Is it time to cash in IRA and pay 50% tax and 10% Penalty?
I’m sure I’m not the only one with this question. I’d really appreciate some discussion on this practical subject. Are you guys holding on to your 401K’s and IRA’s, or are you cashing them in, paying the taxes and penalties, and using the cash to buy gold and implement your preparedness plans?
My wife and I have worked for almost 30 years and have a high percentage of our net worth in a 401k (her) and IRA (me). It’s currently mostly in money market accounts, with about 20% in precious metals and 10% in oil stocks that I bought back in August when I thought gasoline would go to $6 by the end of the year (it went to $2).
I’m considering cashing it all in and paying half in taxes and 10% in penalties. The alternative is to wait about 10 years (I’m 57) and start withdrawing it without penalty, but 10 years is an eternity in these times, and the money could very well be worthless by then. Plus, even if I were to wait, I’d still be paying 30-40% in taxes to withdraw it over time, so paying 50-60% now is only incurring about a 20% penalty.
I would pay off some short term debts, increase business inventory, and buy gold. I’d also add a greenhouse on to my home and implement some other parts of my family preparedness plan that require capital investments.
My wife and I are still employed, and since my self-owned business is in the family-preparedness market, sales should continue to be strong as long as there is any semblance of an economy left.
One other consideration – what about cashing it all in and delaying paying the taxes and penalties? This would provide a heck of a lot more cash to buy gold. Cashing in this month would not require paying taxes until 4/15/10, plus it would take the IRS many months to get serious about needing to collect the taxes from me. The problem I see here is that if gold did not go up for some reason, I could end up being unable to pay the taxes and penalties, and that could result in personal bankruptcy and perhaps prison. I could pay the taxes on time and still meet my personal goals, so my thinking at this time is that delaying the tax payments would result in my taking on more risk than I want to take.
One other question for the financial experts – I could pay off my mortgage, too, but that would mean not buying much gold. Would it be wise to refinance my mortgage and HELOC (Home Owners Line of Credit) into a new 30-year 5% mortgage and pay that off with inflated dollars?
I look forward to your ideas.
I wouldn’t count on the USA, or at least the $ being around in ten years, so I’d cash out while it still meant something. I cashed out my 401K 5 yrs ago and paid the 10% penalty, plus the income tax. Never regretted it. I’m only 37 and was 32 back then. I never started an IRA because I thought it was a scam and an insult to property rights to begin with, but that’s just me.
If I were 57, I’d definitely cash out of both, pay the penalty (I’d delay it in every legal way possible), and buy gold, property, or a commodity-based equity, such as an oil stock or an oil trust fund (like SJT, HGT). Again, that’s just me. As Chris says, we all have to evaluate our individual circumstances, trust ourselves, and take action.
"One other consideration – what about cashing it all in and delaying
paying the taxes and penalties? This would provide a heck of a lot
more cash to buy gold. Cashing in this month would not require paying
taxes until 4/15/10, plus it would take the IRS many months to get
serious about needing to collect the taxes from me. "
If you have a traditional IRA I think you will have the tax "confiscated" upon withdrawal. I think it is called a tax deposit that your account administrator is required to complete as part of the process.
That said, I’m in agreement with Pat on the cash out option. We have recently been in the process of closing out our 401K and IRAs and it is a painfully slow process. It feels good to have it done and to not have funds in an account that is under the control of the gov’t. By that I mean that their actions can devalue what I have worked hard for and I suspect they could freeze the accounts if the going gets nasty……..which it is bound to do.
You can make withdrawals from any qualified retirement plan (401k or IRA) without 10% penalty beginning at age 59 1/2. Not sure why you believe you need to wait 10 more years?? Actually, you can begin withdrawing without penalty from a 401(k) (not IRA) at age 55 if you are already retired. Here is a good site that shows your options.
BTW, I’m 58 1/2 and trying to hold on one more year!!
The good thing is you have time. Govt confiscation of these assets is at least 18 months out. There’s no way to quantify the risk that it will actually happen, but having time is a good thing.
If you do cash out, do not put the whole thing in gold at this time. I still think it will experience a near-term correction probably below $700…then I’d buy big.
A different type of recommendation…perhaps check with safewealthgroup to verify whether you can roll your 401k into a Swiss annuity (has to be at least $100k). I believe you can. This particular annuity product allows you to switch from currency to gold. And Swiss annuities are completely protected from asset repatriation. Swiss banks aren’t, but annuities are.
Thanks for all the ideas.
I’ll be 57 in July, so waiting until I’m 59 1/2 would be almost 3 years, and that’s a long time in this economy. Strabes, thanks for the tip about Swiss annuities – that might be an option. And for the tip that gold might see another dip.
For those who don’t know, there is a way to take cash out of your IRA, without penalty, regardless of your age, for any reason. It is called Rule 72t, SEPP (substantially equal periodic payments). I’ve been doing this for 3 years. There is a formula that allows you to figure out a lifelong annuity amount, then you can remove that amount each year. There are specific rules you must follow, and once you start, you have to do it every year for so many years minimum, but then you can take the cash out and pay the taxes, but not the penalty. Just Google 72t SEPP for info. This option may not be appropriate in our current economic environment, i.e., it may be preferable to just withdraw it all, but I wanted to mention it.
