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Should I Liquidate my 401k // CARES Act 401k Explained // 401k Withdrawal 2020 - YouTube
Channel: Financial Awareness with K.Scholl
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Should I liquidate my 401(k)? If you're under
the age of 59.5 then the short answer is a
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resounding "NO". But you're not a bad person
for asking this question. I'll give you some
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reasons to justify this decision and an example
of when it doesn't make sense. Let's get to
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work! What's up guys I'm KScholl, welcome
to another Financial Awareness video if you're
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trying to make better financial decisions
& grow your wealth you're in the right spot.
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If you've clicked on this video you probably
already know the reason why so many people
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are asking themselves this question. So, for
the uninitiated, the CARES Act that was just
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recently passed has a provision within it
that allows people under the age of 59.5 to
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withdraw up to $100,000 from their qualified
retirement accounts beginning January 1st,
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2020 to December 31st, 2020 without incurring
that 10% early withdrawal penalty. 401(k)'s,
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403(b)'s, SEPs, SIMPLEs, IRAs....if you want
to learn more about those accounts go ahead
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and check out this video right here. Before
we go further, a client said to me years ago,
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"why would I rob my 65-yr-old self?" Which
is essentially what you're doing by pulling
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these funds out early. You're not even robbing
Peter to pay Paul...you're robbing Peter to
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pay Peter. If you can avoid pulling any money
out that is the best way to go. I literally
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said in my last video to give your dollars
a job & let them do their job. You're going
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to need this money down the road for your
future. However, that said, I'm a person too.
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People have poured their dreams and fears
into my head over the years and I completely
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understand why you may need to do this. So,
if you're looking for some reasons to justify
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this decision...here you go...
If you've lost your job, had your hours cut
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back, scraping to get by, your cash savings
account nearly depleted or already gone, or
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you're completely riddled with debt payments
and overwhelming debt - like to the point
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where you're loosing sleep and it's weighing
on you heavily. This could be your release
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valve.
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I've often said to plan for tomorrow, but
live life for today. There are seasons in
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life where you'll have to grind and hustle
& put in those long hours, but 2020 is serving
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up to be a very unique year where many of
you want to work hard, but just can't. And
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if you're in that situation my heart goes
out to you & just know....this too shall pass.
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If you do pull any funds out you'll have the
2020 tax year, the 2021 tax year, & the 2022
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tax year to put your distribution back into
the account or to pay taxes on what you were
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distributed. You normally only have 60 days
to do this - so this is a huge tweak to this
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rule. Even though the IRS and government is
allowing you to do this - to stretch out paying
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the taxes over the next 3 years - I wouldn't.
Just use some of the proceeds from your full
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distribution to pay the taxes right now for
the 2020 tax year and don't play games with
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future tax returns. But why? We'll do some
math in a second, but more importantly the
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IRS is one of those major organizations in
the United States that you just simply don't
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want to mess with. This is where the phrase
"death and taxes" comes from. You cannot avoid
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paying your taxes.
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Ok boys and girls, get your pencils out - quick
math here. Let's just hypothetically say that
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you pull $50,000 out your pre-tax retirement
account. You would normally have a $5,000
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10% early withdrawal penalty, but as long
as you take this distribution during the 2020
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calendar year right now that penalty is waived.
However, regardless of the penalty, you're
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still going to have to pay taxes. Everyone
is in a different tax bracket so for this
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example let's just say the 24% tax bracket
maybe is what you're in. Let's role play these
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numbers and this math real quick. That means
of the $50,000, $12,000 needs to be set aside
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for taxes and I'm suggesting you pay that
$12,000 right now out of the distribution
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that you'll be receiving. That means you'll
get $38,000 net-after-taxes into your checking
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account. However, if you decide to stretch
this $12,000 out over the next three years
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that means that you would have $4,000 for
the next three years. Well, in a 'normal'
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year if you normally get a $1,000 tax refund
you're actually going to have to owe $3,000...where's
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that money going to come from?
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Here's an example of when you shouldn't pull
out any money. Not joking, literally got this
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call from a client a few weeks ago. Married,
couple of kids, dual income, not the best
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of financial habits, but making progress at
making better financial decisions. Really
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awesome people though...like people you'd
want to have a beer with. They wanted to pull
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the money out to purchase an investment property.
They don't 'need' the money. Both are still
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employed and never lost their jobs through
this whole mess. Technically speaking, they
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would qualify to be able to do this because
the IRS guidelines are so loose that anyone
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could qualify. I told them it was absolutely
their decision, but that I strongly advised
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against it. Now, I can already feel some of
those real estate truthers out there disagreeing
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with me, but due to this client's previous
financial habits, I told them that if purchasing
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an investment property was so important to
them that they should save up cash for it
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without sacrificing their long-term retirement
accounts. Or, maybe reduce the amount they
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have going into retirement so they can save
more cash.
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Thanks for watching. Appreciate your time.
If you enjoyed this video - tap that like
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button...it really helps out the channel.
My goal is simply to help increase your financial
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awareness. If you have any questions for me
- leave 'em in the comments below. Thanks!
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