don’t totally cash out . Bad, bad idea.

Enjoy your retirement!

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Tamarind
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Re: Cash out 401K

Post by Tamarind » Sun Jul 15, 2018 7:36 am

Randee wrote:
Sun Jul 15, 2018 5:59 am
The part time job beginning at age 66 (three years) will probably be about $800/month and social security at retirement 63.5 is $1525. I'm confused about this- SSA says delaying claiming SS until FRA age 66.5 increases to $1850 however if I retire at 63.5 and don't claim SS until age 66.5 ( live off of 401K only during that time) does it still pay $1850?

Randy
Yes. Once you stop working, your payment at full retirement age is set. Then they modify it based on how soon you claim. They reduce it if you claim before full retirement age and increase it if you wait longer. It will keep going up the longer you delay until you are 70. There are calculators online to show you what it would be at different ages.

Usually people who think they have reduced life expectancy are advised to claim SS as early as possible. However, if you could better live on your SS amount if you just waited a little longer to claim it, there might be good reason to live off your savings a couple of years longer before claiming.

We talk here about ability, need, and willingness to take risk by investing in stocks. Your ability and willingness are low, but your need may be high. It sounds like your money is not going to last you long enough if you only put it in savings and CDs. I would suggest 30/70 (stocks/bonds). That way, if 2008 happened again your money would only drop about 15% before starting to recover. And the bond funds will give you a steady stream of stable payments to reinvest. But before and after that market correction that you fear but can't predict, the stocks in your portfolio will be giving you the growth you need.

Randee
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Joined: Thu Jul 12, 2018 5:22 am

Re: Cash out 401K

Post by Randee » Sun Jul 15, 2018 8:20 am

Thank you very much! Its mostly stocks now but after retirement to the IRA in December it will be setup for 30/70. Will have to get advice on how to do that.

Thanks again,

Randy

retired early&luv it
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Re: Cash out 401K

Post by retired early&luv it » Sun Jul 15, 2018 9:44 am

Converting it to a Roth would cost no more in taxes than taking it all as cash. I am not sure the rules, if a conversion would mean you can't withdraw it for a while that could of course be a deal breaker.

If you do not want to do the Roth, you could put it all into a Rollover IRA. Then you can withdraw bits of it as needed.

In either a Roth or in a Rollover IRA, you can park it all in a money market account if you want. Vanguard Prime Money Mkt Fund returns (as of end of last month) was almost 2 percent on an annualized basis.
https://financials.morningstar.com/mm/d ... en-US&cur=

If you are low on income starting next year and therefore in a very low tax bracket, you can convert some of it to a Roth each year until it is all converted.

I finished converting all of my Rollover IRA to Roth last year, thus I will have no RMDs. I put my tax defered account from my employer (457 plan, not a 401k) into the Rollover IRA all at once. Then I converted some of it each year based on how much of my account I wanted to incur taxes on each year.

Dottie57
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Re: Cash out 401K

Post by Dottie57 » Sun Jul 15, 2018 10:18 am

retired early&luv it wrote:
Sun Jul 15, 2018 9:44 am
Converting it to a Roth would cost no more in taxes than taking it all as cash. I am not sure the rules, if a conversion would mean you can't withdraw it for a while that could of course be a deal breaker.

If you do not want to do the Roth, you could put it all into a Rollover IRA. Then you can withdraw bits of it as needed.

In either a Roth or in a Rollover IRA, you can park it all in a money market account if you want. Vanguard Prime Money Mkt Fund returns (as of end of last month) was almost 2 percent on an annualized basis.
https://financials.morningstar.com/mm/d ... en-US&cur=

If you are low on income starting next year and therefore in a very low tax bracket, you can convert some of it to a Roth each year until it is all converted.

I finished converting all of my Rollover IRA to Roth last year, thus I will have no RMDs. I put my tax defered account from my employer (457 plan, not a 401k) into the Rollover IRA all at once. Then I converted some of it each year based on how much of my account I wanted to incur taxes on each year.
Here is info from Michael Kitces on the two 5 year clocks on Roth IRAs.

https://www.kitces.com/blog/understandi ... nversions/

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