Your retirement account are not checking acounts

[james.hendrickson]

For the benefit of all those who are still pretty new to to personal finance please remember: your retirement account is NOT a checking account.

A lot of people people seem to think that its easy to get money out of a retirement account. This isn't the case.

1) Getting money out can take a week or longer
2) Paperwork and large fees are often required
3) Short of quitting your job, its often hard to get the money at all
4) If you do take withdrawals, you're at the mercy of IRS regulations
5) Withdrawals or loans against your retirement depend on processing procedures and team competencies, which means that delays can and do happen.

So, remember 401(k)/403(b)/457 money is retirement money, don't expect to see it again until you're ready to retire.

[kork13]

Obviously not a factor for me right now (as a 31 y/o), but out of curiosity, how DOES it work for people in retirement? Do most people just set up monthly distributions from their retirement accounts into their normal checking account? Is there anything involved with that beyond setting up the transfers? (Presuming they're 60+ & eligible to access their accounts penalty-free)

[TexasHusker]

Back when I was working in corporate America, I took out a $50k loan from my 401K to start a new franchise location and this feature was very helpful.

However, it also made me realize that, as you point out James, I had a very sizable asset - well over $400K - that I could not touch while at the company. It was locked away. This helped me decide to leave corporate America. I wanted access to that capital to help me have my own businesses.

That's been 5 years now and it worked out well in my situation, though it was a huge risk.

[disneysteve]

Back when I was working in corporate America, I took out a $50k loan from my 401K to start a new franchise location and this feature was very helpful.

You are by far the exception to the rule, though. You're an entrepreneur who was willing to take that risk for the potential of greater return. And it paid off well for you.

The typical worker borrowing from his retirement plan doesn't fit that description at all. He is likely getting that 401K loan to pay for a new car or helping the kid with college or taking the wife to Hawaii for their anniversary or putting a new roof on the house - nothing that will generate a return on that money. He may even be borrowing from retirement to pay off other consumer debt like the credit cards they've maxed out. That's why so many people get in so much trouble with these loans.

With rare exception, retirement money should be used for retirement. When people have the mindset that they can tap the money whenever they need it, it leads to big problems.

[msomnipotent]

I borrowed from my 403b several times when I was younger. I have no regrets. I plan on doing it again when we move, if I need to. Like the rest of my money, it is just another tool to use wisely. The problem comes when people are unclear on the concept of taxes and paying loans back. Or even worse, they just tell themselves that they will worry about paying the taxes when the time comes, and then they get a payment plan for the taxes and start scheming for the next 401k withdrawal. I had a coworker that did that.

What really drives me nuts is that I can't access my pension. Why do they call it a portable pension when you can't move it to another retirement account? I have $16,000 sitting with an old employer. It does nothing but taunt me. It doesn't increase in value and I can't move it to my other retirement funds. What is $16,000 going to do for me when I retire? Maybe $5 a month?

[TexasHusker]

You are by far the exception to the rule, though. You're an entrepreneur who was willing to take that risk for the potential of greater return. And it paid off well for you.

The typical worker borrowing from his retirement plan doesn't fit that description at all. He is likely getting that 401K loan to pay for a new car or helping the kid with college or taking the wife to Hawaii for their anniversary or putting a new roof on the house - nothing that will generate a return on that money. He may even be borrowing from retirement to pay off other consumer debt like the credit cards they've maxed out. That's why so many people get in so much trouble with these loans.

With rare exception, retirement money should be used for retirement. When people have the mindset that they can tap the money whenever they need it, it leads to big problems.

Very true.

[corn18]

I have softened on my position to max out all retirement accounts before investing in taxable. Not because I am doing that (I am kindof a corner case when it comes to savings), but it does limit options mid to late career because of the limited access. If you know you are a corporate worker and always will be, then the numbers say max everything to maximize potential tax savings. But you could find yourself in a situation where you may not want to stay on the corporate payroll but have to because you have all your money tied up in tax deferred accounts. Or you want to retire early but can't because of the same reason (although there are ways to access the money prior to 59 1/2 rule).

So, I think the answer lies in between. Contribute for the match and then decide what to do after that. Having a portion of your savings sitting in taxable accounts might not be the most tax efficient, but it may give you options down the road that you wouldn't have if it is all buried in tax deferred accounts.

