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Chapter 24. How to Avoid the Biggest Mis... > Retiring and Taking Money out of You... - Pg. 257

How to Avoid the Biggest Mistakes 257 Answer:The Internal Revenue Service considers anything invested longer than 12 months to be a long-term investment for tax purposes. But when investing your money for the long-term, consider five years and beyond to be long-term holding period. Investing Question #24:What is meant by liquidity --how liquid an investment is? Answer:An investment's liquidity means how fast you can convert it to cash. For instance, a savings account is highly liquid. All you have to do is withdraw the money from your bank. However, other investments, such as municipal bonds or real estate, are less liquid--meaning that you have to wait to find a willing buyer and to receive payment. Investing Question #25:I've heard so much about investment fraud lately. How do I know if an investment professional is reliable? Answer:It's a good idea to interview at least three investment professionals before you select one. Look for a planner who is at least a Certified Financial Planner (CFP) licensee. Also, ask friends and work associates for recommendations. Be sure to check if the individual is licensed to sell investments. (See Chapter 22 for more details.) Retiring and Taking Money out of Your 401(k) Withdrawal Question #1:I'll be retiring in a few years. Do I have to get completely out of the funds I'm in and roll the money into something else, or can I leave the money invested as is and simply draw it down over time? Answer:This question has both tax and investment consequences. In general, you should ask yourself if you need all your money, some of your money, or none of your money to live on imme- diately when you retire. Any money that is distributed (not rolled over, that's different) from a 401(k) before age 59½, will be subject to a 20 percent withholding and a 10 percent penalty tax for early withdrawal. The 20 percent withholding is assessed when the money is distributed to you. The 10 percent penalty is assessed when you file your taxes. Of course, the 20 percent that was withheld could be too little or too much depending upon your tax bracket. Whether you can take some of your money out depends upon your employer's plan rules. Some plans do not allow for installment payment (i.e., regular payments to you). If some money comes out, it all comes out. Other plans do allow for installment payment; check with your employer. If you retire, money must begin coming out by April 1 of the year following your 70½ birthday. For What It's Worth There are always exceptions to the rules. A big one is that if you leave your employer after age 55, the 10 percent penalty does not apply. There are other rules, too, so seek the advice of your employer and a qualified tax advisor. Remember, if you roll the money over into an IRA, you can avoid the 20 percent withholding tax. Later, when you are 59½, you'll avoid the 10 percent penalty, and the withholding tax is a flat 10 percent. However, you can opt not to have the tax withheld. (See Chapter 19, "Roll, Roll, Roll It Over," for more help.)