IRA early withdraw to fund another. (Update) | TigerDroppings.com

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SippyCup
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Member since Sep 2008
1510 posts

IRA early withdraw to fund another. (Update)



I had a client ask me for some financial advice this morning. Generaly, as a cpa, unless its tax related, I defer questions to the clients financial advisor but hes a friend so I gave it a shot.

Situation: Client is self-employed and has a SIMPLE IRA (more than 2 years). His wife works for X company and has a 401k. They usualy max out the wifes 401k contribution because her employer matches a high amount, however, they did not do this in 2012. Last week the wifes employer announces they will match up to 15k of any contribution for the remainder of the year.

My client is strapped for cash at the moment and asks me if it smart for him to pull out 15k from his SIMPLE and put that towards his wifes 401k. His advisor says no.



I think his advisor is an idiot. Sure, he will pay the 10% penalty but I dont see why one would suggest missing out on a 15k match, but then again, maybe Im the idiot.



This post was edited on 10/3 at 1:52 pm



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ZereauxSum
LSU Fan
Lot 23E
Member since Nov 2008
9115 posts

re: IRA early withdraw to fund another. (Update)


So, increase wife's contribution and use the IRA distribution to cover the decrease in take home?

Maybe I'm missing something, but I honestly don't think this is a bad idea, as long as they take out enough cash to pay the taxes as well.

The only thing I can see going wrong is if the wife terms employment within a month or two if doing this.






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SippyCup
New Orleans Saints Fan
Member since Sep 2008
1510 posts

re: IRA early withdraw to fund another. (Update)


quote:

So, increase wife's contribution and use the IRA distribution to cover the decrease in take home?


Thats what Im thinking. I may get his advisor to call me to see if there are any facts missing. I just dont see why he would advise against doing this.



This post was edited on 10/1 at 9:44 am


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LSUAfro
LSU Fan
Baton Rouge
Member since Aug 2005
10440 posts

re: IRA early withdraw to fund another. (Update)


I agree with you, but I also sit on the same side of the desk.

Interested to hear the advisor's logic to decline this option.






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ZereauxSum
LSU Fan
Lot 23E
Member since Nov 2008
9115 posts

re: IRA early withdraw to fund another. (Update)


Yeah, keep us updated. I'm interested to know as well. This advisor could be really smart or really dumb

Just running through the numbers:

-15000 IRA withdrawal
-IRS steals 30% (20 withholding and 10 penalty) leaving them with 10500
-Wife increases contribution by 10500, boss matches 1 for 1

So at the end of the year, client has 21000 in 401k instead of 15000 in an IRA, excluding market gains/losses.

Maybe the advisor is concerned about missing out on market gains, but there is no way in hell the market will give him 40% over the next 12 months.






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SippyCup
New Orleans Saints Fan
Member since Sep 2008
1510 posts

re: IRA early withdraw to fund another. (Update)


I will update when I hear something.

Unless this advisor also moonlights as a marriage counselor and knows something I dont, then I just dont get the logic from a financial aspect.






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tigerrocket
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Member since Aug 2008
90 posts

re: IRA early withdraw to fund another. (Update)


Is the match vested 100% from day one?





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Catman88
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Baton Rouge, LA
Member since Dec 2004
40245 posts

re: IRA early withdraw to fund another. (Update)


quote:

Last week the wifes employer announces they will match up to 15k of any contribution for the remainder of the year


You mean he is taking out 15k to make up his wife's shortened about of income right?? Is the employer really going to match outside of her paycheck? Never heard of that.






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tigerrocket
LSU Fan
Member since Aug 2008
90 posts

re: IRA early withdraw to fund another. (Update)


Can she borrow $15k from her 401k, then turn around and contribute it back to get the match? No taxes or penalty, just a monthly payment.





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ZereauxSum
LSU Fan
Lot 23E
Member since Nov 2008
9115 posts

re: IRA early withdraw to fund another. (Update)


quote:

Is the match vested 100% from day one?


Ah...maybe this is the answer.

If it vests over say, 5 years, this scheme is a lot less attractive.






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ZereauxSum
LSU Fan
Lot 23E
Member since Nov 2008
9115 posts

re: IRA early withdraw to fund another. (Update)


quote:

Is the employer really going to match outside of her paycheck? Never heard of that.


My understanding (and I believe the OPs as well) is that the wife would increase her pretax contributions from her paycheck and the husband would cover the decrease in take home pay with the IRA money.

I don't think you can put after tax dollars in a 401k. Could be wrong though.






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SippyCup
New Orleans Saints Fan
Member since Sep 2008
1510 posts

re: IRA early withdraw to fund another. (Update)


quote:

My understanding (and I believe the OPs as well) is that the wife would increase her pretax contributions from her paycheck and the husband would cover the decrease in take home pay with the IRA money.


This is correct. Over the next three months the wife will make enough to cover contribution, but if she is putting her entire paycheck in, he needs to subsidize her income with the early withdraw from his IRA.

