I recently spoke with a man whose story is a good example of just how easily a financial situation can go awry when your own knowledge is limited and you may not be getting the right advice.
He was 57 when he left the fire department, where he had worked for 36 years. So, while he was busy looking for new insurance, planning his cross-country retirement trip and deciding whether he was going to buy the boat he always dreamed of, he also had to decide what to do with his retirement savings. (His funds were in Florida’s Deferred Retirement Option Program (DROP) and a 457 deferred compensation plan.)
He decided to work with a local agent whom he had met at a dinner seminar at a high-end restaurant, and together they rolled all his retirement funds into an IRA.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
He figured the agent and his firm were successful and would take good care of him. Unbeknownst to him, this firm had little to no experience working with first-responders. Though indeed, he told me, they were nice as could be.
Later that year, when he wanted to take out $15,000 in cash to fund a project, he was warned that he would have to pay taxes on that amount — plus a 10% penalty because he wasn’t yet 59½.
Except, he said, “I retired this year — which I think means I have to pay the taxes, but not the early withdrawal penalty.” They remained polite, he said, but looked at him as if he had three heads. Apparently, this was news to them.
The man had read about the “separation from service” rule somewhere on the internet, so he wasn’t positive he had it right, or that it applied to him. These guys were the professionals — what did he know? — so he decided to let it go. They cut him a check — though, you guessed it, it was $15,000 minus the taxes and penalty. Because all of his savings were rolled into an IRA before they wrote the check, the exception, which would have saved him $1,500, was void. If they had taken the money from his 457, then rolled over a portion into the IRA, he might have been fine.
Now, $1,500 may not seem like a lot of money in the grand scheme of things — but when you lose some of your life savings and it easily could have been avoided, it’s a bite.
And the bottom line is, he was right about the rule:
- You can withdraw money from a 457 plan penalty-free at any age provided you are separated from employment.
- If you’re 55 or older and you leave a job — whether by choice or not — the separation of service rule applies to qualified retirement plans, including 401(k)s and 403(b)s, but not IRAs.
- You can’t leave the job at an earlier age and wait until you’re 55 to take the money without a penalty. You must take the money in the year you terminate employment.
- You’ll still have to pay taxes on the amount you withdraw — and if you’ve been working and making money most of that year, you may see a bump in your tax bracket.
Unfortunately, I hear stories like this man’s often. People don’t know what they don’t know. They question what they do know. And because they don’t have someone they trust whom they can call, they wing it. Even those who are planning an early retirement can make mistakes if they don’t have help from the right financial adviser.
There are so many decisions to make — and some can have long-term consequences.
If you’re 50 or older, you’ve probably already noticed a marked increase in the number of solicitations you’re getting in the mail — everything from life insurance plans to vacation homes to funeral plots to investment seminars.
Some are worthy of your attention, but sadly, many are not.
If you have an experienced financial professional on your side, you’ll always have someone you can call and ask. One of our most valuable roles is simply helping people slow down and think through their decisions without getting emotional, in addition to building custom comprehensive retirement plans.
If you’ve been wondering if professional financial advice is worth the cost, why not start a list with questions that come up every day. Lump-sum or pension plan? What should I do with my DROP funds? When should I take my Social Security benefits? Do I need a life insurance policy if my kids are grown? How will I pay for nursing care if my spouse or I get sick?
I think you’ll quickly realize that getting specialized, reliable help is a good investment, no matter where you are on the road to retirement.
Kim Franke-Folstad contributed to this article.
Securities offered through GWN SECURITIES Inc. Member FINRA/SIPC. 11400 N Jog Road, Palm Beach Gardens, FL 33418. (561)472-2700. Voyage Retirement Solutions, LLC and GWN Securities, Inc. are non-affiliated companies. Voyage Retirement Solutions and its representatives do not represent, nor are they affiliated with the Florida Retirement System (FRS). Investing involves risk, including the potential loss of principal. Neither the firm nor its agents or representatives may give tax or legal advice.
-
Prior Authorization Coming to Traditional Medicare Starting in 2026The Centers for Medicare and Medicaid Services (CMS) will implement prior authorization requirements for certain traditional fee-for-service Medicare services in six states starting next year.
-
The 60-40 Portfolio Rule of Investing: Not Dead Yet?Adding alternative investments to a balanced portfolio can smooth out returns.
-
The Hidden Costs of Caregiving: Crisis Goes Well Beyond Financial IssuesMany caregivers are drained emotionally as well as financially, leading to depression, burnout and depleted retirement prospects. What's to be done?
-
Cash Balance Plans: An Expert Guide to the High Earner's Secret Weapon for RetirementCash balance plans offer business owners and high-income professionals a powerful way to significantly boost retirement savings and reduce taxes.
-
Five Things You Can Learn From Jimmy Buffett's Estate DisputeThe dispute over Jimmy Buffett's estate highlights crucial lessons for the rest of us on trust creation, including the importance of co-trustee selection, proactive communication and options for conflict resolution.
-
I'm a Financial Adviser: For True Diversification, Think Beyond the Basic Stock-Bond PortfolioAmid rising uncertainty and inflation, effective portfolio diversification needs to extend beyond just stocks and bonds to truly manage risk.
-
I'm a Retirement Psychologist: Money Won't Buy You Happiness in Your Life After WorkWhile financial security is crucial for retirement, the true 'retirement crisis' is often an emotional, psychological and social one. You need a plan beyond just money that includes purpose, structure and social connection.
-
Retiring Early? This Strategy Cuts Your Income Tax to ZeroWhen retiring early, married couples can use this little-known (and legitimate) strategy to take a six-figure income every year — tax-free.
-
Ditch the Golf Shoes: Your Retirement Needs a Side GigA side gig in retirement can help combat boredom, loneliness and the threat of inflation eroding your savings. And the earlier you start planning, the better.
-
Roth IRA Conversions in the Summer? Why Now May Be the Sweet SpotConverting now would enable you to spread a possible tax hit over more than one payment while reducing future taxes.
