planet-beaver
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For those that have 401K or had 401K in the past, there is many ways to get money out without paying any taxes or any penalty.
As you know that standard age to start redrawing 401K or IRA or Roth IRA is 59.5 years old. Many people think that if you take money out early you will pay 10% penalty plus standard 20% tax. For the longest time the only way to not pay 10% penalty is to take money out for medical bills, education or primary housing purchase or repair.
What most people don't know is that if you quit your job that has your 401K, you can start taking 401K at age 55 without penalties.
Also, if you are younger than 55, let say 45 and quit your job to retire, you can claim a hardship and set up payments from you 401K without paying penalty. You have to set up the payments for at least 5 years and you can not change these payments or stop them. Most 401K plans do not advertise this option because they want to hold on to your money as long as possible. They don't even want you to know about 55 year option. Most will advise you to work as long as possible and keep maxing out the 401K contribution. More money for them to hold and charge you fees.
Here is IRS note
You will not pay 10% penalty if you are separated from service and you have set-up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)
Now, not all 401K plans provide that option, but if you quit, you have the freedom to roll your money to IRA of your choice that does offer hardship payment plan and since you live in the van or RV and have no other income, you will qualify for hardship payments.
So if you currently working and your job is offering 401K, max your contributions up to the limit if possible ($17,500 or $23,500 if over 50) as you will not pay taxes on that money while you have large combined income. Later when you no longer working and if you are single you can take out $10,000 ($6,100 standard deduction and $3,900 exemption) or $20,000 for couple ($12,200 standard deduction and $3,900 exemption for each person) and never pay any taxes or penalties. These deductions and exemptions increase each year to keep up with inflation. By the time you hit 62 and start collecting SS, you want your 401K redraws to be minimal as combined income can put you back into paying taxes.
The idea is to work now and pay as little taxes as possible and later not to work at all, live frugally but still have income and pay no taxes. Again this is something no one advertise to make us work till we die. Also many states that do have state income tax do not apply that for money from 401K. The bottom line is, you will never pay taxes on the money that you are placing into your 401K, plus your employer may contribute to it as well.
Now if you typical American and you take out $20,000-$30,000 from 401K per year on top of your SS benefits, you get nailed with IRS taxes and you have to pay more for your medical insurance.
It pays to live frugally when you are working by maxing 401K and it pays to live frugally when you collect.
One thing I forgot to mention is that some 401k or IRA plans will take 20% for federal taxes but you will get it all back with your tax return. Many plans have options of having no 20% deductions when you making a redraw but ether way, you will pay nothing if you keep your distributions under the numbers I listed above.
As you know that standard age to start redrawing 401K or IRA or Roth IRA is 59.5 years old. Many people think that if you take money out early you will pay 10% penalty plus standard 20% tax. For the longest time the only way to not pay 10% penalty is to take money out for medical bills, education or primary housing purchase or repair.
What most people don't know is that if you quit your job that has your 401K, you can start taking 401K at age 55 without penalties.
Also, if you are younger than 55, let say 45 and quit your job to retire, you can claim a hardship and set up payments from you 401K without paying penalty. You have to set up the payments for at least 5 years and you can not change these payments or stop them. Most 401K plans do not advertise this option because they want to hold on to your money as long as possible. They don't even want you to know about 55 year option. Most will advise you to work as long as possible and keep maxing out the 401K contribution. More money for them to hold and charge you fees.
Here is IRS note
You will not pay 10% penalty if you are separated from service and you have set-up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)
Now, not all 401K plans provide that option, but if you quit, you have the freedom to roll your money to IRA of your choice that does offer hardship payment plan and since you live in the van or RV and have no other income, you will qualify for hardship payments.
So if you currently working and your job is offering 401K, max your contributions up to the limit if possible ($17,500 or $23,500 if over 50) as you will not pay taxes on that money while you have large combined income. Later when you no longer working and if you are single you can take out $10,000 ($6,100 standard deduction and $3,900 exemption) or $20,000 for couple ($12,200 standard deduction and $3,900 exemption for each person) and never pay any taxes or penalties. These deductions and exemptions increase each year to keep up with inflation. By the time you hit 62 and start collecting SS, you want your 401K redraws to be minimal as combined income can put you back into paying taxes.
The idea is to work now and pay as little taxes as possible and later not to work at all, live frugally but still have income and pay no taxes. Again this is something no one advertise to make us work till we die. Also many states that do have state income tax do not apply that for money from 401K. The bottom line is, you will never pay taxes on the money that you are placing into your 401K, plus your employer may contribute to it as well.
Now if you typical American and you take out $20,000-$30,000 from 401K per year on top of your SS benefits, you get nailed with IRS taxes and you have to pay more for your medical insurance.
It pays to live frugally when you are working by maxing 401K and it pays to live frugally when you collect.
One thing I forgot to mention is that some 401k or IRA plans will take 20% for federal taxes but you will get it all back with your tax return. Many plans have options of having no 20% deductions when you making a redraw but ether way, you will pay nothing if you keep your distributions under the numbers I listed above.
