topic Re: Is it wise to draw from 401k if you don't need the money ? in Personal Finance

Is it wise to draw from 401k if you don't need the money ?

Zizou — Sat, 17 Aug 2024 15:04:18 GMT

We are retired , wife is past 59 1/2 (Can draw) , me 57 YO.

We are no financial gurus but do not agree on one point. We are middle class, not rich, not poor.

We are currently fine financially. My wife wants to draw $15000 from her 401K to put in our checking account as a safety net.

I told her if we need extra money we can draw from her 401 k anytime, but I thought it was not wise to draw if not needed as these $15000, will never bring interest anymore.

It makes her fell better to have them in our checking, and I tell her that money is in your 401k, it's yours to draw when you want.

Please be aware we are not fighting over this, no drama, just 2 different opinions and I would like your opinions.

If it's no big deal, I will go her way.

Thanks

Re: Is it wise to draw from 401k if you don't need the money ?

Backwoods — Sat, 17 Aug 2024 16:01:23 GMT

Keep it in the 401K. Taking it out will make it taxable. You can get the money when you need in a few days It will keep earning til you remove it. If you put it i checking its to easy to spend. Short version of what dw and I. We own a business that was hit hard during pademic.(goverment closed) We are well over 65 so we elected to get our social security. We know this is not going to cover everythig we do. Our business is finally recovering. We leave all our cash in biz checking About every two weeks I check to see how short we will be and that is all I transfer If I put all profits in personal account I know it would be spent

Re: Is it wise to draw from 401k if you don't need the money ?

coldfusion — Sat, 17 Aug 2024 16:29:56 GMT

@Backwoods wrote:
Keep it in the 401K.

^^^^^^^^^^^^^^^^^^ this

However if you need to do this for your wife's peace of mind consider instead looking into moving the money into a high yield savings account linked to a checking account so you have the opportunity for that money by default to earn more than lint in your pocket but if needed quickly transfer it to the checking account.

Re: Is it wise to draw from 401k if you don't need the money ?

FicoMike0 — Sat, 17 Aug 2024 16:58:42 GMT

You don't say what your income is. The idea with 401k is to withdraw the money during low income years. Look at your marginal tax bracket, how much tax will be due on the $15k? Do you expect your future income to increase, decrease, not change?

Suppose you could withdraw $5000 this year at 10% tax, the next dollar goes into the next higher tax bracket. Id probably do the $5000. Do the same calculation next year, withdraw another similar amount. Meanwhile, find some investment to put the funds in, like a hi rate savings.

Re: Is it wise to draw from 401k if you don't need the money ?

Backwoods — Sat, 17 Aug 2024 17:08:25 GMT

Coldfusion, that is an interesting idea. My thiking is almost aything I can put on a credit card unless its super big for short term. Now this past week a saw a casual friend have a super big expense. Thier 30 year old son was arrested for dwi, refusal to take breath test and having a concealed weopon without a permit. This was all while he was on a work trip. I think my casual friend just dropped $5,000 plus on bail bonds, attorney and auto impound. Son has no money and will probably loose job and just bought small condo so it will get worse. That I think was a once in a life event

Re: Is it wise to draw from 401k if you don't need the money ?

SouthJamaica — Sat, 17 Aug 2024 18:38:20 GMT

@Zizou wrote:
Hi

We are retired , wife is past 59 1/2 (Can draw) , me 57 YO.
We are no financial gurus but do not agree on one point. We are middle class, not rich, not poor.
We are currently fine financially. My wife wants to draw $15000 from her 401K to put in our checking account as a safety net.
I told her if we need extra money we can draw from her 401 k anytime, but I thought it was not wise to draw if not needed as these $15000, will never bring interest anymore.
It makes her fell better to have them in our checking, and I tell her that money is in your 401k, it's yours to draw when you want.
Please be aware we are not fighting over this, no drama, just 2 different opinions and I would like your opinions.
If it's no big deal, I will go her way.

Thanks

From a purely financial perspective, of course you are right. But in real life I would defer to my wife. Peace of mind is important. Make sure she knows she would be paying income tax on the distribution. And make sure it's in an interest bearing account.

