QnA Friday: Happy New Year! (and 401k QnA Part 1)

by kungfugirl on January 10, 2013

Happy New Year!

Happy New Year my wonderful grasshopper friends!

I’m back!

I cannot believe we are ten days into January already. It seems as if just yesterday the Kung Fu Kids were putting out cookies and milk for Santa and making gifts for the family. My favorite is the handwritten card they made me inviting me to a tea party they hosted:

“Helo Mom we wud liik you tow com for tea. I love you Mom you luck verea pritea” (I think that’s “you look very pretty”…)   :)

Hands-down the best gift I have ever received.

I hope your holidays were filled with love and laughter, too, and that you were able to take at least a small break from the day-to-day craziness that makes up much of our lives.

Thank you so much for your warm and wonderful holiday wishes! I had a wonderful and much-needed break, and I hope you were able to, too. It was lovely to spend so much rare quality time with my family — Kung Fu Guy works like a madman and usually is attached to some screen or another, even on vacation, and lately I’ve been guilty of that, too!

But not this time…we had a relatively “screen-free” break (no iPad/iPhone/iMac/Macbook, and minimal TV since we cancelled our cable a year ago) and just enjoyed each other. Even Kung Fu Grandma flew in from 3,000 miles away to spend three weeks with us, and Kung Fu Guy’s office had its “only once a year” planned shutdown. Bliss.

But I must admit, by Monday of this week I was itching to get back to it…and by “it” I mean YOU!   :)

Because as lovely as breaks and holidays are, it is also a fantastic feeling to get back into the swing of things, back into a routine, and back to doing what I love, which is helping YOU learn to master your mind and your money so that you can live the rich life you deserve.

So, to that end, today I bring you some QnA’s on some of the most popular articles I have ever written on Kung Fu Finance: the four-part series on “4 Ways Your 401k is Robbing You Blind”.

I have received many, many questions on these, and want to address some of them for you below.

If you haven’t read the original series you can do so here:
Part 1: Fees
Part 2: Trapped Capital
Part 3: The Tax Man Cometh
Part 4: Beat That Horse Dead…Nationalization?

I also did do a teensy-tiny bit of work behind the scenes (or rather, my awesome web development company, enfusionize, did) and you can look forward to an updated look and feel and more user-friendly Kung Fu Finance website and email newsletter very soon.

No more troublesome font issues, floating sharebars in the middle of the page on certain browsers, broken links, and other aggravations…hopefully just a beautiful, clean, simple, modern, easy-to-use-and-access site with information organized into easy-to-find categories.

I’ll give you a sneak preview of the homepage next week…and in fact, here are a few of the new more bold and modern logo options:

Kung Fu Finance Logo 1

Kung Fu Finance Logo 2

Kung Fu Finance Logo 3

Kung Fu Finance kicks boldly into the new year…please let me know if you have a favorite in the comments!

And now…time for the QnA I promised!

Question:

Abramml asks,

Your article on the 401K really struck a nerve with me. I have been upset about the money being held in a 403 B plan, as required by my employer. I have learned to trade selling options and puts, and because I have a small IRA account and an individual investment account, I know I can do a better job than the funds I have been mandated through my work retirement plan.

The real issue for me is that the money is locked into the particular funds without ability to follow on a day-to-day basis, just by the fact that they are funds and cannot be traded until end of day.

When I think about how in 2008-2009, my 403B lost 50% of its value, I was really angry knowing that my retirement was in the hands of companies whose primary objective is to earn their fees and not necessarily create market value in the fund, and that my retirement was being mandated in this way.

Until I took my other accounts and learned to trade (and I am talking a serious commitment motivated by fear of losing everything), I did not realize how time- intensive it would be for most people to manage their own funds.

I spend about 1 and 1/2 to 2 hours a day reading newsletters and evaluating the moves the market made each day. I have the time because I am empty nesting and want to focus on increasing growth and income. But, the reality is that most people don’t have the time or education to pursue their own investing.

Answer:

Hi Abramml,

Thank you for your thoughtful comment and personal story. I think your story is not unlike that of many Americans, and is why I started Kung Fu Finance—to try and help provide that missing financial education (and attempt to make it as fun as possible, so that at least your 1 – 2 hours per day are useful and interesting instead of a dreadful chore!)

