When Should You Start Taking Money Out of Your 401(k)?
Summary:
A 401(k) can be one of your most powerful retirement tools, but timing those withdrawals matters more than most people realize. As Victoria with Vitality Investments explains to Erin Kennedy, if you take money out too early, you could face penalties. But on the other hand, if you wait too long, required minimum distributions could push you into a higher tax bracket. So how do you strike the right balance?
In this interview, we break down:
✔️ Why tax-deferred savings matter
✔️ The rules around early withdrawals (and what they cost you)
✔️ How withdrawals are taxed after 59½
✔️ What you need to know about RMDs
✔️ Strategies to create income without creating a tax headache
The goal isn’t just to save, it's to shoot for higher returns by being "tax smart." If you'd like to determine your withdrawal strategy and how it affects when you claim Social Security and what you'll pay for Medicare, please give Victoria a call at 941-413-0331 or visit www.VitalityInvestments.org.
Watch the video on YouTube:
When Should You Start Taking Money Out of Your 401(k)? 💰
Transcript:
Erin Kennedy 0:04
Victoria, so good to see you. A really important question today: When should you start taking
money out of your 401 k? A 401 k is one of the most powerful retirement savings tools available,
but if you take the money out too early, you could face penalties, wait too long, and those RMDs
could push you into a higher tax bracket, and let's start with the basics, because I feel like for
the most part we save in those tax-deferred 401 k's. Why is that important?
Victoria Larson 0:28
Well, first of all, fewer and fewer individuals are going to be receiving a pension, so the
retirement accounts are really essential to help us plan for our retirement, and many employers
offer a match, so for not contributing to those accounts, we're basically giving up free money.
The second thing to consider is that those tax-deferred accounts can be advantageous with
people who are in the 3235 37% tax bracket, because they get to take a deduction in the year
that they're making that contribution, although I'm going to just take a pause there. If you're in
the 22 24% or you have a long horizon, you may want to look at Roth 401 K's, because there
the Roth 401 k is your money grows, you don't pay any tax, and when you take money out, you
don't pay any tax, and who knows what those tax rates are going to be in the future.
Erin Kennedy 1:24
Yeah, that's a really good point. So, before we circle back to that, I do want to talk about what
happens if you tap your 401 k too early. Can you explain what you're giving up, please?
Victoria Larson 1:35
Yeah, it's quite a bit. So, first of all, your dollars are taxed at whatever your ordinary income tax
rate is, and if you are under the age of 59 and a half, you actually have to pay a 10% penalty on
those dollars as well. So now you're giving up potentially 40% of your assets just in the form of
taxation and penalty. Now compound that over 1020 30 years, that's a significant difference that
can make a big difference in your retirement plan
Erin Kennedy 2:09
right now when you are allowed to tout the money generally at 59 and a half. Can you explain
how those distributions will be taxed, please?
Victoria Larson 2:18
Yeah, well, the IRS has a fancy name for that, it's ordinary income rates, and I often ask, like,
what is that rate, and I get blind stares, blank stares at me, right? So we know what they are
today. So currently our tax rates are 1012, 22 24% so you end up having to stack all your other
income streams in, so whether that's a pension or social security or rental income, and then
your tax deferred distributions from those IRAs for one case are taxed at whatever your highest
marginal tax break is.
Erin Kennedy 2:54
All right, now at some point the government says you've waited long enough, it's time to start
taking that money out again. We're
Victoria Larson 3:00
talking about the tax deferred accounts. Can you explain RMDs and when they start? Yeah, so
required minimum distributions up until about 2019 it was 70 and a half. Then they made some
changes. They keep pushing that out. You can see if you're born between 1949 and 1950 your
RMD age was 72 Fast forward to today, anyone born from 1960 forward, your required
minimum distribution date is age 75 Whether you need that money or not, you are having to
take a percentage of those accounts out each year.
Erin Kennedy 3:37
You know, it's easy to see Victoria talking this through with you. Why these tax-deferred 401 ks
are known as ticking tax time bombs. So, what strategies could I put in place today to help
mitigate that tax bomb that's kind of coming that I see coming down the road? And how can I
just figure out how much I should be withdrawing from my 401 k?
Victoria Larson 3:57
Yeah, well, ultimately the goal of financial planning and retirement planning is to optimize your
assets, right. So, when we sit with folks, we literally look and see where are their assets today.
What percentage is in taxable accounts that are generating 1099 What percentage into tax-free
accounts, those accounts that grow tax-free and distributions are tax-free, and what percentage
is in that tax-deferred account? We map that out, we look at what your expenses are, what your
long-term goals are, including legacy goals, your concerns about long-term care, and we build
out a plan, and that plan really helps us identify whether or not it makes sense to do Roth
conversions, Roth conversions for some makes the most sense. It also helps us identify how
much to take out each year to prevent that tax torpedo coming.
Erin Kennedy 4:53
I'm so glad we had time to talk this through, Victoria. Clearly, proactive planning is key, so if.
Somebody would like to sit down with you and kind of crunch the numbers, talk through some of
these strategies, like Roth conversions. What's the best way to reach you?
Victoria Larson 5:07
They can contact us at info@Vitalityinvestments.org
Erin Kennedy 5:11
Great, again, Victoria. Thank you for your time today.
Victoria Larson 5:14
Thank you.
Hypothetical examples used are for illustrative purposes only.
Investment advisory services offered through Brookstone Wealth Advisors, LLC (BWA), a registered investment advisor and an affiliate of Brookstone Capital Management, LLC. BWA and Vitality Investments are independent of each other. Insurance products and services are not offered through BWA but are offered and sold through individually licensed and appointed agents. Index or fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer. Please refer to our firm brochure, the ADV 2A Item 4, for additional information. Registered Investment Advisors and Investment Advisor Representatives act as fiduciaries for all of our investment management clients. We have an obligation to act in the best interests of our clients and to make full disclosure of any conflicts of interests. Please refer to our firm brochure, the ADV 2A item 4, for additional information.
