How long should my 55 year old husband wait until he lowers his job standards?

[Elizabeth0329]

My husband has been working as an Options Sales guy for 30 years in various jobs in New York City. He is currently still employed by his company that he has been with for 2 years but they have drastically reduced his salary and now he is hoping to get a job for $75,000 as his lowest salary. He has been looking for 4 months now and I want to know how long we should wait until he looks for a lower level job. He has his Bachelor's degree, Series 7, 4 and 65. He would like to work at least 10 more years. He sends his resume to jobs posted on Indeed and has gotten a few phone calls but most are for commission insurance jobs. He needs a steady salary job. We wouldn't be able to sustain living here in New Jersey for much longer if he doesn't get a job soon. Thank you for your help. EN

[Gorm50]

I was in banking and downsized years ago at age 56.  Eventually I gave up looking as younger officers were cheaper.  I lived on savings til I formally "retired" at age 62 and claimed SSA.  FACT is with mergers only one position survives and I looked better on the bottom line than payroll so I was downsized. Today it is all about EPS, etc. There is little to no loyalty.  

Unsure what Options Sales is, but I am guessing he is an Options Trader, given his credentials.  Most jobs in that field I would believe are commissioned earnings vs salary, unless there is a base plus. Can ONLY assume his salary was reduced because he was costing the company more than the revenue he produced. In that field one is expected to bring in business, not just respond to incoming calls.  Sounds like they are coaxing him to move out.  Labor is a commodity priced based on contribution to the bottom line. Given the little I know about his circumstances, history, etc, I would keep the job / salary he has, research the WHY the salary reduction, learn what he could do to increase it or negotiate a base salary plus commissions and then discreetly look for another position.  Bottom line, today it is all about producing sufficient revenue, valued relationships to cover one's fully loaded cost (salary plus benefits) plus make a nice contribution to the bottom line.  Concurrent with looking it is always highly recommended he leverage professional friends within his network similarly credentialed for help finding a position.      

[Elizabeth0329]

Wow! That is so nice that you have taken this time to answer my post. I am new to this site. Our goal is to retire at 62 as you have, b/c we currently have 1.1M in our retirement but we are only 55 and cannot access it at this time. My husband's salary was reduced because he lost his biggest account and they feel that he's not a producer anymore. Yes, it is Options Sales. In any case, he is now looking to get out of this commission business to get a salary job, for instance, as a Branch Manager at one of the banks but they send back an email to him that he doesn't fit their criteria. It could be an age thing. I am employed at a hospital and have a secure job making $50k but that's not enough to survive in New Jersey. We are willing to move anywhere where he could get a job and I could get a job that we could live in a lower cost of living state but we don't even know how to go about looking for jobs out of state. Or if that's what we should even do? B/c moving is expensive as well. How long does one wait until they say, they will give up looking for the salary/secure job and get a lower paying job working at Home Depot...IDK. Any suggestions? (PS - We are using credit cards to survive until he gets another job so this could be dangerous as well).  Thank you!

[GailL1]

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@Elizabeth0329 wrote:

. . . . Our goal is to retire at 62 as you have, b/c we currently have 1.1M in our retirement but we are only 55 and cannot access it at this time

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I cannot speak to his job search or where you are willing to move, if that is also a consideration, but there are ways to avoid the 10% early withdrawal penalty.

The IRS has rules that may help you if you/your husband are eligible and you decide to use it to avoid the 10% early withdrawal penalty. 

• One is the equal payment rule (applicable for any type of retirement plan), Know as the 72(t) payments because the rule falls under IRS code section 72(t).
• Another one that is applicable ONLY for 401K plans - is called the "Rule of 55"

You will have to read them to see if you and/or your hubby qualify for either.  I am including the IRS Topic as well as a couple of other links which explains it in more common language.

IRS Topic No. 558 Additional Tax on Early Distributions from Retirement Plans Other than IRAs 

Look down the page to the heading: "NO Additional 10% Tax"

This one is the equal payment rule: 72(t) payments - italic print is quote from links.

There are certain exceptions to this additional 10% tax. The following exceptions apply to distributions from any qualified retirement plan:

• Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.

This one is the "Rule of 55"

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

9.  Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, . . . .

Here are some other links to read about them if you are interested in building one of these into your overall financial picture to ease some money strains.

 THE BALANCE 10/06/2020 - What Is the Rule of 55? 

BUSINESS INSIDER 09/16/2020 - The rule of 55 lets you withdraw 401(k) early without paying a penalty... 

THE BALANCE 09/17/2020 - How to Use 72(t) Payments for Early IRA Withdrawals 

Sure, you should do everything possible not to have to take from retirement funds, early,  but life doesn't always work in the way we want and these are just a couple of rules that help if you have to take this action.

Remember, to be eligible you have to meet the IRS rules of the one that fits the type of retirement plan where the distributions would be occurring.

Remember - unless it is a ROTH type plan where taxes have already been paid - any withdrawal from a deferred retirement plan is taxed at your ordinary income rate.

