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I am looking at retiring in a few years and my plan is to work until I am 65/66 but wait until I am 70 before applying for Social Security (to get the maximum amount). My wife will be retired and will draw a pension (no SS yet) of $24000/yr. I was thinking of withdrawing the maximum amount from my 401k (up to $46700+/-) every year, use what we need to live on and invest the rest, so that I will only pay in the 15% tax bracket and not the $25% tax bracket on an income over $70700. At age 70, both of us will be eligible for SS and with pension we will get $72000/yr to live on, which should be no problem for us.
Does this make sense or am I looking at it all wrong?
It seems like making the money was easy (Thanks Motley Fool!) but coming up with a retirement plan that makes sense a little more difficult
Any input will be appreciated

huntandfish
Long Motley Fool
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I am looking at retiring in a few years and my plan is to work until I am 65/66 but wait until I am 70 before applying for Social Security (to get the maximum amount). My wife will be retired and will draw a pension (no SS yet) of $24000/yr. I was thinking of withdrawing the maximum amount from my 401k (up to $46700+/-) every year, use what we need to live on and invest the rest, so that I will only pay in the 15% tax bracket and not the $25% tax bracket on an income over $70700. At age 70, both of us will be eligible for SS and with pension we will get $72000/yr to live on, which should be no problem for us.
Does this make sense or am I looking at it all wrong?


There is no maximum withdrawal amount, only a maximum contribution amount. You may want to withdraw as much as it takes to get you to the top of the 15% bracket. Remember, that you need to look at taxable income, not AGI.

Ira
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The following I have read. We aren't yet to the point of drawing Social Security, so I haven't personally verified that it is true.

There is an option to restrict Social Security benefits to the benefits of a spouse. The "primary" spouse Social Security benefits are started and immediatly suspended. This allows the spouse to draw benefits, while the Social Security benefits continue to increase.

One or both spouses starts and suspends their Social Security, and then only spousal benefits are drawn. Benefits can be converted to you own at any time. Depending on your wife's age, you might be able to draw some Social Security between 66 and 70, while still accuring the maximum benefit at 70.
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huntandfish,

I was thinking of withdrawing the maximum amount from my 401k (up to $46700+/-) every year, use what we need to live on and invest the rest,

Why are you withdrawing to invest?

If you want the money to invest in better products than your 401K offers, DO a Rollover to an IRA. You will not be taxed on the rollover.

Keep in mind that these are traditional accounts and will be subject to RMDs in the year you turn 70 1/2. This will be added to your income.

Gene
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I was thinking of withdrawing the maximum amount from my 401k (up to $46700+/-) every year, use what we need to live on and invest the rest, so that I will only pay in the 15% tax bracket and not the $25% tax bracket on an income over $70700.

Let's tweak a bit. As Gene noted, why take the money out of a retirement account just to invest it? How about this, assuming you're over 59 1/2 and no longer working for the 401(k) plan sponsor.

First, roll your 401(k) into a traditional IRA. Make sure you do a direct transfer from the plan to the IRA custodian without taking possession of the money. This is a tax-free transaction. Now each year you figure out how much you need to live on and pay the taxes on your withdrawal. Then you look at what's left of the 15% bracket and convert an amount to a Roth IRA. (You will also need to withdraw enough money to pay the taxes on the conversion.) That way the invested amount will grow tax-free, assuming you follow the rules for qualified distributions from Roth IRAs.

Phil
Rule Your Retirement Home Fool
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and invest the rest,

If you are trying to minize RMDs after 70 1/2, then convert the amount you don't need to a ROTH instead of withdrawing it.

Taxes will be the same, and future income will not be taxed.
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How about this, assuming you're over 59 1/2 and no longer working for the 401(k) plan sponsor.

In some cases (including mine) you can rollover a 401k into an IRA at 59-1/2 even if you're still working for the plan sponsor. It's worth a call to find out.
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Thanks all for the advice. The reason I want to cash out the 401k is to avoid paying higher taxes on it after I start drawing Social Security. The lower tax bracket would save me 10% in taxes. Then there is also the matter of estate planning on which, after my demise, it will be a lot easier for my heir to access his inheritance if it is in a cash acccount rather than tied up in a 401k or IRA.
Rolling the funds into a Roth may be an option, but I believe that I would then have to wait 5 years to withdraw any money from it. I am also not sure how inheritance law handles a Roth.
To be honest, I never thought I would have this problem. Thanks again Motley Fool

huntandfish
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Then there is also the matter of estate planning on which, after my demise, it will be a lot easier for my heir to access his inheritance if it is in a cash acccount rather than tied up in a 401k or IRA.

OK, we're at the beginning of what may be a long process, but stick with it. For one thing, we have to disabuse you of the above "knowledge," which couldn't be further from the truth. As long as someone makes sure he knows what a "medallion signature guarantee" is (hint--his bank knows) it's no harder to get his inheritance out of a retirement account than it is from a cash account. Plus, if it's a Roth, he could wind up getting some of the income tax free and extended for many years.

Rolling the funds into a Roth may be an option, but I believe that I would then have to wait 5 years to withdraw any money from it.
.
You believe incorrectly. See Chapter 2 of Publication 590.

