It is ESOP distribution and I have 4 options: 1) Put the money in 401k 2) Traditional IRA 3) Roth IRA 4) Take Cash I hate #1 and #2 because I can't touch money until retirement which is 30 years away easily. Though good thing is that there will be no taxable event on it right now but will have to pay during retirement. With regards to Roth IRA, I again do not get to touch money until retirement though I think there are some clauses which allow me to withdraw money before retirement. I pay tax right now but do not pay taxes during retirement. With cash payout, I will have to pay 10% early withdrawal penalty, 20%federal tax and some state taxes as well. I am leaning towards cash payout and invest it aggressively (mix of stock and rental property). What do you think would be the best option for me? Appreciate any feedback! Thank you!
Ummm take the cash, then redistribute into retirement/market/spending/entrepreneurial efforts etc. so it doesn’t all get locked up. People think we have 2-3 years of correction ahead so another option for some of the $ might be a CD.
It will take you several years to fund the tax advantaged accounts at the annual limits. What do you mean by cash withdrawal penalty? There is no 20% federal tax bracket. If you cash out all at once, you will atleast be in 32% bracket.
ESOP works differently apparently. It is is money that by rule goes into your retirement account. If you withdraw this money from your retirement account before you are 59 1/2 years of age, you have to pay 10% early withdrawal penalty fee. Also, there is fixed 20% federal tax on it as well.
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I think you want to do traditional ira to avoid taxes. Roth would require taxes Also you should ask this question on Bogleheads.org. Great financial resource
Thanks. Will look into Bogleheads
You can move money out of your 401k. See the Roth conversion ladder. Common financial sense says to max out 401k first
I’m not sure you could “invest aggressively “ enough to overcome the tax penalty of cash vs just rolling into an ira and investing the same way.
Fair point. I agree. This is why I am scratching my head to figure out best financial option.
How can you do numbers 1, 2, or 3? There are annual contribution limits that are tiny
Not if it is ESOP money. They work differently.
Wow, that’s awesome. I’d put as much in the 401k as possible, take some out as cash if you want to spend it in the next couple of years.
An argument for Roth is that tax brackets are low so if you’re going to ever convert you want to do it now before the brackets jump back up. After you pay taxes now it grows completely tax free in a Roth. Downside is you need non-Roth funds to pay the tax liability. For 401k there are ways to access it like taking a loan and doing a 72t for early withdraw w/o penalty. Don’t be too greedy and take the cash out now and pay the penalty. The early withdraw penalties can be large. Your biggest factor is time and compound interest so you want to keep as much money working for you as possible. You will want to run the numbers but my thinking is going for Roth and if you can do Roth401k even better. If you have any side gigs (drive for Uber/Lyft) you can setup a solo401k and then you can invest in anything you want while getting the tax treatment. 401k are better than IRA as they aren’t subject to UDFI tax if you invest in stuff that uses any leverage. It doesn’t sound like you need the cash but want the investment options. I would look into solo401k where you can control your investment choices while keeping the tax benefit. Run the numbers for a Roth conversion with tax rates at historic lows it’s worth considering. If solo401k won’t work then Roth IRA conversion still worth considering as you can access it for certain things like first time home buying and education penalty-free. Also after the 5-year rule is met for conversion you can withdraw the PRINCIPAL (which you paid tax on) penalty-free but need to leave any gains though. Congrats! At a certain point it becomes a game of how much you get to keep vs how much you can get. :) Alternatively, if you MUST cash out then you may want to look at Opportunity Zone Funds which let you reduce the cap gains you pay if you invest long enough. It won’t however help with the early withdraw penalty which you’ll just have to eat — ouch! Good luck!!!
Great points! My co worker did tell me about 72t which lets you withdraw money from retirement account without paying penalty. However, if I understand that correctly, money is divided by number of years left to reach 59 1/2 years of age and you get that money annually. I feel like that annual payout is not a whole lot because I have 30 years to hit 59 1/2. I know there are ways to get money out of Roth and 401k before retirement without paying penalties. I am just not aware how that works. I guess I will have to look into that.
Yup! That’s how the 72t works :). Usually people do it as a bridge for early retirement. If you’re looking at it as an investment and long-term then leaving it in retirement funds is not a bad thing and avoids the “temptation” of just cashing out and going to Vegas :). Also you can just move it to retirement funds for now cause sounds like you still need to do something unless you want/can leave it in company stock. Later if you decide you MUST cash out then you do it then. Guess the only downside is if it continues to grow then the penalty maybe higher but you keep your options open. Congrats!
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I concur