On withdrawing money from retirement accounts

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Before liquidating your retirement accounts, you are wise to consult a CPA or qualified financial professional. While this is a personal financial decision, it is important to have accurate information.

On an earlier thread, I suggested early withdrawal of funds could result in giving half of your account to the government. In most cases, you pay at least a 10% penalty and 20% in federal witholding. The withdrawal is classified as income, so if you are in an upper tax bracket, you will owe additional taxes... up to 11% more. You also will owe state income taxes... in some cases up to 10%. The account trustee may also have fees and/or penalties.


Short of withdrawal, it is possible to structure your retirement account(s) to a very conservative position... like short-term government bonds. This allows you to reduce risk while not giving a large portion of your retirement "nest egg" to the government.

There are a number of smart financial moves you can make this year. The best short-term move is to reduce debt. In anything short of the "nuclear war-equivalent" scenario, you will still have to service your debts. In a recession or depression, the debt-free folks are in much better shape. A sound bit of financial advice for good time and bad... have six months living expenses in a liquid account. [Like always, the best financial advice is simple and boring.]

Liquidating a retirement account is an extreme measure, particularly if you consider this. Even in the "Great Depression II" scenario, you will have the opportunity to access your retirement accounts. If you lose your job and are close to financial ruin, you may be able to avoid the withdrawal penalty. In addition, your income will be far lower, so you will pay less in taxes.

And if you manage to make ends meet during the economic downturn, you'll have "all" your retirement money intact.

But don't take my word for it... ask your CPA.


-- Mr. Decker (kcdecker@worldnet.att.net), May 11, 1999



What are your thoughts about T-Bills, as opposed to bonds? Some mutual funds have these short term govt. securities available in a select fund, and if your retirement acount is in an IRA or other such tax deferred holdings, switches to such select funds do not trigger any tax liability as I understand it. Comments?

-- Gordon (gpconnolly@aol.com), May 11, 1999.


Hope over to www.easysaver.gov for more information about government bills, notes and bonds.

"TREASURY BILLS are short-term obligations issued with a term of one year or less. Treasury bills are sold at a discount from face value (par) and do not pay interest before maturity. The difference between the purchase price of the bill and the amount that is paid at maturity (par), or when the bill is sold prior to maturity, is the interest earned on the bill.

TREASURY NOTES AND BONDS bear a stated interest rate, and the owner receives semi-annual interest payments. Treasury notes have a term of more than one year, but not more than ten years. Treasury bonds are long-term obligations issued with a term of more than ten years.

Treasury bills, notes, and bonds cannot be redeemed before maturity unless, by the terms of their issue, they are callable. Some Treasury bonds issued before 1985 are subject to call by the Treasury Department before their final maturity. If called, these bonds stop earning interest on the date called. The details of each issue of bills, notes, or bonds are announced before the Treasury's auction."

You are right, Gordon. Within a self-directed IRA or other self- managed retirement account you can buy government securities and/or a government securities mutual fund. Remember, if you are buying within your retirement account, avoid muni's and other "tax-free" instruments... you are already protected from taxes by virtue of your account.


-- Mr. Decker (kcdecker@worldnet.att.net), May 11, 1999.

Oops. I gave you the professor's answer. (laughter)

T Bills are one of the safest places to park your money. Bonds are riskier because they are longer term. Of course, bonds can be issued by state, municipalities, public and private corporations as well.

Bonds can be just as risky as stocks. For example, issuers of "junk" bonds offer higher yields because of the higher risk. Government securities are backed by the U.S. government. In theory, this is the safest. Foreign governments also issue bonds... some at very attractive yields. There are multiple risks here, including currency risk. You may have paid $10k for your 10m peso bond, but what happens if the peso collapses? Your $10k bond may be worth $1k....


Well, let me stop before I make your eyes glaze over. There are many good investment books on the market. Enjoy.


-- Mr. Decker (kcdecker@worldnet.att.net), May 11, 1999.

Decker, are you really a dumb twit, or are you just a clever troll pretending to be? Consult a CPA my a$$.

