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Should I cash in my retirement account and pay the penalty?

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  • Wed, Dec 07, 2011 - 08:08pm

    #1
    doug green

    doug green

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    Should I cash in my retirement account and pay the penalty?

I have just about $350 k in my government retirement account, and fear that:

1)  I cannot protect it from losing value outright, and certainly to inflation (purchasing power), and

2)  that before long Uncle Sam will be confiscating wealth and looking hungrily at retirement accounts.

I can cash it in at a penalty, where there is a 20% withholding for taxes (presumably trued up for actual taxes per my tax filing).  Or I can cash it in, pay taxes but transfer it to a Roth IRA where I can direct investments to gold, etc. but where it would still be on the government’s radar screen for confiscation/wealth tax.

Any useful advice on whether to cash it in for a single payment or transfer to Roth would be appreciated.  If I DO get a single payment, I don’t plan to use it all for gold and silver, as I already have a lot and worry about the smaller chance of DEFLATION coming about, which wouldn’t bode so well for PMs.

 

Thanks! 

  • Wed, Dec 07, 2011 - 08:22pm

    #2
    Peak Prosperity Admin

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    BTW, I have my CFA

BTW, I have my CFA designation, a degree in finance, masters work in finance, and 20 years of experience related to finance.  I have met NOBODY who can show me the math of how we’re going to get out of this pickle.  Peter Schiff’s Crash Proof and David Wiedemer’s Aftershock are excellent books that really look prescient in our situation.

Any help on cashing out or transferring to Roth would be appreciated, including any thoughts on the possibility of confiscation/pooling of retirement accounts, means testing, ,etc.   I realize we are in agreement here, and each probably have family members (my wife and my brothers!) who have no clue and don’t want to know of the h&ll we can expect to go through…

  • Wed, Dec 07, 2011 - 08:47pm

    #3
    Peak Prosperity Admin

    Peak Prosperity Admin

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    Welcome to the community,

Welcome to the community, dmger14!

This is a frequent topic here. One discussion on it can be found at https://www.peakprosperity.com/forum/anyone-taking-10-penalty-and-cashing-out-401k-or-ira/14434. There are other seriies of posts on the topic "retierment account": just use the handy Google ‘search this site’ feature on the upper right-hand side of any page in PeakProsperity.com.

Our example might be instructive to you. We did and we didn’t. My husband works full time; I work part-time from home as an engineering consultant, but we do not bring in enough for things we need for what we see is coming. So we’ve been cashing my IRA out, and left my husband’s intact. With the 7% state tax and penalties it was more like a 37% hit on what I took out so far. All of it went to preps, physical items to get us more sustainable. Most notably we bought an airtight woodburning stove ($5,500) and a well ($3,000), but also other things like materials to put in a huge garden and security things like steel framed front and back doors, new locks and a perimeter fence. We did buy a little silver, but that was in case we needed to pay our tiny property taxes that way. Taxes on our South Carolina home were only $350 last year.

A lot of it went to little things that add up, like insulating shades for all the windows, repairing window screens, contents of the bugout bag, pantry items, fruit trees – and a safety lesson for me, the new gun owner, who just inherited a revolver. We needed canning supplies and canners, a clothesline, and all the little things the "What Should I Do?" series suggest that are right for our situation.

Our philosphy is, "It will only get more expensive and harder to find, so we might as well buy it now." We do a little bit every day, every weekend, toward our goals. Are we there yet? Heck no, but we’d not be where we are today unless we’d raided my 401K. And we can tell prying relatives that my money is all going to making our eventual retirement less expensive. And we tell them we still have his retirement account. (For now.)

  • Wed, Dec 07, 2011 - 09:01pm

    #5
    Peak Prosperity Admin

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    Thanks safewrite!  It’s

Thanks safewrite!  It’s refreshing to finally talk/write to people who understand our dire situation.

I was looking for the search feature but didn’t look so high!  Unfortunately, my wife doesn’t buy into any of this, despite the fact that she knows I am no dummy and that I spend probably two hours a day on various sites (zerohedge, this one, dollarcollapse.com, etc.) reading up on the latest goings on.  So the bottom line is that it is a fight for me to buy PMs and I feel guilty when she gives me grief about it, even though I know much more of our situation than she does.  She once said "They will make food because people will be hungry."  Try dealing with someone who said something so idiotic as that!  Congratulations on having a partner who is of the same mind, because I’m sure it makes a world of a difference compared with what I have to deal with!  I have no more food than she’ll allow me to stock before hearing it, and I have no canning/gardening or other survival skills other than owning guns and being a hunter for 20 years, so I’m toast if things get really bad and can’t barter with my silver!

I didn’t think of the tax bracket issue.  Does anyone know offhand the cutoff for higher brackets and whether payouts get added to annual income or how that works?  My area of expertise does not deal with personal taxes.  Maybe I could put SOME in Roth or spread out payments over a few years.  Anyway, thanks again and I will check out that link!  if the answers are there, I don’t want people wasting their time re-posting them here.

