retirement money question

[BillyDkid]

Okay, I intend to work 5 more years - until I am sixty. I have my money in the company profit sharing plan, mostly company stock. I would like to take all the money in one chunk when I retire and buy some property - a little farm in the boondock or a place on a remote lake - but I figure I will really get killed with taxes if I do that. Is there anyway around this? Also, I wish I could roll it all over into a Roth - which would ultimately make it tax free after paying the tax for the rollover, but I can't do this as long as I work at the place I think and you have to keep it for 5 years in the Roth after rolling it over. I just don't really know what to do. Any advise? thanks, doug

[angelatc]

PM Indy4Chng . He is current on that stuff.

[Zippyjuan]

These days (or any time really) it can be dangerous to have your retirement tied up in company stock. If the company goes under you lose both your job and retirement in one blow.

As far as I know, if your company plan is a tax deferred one like a 401k then you will have to pay taxes up front on all of the money to convert it into a Roth IRA. Then everything in the Roth, including returns, will not be taxes later on. After 2010 the IRS is supposed to allow you to spread the tax payments up to two or three years. http://hffo.cuna.org/14953/article/2381/html

So you pay the tax now and your nest egg is smaller and will earn lower returns because it is smaller but you will not pay taxes on what it earns. I am going to make up some numbers here just to try to see what could happen. Lets start with $100,000 and figure a 25% tax bracket.

Plan A would be to keep the money in a tax deferred account. Let's figure it can earn ten percent. $100,000 plus a ten percent return would mean you have $110,000. A 25% tax bracket means you could spend $82,500 at the end of one year. If you did not spend anything and let it ride for another year at 10% you now have $121,000 before taxes and $90,750 if you spend it all at the end of the second year.

How about Plan B. Pay the tax now but get your gains tax free. Again start with $100,000. Take out the tax now which would leave $75,000 to invest at our ten percent or a gain of $7,500 dollars. Again you come up with $82,500 dollars to spend after one year. Year two- ten percent gain on the 82,500- no taxes. Again $90,750.

This seems to say that unless your tax bracket changes after you retire it does not matter if you change to a Roth IRA or not- asuming no other costs other than the conversion. But I am no expert. Check numbers and see what will happen for you. If your tax bracket is going to be lower when you retire you may be better keeping it in the tax deferred account.

[KCIndy]

I would second Zippyjuan's advice at least as far as getting OUT of 100% company stock. Look what happened a few years back when a lot of Enron employees lost everything because their 401K was entirely, or almost entirely, Enron stock.

At a MINIMUM I would diversify the 401k into a group of mutual funds. The more spread out you are, the lower your risk... assuming, of course, the whole "system" doesn't crash down around our ears. :) :)

The only question I would have about either plan A or B above is: Where the heck can you invest money today and get a 10 percent return? (no offense, Zippyjuan)

[BillyDkid]

Thanks for your input. Unfortunately, as long as I am employed there I have no choice but to leave it mostly in company stock.

[steve005]

quit

[axiomata]

quit
That is just retarded.

[KCIndy]

Thanks for your input. Unfortunately, as long as I am employed there I have no choice but to leave it mostly in company stock.

Wow... what a bummer....

Don't quit (jobs are hard to find right now!!) but you might want to check with your HR department or whoever runs the 401k and ask if they've considered opening up other investment options.

Taking it out right now would mean a huge tax hit UNLESS you roll it over into a standard IRA. According to the IRS website, you can avoid any tax consequences if you roll over your 401k to a traditional IRA. Here's a link:
http://www.irs.gov/retirement/article/0,,id=160469,00.html

If I were in your position, here's what I would do:

I would roll over 100% of my current 401k into a traditional IRA. There are any number of reputable investment companies you can roll over to. Smith-Barney, Templeton, Fidelity, ScotTrade, E*Trade, etc are all examples, but personally I would recommend Vanguard.

Vanguard is noted for having very low commission rates, and a wide variety of funds to choose from.

I don't work for Vanguard and have no connection to the company other than the fact that I've heard a lot of favorable things about them.
www.vanguard.com or the personal investor page:
https://personal.vanguard.com/us/home?fromPage=portal

More than likely you can call their customer service (or any other financial management company's customer service!) and they'll probably be able to talk you through the process or even take care of most of the work for you.

Once you've transferred or rolled over your 401k balance, (it will probably be transferred to your IRA as your own company's stock) you can, inside your new IRA, cash in the company stock and re-invest in mutual funds that will greatly spread out (and therefore greatly diminish) your financial risk....


Remember, this doesn't mean you'll have to end your company 401k. It will continue, but at least you'll be able to safeguard the amount you already have. If a year or two goes by and you accumulate another big company 401k balance, you can always choose again to roll it over or leave it where it is.


Even if you don't want to mess with any of the above, at the very least you might want to talk to a CPA or financial advisor. (Find one who charges by the hour, rather than one who makes his money selling on commission - you'll get better advice. If you talk to someone who wants to sell you something like "whole life" life insurance or some sort of annuity, the odds are he's out to make money for himself, rather than you!)

Best of luck to you!

[BillyDkid]

Thanks guys for your input.