To Fully Withdraw or Not?
Dear Chris (and Forum members):
Some advice I’ve heard at Peak Prosperity and elsewhere is to get assets now in retirement funds (IRAs, 401k’s, 403b’s, etc.) out as quickly as possible. Most of these focus on some kind of confiscatory risk—that is, since there’s a lot of wealth tied up in such funds, if and when things get bad enough financially, the US government will appropriate them in some fashion (e.g., compel conversion to government sponsored annuities; impose new and steep taxes, either on the pre- or post-distribution funds). Like a lot of folks on the verge of retirement (I’m 65), the majority of my assets now sit in such funds, so this is a serious decision for me. For what it is worth, I’m debating a number of pros, cons, and alternatives. I’d be most grateful not only for general opinion and advice, but more specific reactions to these:
- If such confiscation does not come to pass, pulling everything out means that one takes at least two tax hits—a) being taxed at the highest income bracket for most of one’s withdrawn funds, and b) having to pay taxes on any future capital gains or income earned after the withdrawal (vs. such having such earnings accrue tax free within the retirement fund).
- I understand that there is precedent and even a legal pretext for such actions elsewhere (e.g., the Cyprus buy-in; Poland in 2013; Argentina in 2008, etc.), but is such confiscation politically plausible in the U.S. (e.g., are the Congress and Supreme Court likely to ever become so deaf to public opinion and the Constitution that an administration could get away with it?)
- Privately held funds (outside retirement accounts) could be as vulnerable to some form of confiscation as those in such accounts.
- If all one’s funds were “replaced” with government IOU’s (Treasury bonds whose real purchasing value will dwindle as QE, ZIRP continues), one’s real retirement savings could soon be toast.
- Income tax rates are certain to rise anyway, so one might as well pay now (and quickly) at the current lower rates as later (and slowly) at progressively rising rates.
- Until and unless stricter capital controls are put in place, one could geographically diversify one’s withdrawal to provide at least some means of preserving one’s assets.
- One has more flexibility about how one invests outside vs. inside retirement accounts (even the more flexible, self-directed ones)
- Even though there are many disturbing signs of financial trouble ahead, it may be years until the s**t well and truly hits the fan. In the meantime, might one withdraw at an accelerated pace (that is, faster than one’s living costs require), perhaps using tax bracket cutoffs as targets, and achieve some/most of the benefits of an immediate and total cash-out while avoiding the worst of the tax bite.
I’ve heard and read enough to know that there are lots of folks who have resolved these questions in their own minds, and are certain that one is either an idiot to cash-out or and idiot not to cash-out. I’m hoping that some of the thoughtful and well-informed people on this forum who, like me, are not so certain may have considered this issue and can offer useful advice.
My feeling is that you should have diversification from the point of view of taxation. You don't want only an IRA and no taxable investment account. Since you cannot predict the future you want to spread your bets around.
I probably have about 40% in tax-deferred accounts and the rest in taxable accounts.
If your income is dropping due to retirement, I would see about converting a portion of a traditional IRA into a Roth IRA every year. The amount would be calculated so you do not bump yourself up into the next tax bracket.
The Roth IRA would protect you against future tax increases.
The Traditional IRA would give you current tax deductions and tax deferred gains at the risk of a higher future tax rate and with the downside of being taxed as normal income rather than capital gains.
Equities in a taxable account could defer taxes if you held them long enough and they did not throw a lot of dividends. These might also protect against a future tax increase to the extent that you pay capital gain tax now.
Having the taxable account might protect you against some forced restructuring of the IRA accounts.
If still working, maybe putting only enough to get an employer match in the 401K and then saving the rest in a taxable account might make sense. That would be similar in strategy to rebalancing a portfolio by buying items from the asset class that was too low rather than selling from the asset class that is too high.
Not saying I know what I am talking about, but these are my thoughts.
Very helpful, indeed. Thanks!!
I'd personally recommend fully withdrawing. Otherwise you might have another kid .
I have been asking myself the exact questions, even at 80 yrs of age. Maybe Rickards The Death of Money, especially Chp 11 (page 265) to the end (p. 304) will be helpful. Not a complete answer to your (and my) situation, but helpful nonetheless.
Thanks for your questions and thinking. Ken
My husband and I dealt with it this way. We are both 58-59. About 5 years ago, I quit my job in NY to marry him and move to SC. Retirement was very much on both of our minds; certainly, it was a large part of why I left high-cost-of-living and high-tax NY. He had a good amount in his 401K, and puts in 12% of his salary a year, with a slightly smaller matching amount from his employer. I had a smaller amount in my IRA transferred from a 401K when I quit my job to move south and marry him. Understand that neither of us has any debt, and the house is paid off. If there were debt, we would have dealt with that first.