 

 

 

  • Wed, Dec 07, 2011 - 09:02pm

    #4
    Peak Prosperity Admin

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     dmger14 One option that

 dmger14

One option that may be available to you is taking a loan against your retirement account and investing in PM’s.  If it’s like the 401k you get the loan without penalty or taxes on it.  You then must make regular payments including interest, back to yourself.  The amount of the loan will be subtracted from your total sum and not be available to invest.  For example if you have $350k and borrow $50k you only have the remainder $300k to invest.

You can counter your loan repayments with a corresponding offset in your contributions.  With a recession/depression looming it not likely to be an opportunity loss. AFter the loan is repaid you have all the money back in your account plus interest and the PM’s you bought.  

This may be a nice compromise to the 40-45% haircut you would otherwise take with an early withdrawel.

 

  • Wed, Dec 07, 2011 - 09:15pm

    #6
    Peak Prosperity Admin

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    as to tax brackets

As to how your withdrawals should consider your resulting tax brackets, that is what we have accountants for. Our accountant has been very helpful.

I married my husband 2.5 years ago, in part because he understood what is coming. He had no debt and a paid-off house. Alimony eats half his take-home pay, but I can live with that. We found this site right after we married – yes, it is great to find others who "get it!"

There is a "What Should I Do?" (WSID) entry on dealing with a reluctant spouse, written by Chris Martenson’s wife who truly did not get it at first. One thing I have heard suggested is that you store your preps at a local relative’s garage, or in a storage unit. Whatever you do, have fun, for whatever value of fun this might be for you. Since I love gardening, being frugal, improving our home to be more energy efficient, and things like canning and target practice – I’m enjoying the process of prepping. You don’t feel powerless about the future when you are doing something positive about it!

  • Wed, Dec 07, 2011 - 09:20pm

    #7
    Peak Prosperity Admin

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    I will certainly consider

I will certainly consider that as well.  Never an easy decision to be made!

The statement says that there is a 20% withholding for money NOT being transferred to a ROTH, meaning all money I would get in my checking account.  Seems to me they can tell what you put in and only tax you on the EARNINGS of the fund, and that 20% is a benchmark rate that gets trued up to actual.  

If I transfer to Roth, would I still pay the 10% early withdraw penalty or just taxes?  Sorry so many questions but retirement is new to me.  Seems like yesterday I was skidding out at the bottom of the street on my bigwheel!

BTW, the administrative people here at my federal government office tell me I can’t withdraw my TSP retirement money without financial hardship, but the form I printed out makes no mention of that being a requirement so I assume I CAN get to it…

 

  • Wed, Dec 07, 2011 - 09:43pm

    #8
    Peak Prosperity Admin

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    cashing out

Somewhere in that thread I gave you a link to there is a reference, possibly a link, to a book on the How To.

My husband’s retirement is in a 401K. He’s in all cash, and hesitates to take out a loan. But 401Ks are a cast iron bee-otch to cash out of early, unless you take out a loan to yourself.

  • Wed, Dec 07, 2011 - 09:47pm

    #9
    Peak Prosperity Admin

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    dmger14,If you are not 59

dmger14,

If you are not 59 1/2 years old,  you cannot pull money out of your workplace retirement account without a 20 percent witholding (for tax purposes) plus  a 10 percent early withdrawal penalty.     Read your plan bylaws very carefully and consider the consequences.

If you are past 59 1/2 you can—-

  (1)   leave the money in your plan to be withdrawn at a later date

 (2)   roll over the money into an IRA account with a mutual fund company, brokerage firm etc.

   Only  your after-tax contributions and earnings can be rolled over to a Roth IRA account.  That is if your workplace plan had an  after-tax  option, like Roth 401k .   All other money, such as employers matching contribution and earnings is taxable upon withdrawal so this portion can only be rolled over to a Regular IRA.   Visit websites of T Rowe Price, or The Vanguard Group for clarification.

 

 

  • Wed, Dec 07, 2011 - 10:58pm

    #10
    Peak Prosperity Admin

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    Carl,I am 46.  I did not

Carl,

I am 46.  I did not know that I couldn’t get to my money to at least transfer it to a Roth, if not take a penalty and have access to it. I WAS told that by a gubment employee but the form doesn’t note that I cannot do it so I was going to try anyway.  Are you SURE I can’t transfer it?   If so, I guess there’s not much I can do but keep it in the G fund and hope by the time I take it out it the $500 k plus will buy more than a used car!  Personally, I think the first step toward confiscation might be the government forcing all retirements to invest in treasuries to displace China’s walking away from our debt.  I’m sure there will be some patriotic mantra thrown out there to try and make such a bad investment palatable.  This would also not be as inflationary as otherwise since the fed (the soon-to-be only buyer of treasuries) wouldn’t have to print as much to buy the debt.  I think after this scheme buys an extra year or two of time, there might be outright confiscation/taxation to keep the ponzi scheme going, along with means testing for benefits we all paid into over the course of our careers.  The math is simply too scary to think it won’t come to these drastic measures!

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