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Author: Ronbert Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25242  
Subject: What to do with Federal 401K? Date: 11/15/2011 9:29 PM
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I was a federal civil service engineer for 25 years and paid into the Federal Thrift Savings Plan, a 401K account. My base closed and I lost my job but I was studying law at night and graduated from law school. I am trying to pass the California Bar exam and have failed twice and it may take some time. I have $175K in my account and need to tap into it for money to live on. The government only allows you to make a one time partial withdrawal, or to take it out completely in one payment, or to take it out in monthly payments until empty, or to roll it over into another 401K. I cannot do the one time payment because I may not take out enough and if I take it all I won't have any at retirement. Is there a way to roll it into another type of 401K (or several 401K accounts)so that I can take out piecemeal (say around 15K a year?) and still have some left at retirement after I pass the bar (hopefully)....?
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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24777 of 25242
Subject: Re: What to do with Federal 401K? Date: 11/15/2011 9:45 PM
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The government only allows you to make a one time partial withdrawal, or to take it out completely in one payment, or to take it out in monthly payments until empty, or to roll it over into another 401K.

Are you sure these are the only options? Since you apparently aren't employed any more, you aren't eligible for another 401(k), so rolling to a 401(k) isn't an option for you. However, I believe you should be able to roll it into an IRA.

I cannot do the one time payment because I may not take out enough and if I take it all I won't have any at retirement.

Well, just because you take it out doesn't mean you have to spend it, and the account doesn't have to have "IRA" or "401(k)" or "TSP" in the account name to be for your retirement. So just because you take it out doesn't mean you can't still save it for your retirement.

Is there a way to roll it into another type of 401K (or several 401K accounts)so that I can take out piecemeal (say around 15K a year?) and still have some left at retirement after I pass the bar (hopefully)....?

Rolling to an IRA would allow you to take out smaller sums.

However, be aware that with Federal and CA taxes and penalties, depending on your tax bracket, you may end up netting only about half of what you pull out.

Can you get another job that will use your legal training, like a paralegal, that will use your legal training until you can pass the bar?

AJ

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24778 of 25242
Subject: Re: What to do with Federal 401K? Date: 11/16/2011 4:30 PM
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Note that if you are unemployed and have no other taxable income in the current tax year, the income tax rate on $15K is likely to be low. Hence, the 10% penalty is not a large bite.

But if you were employed part of this year and hence have used the lowest brackets already, waiting until next year can save a lot.

You can roll it all into an IRA and then take distributions whenever you like. But they will take withholding and you will have to pay income taxes and penalties on them.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24779 of 25242
Subject: Re: What to do with Federal 401K? Date: 11/16/2011 4:59 PM
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Note that if you are unemployed and have no other taxable income in the current tax year, the income tax rate on $15K is likely to be low. Hence, the 10% penalty is not a large bite.

The Federal 10% penalty is a 10% penalty, no matter what the marginal tax rate is. In addition, CA levies a 2.5% penalty on early withdrawals, so that bumps the total penalty up to 12.5%

On $15k, the Federal and CA penalties will total $1,875. For a single filer, with a $3,800 exemption and a $5,950 standard deduction in 2012, the marginal tax will be another $525. Assuming CA takes another $100 or so, that's a total bill of $2,500, or about a 17% hit - over 2/3 of which is the penalty.

The problem comes if the OP is using the 401(k)/IRA money to supplement other income (possibly from a spoouse or other employment) and is already in 25% or 28% Federal bracket, and a 9.3% CA bracket. In that case, the total taxes and penalties would be 46.8% - 49.8% of the withdrawal. So, from a $15k withdrawal, after taxes and penalties, the OP would only end up with $7.5k - $8k in spendable income.

AJ

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24780 of 25242
Subject: Re: What to do with Federal 401K? Date: 11/16/2011 5:15 PM
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Yes, as your figures show, the unemployed with no other income can find the 401K useful to fund minimal expenses without paying serious taxes.

Similarly those over 59-1/2 who are unemployed and have no other income can find penalty free distributions get their money out of the IRA at the lowest tax rate they will ever pay. But better can be to do a Roth conversion instead--to make best use of that very low tax rate. Over 65 can be a bit better due to additional exemption--assuming Soc Sec is not taxable.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24781 of 25242
Subject: Re: What to do with Federal 401K? Date: 11/16/2011 7:26 PM
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Yes, as your figures show, the unemployed with no other income can find the 401K useful to fund minimal expenses without paying serious taxes.

I'd actually argue that the taxes paid on these withdrawals are fairly serious.

If the unemployed with no other income could find the same amount in other income from another source taxable as ordinary income, they would only end up paying $625 in income taxes ($525 from Federal and $100 from CA). That's a hit of a little over 4%.

By withdrawing from the IRA, they end up paying $2500 - 4 times as much. As already mentioned, that's a hit of about 17%. While not big hit in absolute dollars, I'd consider it a pretty big hit in comparison to the minimal income.

AJ

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Author: Ronbert Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24782 of 25242
Subject: Re: What to do with Federal 401K? Date: 11/17/2011 12:01 AM
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Outstanding information!
What sort of IRA would allow me to withdraw small amounts?
What is a safe IRA as well (not based in the stock market, based in safe investments like government backed securities)?

I stay away from the stock market after losing $36K from my 401K in 2008 before I put everything in government backed securities.

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24783 of 25242
Subject: Re: What to do with Federal 401K? Date: 11/17/2011 12:46 PM
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Rolling it over into an IRA and taking ESPP (Rule 72t) might also be an option to get at small amounts on a regular basis with no penalty, but you'd have to keep up the withdrawals for at least five years or until age 59 1/2, whichever is later.

#29

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24784 of 25242
Subject: Re: What to do with Federal 401K? Date: 11/17/2011 2:40 PM
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What sort of IRA would allow me to withdraw small amounts?

Assuming you are rolling the money to a Traditional IRA, you need to check with the trustee (bank, brokerage, etc.) to see if they have any limitations on the withdrawals that can be made.

Since the withdrawals will be premature (assuming you are under 59 1/2), the trustee will be required to withhold 20% for Federal taxes - not sure if there is a requirement for CA taxes. However, as pointed out upthread, you may owe close to 50% of withdrawal amount in taxes, so be sure to set some of the money aside to make quarterly estimated tax payments and/or pay when you file.

You can read IRS pub 590 for additional details. If you are still taking classes for the bar, you should read this pub to see if some of your education expenses will exempt you from some/all of the 10% penalty.
http://www.irs.gov/pub/irs-pdf/p590.pdf

AJ

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Author: bension18 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24785 of 25242
Subject: Re: What to do with Federal 401K? Date: 11/18/2011 12:04 PM
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What is a safe IRA as well

An IRA is a type of account, once you open it you can invest it any stock/bond/mutual/CD fund you choose.

The trustee may have some limitations (only offers certain mutual funds, etc). If you roll into a different 401K they may only offer a limited number of investment options.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24812 of 25242
Subject: Re: What to do with Federal 401K? Date: 1/3/2012 3:22 PM
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You should consider a 72T distribution from an IRA to avoid the typical 10% penalty.

http://www.moneymanagment.info/72T.htm
http://www.bankrate.com/calculators/retirement/72-t-distribu...

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