[Elizabeth0329]

Thank you so much Gail for all of this very useful information. I have never heard of the 72t but I have looked into this and it sounds like the best solution for our problem(s). We are going to have a meeting with our Financial Planner to see if we can get this started. Thank you so much again!

Liz

[Elizabeth0329]

HI Gail,

We have contacted our Accountant to set up the Rule 72t but he said there were some changes to the rule in 2020. He mentioned a change in March and a change in December. We are praying that these changes wouldn't affect us. Do you have any idea what these new changes are please?

Thank you again for all of your help.

Liz

[GailL1]

@Elizabeth0329 

For clarity, I do not know all of your specifics - type of retirement plan / age of the worker, etc. but will be glad to offer information for you to read and hopefully, understand. I try to find knowledgeable sources that offer explanation in as clear as language as possible. I am also retired now so I don't have to keep up with a lot of changes but I think I know the changes that your Accountant referenced. I am not sure either will affect you since you are just beginning the process.  You seem to want to use the Rule just as it was intended - that is to say, the Substantially Equal Periodic Payments (SEPP).

READ THIS:  Great Article and current.

Investopedia (updated Jan 20, 2021) Learn the Rules of Substantially Equal Periodic Payment (SEPP)

Remember the avoidance of the 10% early distribution penalty on early withdrawals under this method or the other one (Rule of 55) is dependent upon following the rules SPECIFICALLY -

A few of them are:

• Your husband has to leave the job where the retirement funds will be distributed; if that is where they are.
• There is no changing the amount that is calculated except for death and I think disability
• no modifications except as was put in place by the SECURE ACT (see below) but that is already in place now so your amount would be figured under the new life expectancy table

The changes which I am aware to the SEPP in Tax Year 2020 are:

1. The SECURE Act, passed in December 2019, made changes to the life expectancy tables to account for increases in life expectancies across the board. As a result, if either the fixed amortization or annuitization methods were used, the annual amount can be recalculated once using the new tables without the update being treated as a modification for the SEPP program. This change has the potential to lower the annual amount required under these two methods.

2. On March 27, 2020, President Trump signed a $2 trillion coronavirus emergency stimulus bill. It allowed those affected by the coronavirus situation a hardship distribution of up to $100,000 without the 10% penalty those younger than 59½ normally owe. Account owners also have three years to pay the tax owed on withdrawals, instead of owing it in the current year. Or, they can repay the withdrawal to a 401(k) or IRA plan and avoid owing any tax; even if the amount exceeds the annual contribution limit for that type of account.  (This is called a Coronavirus Distribution)

Another good link on this part (#2):

The Street: 08/19/2020 - Don’t Qualify for a Coronavirus-Related Distribution? There’s Always 72(t) 

I am not sure that #2 is what you wanted to do - it is more of a loan than an actual distribution. But the decision is up to you - rather your hubby, the owner of the retirement plan.  If he is unsure if he is gonna leave or stay with the employer - this one will be a bad option if he leaves the employer because any loan from an employer deferred retirement plan is due in full or if not repaid immediately everything comes due - taxes on the (loaned) amount + (if less than 59-1/2 years old), the 10% penalty.

Your hubby's decision whether to stay or go from the employer is paramount in the decision to do any of these things - loan or SEPP - He has to make that decision.

Hope this helps with the understanding.  The above links will probably be easier for you to read but if you want it from the IRS - here it is:

THE IRS JARGON IRS Notice 2020-50 - Guidance for Coronavirus-Related Distributions and Loans from Re... 

(page 3)

Section 72(t)(1) imposes an additional tax on early distributions from eligible retirement plans (other than governmental § 457(b) plans, unless a distribution is attributable to an amount that was transferred to the § 457(b) plan from a plan that was subject to § 72(t)). In general, this additional tax is equal to 10% of the portion of the distribution that is includible in income. For any amount distributed from a SIMPLE IRA during the 2-year period described in § 72(t)(6), the rate of the additional tax is increased from 10% to 25%. Section 72(t)(2) provides a number of exceptions to this additional tax, including, for example,

• exceptions for distributions made on or after the employee attains age 59½,
• distributions made to a beneficiary on or after the employee’s death,
• distributions made because of the employee’s disability,
• and distributions that are part of substantially equal periodic payments made over the employee’s life or life expectancy

[Elizabeth0329]

Thank you again, Gail, for all of this great information. To answer some questions for clarity:

-- The reason we are considering the Rule 72t is to pay off $80K of credit card debt.

-- The type of retirement plans we both have are traditional IRAs. I have $480K and he has $605K. 

-- We are both 55 and both currently employed Full Time, although my husband is looking for a new job. He doesn't have a 401K plan at his company. I have a Roth 401K plan that I am contributing to b/c we are trying to build up our Roth (as opposed to traditional). So, the Rule of 55 is not an option for us.

