In the early 1980’s, Individual Retirement Accounts (IRA’s) became available. It was the Federal Government’s partial answer to the impending Social Security problems. The theory was that if more people saved tax deferred money on their own, Social Security would become less important. 401(k)s came along shortly thereafter where your employer set aside tax deferred W-2 earnings on your behalf.
This month I turn 70.5 years of age. When I hit that magic age, I must begin the process of withdrawing some of the 401k money. Each dollar withdrawn must be added to my taxable income this year. Required withdrawal amounts to about 4% of the total 401k funds this year and increases gradually so that if I live to 115 years of age, I must pull out more that 50% of what is remaining.
The theory has been that if you deferred paying taxes on your W-2 earnings and invested it, you would have more money to invest and you would have more in retirement. How is that working for you? Since the year 2000, the stock market has averaged a 1.58% loss each year. So for the last 10 years, our tax deferred money has gone down in value, not up.
Here is the scoop. Social Security will not have a cost of living increase this year so I have to live on the same income next year. My insurance costs are going up because of Obamacare. I need to withdraw money from my 401k because I turned 70.5 and I have to add it to my current income and pay taxes on it. I’m not sure what current insurance benefits I receive will be added to taxable income next year but I’m sure the Washington establishment will inform me soon! “Pass the collection plate”..
The good news is that I did put a few dollars into a 401k over 20 years. The bad news is that it actually has a negative growth the last ten years. The good news is that I lived to 70.5 to be able to begin mandatory withdrawal of deferred 401k account. The bad news is that income taxes on the 401k funds withdrawn is due.
The rules regarding management of deferred 401k and IRA accounts is very complex. The tax booklet explaining the rules is over 100 pages long. The lesson Grasshoppers is that you owe it to yourself to learn the 401k and IRA rules that affect you. You should maximize potential benefits to you. Don’t let the Government do it for you?
Who would have believed that turning 70.5 would be significant? What else is going to happen to me?
Love,
Dad