What You Don't Know Can Hurt Your Retirement
Misunderstanding the "separation of service” rule cost a first responder I know $1,500. His story shows how asking questions is key to finding the right financial adviser and avoiding heartache down the road.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter
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.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
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 (opens in new tab) 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.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Daniel Rey is the founder and CEO of Central Florida-based Voyage Retirement Solutions (opens in new tab). Daniel developed the Retirement Navigator, a proprietary planning process designed to help Voyage's clientele achieve their long-term financial goals. He is passionate about helping investors, from public pensions and other employee retirement benefit plans to individual retirement planning.
Dollar Tree Has Stopped Selling This One Staple
Shopping Dollar Tree stores are taking eggs off their shelves due to high prices.
By Quincy Williamson • Published
Ford and Honda Recall Nearly 2 Million Vehicles. Is Yours Affected?
Ford and Honda have recalled models including the popular F-150, CR-V and Accord for issues with brakes, wipers and more.
By Ben Demers • Published
Five Investment Strategies to Focus on in 2023
Planning instead of predicting, reducing allocations of illiquid assets and having a diversified portfolio are good ways for investors to play defense this year.
By Don Calcagni, CFP® • Published
Investors Nearing Retirement Show Patience With Markets
Despite last year’s upheaval, many investors are sticking with long-term plans and tightening their budgets instead of moving money out of stocks and bonds.
By Matthew Sommer, Ph.D. CFA® • Published
Long-Term Care Planning vs. Taxes: Finding a Healthy Balance
Many families discover that trying to mitigate the cost of long-term care can conflict with another common retirement concern — reducing taxes for retirees and their heirs.
By John M. Graves, Esq., IAR, Agent • Published
For a Concentrated Stock Position, Ask Your Adviser This
There can be advantages to having a lot of stock in one company, but ‘de-risking’ can help avoid some significant disadvantages.
By Robert Gorman • Published
Trusting Fintech: Four Critical Moves to Protect Yourself
A few relatively easy steps can help you safeguard your money when using bank and budgeting apps and other financial technology.
By Shane W. Cummings, CFP®, AIF® • Published
Four Ways Women Can Take Control of Their Financial Health
Adjusting for life events, taking advantage of workplace benefits and preparing for caregiving can make a big difference in your financial future.
By Kate Winget • Published
Can a Potential Employee Negotiate Conditions of Criticism?
Labor lawyer weighs in on whether job candidate with traumatizing childhood can request that prospective boss curb his management style to avoid triggering her.
By H. Dennis Beaver, Esq. • Published
Long-Term Care Insurance Quandary: Keep Paying or Let It Go?
As long-term care insurance premiums go up, many policyholders are struggling with what to do. Accept higher premiums, reduce benefits, let the policy lapse or take a payout?
By Roxanne Alexander, CFP®, CAIA, AIF®, ADPA® • Published