After 59 1/2, you can take money out of your 401(k) plan without penalty -- but it is still subject to taxation as you take it out. I knew this, but somehow I was thinking that I could just convert it to municipal bonds, and have a tax-free income stream. Nope! The interest income is tax-free, but when you take that interest income out of your 401(k) (according to the account manager I spoke to today), it is taxable income again.
If so, it argues for leaving it in equity funds (which in the long run will likely outperform bonds), and taking a relatively small fraction out each year to supplement tax-free income in my personal portfolio. I suppose that I could take out money from the 401(k) each year and invest it in municipal bonds, slowly moving it over an entirely tax-free income stream -- but it somewhat frustrates me to think that the IRS is going to get a chunk of that every year.
Complicating this, you have to take a minimum amount out each year after 70 to avoid penalties.
There is (used to be?) a dodge for IRAs which might also apply to 401(k)s - you put the money into a life insurance policy, then borrow from the policy, without repaying it. This is definitely in the "talk to a good tax adviser" territory, but apparently what gets taxed is only the life insurance payout when you die.
ReplyDeleteYep - IRA's are a tax trap - you can get bitten.
ReplyDeleteThey seem to be predicated on the idea that you'll have less income when retired. Bad idea.
You might also be able to roll over the 401K into an IRA and be subject to different restrictions.
ReplyDeleteI wish my 401K had exchange-traded funds among the choices. A year or so from now I'd put it in Direxion Daily Financial Bear 3X Shares (symbol: FAZ). Mimics 300% of the inverse of the performance of the Russell 1000® Financial Services Index. The Fed bubble is gonna burst, and I'd like to have a real choice to protect it.
ReplyDeleteI'm a big fan of Ken Moraif, a huge proponent of the buy-hold-sell strategy. (It's galling how so much conventional wisdom is invested in buy-and-hold. That line of thinking makes a portfolio a ship without life boats.)