School me on retirement plans

So I currently have a 401K that I've been contributing to for about 10 years. For the most part, I've done so rather blindly, just contributing the maximum of my employer's match. I'll check on it on occasion, see what's in there, how much it's grown, etc. I moved it to some more aggressive investments a few years ago per some research and suggestions, given my age, which seems to have paid off when I look at my growth versus the average for my demographic. But this is the extent of it. I'm not even completely sure how it all works but doing some math today using some online resources, analyzing my current finances against financial goals, etc., it seems the option of retirement at say 55 wouldn't be out of the question if I could access those funds at that time. But as I understand it, withdrawing from a 401K before 65 makes you subject to a bunch of penalties that take a huge chunk out of it. So what other options are there? I've only heard of things like IRAs but have no idea how they work and what trade-offs you make going that route. For reference, I'm 31 now so I have some time to make things happen but I know it's smart to plan for retirement your whole career.

 

Sure, I appreciate it. That was my intention eventually but wanted to kind of wrap my head around all of it first before talking to someone who may stand to benefit from swaying me in one direction that wasn't necessarily best for me.

 

The beeb is only for medical advice. Seek professional help for your financial questions.

 

Buy two strokes!

 

Ammo is a can't miss right now.

 

If history is an indicator, ammo is an extremely poor investment right now...Now a year ago... different story.

 

The penalty free age for distributions you're referring to is 59 1/2, not 65. That's not necessarily a hard limit either.

This is what I do, so if you have specific questions that you might not want public feel free to pm me.

 

I maxed out on my 401k every year till my investment person said I have enough in there and then switched it all (except the amount to match my employer contribution) to a post tax investment account. My wife’s company has an IRA that she adds the minimum to so she gets the benefit and the rest she puts into a post tax account that the advisor set up for her. Make it all automatically deposit every time you get paid and you will never miss it. Do at least 20%.

 

I appreciate it man. For right now, I see no need to get into too many details just because I'm still trying to wrap my head around what all the different options are in general, what the difference between a 401k and an IRA (insert any other option here) are. But I may message you before too long once I'm ready to get into decision making.

Another reason I'm not jumping to make a decision right now is my career/income/goals WILL change, for better or worse, in 3 months. Hoping for better but not going to count on it until it happens. If it is for the better, I'll be setup with what appears to be some nice stability, though I don't know yet what my income would be (I have a rough idea but I manage my finances to the penny so no desire to make decisions until I know for sure). If it's for the worse, then well... I'll cross that bridge when I get there.

 

just spend it all on hookers and blow in one night. if you live to tell the story then you didn't save enough

 

Like Sean said, talk to an advisor, but this is the beeb so I will carry on.

You can make a "Withdraw" from a 401K at any time, but it is subject to the 10% penalty, and then it also counts as income, and you will pay taxes on it.

You can make "Withdraws" from your 401k at 59 1/2 years old, avoiding the "10% Penalty" imposed by the govt......but you still pay taxes as earnings.

Between 55 and 59 1/2 you can make "Hardship Withdraws", but the criteria is pretty strict......to retain primary home, medical expenses, etc.....With these "hardship withdraws" the 10% penalty is waived, but you still pay taxes.

After 59 1/2, there is no 10% penalty for withdraws, but you pay taxes.

The thing with 401K's is, you pay no taxes now, you pay when you withdraw. The intention there is your income should be less when you retire, so the tax burden will be less.

At your age, something like an IRA may be better. Taxes on it are paid up front, and you dont pay taxes on it when you withdraw......I believe whatever money you make is tax free....anyone confirm?

I'm 59 next month, so I've been reading up.

I took alittle "Nip" at my 401 recently thru the CARES act, which waives the 10% penalty......CARES expires dec 31.

 

No doubt. It’s amazing the profit I could make right now if I was willing to sell my stash.

 

Feel free. I have new clients often wanting to wait to come talk to me until they have what they think is everything in order. Spoiler: as human beings that rarely ever happens. Part of what I do is help people sort through that stuff so they can make informed decisions and help adjust for the changes life brings.

401ks and IRAs don't actually have a significant difference in tax treatment in most scenarios. Depending on your plan, both may allow pre-tax and post-tax contributions. 401ks do have higher contribution limits however, as well as the ability to take loans. IRAs have more flexibility in how they're invested and by definition aren't attached to an employer.

Generally speaking it is good to have a mix of tax treatment for your assets to be able to control income brackets in retirement, though every person's situation is different.

In case I sound like a commercial, I'm always happy to offer general education to anyone.

 

Well, the good news is that you are 31. You should begin to increase your contribution above and beyond your employers match with every increase in salary (bank some, spend some). The most you can currently contribute is ~$19,500 annually.

When you are over 50, you will be able to make additional pre-tax catch-up contributions - the limit right now is ~$6,500, but will probably change by the time you are old enough to contribute.

Work on a monthly or weekly budget to understand what your current needs are and where there might be leaks that you can plug, and then blow that forward about 30 years with annual inflation. This will help you to understand what you will need to have in addition to Social Security (assuming it's still around).

At some point you will need to start an after tax account that will have capital gains exposure but won't be subject to penalties.

Ultimately it boils down to how much you need each year and how long you expect to live

edit - oh yeah, give mpusch a call...I don't do this for a living

 

with covid and cares, the penalty is waived on 401k withdrawals, until dec 31 2020. after that, with this still going, they may extend it... your results may vary.

those close to retirement, or set very well, wanting to "semi-retire" may want to look into this. especially if you are less than 59.5 and would like your money now, with no penalty, other than the income tax. (which you will pay when you remove it, when you retire anyway.) means, you get to control your liquid money sooner. Ski

 

Completely understand not trying to wait until everything's in order. Came to that realization when my wife and I discussed having kids for years. Kept waiting until the "right time." Eventually realized that would never happen because with every milestone achieved, we would just come up with new one to hit. So we just went for it and it worked out just fine with some planning. That said, I know a major change is coming in 3 months that will have the biggest impact on my career to this point and I can't quantify it. So my goals, available contributions, etc. will drastically change at that point. I'll either continue making approximately the same money I am now (possibly more, but doubtful) with a new 401k contribution or I'll be in the employment market at a rather shitty time. It's looking to be the former of the 2but given the current political climate, Covid, and the potential for another sudden economy shake up, the latter is unfortunately not out of the question.

 

Just a point of clarification ... Hardship withdrawals aren’t age limited. They’re hardship limited. They can be done any time you have the money available and meet the “hardship” requirement.

Oh, and I’d listen to the guy with his Ferrari as his avatar pic.

 

What does a Ferrari have to do with it? You can be just as broke as anyone else and park one in the driveway for a bit.