Re: Is it wise to draw from 401k if you don't need the money ?

keekers — Sat, 17 Aug 2024 19:49:26 GMT

Regardless of where the $ is stored (e.g. savings account, 401k, etc.) it is all part of your total portfolio. If there is angst about whether it is in a 401k vs. checking, it signals to me that the underlying issue is actually the asset allocation of your portfolio. In other words, the want to move $ out of the "market" and into a checking account as a "safety net" indicates that she doesn't want to take risk with the funds. I would suggest an alternative to withdrawing money. Instead of withdrawing and potentially realizing losses in addition to incurring additional taxes, reevaluate how your total portfolio is allocated across the various asset classes (i.e. equities/fixed income) and rebalance as necessary to help alleviate the worry of market volatility (e.g. peace of mind).

Speaking of taxes, assuming the 401k is not Roth you should take into consideration that you will have to pay taxes on withdrawals from your 401k. As pointed out earlier, you should consider whether you will pay more or less taxes now vs. the future as a primary decision point for unneeded withdrawals.

Re: Is it wise to draw from 401k if you don't need the money ?

IsambardPrince — Sun, 18 Aug 2024 08:37:08 GMT

@Zizou wrote:
Hi

We are retired , wife is past 59 1/2 (Can draw) , me 57 YO.
We are no financial gurus but do not agree on one point. We are middle class, not rich, not poor.
We are currently fine financially. My wife wants to draw $15000 from her 401K to put in our checking account as a safety net.
I told her if we need extra money we can draw from her 401 k anytime, but I thought it was not wise to draw if not needed as these $15000, will never bring interest anymore.
It makes her fell better to have them in our checking, and I tell her that money is in your 401k, it's yours to draw when you want.
Please be aware we are not fighting over this, no drama, just 2 different opinions and I would like your opinions.
If it's no big deal, I will go her way.

Thanks

You could start drawing it out now but it may not be wise if you don't need the money.

The only way it makes sense to do it now is if you need to in order to pay less taxes over the long run. If it's a traditional 401(k) it will affect your taxes now, if it's a Roth it wouldn't because you were already taxed before it went in there.

If it's a Traditional, then most people your wife's age are still working, and can expect to make significantly less money when they go into full retirement.

If that's the case, you should begin drawing it then, not now.

If it's a Roth, you can take it out now and not only would it not affect your taxes (probably), but you could spare yourself potential taxes on Social Security benefits later.

The government sets things up so that if you go above a certain amount of money, and some of it is Social Security money, then some of your Social Security money will be subject to your federal income tax bracket. It's never "all" of your Social Security money, it phases in, and at the worst, we're talking about 85% of the Social Security money being subject to taxation.

Social Security is a worse deal all the time. In the 1980s, Reagan signed the law that raised the retirement age and kept on raising it, which was a Social Security cut (becuase no matter when you retire it will always be less money than you would have had if the law not changed), and in the same stroke of the pen, the tax on Social Security benefits was implemented, and it's never been adjusted for inflation since then, so unless you're dead broke, expect them to take some of it back using the IRS, which is another cut.

If they only made a change to adjust it for inflation, then almost nobody would pay a tax on their benefits, because you would then need to surpass $100,000 a year in retirement to start owing the IRS anything. But they haven't, so we must deal with the law as it is.

And now they want to just do nothing and let the trust fund deplete itself, so 27% will be lost beginning sometime around 2031, most likely.

So they're taking it in chunks, and if you start grabbing at your 401(k) accounts now, you may well wish you hadn't done that later.

You've said you're not rich, and if you're not rich then you probably don't have enough money that you'll never outlive it. If you take your retirement money to prop up lavish spending right now, you might not like where that leaves you later.

Further, even if you did save it responsibly, then consider that as soon as you take it out, you get taxed if it's traditional, not Roth.

If you did something like reallocate the $15,000 over to a conservative fixed income fund like investment grade bonds, it would still keep growing tax-deferred. You could even just keep it there until something does happen, or start drawing it out but not in chunks big enough to imact your marginal income tax rate. That way, over several years you'd have it all out, but you'd pay less in taxes. And if all hell breaks loose, the option to get the rest right that very minute is still on the table, it just might affect your marginal tax rate a little more.

I've never heard of a retirement account where no fund option will ever make money for you again. But if that is the case, you could do a rollover. Build yourself a ladder of IRA CDs. If you move money from a Traditional 401(k) to a Traditional IRA CD, you continue to defer taxation as long as each of the CDs in your ladder rollover, and you don't take the money at that maturity point.

There are few investment losses that are worse than paying your taxes. So most smart investors figure out how to strategically take money off the table at the end to minimize the tax obligation.

For many workers, Traditional 401(k) contributions are better, because they earn so little that getting them taxed during that tax year would crowd out their budget and make it harder to save anything at all, and they can expect to earn even less in retirement, so their taxes would likely be low anyway.