This is sounding suspiciously like DIY estate planning, which is something that I argue against most vigorously regardless of circumstances. You could take the time to learn the raft of knowledge you currently lack, or you could pay someone who already knows it to give you advice. I'd recommend the latter.

Phil
Rule Your Retirement Home Fool
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Then there is also the matter of estate planning on which, after my demise, it will be a lot easier for my heir to access his inheritance if it is in a cash acccount rather than tied up in a 401k or IRA.

You have it backwards. With a proper beneficiary designation, the beneficiary can access the funds in a retirement account immediately upon documenting your death and his/her identity. A cash account may have to pass through probate and estate administration before it can be accessed.

Ira
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Also to note is an investment account does not have to be cashed out for an inheritance. Shares can be directly transferred to the recipients of the inheritance.

I inherited stocks and bond funds in Fall of 2008 during the financial crisis and I elected to transfer shares due to the plunge in values in the short time the estate was being settled. Once they recouped all and more of the value in a year or two, I make changes (sales) to compliment my own port.

conifer
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The reason I want to cash out the 401k is to avoid paying higher taxes on it after I start drawing Social Security. The lower tax bracket would save me 10% in taxes. Then there is also the matter of estate planning on which, after my demise, it will be a lot easier for my heir to access his inheritance if it is in a cash acccount rather than tied up in a 401k or IRA.

Rolling the funds into a Roth may be an option, but I believe that I would then have to wait 5 years to withdraw any money from it. I am also not sure how inheritance law handles a Roth.


As other knowledgeable posters have noted, you REALLY need to talk to a professional who knows about retirement and estate planning. As noted, there are a number of ways to mitigate increased taxes which may result from Required Minimum Distributions (RMDs) being made while receiving social security benefits. The "save 10% in taxes" may not be entirely correct, and you need someone who can A) crunch some numbers specific to your situation and B) present various options which you may not be totally educated about currently. The "convert $X/yr to a Roth" option is just one that was noted earlier.

Obviously we don't know your entire situation, but your comments regarding estate planning would appear to be incorrect.

Circular 230 disclaimer - this is the intermaweb and I could be a dog for all you know. Talk to a real professional, don't rely on anything I say, and saying "I read this stuff online" won't help you with the IRS.

-synchronicity
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Would you please be so kind as to show me where in Pub 590 Chapter 2 it states that I can roll a IRA/401k directly into a Roth without paying taxes on the rollover or that I can contribute to a Roth and take anything more than the original priciple back out before the 5 year time period without paying taxes on the interest/dividends?

It's funny, the Gardner bros. don't think I am too stupid to invest in the stock market on my own, but you seem to think I am too stupid to figure out my own financial retirement plan. It ain't rocket science, buddy.(Which, by the way, I went to school for). God forbid, I would have to bone up on rules and regulations (hoping that the publications only use two syllable words or less) and HORRORS!, I would have to work with NUMBERS!

Thanks for the condescending answer. I question your TMF moniker.

huntandfish
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I have already done my estate planning. Probate is covered along with the estate administration.

I thought it would be easy since I have only one son and figured he would get everything. But then the question was posed to me as to what happens if he goes first. It would have been easier to list the people in my life that I DIDN'T want to get any of my money rather than people/organizations worthy of my money.

huntandfish
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Would you please be so kind as to show me where in Pub 590 Chapter 2 it states that I can roll a IRA/401k directly into a Roth without paying taxes on the rollover

Rollovers are taxed. If you were going to take a distribution that is taxable and invest it, then a conversion to a ROTH has the advantage of the potential for future income being tax free.

ROTH IRAs also don't have required minimum distributions.

I can contribute to a Roth and take anything more than the original priciple back out before the 5 year time period without paying taxes on the interest/dividends?

The five year period is from the time the IRA owner established their first ROTH IRA. It is not for every conversion or contribution. You can establish a ROTH of any size now to start the clock.
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It's funny, the Gardner bros. don't think I am too stupid to invest in the stock market on my own, but you seem to think I am too stupid to figure out my own financial retirement plan. It ain't rocket science, buddy.

DIY estate planning frequently turns out very bad.

Given the federal laws/regulations and every state has its own laws, rocket science is easier.
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I have already done my estate planning. Probate is covered along with the estate administration.

Have you considered a revokable trust? Death is often not the most complex event that could happen.
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Thanks for the condescending answer.

You're welcome. It's your money, do with it as you like.

I won't bother you again unless you specifically ask me to.

Phil
Rule Your Retirement Home Fool
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I have already done my estate planning. Probate is covered along with the estate administration.

It's not the planning, it's the execution. There is a waiting period after you die before the will can be probated, then it takes time for the Surrogate's Court (or whatever it's called in your state) to certify that your Executor is empowered to administer the Estate. Additionally, if your state has an Estate Tax which you will be subject to (eg., here in NJ the threshold is %675K), your state will often restrict/limit access to Estate assets until the Estate's tax liabilities are satisfied.

None of this applies to retirement accounts with named beneficiaries. Beneficiaries can access the accounts as soon as they can obtain an official Death Certificate.

