Epic Real Estate Investing - How to Avoid Early 401K Withdrawal Penalties | 383

Episode Date: May 1, 2018

Did you know that there are ways around early 401k withdrawal penalties? Today, Tim Berry and Matt Theriault explain multiple ways to avoid these penalties. Plus, find out the hidden dangers of paying off your mortgage early. Hear it all with Epic Real Estate on Tax Hacker Tuesday! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn't it about time you play on a level playing field with the wealthiest 1%? Now you can. Tim Berry, attorney at law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what's rightfully yours.

It's time. for Tax Hacker Tuesday. Hello and welcome to the Epic Real Estate Investing Show. It is another day, another Tuesday. That's Tax Hacker Tuesday with my attorney and friend Tim Berry. On Mondays here at Epic, we show you new and creative ways as well as time-honored ways of making money using real estate. And on Tuesdays, we show you how to keep it.

Hey, Tim. Hey, Matt. How are you, sir? Doing well, thank you. Good to see you again. Can you see me? I actually can't see you. They can't see you, but I can see you.

That is a beautiful piece of art behind your desk. There's got to be a story about this fish you have back there. Oh, there is a story. There was a client who made these, and I was fortunate enough out of his goodwill. He said, hey, Tim, have this fish. So, well, I love these things, actually. I wanted four or five of these, but my wife wasn't quite on the same plane as I was, of a mental plane, shall we say.

Got it. I would imagine that the artist's wife wasn't on the same plane either. They said you need to start giving some of these things away. What are you saying, man? No, I love it. It's very colorful. Cool. So if you got a question for Tim, you can go to taxhacker.com ford slash questions and post it there.

And then we'll answer it here live on the show. This question actually came in, snuck in the back door via email, says, hello, Mr. Terrio. And says, I hope this message finds you well. I've been listening to your podcast for a few months now. in one of your recent Tax Hacker Tuesday podcast featuring Tim Berry, who talked about 401ks and IRAs, which led to this question. Is it possible to avoid the 20% withheld amount and or the 10% penalty for early 401K withdrawal?

So that's one question there, Tim. Should I go on and read and just put the whole thing in context? Yeah, put the whole thing in context, please. Okay, so that's really the question. And then he adds an explanation for this. So he says, I'm no longer employed by a U.S. company. Therefore, I have not contributed to my 401k in a year. Plus, for the next three years, my wife and I will be expats in Germany.

We are renting our house in the U.S., and our rent in Germany is paid for by the company. Our goal is to pay off our mortgage in the U.S. using the funds from my 401K. Is there any specific advice you can provide in this situation? Thanks for all that you do for the REI community. we enjoy learning from you and your featured guest. So Mr. Featured guest, do you have a response to that? Did you understand that?

Because I was a mouthful. I did understand that. Okay. The answer is going to be a mouthful. A bunch of things we could do. Okay. First one, super easy one. How do we avoid the 20% withholding?

And what is 20% withholding? Under the tax code, it says if you take money out of a qualified retirement plan, a 401K, The person, the 401 has to withhold 20% of the amount that was distributed to prepay your taxes. Okay, that's a bummer. How do we get around that? That is super duper easy. All we do is we roll the money from the 401k into an IRA. So that's going to be a non-taxable event.

We move your money from your 401k into an IRA that you control. And now a tax code doesn't have that 20% withholding on an IRA. So now you can take out the money. you don't have the withholding and we don't have that issue problem solved right there that's that's sweet yeah yeah it's a really neat way to do it now number two the 10% withholding a little bit easier and matt what was this fine gentleman's name this is mr christopher stokes mr christopher stokes mr christopher stokes matt you know that don't you i do not know that no oh no let's talk about mr christopher stokes uh age if he's a

under 59.5 and he takes out money, he's going to be hit with that 10% early withdrawal penalty. There's a neat little exemption, and I say neat. I've seen this done a number of times, but I have yet to see it done right. Everybody blows up. And there's a provision that says, if you start taking out separate and equal payments from your IRA each and every year, and those payments go for the greater of five years and your past 59 and a half, then you don't have to pay the 10% or the withdrawal penalty. So if Mr. Stokes is only 57, 55, 54, and he starts taking out an equal dollar amount each year from the retirement plan, we can ignore that 10% penalty.

It's not going to apply. So, but that's one idea. but if Mr. Stokes is, gosh, 39 years old, eh, not going to really happen. And the reason I say it's not really going to happen is if you take out just one cent that's not separate and equal from all the other years, so if you have a disproportionate year of some sort, then the IRS is going to come back and tag you for all the back taxes. So there's that provision out there for separate and equal payments. A lot of people would say, oh, you can do that, but I've got to warn you,

I have yet to see that done successfully. and I've talked to dozens of people who started doing that, and it kind of blew up on him. So getting around the 10% is going to be a little bit tougher. But let me throw out one other idea for getting around the 10%. If Mr. Stokes can have his own valid business, even while he's in Germany, what we could do is create a solo 401K for him. And now we can move that money from his old 401k, his old employer, over to his brand new solo 401K. Now with that brand new solo 401k, he can borrow. out the lesser of 50% or $50,000. So don't know how much you have inside the account, Mr. Stokes,

but if you have over $100,000, you could borrow out $50,000 and use that to pay down on your home mortgage if you wanted to. So that might be another idea, and that would be a non-taxable event, but you're going to need some sort of self-employment income either between you or you and your spouse. Got it, got it. So if he did the solo 401K though, now he's back to the the 20% withheld amount. He's back to the 20% withheld amount if he takes a distribution. But if he just borrows the money out, that's not a distribution. Tax free and he just has to pay it back in five years.

