3 Replies Latest reply on Aug 26, 2010 2:58 PM by JerryD

    Future tax rate fears

      I'm 66 and fully vested.  I am thinking about making major withdrawals (25% or more - possibly 100%) of my approx $400,000 in TIAA-CREF before the end of the year, just to avoid what I think are going to be huge tax rate increases in the next couple of years.  Even though a major philosophy behind 403 and 401 plans is to take money out in retirement at 'lower' tax rates, but if these lower rates double within a few years, then my life-long approach to retirement savings seems to be at risk.  The ultimate question is how much can I take out now before encountering some outlandish rate increase or penalty.  It seems that by the end of 2010 would be the time to do such a liquidation, as starting in 2011 our socialist government will have a free hand to tax at will.  Anyone have similar fears as to possible financial catastrophies Obama might unleash on us, and what we can do to avoid them? 
        • Re: Future tax rate fears
          You need to make sure that purely financial decisions are not clouded by political emotions. I'll try to avoid judging your Toxgeezer politics and focus on the real question: Will you have more money to spend on your retirement if you pay taxes today on 25% of your accumulation? Just as no one knows what interest rates will be in five years, no one can "know" what the tax brackets will be in five or ten years. Are you really prepared to assume you know the answer?

          Your discussion doesn't include any factors except politics. Have you considered:
          Will my expenses (yes, including health care) decrease in retirement?
          How much do I need/want to live on in each of the next few years?
          How many sources of income will I have?
          When will I begin Social Security?
          What is my tax rate today, what would it be if I withdrew x-dollars and had no other income?
          Do I want to leave a legacy for someone after my death, if it turns out I had enough to live comfortably?

          Sure, these questions are hard to answer, and you can't find the precise numerical answers for your own financial life online. It's real easy to pound your fist on bar and dispute an absent politician. It's more effort to get out paper and pencil and figure out your own financial life.

          Few TIAA-CREF participants I know use the term "vested". For most of them, the only reason to use the word is that employer contributions to their plans are (In my experience, anyway) 100% vested immediately. Do you mean that your employer no longer has any control on whether you withdraw your funds? That's usually controlled by age and separation from service, in policies set by the employer.
          • Re: Future tax rate fears

            My former boss, a highly ethical and respected independent CFP, used to tell  his clients, "Don't let the tax tail wag the dog!"

            The biggest threat to your retirement isn't taxes. It's inflation, especially when you have at least 20-30 yrs life expectancy remaining. There's nothing wrong with converting to cash if it makes you feel more secure, but you need to realize you may be severely 'shorting yourself' by not allowing your portfolio its normal compounding power.

            You can take any amount you want out of your IRA you wish, just pay the taxes and weep. For a 401k where you have left the employer but not converted it to an IRA, just request the check be made payable to your name and sent directly to you.

              • Re: Future tax rate fears
                Previous posters have made excellent points. In my opinion never make such a decision based on emotion. ALWAYS "do the numbers" even if it requires making some assumptions about future events.

                One big mountain for your logic to climb is, what will the tax rate be this year when you force that much income into one year? The other side is that you are not required to take any of this money until 70 1/2. I don't have my spreadsheet open on minimum required distributions but the pay out will be only 3-4% at that time and will continue until there is none left to distribute sometime around 100 years of age. And the undistributed amount will grow untaxed until it is distributed. I don't think that trickle of extra income will have much impact on your taxes compared to taking it all in one swoop.