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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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.
-
Dismal August Jobs Report Offers Rate-Cut Relief: What the Experts Are SayingThe August jobs report came in much lower than expected, lifting the odds that several rate cuts will come through by year's end.
-
Ask the Editor — Tax Questions on the SALT DeductionAsk the Editor In this week's Ask the Editor Q&A, we answer questions from readers on the OBBB's changes to the SALT deduction.
-
Greed, Fear and Market Volatility: A Financial Adviser's Guide to Keeping Emotions Out of Investment DecisionsDon't panic! And don't be so confident in the stock market that you overlook risk. Instead, be logical. Your retirement security could depend on it.
-
Want a Financial Adviser Who Shares Your Faith? Look for One With a CKA DesignationFinancial professionals with a Certified Kingdom Advisor certification are committed to integrating biblical principles with sound financial advice.
-
10 Ways to Stay Safe From Grandparent Scams and Other Fraud, Courtesy of a Financial PlannerScams are increasingly hard to detect, and anyone can be fooled, from older people to educated professionals. Here are 10 ways to avoid becoming a victim.
-
This Is How the Student Loan Bubble Is Primed to Pop, From a Student Funding ExpertFueled by easy money, inflated tuition and high default rates, the student loan bubble mirrors the 2008 subprime mortgage crisis. We could be headed for a potential financial collapse. What can we do?
-
More Than Money: The Hidden Toll of Financial Abuse of Older AdultsFinancial abuse from schemes involving tech support, government impostors, false sweepstakes, grandchild hoaxes and online shopping issues can cause thousands of dollars in losses.
-
I'm a Financial Planner: Here Are Three High-Impact Ways to Make a Difference With Your DollarsThe world often feels out of control, but here are three ways to use your money — through investments, charitable giving and political donations — to help create a more just and sustainable future.
-
The Unsung Hero of Aisle 5: A Tale of Forgotten Change and Compassion at the SupermarketThis supermarket manager went above and beyond to help when a child forgot her change at the checkout counter. You might be surprised at some of the complications that supermarkets face when it comes to customers' forgotten change.
-
Train, Integrate, Retain: A Strategic Playbook for Adviser OnboardingsBuild a thriving practice by training new advisers with clear goals, structured processes and consistent mentorship for strong team growth.