Most people earning a low amount in their 30s and 40s are not going to see their situation improve much, and the RoI of trying to go to college now at the same prices and interest rates that those in their late teens or early 20s pay is a different value calculation for sure.

For those in their 40s with low income, it's a bad place kind of. Too late to start over, not much point investing heavily. Wouldn't ever have a lifelong career as a doctor, dentist, or lawyer to cover all the debt they'd rack up so the only thing that would make sense for a person my age would be some sort of vocational training they could get in and out of quickly and relatively cheaply.

So it would make more sense to do a traditional IRA/401(k)/403(b). I don't know if you ever gave it this much thought as to which you'd do.

Re: Is it wise to draw from 401k if you don't need the money ?

Zizou — Sun, 18 Aug 2024 10:40:33 GMT

Thanks a lot for the help!

Re: Is it wise to draw from 401k if you don't need the money ?

Zizou — Sun, 18 Aug 2024 10:44:14 GMT

Thanks for the help. I think she will go my way, if I show her the money we could lose.

I told her "Have we ever needed even $2000 in a hurry for the 33 years we have been married?".

Never!
Even the plumber we just hired offered us free financing for 18 months.

Thank-you 👍🏻

Re: Is it wise to draw from 401k if you don't need the money ?

Zizou — Sun, 18 Aug 2024 10:49:39 GMT

They told her 20% will be taken out if she withdraws the $15000.

It made her think.

We are not sure of our final income as I might take a PT job (Headaches free, no specific hours, no benefits), if we decide to travel more, which is our goal in retirement.

I m going to look into what you mention.

Thxs a lot 👍🏻

Re: Is it wise to draw from 401k if you don't need the money ?

Zizou — Sun, 18 Aug 2024 10:54:54 GMT

OMG, these poor people!

This will ruin your life.

Thanks

Re: Is it wise to draw from 401k if you don't need the money ?

Zizou — Sun, 18 Aug 2024 11:09:09 GMT

Yes she found out about the 20% tax they told her would be taken out.

It kind of made her think twice now.

We won't lose any sleep over it no matter what we decide but i hate to lose money for nothing.I wrote the numbers black on white for her and the amount of money we could lose over several months.

I just agreed to her wish to (Really) upgrade an upcoming cruise (Doubled the price), it was really important for her to experience this unique experience once in her life.

So if we go my way i told her, it could give us the opportunity to do it again in the future.

And it's not my way, it's for both of us.

Thanks for the help!

Re: Is it wise to draw from 401k if you don't need the money ?

Zizou — Sun, 18 Aug 2024 11:15:35 GMT

No her decision has nothing to do with market volatility.

I check my 401k weekly and make her do the same, or she would not.

It's more an old fashionned way of thinking that having cash in your wallet (Physically) makes you think you are really ok financially.

My dad (RIP) was like that, he could have $20000 in his checking account with all bills paid and worry about money but having $1000 cash in his wallet made him so happy.

Thanks for the help!

Thxs for the help!

Re: Is it wise to draw from 401k if you don't need the money ?

Zizou — Sun, 18 Aug 2024 11:32:19 GMT

Well, no we are not broke but we live within our means.

The goal is to travel as much as possible.

And yes we have 401k's.

Not the discussion here but we went against Roth or other possibilities.

We will stick with our 401K's.

Thanks

Re: Is it wise to draw from 401k if you don't need the money ?

IsambardPrince — Sun, 18 Aug 2024 19:43:44 GMT

@Zizou wrote:
No her decision has nothing to do with market volatility.
I check my 401k weekly and make her do the same, or she would not.
It's more an old fashionned way of thinking that having cash in your wallet (Physically) makes you think you are really ok financially.
My dad (RIP) was like that, he could have $20000 in his checking account with all bills paid and worry about money but having $1000 cash in his wallet made him so happy.
Thanks for the help!

Thxs for the help!

Well, cash is a liability when there's too much of it around. Some people keep a bunch in their wallet or house and then the risk becomes that someone strongarms you and just takes it and nobody gives it back, like a bank with fraud protection on a debit or credit card probably would.

I got mugged, they took all my credit and debit cards. I got back to my laptop and reported them all stolen before they managed to take anything from them. My ex got mugged 3 months later. The guy tried a $40 transaction at a bodega on the corner but the bank gave that back, all the other cards got shut down.

