I lost my job back in February and haven’t found anything new. My savings are almost gone, so now I’m looking at tapping into my retirement accounts. I’d like to minimize the tax impact if possible. Here’s what I have:
401K with both vested and unvested funds.
An IRA with pre-tax and post-tax contributions.
A Roth IRA.
A small HSA with some medical receipts I could use.
Should I draw from these in a specific order to avoid too much tax now and down the road? And would it help to convert the post-tax IRA contributions to a Roth before withdrawing? Any advice would be great.
If you have an HSA, I’d start with that—no taxes or penalties if used for medical costs. Then, look at Roth IRA original contributions, since you can take those out tax-free. After that, maybe check if you qualify for any penalty-free withdrawals from your 401k or IRA.
It might be worth talking to a tax pro at this point. Converting to a Roth IRA could make sense, especially if this year is a low-income one. Let’s hope others have more insights too.
You might want to convert any post-tax 401K contributions to a Roth IRA, but it could trigger some taxes. Ideally, you’d convert right after contributions are made to avoid gains taxes. For instance, if you contributed $1000 a couple of years back, and now it’s $1300, you’d have to pay taxes on that $300 gain.
I know it’s a lot to take in, especially during job struggles. Sending positive vibes your way! And maybe there’ll be some favorable tax changes coming, considering recent political shifts.
@Shiloh
Thanks for the advice! Just to confirm, you’re suggesting this for the post-tax IRA, right?
If I do a conversion from an IRA to a Roth IRA, I think the pro-rata rule kicks in. But since my income’s low this year, it might be a good time to go for it.
Once I convert, does the five-year rule still apply for Roth withdrawals? And does it count from the IRA contribution or the Roth conversion?
@Jaden
Good call. Being in a low tax bracket can work in your favor, even if job stuff is tough. My sister went through something similar and managed to make it work. There can be silver linings!
@Yan
Thanks for catching that. Yes, it’s counted as regular income by the IRS, not capital gains. Disregard my earlier example—it would probably be a bigger tax hit than capital gains.
I took out a large chunk from my retirement when I was 40, and honestly, it was one of my biggest regrets.
Did you get injured or is your field struggling? I only ask because, for me, it felt like a good solution at the time, but looking back, I wish I’d done something different, even if it meant moving in with family until I got on my feet. Wishing you the best—these situations are rough.
To really give you good advice, it’d help to know the balances in each of your accounts, how much you need to take out each year, and how long you hope to make it last.
Have you checked out any resources on this forum about financial independence?