Not sure about the vested question. Advisor should be calling me tomorrow.






This post was edited on 10/1 at 2:52 pm


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SippyCup
New Orleans Saints Fan
Member since Sep 2008
1510 posts

re: IRA early withdraw to fund another. (Update)


Advisor called me this morning. He was clueless. Said 1)he does not advise that clients take early withdrawals from thier plans and 2)he cautions against funding/supplementing a spouses plan before his/her own. Both were red flags according to him.

Thats all I really needed to here to know this guy is lost. I can let the first thing go, but I pressed him on the second. I asked why he cautions against supplementing the spouses plan (as in this case) and he said because the client could lose that in a divorce.

I just let it go and told him thanks for calling. I dont have time to deal with this. I was hoping he would show me an angle we didnt explore here.

After I ended our conversation, I gave my client a call and advised him to switch advisors.






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ZereauxSum
LSU Fan
Lot 23E
Member since Nov 2008
9115 posts

re: IRA early withdraw to fund another. (Update)


quote:

I asked why he cautions against supplementing the spouses plan (as in this case) and he said because the client could lose that in a divorce.


Wow

So I guess by his reasoning, married couples should never join finances in any way.

quote:

I was hoping he would show me an angle we didnt explore here.


Me too. I actually assumed that there was something we were all overlooking.

Oh well, at least your client learned something new






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tirebiter
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ATL
Member since Oct 2006
5231 posts

re: IRA early withdraw to fund another. (Update)


Can the couple obtain a personal loan from a bank or credit union, does his plan allow loans and he could pay it back next year? I'm still getting 0% offers from credit card issuers for up to 18-months, that would work as well with the obvious caveat of analyzing the upfront fee, etc.





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LSUAfro
LSU Fan
Baton Rouge
Member since Aug 2005
10440 posts

re: IRA early withdraw to fund another. (Update)


wow is about the only word to use here

That's bad and unfortunate. I wonder how old this guy was to be giving away such bad advice and getting paid for it.






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frb1951
Member since Apr 2012
60 posts

re: IRA early withdraw to fund another. (Update)


If I have the following facts right, stop and do a little investigation before making a decision:

1. Wife's company usually matches "a high amount" of employees 401(k) accounts but did not match at all in 2012..

2. "Last week" the company announced they will match up to 15k of any contribution for the remainder of the year.


Wife's company had to be in a financial bind earlier this year because of not matching the contributions, and the company is now telling employees it will "match up to 15k of any contribution for the remainder of the year".

With the announced new match for the remainder of 2012, one of two possible scenarios are:

1. The company made such a turnaround in it's financial picture that it is now able to make this "too good to be true" match.

OR

2. The company is struggling to survive and by "matching" 15k of employee deferrals, it temporarily gets company off the hook with a horrible cash flow problem. $15,000.00 less per employee for paychecks from now through 12-31-12 would help any company with cash flow.


401(k) plans have government red tape a mile long associated with them on the employer's end. I wonder if the company made the required reporting as to altering the match percentage as it did at the beginning of 2012. Also, did the company again make the proper reporting to IRS to alter again their match percentage for the balance of 2012, and is it even legal for a company to do this? Trying to decipher 401(k) reporting requirements, match rules and regulations can make one nauseated reading them on IRS.gov.

Companies can do wonderful things with "constructive accounting" to make their financial picture bright...the situation just seems odd to me and personally, that would be the first hurdle I see in this matter.






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slim thug
Member since Apr 2010
8004 posts

re: IRA early withdraw to fund another. (Update)


quote:

he said because the client could lose that in a divorce.


didn't know he was a lawyer, too






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frb1951
Member since Apr 2012
60 posts

re: IRA early withdraw to fund another. (Update)


quote:

So I guess by his reasoning, married couples should never join finances in any way.


quote:

Me too. I actually assumed that there was something we were all overlooking.

Oh well, at least your client learned something new

I'm definitely not defending word for word what the advisor told his client, however, after years and years of seeing rock solid couples (you've seen them...you would NEVER suspect in a million years that certain couples would part ways) split and have awful battles with community property issues, I could definitely see where keeping retirement accounts separate would be beneficial, not just for such things as divorce but also for the death of one the spouses especially where children not belonging to both spouses are involved.

By co-mingling retirement accounts, then having to later separate those funds could result in unnecessary income taxes just to settle up community property or estate issues.

By not explaining to his client the reasoning, I could definitely see where some might consider the advisor's thoughts "silly".






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slim thug
Member since Apr 2010
8004 posts

re: IRA early withdraw to fund another. (Update)


"John, this is my standard advice to all of my clients re: retirement accounts for you and your spouse, and it has nothing to do with your individual marriage. I advise all my clients to keep separate retirement accounts from their spouse while they are in the workforce. It is easy to combine them down the road when you both are retired, but it is incredibly difficult to split them up if they are combined and, God forbid, something goes wrong in the marriage."

Boom. Problem solved.






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