In my case, they made off with a very bad Android phone (Samsung Galaxy S6) which was very slow and got horrible battery life. Back then, they didn't come encrypted from the factory, but I did it myself, so I know they didn't get any of my data from it. Since phones are tracking devices, I gave the police a map showing that they went to someone's aunt's house and the cops recovered their guns, my wallet, and my phone, and took them to court. They tried to plead not guilty, and then when they saw me walk in ready to testify against them all, they tugged on their lawyer's suit and all took a plea deal. Lately, they seem to have gotten wise to the phones as a tracking device and are making the victims unlock them and wipe them first. I'm glad I don't live in Chicago anymore.

But if I was carrying cash, I would have gotten none of that back, most likely. You can't even prove cash is yours.

Dave Ramsey had a caller ask how much cash she should keep in her house, and he told her (southerners are very direct, we don't beat around the bush a lot), that the reason you don't do that is because people can "break in and knock you upside the head and take it", and that would be my concern too.

I never keep any cash aside from walking around money and "small emergency" like the credit card machines go down and I need some gas to get home or something. The more cash you keep around, the more investment opportunity you lose, even if it's just the 5% interest you could get on a bank CD, and you don't get cashback points if you use it to buy food or pay your utilities, so it comes with its own costs.

In personal finance, I don't like a lot of cash hanging around.

Re: Is it wise to draw from 401k if you don't need the money ?

IsambardPrince — Sun, 18 Aug 2024 21:32:23 GMT

@Zizou wrote:
Well, no we are not broke but we live within our means.
The goal is to travel as much as possible.
And yes we have 401k's.
Not the discussion here but we went against Roth or other possibilities.
We will stick with our 401K's.
Thanks

I'm glad to hear about it when people live within their means. I like the 75-10-15 rule.

No more than 75% of your income should go to expenses, at least 10% should be saved, and at least 15% should be invested.

When you live as close to the edge as many people do, you are already spending 100% of your income on your daily expenses and possibly taking out loans as well. It's a bad way to live because you end up living on less than 75% of your income anyway, but the rest just goes to debt service for things you bought a long time ago, most of which is interest which doesn't even help you.

The bankruptcy sucked all the pride and arrogance right out of me. I no longer care what I look like to other people. We tend to gravitate, not on a conscious level, to what's called Social Comparison.

Simply put, Social Comparison is where we use those around us as a benchmark to define what success means to us.

If you're a broke college kid and everyone around you is broke too, it becomes acceptable in your mind to not be doing very well financially at that point in your life. But if you're making $100,000 a year and everyone else in your neighborhood is a millionaire, then you won't want to spend $20,000 on a Toyota when they're driving a Tesla Cybertruck, so you end up spending the $20,000 that could have bought a Toyota outright, on a down payment on a Cybertruck, and then you owe another $140,000 where that came from, which means monthly payments, and an opportunity cost of not investing the money, so you can look ridiculous and impress the neighbors.

Then people wonder why it never mattered to them that they drove a beater before they moved into that neighborhood.

Never compare yourself to others. Don't allow Social Comparison to creep in.

The reason I love 75/10/15...

Almost anyone can do this, even with just over $50,000 in income living in the 4th richest county in America!

When most people say there's nothing to save and they can't do it and that's impossible, it means they don't want to sit down and figure out, using a spreadsheet and zero base budgeting (start from zero, justify every expense) how they're going to make that happen so they can win.

If it was me and I actually didn't need the money, I'd keep it invested.

You said earlier "How often does even $2,000 come up in an emergency?" If you're smart and frugal, it usually doesn't.

Some people consider the alternator on their car going out ($180 if you DIY like me, $700 or so at a garage) an emergency. I don't. It kind of sucks that I have to take it out of an interest bearing account, but these things happen.

The alternator may blow up but it will be an inconvenience, not an emergency that requires a bank loan. It sounds like you guys get that, which is good. Not everyone does.

There is no replacement for a cash cushion. When I had a car accident in 2021, I didn't even report it to my insurance company. They charge you about 300% of what any claim actually cost them. They make sure that they get it by putting it in CLUE and making sure you might as well just pay them higher premiums for a few years, because you'll pay them to someone. When I paid cash to fix the car, and paid cash to hire a lawyer to beat the traffic ticket that came from it, thus discouraging a lawsuit from the other party (who was going to wait and try to use a guilty plea from mailing the ticket with some money to bootstrap a lawsuit), I saved myself so much in further losses by spending $1,000 I had.