And hopefully once educated, you can cut that 1 – 2 hours per day down to 1 – 2 hours per week…a much more manageable time commitment for most people (although if you do have the time and enjoy it, then by all means dive in—I’ve done well selling put options myself and love it, but it’s definitely not for everyone.)

As you point out, unfortunately there are no “quick and easy” solutions to the overall problem of helping people save enough to retire at age 65 or 70 and live on for another 30-40 years. Basic math using the best case scenario says $50,000 / year * 30 years = $1,500,000, and most people do not have anywhere near $1 million in all of their retirement accounts combined, let alone their 401k or 403b.

Conventional wisdom says that if you supplement your individual retirement accounts with income from Social Security and perhaps a nice defined benefit pension plan and good health benefits, you’ll have a decent retirement, and suddenly that $1.5 million is not all “on you” to save.

But this is dangerous thinking to me…it’s leaving your financial future in someone else’s hands.

For years we did that more or less successfully—we could rely on that “three-legged stool of retirement” (Social Security, Defined Benefit pension plan, Personal Savings).

But today, Social Security is bankrupt, defined benefit pension plans are obsolete, and that leaves us with personal savings…meaning we have to take care of ourselves.

We are undergoing a generational (and demographic) shift in how we think about and plan for retirement. Just as we moved from the Industrial Age to the Information Age, we also moved from an age where people stopped working at age 65 (primarily because they physically needed to—jobs in the Industrial Age were more physically demanding) to an age where many people can work into their 70’s and 80’s.

But many cannot…there are still many jobs that require quite a bit of physical strength, and other jobs that people simply do not find soul-fulfilling and so are ready to do something else once they hit that magical retirement age.

I could go on and on, but in short, there are no easy solutions, and you are doing the right thing to grab the reins of your financial future in your own hands and do your best to learn how to manage and grow your money.

Question:

Zeke asks,

The law is to begin withdrawing at age 70 1/2 yeas old. The question is what
is the best method and how much to withdraw. Another question is that if I have several IRA accounts what is the best way to comply with law?

Answer:

Hi Zeke! Regarding how much to withdraw, the IRS dictates the minimum for you—they have several publications and worksheets to help you determine how much you are required to take out each year by law. One such worksheet is:

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Required-Minimum-Distribution-Worksheets

So if you are age 70 and have $100,000 in your IRA, you are required by law to take out $100,000 / 27.4 = $3650 that year. You of course also have to pay taxes on that (assuming it is not a Roth IRA) and so if you are in the 28% tax bracket you’ll see approximately $2628 of that.

That is what you are mandated to take out by law—the rest of the decision of how much to take out depends on your personal situation. You want to take out what you need to live on, but not so much that it will bump you into the next higher tax bracket. It can be quite a science, and I definitely recommend talking with your qualified tax professional before making your decision!

As far as the best method, that again depends on your personal situation and your investments—which investments should you sell? That depends on which investments you have in your 401k/IRA to begin with, why you bought them in the first place, what you think their prospects are for the coming years, how they’ve performed over the past year, etc.

If you have multiple IRA’s, the required minimum distribution is based on your total amount across all of your IRA’s. So if you have $50,000 in one IRA and $50,000 in another IRA, you need to take out $3650 (as we worked out above) from either one of them, or some from each IRA to equal at least $3650.

Definitely consult with your tax advisor before taking any action (the rules are slightly different if you have not rolled your 401k’s into separate IRA’s and they are still considered “employer plans”.)

I hope this makes sense! The rules and restrictions are frustrating—one of my big beefs with 401k’s.

Question:

Doreen (name changed to protect privacy) asks,

I am 68, single, in good health, own my home and have 250 K in a 401K that
at some point must either be taken in a lump sum or a designated $ amount
each year until it runs out.

If I take the cash I pay income tax on it immediately even if I put it into
a Roth. To avoid being taxed as a “rich person”, which I am not, I could roll it over into an IRA and take it out as I need it and pay at a lower tax rate.