Perfect. So it really depends on how much he needs. Yeah. How much he needs and how old he is for the... How old is? This guy. Got it. I have another thing to run by this.

And you can comment on this, Tim. I see that when we hear the words like tax, tax liability or tax implication, or we hear the words like penalty, like those types of words that are attached to those amounts are almost more scarier than the amount is. And really, it's just an equation of pluses and minuses. And I would look at, you know, I would be thinking my strategy, if I were in Mr. Stokes' shoes that, okay, I'm going to transfer over the IRA so I can avoid the 20% part. And then on the 10% that's left, I'd really just do a math equation and treat that like an

expense as far as you want to pay off your mortgage. If you had to wait until you were able to withdraw all those funds to pay off your mortgage, how much would that cost you in waiting versus how much would it cost you in pay? hang it off early. Totally agree with you. That's the smart way of looking at it. Right. Yeah, that's the real smart way.

It's just to do the benefits and, or I can't even think, cost and benefits of the whole thing is with pros and cons. Right. There's another big issue, though, here. That's the emotional pros and cons. And the reason I say that is I've dealt with a lot of people, big bucks people,

and they don't want to have any mortgage on their home for some reason. They see that as a bad thing, and they just want to pay it off by cash. Being a tax geek, I say, but wait, you're going to miss out on the mortgage deduction. Being an asset protection geek, I say, but wait, the bad guys. Can come and take your stuff. Well, yeah, if you pay it off, they can come and take yourself. And I got a guy right now.

He's got a fancy condo in a fancy location. It's worth a lot of money. And this guy pays down his mortgage as much as it possibly can. His mortgages may be one-fourth the amount of the condo right now. And guess what? he's gotten into a bad situation. Now it looks like now there's, how do I put this? Certain dance steps are being taken to protect the condo

where as if he never would have paid down the condo, we wouldn't have had this issue. Mm-hmm. Mm-hmm. The other thing, another perspective to that, that is when you pick off your mortgage, that's all money that's no longer working for you. Oh, yeah.

It's buried in your house and you've essentially, and I don't know, the other aspects and circumstances of your situation, Mr. Stokes. But I'd be looking at, wow, you're retiring your money before you get to retire yourself when that money could be put somewhere else to create a residual income for yourself to where it could cover some of your living expenses as well as the mortgage payment. And you still get the deduction and blah, blah, blah, blah, blah. I couldn't agree more.

I mean, the last few years, they've been given way money. Mortgages are what, three and a quarter, three and a half and all that stuff? Where the hell else can you get that? And if you can't reinvest that money somewhere else, and make three and a half percent, game over. Don't listen to the show ever again. Don't ever call me. I don't want to hear from you.

I mean, everybody can make over three and a half. That's easy. So really simple arbitrage, take that money at three and a half, four, four and a half, reinvest it as a measly six or seven, if that's all you can do. If not, I don't want to go exaggerate numbers. But you know what I'm trying to say, Matt? It's just a whole party not to have that money working for you. Yep.

And there lies another emotional. obstacle, right? We've all been told to work and work and save and save and pay off our house as soon as possible and buy that house as soon as you're able and then pay it off as soon as possible. And that's all this traditional advice. And we all have a, it's ingrained in our culture. We have a huge emotional attachment to it and to hear something to the alternative can freak people out.

But the answer to his two specific questions, is it possible to avoid the 20% and the 10% penalty for early 401K, the answer is yes, it is possible. And the second answer is, is there specific, or a second question, is there specific advice you can provide in this situation? Yeah, it asks you to consider not paying the house off at all. There's better things to do with your money than to pay off your house. But then again, if that's what's going to allow you to sleep at night, make sure you protect your assets the best you possibly can and, you know, basically what do they call it in the Western days. Circle the wagons. And yeah, make sure you got that. So you can actually sleep well at night without that false sense of security just by having the

mortgage paid off. How do we do? I thought that was fantastic. Yeah. I love the question. And it went somewhere where I wasn't expecting when I originally read it, but got me thinking. So cool. What's new and exciting in your world, Tim? Not much. I wish I could say there new and exciting stuff, just the tax code. The wonderful thing called the tax code. It's just pure excitement and entertainment all by itself. It is, isn't it? And the more they change it, the more job security that creates for yourself.

Oh, you got that right. It's a wonderful thing. It's a wonderful thing. So if you got a question for Tim, you can go to taxhacker.com forward slash questions. Post it there. We'll read it here live on the air. So thank you, Mr. Stokes, for your question today. And if you like a copy of Tim's free book,

How to Take Advantage of the Five Loopholes and Trump's New Tax Plan, the mainstream media isn't sharing with you, and could cost you a small or large fortune, go to taxhacker.com, and you can grab that copy there. We need to truncate that title. It takes up half the episode. And after you've got a copy of Tim's book, you'll have the opportunity there to schedule some time with Tim, and either he or one of his team members will get on the phone with you for a short five-to-10-minute call to assess your situation.

And if there's a good fit, they'll take the next step to schedule a tax action. plan with Tim and if there's not a good fit. Don't fret. They'll share some alternative resources with you to where a better fit for you can be made. Either way, Tim and his team are committed that you are better off after the call than you were before. That's just Tim. That's what he does. Good guy. All righty, Tim. Speak now. Forever. Hold your peace. Anything else? Now, I just want to say thank you much, Matt. Look forward to the next tax hacker Tuesday. Yeah. So that's it for Tim and myself. He just said so. And we will see you next week for another episode of Tax Hacker Tuesday on the epic estate investing show.

That's it for today, as we dream of a tax system that works just for you. But until then, you have Tim Berry. See you next Tuesday for another episode of Tax Hacker Tuesday. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.