@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.