We decided to take only my portion of our retirement funds, and use them to lower costs going forward. We tried to make the house more energy efficient and lower our food and water bills going forward. With what was left of my money after a 37% tax and penalty hit on withdrawals which we staggered so that it would not raise our yearly income taxes, we did the following:
- Food: we used my retirement money to install a large square foot garden, and edible landscaping consisting of various perennial food plants and trees. It also bought our initial seed stock (I'm a seed saver.) A larger and larger portion of our food comes from this established garden. My retirement funds also bought a very large amount of canning supplies and were used to build a solar dehydrator. None of this food we grow and eat ourselves is taxable income.
- Water. We had a potable-water well drilled, which supplies the garden and eventually the house. Keeps the water bill down; may replace it.
- Heating: We used my retirement money to put a very efficient airtight woodburning stove insert in our fireplace. We also used my funds to buy light duty and heavy duty chainsaws, axes, a splitting wedge and a sledgehammer. The stove has paid for itself. (Note that the edible landscaping does passive solar heating in the winter.)
- Cooling: Part of my retirement funds went to two gable fans and one solar attic fan. I also repaired and replaced window screens and added two screen doors. Note that the edible landscaping was designed to aid in shading the house in the summer.)
- insulation: He'd already done high-R batt insulation and insulated the water heater and central heating/air ducts. We used my money to add foam-core entry doors, window treatments that kept the fierce heat and occasional cold out of the house, and radiant barrier insulation in the attic.
- Security. Some of the money also went to security items like the aforementioned steel doors and better locks. We got gun safety training, and I have a concealed carry permit.
My husband still has his big 401K, but we worry that nationalizing retirement accounts could become a form of confiscation. Or that the dollar could crash. If there is a hard crash, my preps will mean survival. In a stair-step down scenario, the way I spent my retirement funds will still help us. We also used my retirement funds to buy enough silver to pay our taxes should there be a dollar crash. (Any inflation on the value of the silver will be taxable.)
Understand that our belief is that–due to population issues and peak oil alone–there will be inflation in necessities and deflation in luxuries. We tried to structure the way we used my retirement funds to address keeping necessities available and affordable.
Interesting point about necessities being inflated while luxuries are deflating.
Time2help: I have to say that having had an “oops” child, (Our oldest was thirteen and our youngest was six when the surprise child was conceived. We were nearly 40.) he turned out to be our favorite. He is now twenty-one and is our most well-adjusted, kindest and happiest kid. He washes cars, shovels snow, cuts grass, takes out the trash, volunteers when someone needs help, makes sure the cars are serviced on time, checks in on his grandparents and makes up for the difficulties of my ever advancing arthritis, which leaves me more debilitated each year, all without asking. He has attended junior college to get a degree in business and is planning to go to a state college next year to get a degree, at the lowest price possible, which will help him make money. He berates his older siblings when they get too caught up in their own silliness. He is my entrepreneur, always figuring out a way to turn a dollar, and he is the most wonderful uncle to his three nieces and nephews. I am so glad I did not “withdraw” in time.
On to more serious matters. We have taken our savings, (which were well over fifty thousand in 2007, which then dropped to twenty-five thousand in the insanity of 2008, then they had risen to about forty-thousand by 2011), sold a piece of land we owned for thirty years and used the proceeds from the savings and land sale to buy a home on five acres in northern New England. We have spent the last three years upgrading the property to be livable on or off grid. This year I am going to start my first real garden (part time efforts last year produced encouraging results). We have no mortgage on the “camp”. Our home will be paid in four years, one year before my wife retires, as a teacher from a municipal school system with a decent pension, if they still exist. I own my own business which I hope to sell to my younger associates in a few years. I also own a piece of commercial property, debt free, which pays a decent rental income each month. (Triple net lease so at the moment tenants pay taxes, insurance and all other carrying charges.) After 2009, I am very concerned that paper assets could disappear in a moment. Like Wendy, I have tried to use the wealth I have to make my wife and I, and our extended family, as self-sufficient as we can be. We still have some debt which I am paying off as quickly as I can. The hope is that as my wife reaches retirement in five years we will be debt free, own three parcels of real estate outright, have enough income to pay the real estate taxes and to purchase those things which we cannot make or grow ourselves.
It is a plan. I don’t know if it will turn out as we hope but it give us something to work for which is hopefully out of the hands of the bankers and the shills on Wall Street.
However, I found T2H's comment hilarious.
When I approach my parent's about the risks of owning a retirement account they express the same concerns. Rightfully so as I recognize how stupid and wasteful it seems to "withdraw."
I know what I would do if I was forced with the decision, but if I had a partner to share with I would be very disturbed with this decision. I am happy to not have a single dollar in a retirement account.
Wildlife tracker: I hope your parents showed you the love and approval all children deserve. I have come to fully believe that "life is what happens when you are making other plans." Many of the very best things I have experienced are not those that came from my careful planning but from totally unexpected events. It is important to plan but is just as important to be able to go with the flow and to accept what the universe puts in your path, planned or not.
I also appreciated T2H's humor, but coming from the life I have lived, I just had to needle him a little.