The other people never bothered to file a claim against my insurance. I don't know why. I don't care why. The important thing is I got incredibly lucky and they had two years to do something about that and they didn't.

Re: Is it wise to draw from 401k if you don't need the money ?

IsambardPrince — Sun, 18 Aug 2024 20:34:54 GMT

@Zizou wrote:
Yes she found out about the 20% tax they told her would be taken out.
It kind of made her think twice now.
We won't lose any sleep over it no matter what we decide but i hate to lose money for nothing.I wrote the numbers black on white for her and the amount of money we could lose over several months.
I just agreed to her wish to (Really) upgrade an upcoming cruise (Doubled the price), it was really important for her to experience this unique experience once in her life.
So if we go my way i told her, it could give us the opportunity to do it again in the future.

And it's not my way, it's for both of us.

Thanks for the help!

If you're over 59.5 you won't pay any penalty tax (which is an extra 10% the IRS charges to make it really expensive to take it early), but you still will pay your marginal tax rate.

The progressive nature of the federal tax code and brackets, mean that everyone pays a blended rate. The more you make, the more of each segment of the income goes into the next bracket. If all of the money or substantially all would be taxed at the 20% rate because of your other earnings, then it may behoove you to wait until you make Social Security checks and not a lot else later on and start drawing it out in a staggered manner then.

Why? Well, it will be easier to keep this money in the 10 or 12% rate then than it will be now. Ideally, your wife would wait to take from hers until you're both in full retirement, and filing jointly. You will get an additional senior deduction as soon as she's 65 (the tax year of her birthday) and another one when you are. So if you really want to wait and drive down the tax burden, you can wait until both of you get this additional deduction.

I think that would make her 69 years old by that point. Women live a couple years longer, so you're actuarially the same age.

I would just maybe put this off and then take most of it off the table when you're not making a lot of money in retirement, you both get the additional senior deduction, and you can get most of it out of there before required minimum distributions begin.

Thing is, a lot of people don't sit down and tax optimize. They go "Well, I want a Tesla Cybertruck and if I just zoink all this money out of my retirement account..." and that makes the IRS very happy.

One nice thing about Social Security retirement checks is if you want to leave the United States and live somewhere nice but relatively cheap, you can!

The SSA will deposit your checks as long as you live in a country where they can send the money, and that's most countries.

It's not hard to live in the Philippines (spouse is a citizen there) as an American expat, which is why I'm planning to go there as soon as I hit FRA in 26.5 years.

At this point I'm counting the days until I can blow this popsicle stand. Pretty much the only thing America has ever done is make me constantly fight for my life and declare bankruptcy, so it's been real and it's been fun, but it ain't been real fun. If I could go now, I'd go.

The only downside is that America is the only major country in the world that still taxes you (federally) wherever you live, so I'll get a little of the hair of the dog that bit me until the day I die as the cost of taking the Social Security checks.

I'd do better on Social Security checks alone in the Philippines than many of their urban professionals do, and in America I'd still be dealing with a slumlord that doesn't make the toilets flush until the city is threatening him.

Re: Is it wise to draw from 401k if you don't need the money ?

Zizou — Sun, 18 Aug 2024 22:27:27 GMT

On a Caribbean island, they keep an eye for tourists that are using their phones. If the phone is in use, it is not locked. They run by you, grab it and set it to not lock while running.

I always get myself in a safe spot prior to use my phone and look around.

Thxs

Re: Is it wise to draw from 401k if you don't need the money ?

Zizou — Sun, 18 Aug 2024 22:46:53 GMT

People living over their means are legions (My parents LOL)

I would never ask anyone why they bought a Mazerrati when they should buy a Camry, live in a gated golf community when they should live in a normal sub-division and get the surf and turf when dining out instead of a good old burger.

Then they work 40 h when I worked 50-60 all my life.

IT ADDS UP!!!

But when I hear people tell me that I am lucky to retire at 57 or try to make me look like I am the bad guy because I could go on a vacation , it really makes me mad.

They usually never ask me about this again because i put them back in their place politely pointing out what they drive, where they live, how often they eat out and more.

I don't get that folks would be that dumb to not realize how a person they have known forever has run his/her finances a lot better than them and then pointing them out as being the bad guy.

I hate envious people. I have friends that are multi millionaires, I would never think to go to their house and not bring some of the food or wine.

Ok, sorry this is a sore subject for me. I just opened a $5 bottle of Kirkland Pinot Grigio to relax (See frugal) LOL

Thxs for sharing