Ira
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As long as someone makes sure he knows what a "medallion signature guarantee" is (hint--his bank knows) it's no harder to get his inheritance out of a retirement account than it is from a cash account.,


I went to my bank for a medallion signature guarantee, and none of the tellers knew what it was. They had to call the manager, who searched but couldn't find the medallion stamp. They had to send me to another branch.

The whole purpose of the medallion signature guarantee is that the bank employees are supposed to know you by sight. Therefore, it's supposed to be even more secure than a notarized signature*. By (A) losing the stamp and (B) sending me to a branch that I'd never been to, they completely blew the extra security.



* As we learned in the mortgage meltdown, a notarized signature is virtually worthless: http://www.americanrescuesolutions.com/Articles/Bankruptcy-A...

A notary public functions in part as an official who authenticates the signing of a document. In other words, the notary's stamp and signature is an official declaration that the other signatures on the document are true signatures, not forgeries. Generally, a notary public directly observes the person who signs a document and verifies that person's identity, thus certifying that the document is legal and authentic.

The following is testimony from the deposition of paralegal Tammie Kapusta, former employee of a law firm with clients in the mortgage industry, as published by the Florida AG:

Q: Would these notaries be there watching [...] as she signed?
A: No.
Q: She would just sit there and sign stacks of them?
A: Correct. As far as notaries go in the firm I don't think any notary actually used their own notary stamp. The team used them.
Q: There were just stamps around?
A: Yes.
Q: And you actually saw that?
A: I was part of that.
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None of this applies to retirement accounts with named beneficiaries. Beneficiaries can access the accounts as soon as they can obtain an official Death Certificate.

Ira


IRA balances are included in the estate, and can be subject to estate taxes. It appears to get messy when the beneficiaries of an IRA are different than the heirs stated in the will.
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The whole purpose of the medallion signature guarantee is that the bank employees are supposed to know you by sight.

And thanks to technology, how often does that happen nowadays? I remember the last time I had to get a medallion signature guarantee from my bank it had been so long since I'd written a check that they had to dig up (electronically) the signature card. After, of course, I showed them ID since not one of the employees there could pick me out of a lineup.

Phil
Rule Your Retirement Home Fool
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None of this applies to retirement accounts with named beneficiaries. Beneficiaries can access the accounts as soon as they can obtain an official Death Certificate.

Ira


IRA balances are included in the estate, and can be subject to estate taxes. It appears to get messy when the beneficiaries of an IRA are different than the heirs stated in the will.


Correct. While the testator (the decedent) is free to make other arrangements though the terms of the will, the Estate Tax is usually paid out of the residual estate after non-probate assets and specific bequests are distributed. The problems arise when there isn't enough left in the residual estate to cover the tax liability. The govenment (state or federal) will then seek to recover the tax from the recipients of the non-probate and specific bequest assets. And the government usually wins.

Ira
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As a Notary Public for the State of South Carolina (and have been since 1965, except 3 years living in GA and being a Notary there), I would NEVER notarize a document in which I did not actually see the person actually signing same. Or, in the case of an Acknowledgement, the person MUST appear before me and acknowledge that they signed the document. I make a relative amount of money as a Notary, from performing weddings, etc. and would never give that up for some nitwit of an employer telling to sign something fraudulently.

In the past, I have told people to take a flying leap when they asked.

Donna (who intends to keep her Notary license)
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Nice to see we have at least one honest notary!
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I went to my bank for a medallion signature guarantee, and none of the tellers knew what it was. They had to call the manager, who searched but couldn't find the medallion stamp. They had to send me to another branch.

The whole purpose of the medallion signature guarantee is that the bank employees are supposed to know you by sight. Therefore, it's supposed to be even more secure than a notarized signature*. By (A) losing the stamp and (B) sending me to a branch that I'd never been to, they completely blew the extra security.


Well ONE reason for the signature guarantee is for the extra security, yes. But even if the bank doesn't know you, they are still legally responsible for reimbursement up to a specific amount if you commit fraud and misrepresent yourself.

That is, the company which is requesting you to get the guarantee wants to be sure it's you, yes, but more importantly, they want to limit their liability in case it's NOT you. So they outsource the job of identity verification, and in doing so they shift some of the liability of error onto the bank providing the guarantee.
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feedmeNOWhuman: "Generally, a notary public directly observes the person who signs a document and verifies that person's identity, thus certifying that the document is legal and authentic."

Not sure where that idea came from, but it is not accurate in Texas for an acknowledgement.

If the notary is to witness the signature, than a jural (and not an acknowledgement) would be necessary.

Regards, JAFO
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Then there is also the matter of estate planning on which, after my demise, it will be a lot easier for my heir to access his inheritance if it is in a cash acccount rather than tied up in a 401k or IRA.

I really appreciated the ability to get part of Dad's estate as an inherited IRA. The tax deferral was lovely. Most of my siblings had no problem telling the company holding the IRAs to liquidate and send cash. It was slightly easier than what I had to do to keep it as an IRA, but only slightly, and now I only pay taxes on the RMD which is required the first year I had the account, but based on my age, not Dad's.

IP
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