I am considering using the money for a) purchasing $125 k of real estate per
The Palm Beach Letter’s advice, b) buying into a continuing care retirement community (where assisted living and nursing care are included in the purchase price and monthly fee) – maybe 175-250 K for the housing unit or c) possibly an annuity.

Your comments on the use of the money would be appreciated as well as the
best way to minimize taxes.

Additional background:

I am reluctant at this age to get into the landlord business.

I feel too young to go into a CCRC, yet it’s important to go while you are
independent to make friends. (The availability of transportation and
activities are appealing, yet I have not found a facility that meets all of my
requirements.)

With an annuity I am concerned about inflation and the longevity of the
company that sells a policy.

I have another 250 K mostly in IRA’s. Should have gotten out of IRA long ago.

Answer:

Hi Doreen, I have to insert here that I am not a “registered investment advisor” nor licensed to give personal advice, and in all honesty, even with the information provided above I would hesitate to do so simply because I just don’t know enough about you…it is such a personal decision!

It’s difficult to even advise you on which is the best from solely a tax perspective, because I just don’t know enough about your personal situation, and that is only a portion of the decision you are making.

From a tax perspective, you can roll your 401k into an IRA without paying any taxes now—this would not be considered a “lump sum distribution” as long as you follow the rules and do it properly (it’s not difficult).

However, you are not avoiding paying taxes—just deciding to pay them later instead of now. With your new IRA, you will need to take out your required minimum distributions starting in 2 ½ years, once you reach age 70 ½ . If you have $250,000 in the IRA and are 70 ½, in year one (based on the IRS chart above) you will need to take out $250,000 / 27.4 = $9,124 that year. That will be taxed as ordinary income to you that year so you will owe taxes on that depending on your tax bracket (e.g. if you are in the 28% tax bracket, you would receive $6569 after taxes).

You are allowed to take out more than the RMD, but that would depend on your tax situation—on whether or not taking more would bump you into a higher tax bracket or not.

If you want to take $125,000 and purchase rental real estate with it, you can certainly do that—I’m unclear whether you want to roll your 401k into a self-directed IRA and purchase the real estate inside of that entity or whether you mean to liquidate part of your IRA and purchase the property outside of the IRA.

You can do either, and they both have tradeoffs. With the self-directed IRA, you can buy much more real estate, because you will have access to your entire $250,000, but you must follow the rules set by the IRS very closely to make sure your real estate purchase is qualified (you cannot use it for personal use, etc.). But that could be an attractive option for you—you would have to pay income tax on the rental income you withdraw from the IRA, but you can buy a LOT more real estate for $250,000 than you can for ~$175,000 outside of your IRA.

You can also liquidate your 401k and purchase rental real estate, but as you mention, you will take a HUGE tax hit for doing this, particularly because you have such a large sum of money to liquidate…assuming you have no other income whatsoever this year you would be in the 33% tax bracket for a single person and would pay $43,482.50 + 33% * $71,350 = $67,028, so that would leave you with $182,972 (again, assuming this was your ONLY income). (From the IRS tax table—you pay 25% on your income up to $178,650, then 33% on every dollar over that amount, and that will most probably increase to 35% in 2013).

Ouch.

If you are not terribly interested in being a landlord or investing in real estate, that might not be a great option for you. Real estate can be very lucrative, and you don’t “have” to be a landlord necessarily (you can hire a property management company to deal with a lot of the day-to-day management)…but you still will need to research locations and properties, pound the pavement and find some good property options, make offers on properties, get financing (unless you want to pay all cash), interview property management companies, etc.

Some people absolutely love that process, while others don’t. It truly depends on you and what you will enjoy. Real estate can be wonderful, but it’s definitely not a “hands off” investment, even with a property management company, and particularly for a beginner.

You’ve done a great job of laying out your options and seeking advice, and I think that financially you understand the various options between taking the lump sum and tax hit now vs. later, buying real estate, buying into a CCRC, or buying an annuity.

All of them have their tradeoffs…perhaps buying rental real estate inside of a self-directed IRA might be a new idea for you (in which case I encourage you to investigate that—it could be great for you IF you decide you are interested in real estate), but the rest I think you already understand.

