Access to Retirement Funds

[corn18]

here is my discussion with the 401k provider:
"Your plan does allow for a source specific rollover, however; whatever the after-tax money earns in the market also needs to be removed.

That means that if you rollover the after-tax to Roth, you would need to take out the pre-tax earnings as well.

You would have the option of opening a pre-tax IRA for those earnings."

the person knew what I was trying to accomplish with the backdoor roth, but the ability to do so does not exist without removing the pre-tax earnings.

am I right that the pre-tax earnings was the deal breaker?

This is actually very good for you. They will roll the after tax contributions into a Roth IRA and the earnings on the after tax contributions into a traditional IRA. None of that will be a taxable event UNLESS you already have money in another traditional IRA. If you do, then this gets REAL complicated and could be very stupid.

So, do you currently have money in ANY traditional IRA anywhere?

[Jluke]

This is actually very good for you. They will roll the after tax contributions into a Roth IRA and the earnings on the after tax contributions into a traditional IRA. None of that will be a taxable event UNLESS you already have money in another traditional IRA. If you do, then this gets REAL complicated and could be very stupid.

So, do you currently have money in ANY traditional IRA anywhere?

the person said pre-tax earnings... which confused me. why pre-tax earnings?

they said they knew what I was asking about b/c I specifically said backdoor roth and that it wouldn't work otherwise...

my wife has a traditional IRA just sitting around. does that count?

[97guns]

Why do you say access at 65? I'm not aware of any retirement account that can't be accessed at 59.5. And Roths can be accessed at any time.

i say 65 because full SS benefits can be received at this age and i see so many people hanging in there until then or later but of course its always because they love what they do and would be super bored with retirement roths can be accessed at anytime but would there be any advantage with saving with an ira and withdrawing early, it would be counterproductive, the gained advantage is hanging in until term

[Like2Plan]

DH and I are both over 59.5, so access is not a problem.

We plan to access after DH retires.

Also, after DH quits work we want to do some conversions from pretax to Roth prior to RMD. This is to level out the tax liability after RMD.

[disneysteve]

roths can be accessed at anytime but would there be any advantage with saving with an ira and withdrawing early, it would be counterproductive, the gained advantage is hanging in until term

The advantage of saving in a Roth is that the money grows tax-free from the day you put it in. You can withdraw contributions at any time (you can't withdraw earnings until 59.5). That's a huge advantage IMO.

For example, my daughter opened her Roth when she was 17. She can have that money grow tax-free and take it out when she's 50 if she really wants to. She'll save a ton of money by not paying taxes on 33 years of growth. If she leaves it in longer, even better.

[corn18]

the person said pre-tax earnings... which confused me. why pre-tax earnings?

they said they knew what I was asking about b/c I specifically said backdoor roth and that it wouldn't work otherwise...

my wife has a traditional IRA just sitting around. does that count?

Your wife's Ira only counts if she is doing the backdoor Roth.

Pre tax earnings might mean earnings that have not been taxed. If you convert those to a traditional Ira, they will be taxed when you withdraw them.

[Goldy]

I'm planning to retire pretty early, in my 40's and will fund this through taxable investments and Roth contributions. I'll probably convert from my 401k to a Roth at some point once my income drops to a retirement income level. This could all change but it's what I'm planning for now.

[TexasHusker]

The government sweetens the pot with tax breaks. Employers sweeten the pot with matching funds. It's not to hard to understand why people jump at the chance to get a guaranteed 50% return on their investment.

For Roths, I get to invest tax-free for the rest of my life. While not a 50% return, it is a guaranteed 15% or so return since I never have to pay capital gains taxes on those investments. I'm good with that.

You aren't getting a tax break. You are getting tax deferment.

You aren't getting a 50% return. You are getting a one-time 50% match of a few $ thousand in return for your agreeing to lock the money away until you are an old man, and agreeing that your "investment" choices are usually limited to a very short list of mutual funds listed on the brochure in your HR department.

That's a heck of a price my friend.

[Nutria]

your "investment" choices

Love those scare quotes.

are usually limited to a very short list of mutual funds listed on the brochure in your HR department.

My current 401(k) has 32 choices, plus a link to a brokerage. My former 401(k) had about as many.

That's a heck of a price my friend.

The price, Tex, of a good argument are facts. And you're woefully short on them.

[TexasHusker]

Love those scare quotes.



My current 401(k) has 32 choices, plus a link to a brokerage. My former 401(k) had about as many.



The price, Tex, of a good argument are facts. And you're woefully short on them.

A whole 32 choices ? Wow, that's like twice as many as you usually see. You lucky guy.

What did I state that wasn't factual ?