-- Do you know if the Coronavirus hardship is still an option for us in case we chose to not do Rule 72t, but instead take a lump sum from his traditional IRA? Was this coronavirus hardship distribution only available in 2020 or is there still something available for 2021?

-- My husband is now mentioning him just taking a one time withdrawal from his traditional IRA of $40,000. But after we pay the taxes and $4,000 penalty, I calculated it to come out as $22,000 net. We are in the 22% tax bracket.

We know it is not ideal for us to withdraw early from our retirement account but we have no other cash to pay off this. Some other thoughts that we had to get the $80k were:

--- cash out refinance (our house is worth $480K and we owe $300K)

--- 10 year loan for $80,000 from Discover at a 5.75% rate

--- move somewhere else, to a lesser cost of living state

What do you think is best or do you have any other ideas? Thanks again!

Thanks again!

[GailL1]

@Elizabeth0329 

I cannot advise you on what to do - I can only give information and the sources of that information.  However, it is never a good idea to raid ones retirement account(s) to pay off debt if at all possible because of the (personal financial) consequences that could come up later at actual retirement.  

Aside from the early distribution penalty, You lose valuable grow in your retirement accounts by taking the money out early.   Think of your retirement as a source only at LAST RESORT - from lifestyle to homelessness or losing everything - there is a big span in-between. It should be a disaster not a lifestyle problem.

Make a plan - do things in order - seems that the 1st thing is upping the (earned) income - husband and/or yours.  Cutting expenses is also a way to make the budget better - working these two things together will offer some relief too.  Using Credit to make ends meet will only dig you in deeper. 

OK, done preaching -

But I will answer your questions - then see your accountant.

It seems the CARES ACT passed in March 2020 - This Coronavirus Retirement option - ONLY covered these type of distributions for 2020

(Covid Retirement Distributions - 2020)

IRS.gov - IR-2020-124, June 19, 2020 - Relief for taxpayers affected by COVID-19 who take distributi... 

But there is another one - passed in December 2020 as part of the the Onmibus Budget & Spending Act which also included the last covid stimulus relief package ( known as COVIDTRA short for the Covid Tax Relief Act) - It has an early retirement distribution penalty waiver which  is similar and permanent in nature. It is called the Qualified Disaster Distribution. But it has some limitation  and is a little different in what qualifies- Instead of focusing on COVID-19 impact like with the CRD, to qualify under COVIDTRA you must have primarily resided in a qualified disaster area and you must have sustained an economic loss from the qualified disaster. 

Here are some links to this Qualified Disaster Distribution info

FORBES 12/31/2020 - How Retirement Planning Changes In 2021 After The New COVID-19 Relief Package 

Read the whole thing cause it describes the 2020 CRD and the new one beginning in 2021 - from the link:

Ultimately, the newest bill did not use retirement accounts or retirement laws as a source of continued COVID-19 relief. Instead, the changes mostly focused on allowing more flexibility in the future as it relates to potential qualified disasters. This does open up long-term access and flexible planning when it comes to retirement assets.

There is little info from the IRS on the new Qualified Disaster Distribution since it just started in 2021 - What's a covered "Disaster" - this may be more than money difficulties.  Where the President declares a disaster area - fire, flood, tornado, hurricane - things other than covid but does covid still qualify in 2021 - I do not know -

This may not be the only changes in 2021 on retirement accounts.

Your accountant may know more about the new Qualified Disaster Distributions.

Good Luck.

[Elizabeth0329]

Thank you again for your research regarding the above information. I am getting a bit nervous about the Rule 72t because of the commitment time of 5 years and the fact that it could get screwed up and then I'll owe alot of penalty taxes. So, I don't think I'm going to proceed with Rule 72t.

But we still have this $80K debt problem. My next thought was to take out a cash out refinance. This is our current house situation:

Worth: $480,000

Owe: $297,000

25 years left on mortgage

3.875% rate

$2,404 is the monthly payment including principal, interest, taxes and hazard insurance

(We have been in our house for 15 years but have refinanced a few times).

And the mortgage brokers are offering:

25 years

2.99% rate

$40,000 cash out to pay off credit cards

$2,473 monthly payment including prin, interest, taxes and hazard insurance 

New house balance would be: (I can't find but say about $340K)

The part I am getting confused about is how to figure out apples to apples what the closing cost will be b/c we have 3 quotes. One quote is $3,000, another is $6,000 and another $11,000. When I asked the $3,000 guy why his was so low, he said b/c the others are probably including other things that he didn't include.

Do you know what should be included in closing costs? I think this is very confusing for a nonprofessional financial person to be dealing with. We have a financial advisor but for some reason, he's not writing me back.

In any case, do you know of any articles on a cash out refinance b/c this is the only thing I can see that will get us out of this $80,000 (to pay off the other $40,000 we will take $20,000 out of my husband's IRA and pay off $10,000 because that's my estimate, after taxes and penalty, of what he'll get back net. Then we'll have to cut back on expenses and work extra jobs to pay off the other $30K). Unless you have any other suggestions/ideas I haven't thought of. Thanks again!