It really comes down to YOU, and what will make YOU happy in the future, and unfortunately no one can advise you on that better than you. You don’t seem terribly excited about real estate or about moving to a CCRC—I would ask yourself what would get you truly excited about your future? (I find “happy” doesn’t motivate me enough to make any decisions or do anything—instead, think about what will truly excite you in your retirement!)

Good luck—I wish you a tremendously rewarding and lovely future!

________________________________________

That’s it for today! Have a fantabulous Friday and please let me know if you have any more 401k questions for me — I’ll post Part 2 next week!

I hope your 2013 is off to a kick butt kung fu start! Much more to come…

To your financial success,

— Kung Fu Girl

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About the Author:

Susan Fujii, aka , is an SEC Accredited Investor who believes that anyone can learn to be financially independent.

Susan has authored 199 posts on Kung Fu Finance, and you can connect with her on .

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{ 4 comments… read them below or add one }

Gary in Aussie January 11, 2013 at 4:18 pm

Kia Ora Fung Fu Girl,

Here in Aussie we set up a Self Managed Super Fund (SMSF) and withdrew our funds from five managed funds. These funds had all lost around 40% plus of our money over a five year period. This money was from employer deposited super at 9% of employees earnings.
First each fund had a “fee” for exiting their fund. Then the banks took out a “fee” for transacting the funds into our SMSF.
Then the Aussie Government has an SMSF establishment/registration yearly “fee”. We needed to have a yearly review by an accountant plus an independent financial service to verify we were investing to Government requirements more “fees”.
Finally closed the SMSF moved the shares etc we had purchased in the SMSF to our company account.
Now trade through this account with all the tax benefits of a company and only have a yearly accountants ” fee” and a yearly Government company registration “fee”.
Result, more money in our pockets to do what we want to do.

Kai pai tou ra
(Have a great day)
Gary

Reply

Ron Blake January 11, 2013 at 5:47 pm

Hi Kung Fu Girl

I had been following you since you started your blog (web site)

What you are really trying to do is a good thing, financial eduction that American people really need.

But I think you are really kind of beating a dumb mule.

By that, look at this fact; you have to be a “registered investment advisor”, plus be licensed to even give personal advice or even tell a person when you are educating him, on how to do a financial investment or what ever. (I can even get into trouble by doing that for a friend, but I do it any way.)

Why is this so? Because Wall Street and others (you know who) want the American people to be like a dumb mule or worse yet for them to just say Baaa.(sheep)

Plus the fact that even in high school or collage financial education is really not given to the kids and nobody makes them study it. See above for the reason why.

If you Kung Fu Girl would do a financial quiz on say 1,000 adult people,
I would bet you any amount of money, that 98% would get a F. (darn, let my age show up with that one, Ha,Ha)

Also between Congress, IRS and Wall Street, they sure as hxxx don’t want any one to know whats going on with any thing to do with finance.

Like you, I read a lot of every book on finance that I could get ahold of. plus asking questions on finance of anybody that would stay still long enough to get some answers and then doing different types of investing until I figured out what works or don’t work.

After doing all of above, here is what I found out that really works and is the only thing that works.

Invest in what I call the Stuff of Life. Made more money with that then I could spend in 5 or more life times.

I think that you know what I’m talking about.

Any way carry on the good work, because if you don’t, then who will.

I’ll see you around sometime.

Ron Blake

Reply

Steve January 12, 2013 at 8:51 am

Welcome back KF Girl,

Question for you, just on opinion not advise. If it were you would you consider opening a self directed roth, As I am 59 this month I am looking for higher returns, I am thinking Tax liens and Peer to Peer lending, through a self directed Roth IRA, with anticipated returns of around 12 percent.

Also I am changeing my personal philosophy, I have been worrying about having enough money to retire on. One day I asked myself, why in the world would I retire. Just sign up when the time gets there and collect the benifits, ahhhh but keep on working in some fashion.

Why would I want to consume all my hard earned savings just to be lazy.

I began thinking about, where did this concept of retirement via government come from. It wasn’t there before FDR, when and why did we become a handout nation.

Your thoughts

Steve

Reply

Tom Smith January 12, 2013 at 11:14 am

Definitely the middle Logo. Clean, distinct and pleasantly large. Colors seem crisp and letters distinctive.

Reply

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