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Question for the Money Doctors

Question submitted on May 6, 2013.

Question

I have 401K money with an investment firm, and I am 71+, the firm just started sending me a few thousand dollars at the end of the year, because they have to, if I was to take all my monies out at one time how much tax would I have to pay, I would rather have all my cash because I am making nothing being invested, each year the firm makes money but not me. My husband is 79, we are both retired. With the economy as it is now 2013, I am not sure what is best, I do not want to pay taxes twice, I would keep the cash so I would not have to pay taxes again.

Answer

Because you are older than 70.5 and retired, you have to start taking a minimal amount, known as a required minimum distribution, out of your retirement plan, whether it is a 401k or an IRA. If you take ALL of it out at one time and not roll it to an IRA you will be taxed on the entire amount, likely a significant amount pushing you into a higher tax bracket. It sounds as though the real crux of the problem is that you are not making any money on your investments inside of the 401k plan. Typically that is not a problem of the 401k plan, rather what you have selected in which to invest. I suggest reviewing the options and pick more appropriate investments. If you don''t have the expertise, try to find a fee only financial advisor that will help you on an hourly basis. If you still don''t like the options inside the 401k plan, roll it to an IRA. This IRA can be at a bank investing in CDs or at a brokerage or mutual fund company investing in stocks, bonds and mutual funds. I really believe the likely issue is not the 401k plan itself, but rather the specific investments that YOU have selected within the 401k plan. Equity markets have done very well the last 16 months. Obviously no one knows what the next 6, 12, 24, etc months will bring so stay diversified in whatever you do.


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