To answer kork13's question:

"Obviously not a factor for me right now (as a 31 y/o), but out of curiosity, how DOES it work for people in retirement? Do most people just set up monthly distributions from their retirement accounts into their normal checking account? Is there anything involved with that beyond setting up the transfers? (Presuming they're 60+ & eligible to access their accounts penalty-free)"

Not sure as I'm not retired yet. My MIL is retired and over 70 and has Requireed Minimum Distributions (RMD). She just sells enough in her tax deferred accounts to meet the RMD requirements each year and transfers that to her checking. It's more than she needs each year so after a few years, her checking account gets pretty big and she invests it back into her taxable account.

Before RMD's when my FIL was alive, he would keep enough cash in checking and savings to cover 5 years of expenses. If he needed more money, he just sold out of his retirement account what he felt he needed and transferred that to savings. That's my plan.

[tripods68]

James---There's way to access a tax-deferred account without penalty or before age 59.5.

If you work in public sector, a teacher, firefighter, county, district, state work, employer that offers 457b has a separation of service clause. In other words, if you leave your current job that offers 457b you have access without penalty.

You may take a lump sum distribution. Unlike the 403(b), there is no 10 percent early withdrawal penalty for withdrawing 457(b) money upon separation of service. Withdrawals will be taxed as ordinary income.

https://www.403bwise.com/highered/content/18

Rule 72(t), issued by the Internal Revenue Service, permits penalty-free withdrawals from IRA accounts and other tax-advantaged retirement accounts like 401(k) and 403(b) plans. ... The IRS still subjects the withdrawals to account holder's normal income tax rate.

https://www.irs.gov/retirement-plans...iodic-payments

[TexasHusker]

James---There's way to access a tax-deferred account without penalty or before age 59.5.

If you work in public sector, a teacher, firefighter, county, district, state work, employer that offers 457b has a separation of service clause. In other words, if you leave your current job that offers 457b you have access without penalty.

You may take a lump sum distribution. Unlike the 403(b), there is no 10 percent early withdrawal penalty for withdrawing 457(b) money upon separation of service. Withdrawals will be taxed as ordinary income.

https://www.403bwise.com/highered/content/18

Rule 72(t), issued by the Internal Revenue Service, permits penalty-free withdrawals from IRA accounts and other tax-advantaged retirement accounts like 401(k) and 403(b) plans. ... The IRS still subjects the withdrawals to account holder's normal income tax rate.

https://www.irs.gov/retirement-plans...iodic-payments

In terms of 401Ks and and IRAs, early withdrawal provisions without penalty are extremely narrow and restrictive. There is no way to get unfettered access to the cash without the 10% penalty. But hey, if you've got a great investment opportunity, it isn't the end of the world to pay a one time 10% penalty and call it good.

Several years ago, I cashed in all of my 401K - about $400,000 - paid the penalty and taxes, and invested the rest into two vacation rentals. Those pay me about $35K-ish a year net after all expenses and have ever since, so it took me a while but I did get paid back. I don't recommend that strategy for most circumstances but it is available.

[tripods68]

Texashusker---YOu are an exception to the rule. Most W2 employees wouldn't do what you did (cashing out 400K + penalty+tax) unless they have the entrepreneurial spirit endeavor that could potentially earn a big return on their investment. High-risk big reward.

[TexasHusker]

Texashusker---YOu are an exception to the rule. Most W2 employees wouldn't do what you did (cashing out 400K + penalty+tax) unless they have the entrepreneurial spirit endeavor that could potentially earn a big return on their investment. High-risk big reward.

Well, buying some vacation rentals isn't that far out there on the risk scale. I would rate it a lot less risky than starting a business, buying a bunch of fine art, or playing the day trading video game. The deals I got on the vacation rentals weren't particularly great, just average I would say.

This might start a torrid debate, but my "sleep at night" factor is much, much higher with vacation rentals than it ever was with anything to do with the stock market. Real estate could crash, but guess what, I still own the real estate and enjoy the income!

Now, it could well be that the $400K I cashed out could have been worth $800K today, but I would have lot more gray hair.

[chestynuts]

Well, buying some vacation rentals isn't that far out there on the risk scale. I would rate it a lot less risky than starting a business, buying a bunch of fine art, or playing the day trading video game. The deals I got on the vacation rentals weren't particularly great, just average I would say.

This might start a torrid debate, but my "sleep at night" factor is much, much higher with vacation rentals than it ever was with anything to do with the stock market. Real estate could crash, but guess what, I still own the real estate and enjoy the income!

Now, it could well be that the $400K I cashed out could have been worth $800K today, but I would have lot more gray hair.

I agree with you, that purchasing a vacation house has a little risk than putting more money in a day trading.