[corn18]

When I invest pre tax dollars into my 401k, I get a 39.6% tax break. Then they match the $24k I put in this year with $18k. When I retire @ 60, I will be in the 25% tax bracket. So let's do that math:

1. I made 14.6% from the tax break
2. I made an instant 75% return with the match

More math:

Invest $24k / year into 401k until I am 60:

1. $24k x 9 = $216,000
2. $18k x 9 = $162,000
3. Earn 5% on the money over those 9 years = +$85,115
4. Pay 25% tax on withdrawal = - $115,778

Total in my pocket = $347,337

Invest $24k / year into any taxable investment

1. $24,000 x 9 = $216,000
2. Pay 39.6% taxes = - $85,536
3. Earn 10% on the after tax money over those 9 years = $66,384
4. Pay 15% tax on those earnings = - $9,957

Total in my pocket = $186,891

Please explain how the 401k is a bad investment.

[Fishindude77]

While I agree with many of TH's thoughts on investing, condemnation of 401K's seems a bit ridiculous. The days of pensions are over for most, and these are one of the best tools available to the average person.

You get "free" matching money from many plans just for participating, you get to invest your money pre-tax, most of these plans are managed pretty well and get respectable long term returns, it creates kind of a "forced" savings plan, and if you stay with it you will have a nice income source in retirement in addition to social security.

And you are supposed to wait until you are an old man to tap this money. It's intended solely for retirement income.

[disneysteve]

What did I state that wasn't factual ?

You aren't getting a tax break. You are getting tax deferment.

That's true for some accounts (401k, traditional IRA) and not true for others (Roth IRA).

You aren't getting a 50% return. You are getting a one-time 50% match of a few $ thousand in return for your agreeing to lock the money away until you are an old man

It isn't a "one-time" match. It is an ongoing match each and every pay period for as long as you contribute to the account. The current 401k contribution limit is $18,000 so that means getting $9,000 free every year for as long as you participate (and that amount rises with inflation). After 30 years with an average 6% return, that would be over $750,000, and that's if the match stayed at 9K and didn't rise with inflation. That's hardly "a few $ thousand".

I would also certainly disagree with you that being 59 years old makes you "an old man". I think you have a very outdated sense of what aging looks like. My uncle turned 90 last year. He and his wife took a 2-week Mediterranean cruise to celebrate. My 61-year-old cousin, who retired when he was 55, just got back from 2 weeks in Europe including a 7-day river cruise. I have 2 patients in their 70s who are musicians who still perform on regular basis. I have friends in their late 60s (maybe early 70s) who just returned last week from a trip out west where they spent their days hiking in the National Parks. Another couple recently got back from Hong Kong. I have a couple of patients in their 90s who still live independently, cook and clean for themselves, travel to see family, and tend their own gardens.

I you think 59 is an "old man" you need to spend some more time with the senior citizens in your life.

[bjl584]

I have a 401K, a ROTH IRA, and a taxable account.

As of now, the amount is about 50/50 between accounts that I can't access until I'm 59 1/2 and accounts that I can access today.

I plan to keep working at least until I can access Social Security, so I'll have access to all of my money by then.

[TexasHusker]

That's true for some accounts (401k, traditional IRA) and not true for others (Roth IRA).


It isn't a "one-time" match. It is an ongoing match each and every pay period for as long as you contribute to the account. The current 401k contribution limit is $18,000 so that means getting $9,000 free every year for as long as you participate (and that amount rises with inflation). After 30 years with an average 6% return, that would be over $750,000, and that's if the match stayed at 9K and didn't rise with inflation. That's hardly "a few $ thousand".

I would also certainly disagree with you that being 59 years old makes you "an old man". I think you have a very outdated sense of what aging looks like. My uncle turned 90 last year. He and his wife took a 2-week Mediterranean cruise to celebrate. My 61-year-old cousin, who retired when he was 55, just got back from 2 weeks in Europe including a 7-day river cruise. I have 2 patients in their 70s who are musicians who still perform on regular basis. I have friends in their late 60s (maybe early 70s) who just returned last week from a trip out west where they spent their days hiking in the National Parks. Another couple recently got back from Hong Kong. I have a couple of patients in their 90s who still live independently, cook and clean for themselves, travel to see family, and tend their own gardens.

I you think 59 is an "old man" you need to spend some more time with the senior citizens in your life.

Steve, I'm not implying that the 401K/IRA isn't a good retirement vehicle. It works for many people. My point is that, along with the benefits of the match and tax deferment, there are also some compromises. I just encourage people to look at the pluses and the minuses. There are some minuses here. Had I put less money in my 401K and more money in other investments, I might have been able to quit the rat race at 36 instead of 46.