Y2K will be like nothing that has ever been experienced before. Your "business as usual" approach to one's financial planning shows a complete lack of understanding of what is involved. Or, more likely, willfull ignorance.

To all: No doubt, these are very weighty matters, and very serious ones. I urge everyone to read the chapters in the "Money" section of Michael Hyatt's new (came out last month) book, THE Y2K PERSONAL SURVIVAL GUIDE. (If nothing else, just go to a bookstore and "browse" this section.) You owe it to yourself, believe me.

-- King of Spain (madrid@aol.com), May 11, 1999.


With all due respect, you have an OPINION as to what will happen with Y2K. What happens when you liquidate a retirement account is a matter of FACT.

You can gather the data available on Y2K and make an educated guess on what you think will be the impact. But it will remain a GUESS. If you meet with a smart CPA, he or she can tell you down to the cent what the financial and tax impacts will be.

My suggestion is simple. Have all the available facts before making a final decision. Know, to the penny, how much money you are giving to the government... before you wager that retirement accounts will be worthless next year.


-- Mr. Decker (kcdecker@worldnet.att.net), May 11, 1999.

1. What is the relation between Treasury Bonds and the stock market, inflation or other economic indicators? Why does the value of treasury bonds go up or down in relation to the market economy?

2. What is the relation between the cost of the bond and the interest it pays?

3. Why exactly do they call it the "bellweather" thirty-year bond?

4. Can you make or lose money when you sell your bond at maturity, or do you always get the same amount you put in back? If you sell early, is it possible to make money?


-- Clueless (Clueless@bonds.$), May 11, 1999.

Mr. Decker,

You are quite right that we are making educated guesses about what next year will look like. In the meantime, there seems to be a number of questions about basic investment decisions, and I note the above question to you. Perhaps you can offer a bit of a primer, as per your own understanding, on the relationships and impacts of these investment decisions. It certainly is part of preparation, right?

-- Gordon (gpconnolly@aol.com), May 11, 1999.

Those folk, of _any_ persuasion, who are inclined to trust the U.S. government to borrow, protect, and return their funds, would do well to first review the governments performance with respect to the American Indian.

-- A. Hambley (a.hambley@usa.net), May 11, 1999.

An article from Westergaard 2000 relevant to this discussion is at:


"Consumer Confidence and the Flight to Quality"

-- Kevin (mixesmusic@worldnet.att.net), May 11, 1999.

There are many good questions here, but I haven't the time or space to answer them all.

Maybe an example will help. Let's say I plan to build a large Y2K retreat and finance the construction with bonds. I decide to sell $1,000 bonds to members of the EY forum. The coupon rate is 5% and the bonds mature in ten years. So, you pay me $1,000 and I promise to pay you $50 per year for ten years and give you your $1,000 when the bond matures.

Pretty simple. What makes it more complicated is that you can sell my bond to someone else. Hmmm... if interest rates are lower, the %5 percent return looks pretty good, so the bond is worth more. [This is how to make money by selling a bond. If you can guess interest rate movements with great accuracy, you can become a very wealthy person.]

If interest rates have increased, the 5% looks puny. Sadly, the bond is worth less and you'll take a loss if you sell.

A complicating factor is inflation... or the broad increase of prices. If inflation is running at 3%, the real rate of return on the bond is only 2%. If inflation rates increase, I will have to increase the coupon rate on my bond to attract buyers. The last place you want to be is holding my 5% bond when inflation is running at 10%. It's like watching your snowman melt.

One of the most important factors is your opinion of me. (This could hurt.) The assessment of my creditworthiness impacts the both the initial bond price and their ongoing value. After all, you want your $1,000 back.... right?

The safest bets are short-term T Bills... the movement of interest rates impacts them far less than the 30-year bonds. This is why 30- year bonds are watchable....

Hope this helps.


-- Mr. Decker (kcdecker@worldnet.att.net), May 11, 1999.

Thanks, that was a useful primer.

Still curious about "bellwether" though. "Bellwether" means something that takes the lead; I thought bonds reacted to outside factors.

-- Clueless (clueless@clue.less), May 12, 1999.

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