Here’s a tip for your 401k plan

I should have known this but I didn’t.

Some 401k plans allow participants to save money both on a pre and post-tax basis (other than Roth contributions). When money is withdrawn it is typically taken from the plan proportionately from all funds and types of money (pre-tax, post-tax and employer contributions).

Now, when you reach 70-1/2 you must make a minimum withdrawal based on IRS rules. Your first such withdrawal will be about 4% of your account balance on December 31 of the previous year. Say you have $500,000, your first withdrawal must be about $20,000.

The purpose of this mandatory withdrawal is to limit further tax deferral so the IRS can start collecting your taxes. Remember, all taxable withdrawals from a 401k plan are taxed as ordinary income, not as capital gains.

But wait‼️ It turns out the IRS doesn’t care if the money you withdraw is pre or post-tax so you can access your money and pay taxes on only a portion of the withdrawal… if you ever contributed post-tax money.

To meet your requirement to withdraw at age 70-1/2 but at the same time give as little as possible to Uncle Sam, if your plan permits after-tax contributions, it might be worth putting a portion of your contribution into your plan post-tax.

Of course, you give up some tax deferral benefits when you are younger, but keeping more later in life may be more important to some people. This may be valuable if you would not have made the 70-1/2 withdrawal if it was not required. You can reinvest what you don’t pay in taxes.

Just a thought.

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