There is also a way, though I don’t know the details, to set up an LLC and then use your IRA or 401K to invest in the LLC, thereby "loaning to yourself". My brother did this, so I’ll check out the details. This would be the best way to go, as no taxes would be paid because the money would still be in the retirement vehicle. As I write this, I realize that this would be the best option, so I’ll look into it some more. I think I recall an email from my brother saying the IRS was challenging this investment and he had some meetings scheduled ……..
What have YOU done?
I worked in financial services for many years, and have been frustrated by the lack of skilled opinions, advisors and options for people who want to prepare for these things financially. I’ve been working on putting together a ‘tool kit’ for regular people to address these investment needs. I wonder if someone could eventually hang a shingle as an ‘alternative outcome’ financial planner?
I’ll share some resources and thoughts I’ve found in my search for useful solutions:
1. the 72T rule works great, but it really only avoids the 10% penalty and the difference between a higher and lower income tax bracket because you withdraw less each year and spread it over time.
2. If you can offset your withdrawl with some sort of write-off, you can eliminate a lot of the income tax burden, which is the big one. I can’t tell if this is a good way to go or not, but when you buy into an oil and gas partnership you usually get to write off about 70% of the amount invested against your income under some antiquated tax law that allows it for ‘exploration’. In the case of natural gas in particular there is no exploration, they simply tap another hole next to an existing well. But you are still allowed the deduction. Downsides are: peak gas is hard to predict- you could own a piece of a well that runs dry, and liquidity is reduced. Upsides are that you get a giant deduction (offsetting most of your IRA withdrawl) and ongoing depletion deductions, and the distributions on most of them is quite high and going higher- 14% or so from what I’ve seen.
Atlas America had what seemed like a reasonable program: http://www.atlasamerica.com/
3. You can invest your IRA in all kinds of alternative investments including real estate, foreign real estate, rental property, and create promissory notes to fund the start up of a business or finance someone else’s debt. The custodian I believe is the best for this right now is Entrust. The website is very informative and the fees are very reasonable. Setting up an IRA to hold real estate only costs around $300. I’ve dealt with the Minnesota branch and was very impressed. You can use any branch (not just local ones) Check them out here: http://www.theentrustgroup.com/locations/franchises/11/
They have literature explaining IRS challenges which are usually related to the ‘prohibited transaction’ rule. Don’t be intimidated, it just takes some reading.
4. Learn to trade. There are thousands of people doing this, but they are often humble, modest, and dedicated. I’ve been researching this program, and it comes highly recommended: https://www.achieverschoicequest.com/aboutacq/tabid/146/Default.aspx
If you are sucessful at learning to trade, you can use your capital to provide an income stream to invest in the other things that will matter in the future (classes, property, hard assets, your community). The returns most traders get will make up the difference in what gets lost in taxes pretty quickly.
5. Explore alternative money managers who may be able to navigate and make money in a market that goes into a permanent decline. Search for terms like ‘absolute return’ fund. I found two resources I was really impressed with:
-Profitscore was able to bring hedgefund like strategies to smaller investors: http://www.profitscore.com
I’m researching them now and they seem to be pretty good.
-Subjex corp makes a piece of sophisticated software that when applied to markets, is incredibly accurate at finding short term trends that can be traded. This technology has been used by hedgefunds with great results. They may allow smaller investors as well: http://www.subjex.com/
I found them here: http://hedgefundfaq.com
6. Convert to a ROTH. You pay the taxes anyway- and if the gains are in the ROTH stay sheltered for a while- you’re ahead, if not you aren’t really any farther behind.
7. There are a couple companies I met that ‘offshore’ accounts. This essentially means that your IRA statement is held in some kind of a trust that is held by a bank in the caribean. You can still get your Schwab account delivered to your mailbox, but it is titled as your IRA of the so and so trust. While this doesn’t prevent anything from being forfeited or seized, and it isn’t a way to avoid taxes, it does make it legally complicated for someone else to get at. You have to hire a lawyer on some small island to push the paperwork, which is backogged by years. By the time it gets close to case time, you move it to another island bank. This is the game the wealthy play when they are making assets hard to get in divorce or bankruptcy proceedings.
I hope this is somewhat helpful to you as well as others. I’ll keep adding to my list in the coming months as I discover new ideas that might work in this environment.
Where can I find more about the Swiss Annuity?
Fortytwo, some GREAT ideas, thanks! It’s good to have someone with your background on the forums.
I think Entrust is what my brother used to get access to his IRA funds. He formed an LLC that opened a restaurant and his IRA invested in the LLC.
The Entrust site said that one could invest IRA funds in gold and other precious metals. Is ther a way to do this and actually take physical position of the gold?
[quote=fortytwo]Where can I find more about the Swiss Annuity? [/quote]
Can I get your email address to send a pdf? I’d love your opinion on it. They don’t have a public website due to global compliance issues, and because it’s not a mass market advisory service.
Email [email protected] for more info.