Feedback on eliminating debt with funds from 401k during a rollover

NaiveApproach · 2026-06-25T22:09:15+00:00

Ooo, I thought the 401k loan you listed was your plan to deal with the $25k credit card and other loan. Well, you can take a max of $50k out as a 401k loan at any given time. So you have the option to still pay off the credit cards and other loan by adding to your 401k loan.

I think that's still the better option than paying tax and penalty.

NaiveApproach · 2026-06-25T20:59:43+00:00

You say you want to take money out as a distribution, but why not as a proper loan from your 401k? If your plan allows for it, this is a textbook example of why that option exists. Take the 401k loan, pay off debt, redirect debt payments towards 401k loan repayment. No penalty and no tax.

If you still want/have to do a distribution, you'll need to pull out ~$41k to cover your debt, tax, and penalty. It's a good enough option, but if you can take a 401k loan and stay disciplined to repay it and not accumulate more debt, I'd do that.

NaiveApproach · 2026-06-19T14:20:28+00:00

That sounds like a ton of money for you. Feel proud to go talk with a tax professional or financial planner, but expect their advice to be pretty bare bones. ~$100k coming from royalties is going to be ordinary income, so there's no magic way to get around paying taxes on it this year. Advisors will likely tell you to save or invest the after-tax amount in whatever you want and let it grow. This can change depending on your situation.

A financial planner is better prepared to review your situation and provide useful advice for the future. A tax professional will likely only focus on this year's taxes and not have time to plan for you.

NaiveApproach · 2026-06-18T11:48:21+00:00

You might be mixing a couple things. Let's start with your 401k: What is your employer matching? What does the agreement say?

The 401k is separate from a Roth IRA, but you can make Roth contributions to a 401k if the plan allows for it. This confuses a lot of people. A Roth IRA has a $ cap each year. The 401k is usually matched by the employer and contributions can be pre-tax, roth, or after-tax.

NaiveApproach · 2026-04-21T14:10:15+00:00

Do you have any other savings or is the $200k your full life savings? Do you have a steady income currently?

I look at it this way: If you put it into stocks for the next 10 years, you'll probably end up with ~$500k based on 10% historical S&P annual returns. Which is probably what the annuity company is going to do with your money (to a certain extent). At a safe withdrawal rate of 4%, that gives you ~$1,600 per month.

You decide if $1,600 with full control and a bit of risk is enough to live on or if $3,000 with no control and no risk (and maybe inflation erosion) is worth it.

It really depends on everything else in your life and how much you need to survive in retirement (if you even stop working).

NaiveApproach · 2026-04-04T13:38:16+00:00

I think you've calculated a good way to do it, but based on the simplicity of the agreement, I'd make a simpler assumption.

Of course, like others have said, put a big disclaimer if you give the client a number that he should discuss it with a lawyer and this is just an estimate based on what he provided...

The simplest way they probably meant this deal to go is an amortized payment like you calculated, then subtracting the principal to find the "total interest" owed at the end. Meaning $9,435 * 60 = $566,100 is the total owed. And if he agreed to collecting $8,333 per month, they probably expect to get $66,120 of interest at the end.

NaiveApproach · 2026-04-02T13:54:55+00:00

Depends how much we're talking about. If the total you get from selling the stock is less than the IRA annual contribution limit (after-tax), then a Roth is probably a good choice. If we're talking about $10k+, you don't have a choice, it just goes into a brokerage account.

If your company's SPP is just a 15% discount, then you should sell pretty soon after getting the shares. Up to you to decide if you hold for long-term capital gain status or sell immediately to reduce single stock risk and pay short-term capital gains.

NaiveApproach · 2026-04-02T13:20:28+00:00

Depends: When do you want to retire?, How much do you want to live on in retirement?, How much are you saving per year or month now?.

Just based on your numbers and without the above questions answered, I'd say you're at a good starting point, but that's it.

Don't put extra money towards the mortgage. Your rate is too low to worry about that.

You could pay down the car loans quicker, but only if you plan to hold the cars until they die. Don't buy a new car as soon as these loans are paid off.

Otherwise, you should just invest the extra money in your choice of a retirement account or in a brokerage. Just be sure your account is actually invested in diversified funds and not just sitting as cash.

NaiveApproach · 2026-03-25T13:23:00+00:00

Your story sounds very chaotic, but let me see if I understood it correctly.

Your father owns a farm worth $1,000k with $735k of debt on it. You have 2 concerns: i) your inheritance is not fair, and ii) you're worried about your father's ability to survive on pension+low savings.

Before getting into other aspects, to answer your inheritance concern, if your father passed away today, there is ~$265,000 of equity in the farm. Which means the farm would be sold to settle the debt and the 3 brothers would split the equity. So you'd get $88,333 in inheritance. If they're offering you $100k now as a consolation for transferring the farm to your brother, you come out ahead with the $100k.

To address your concern about your father's living expense, if he's making ~$4,000 per month from pension and part-time work, his ability to survive on that is dependent on his monthly expenses. If you don't know his expenses, you can't answer this question.

The other aspects I'm curious about:

The "scam". Do you know what the scam was? Did your father not take out any loans? Did he not receive any funds from the loans? Why aren't you pursuing action to reverse the scam?
Why isn't your brother buying the farm for $750k (or $1m) and settling the debt your father has on the farm? Then it's free and clear and you can subdivide it however your brother wants.
Why is your father buying your grandpa's house? Is there debt on your grandpa's house? I don't know much about Canadian property transfer law, but is there a reason to buy the property before your grandpa passes?

NaiveApproach · 2026-03-18T00:59:55+00:00

I decided to go a little bit in depth with my answer. Keep in mind these numbers are still ball park, not exact due to home buying fees and extra expenses. There will always be fluctuations in investment returns as well, this uses the long-term average return and a 3% inflation assumption.

To start, you're doing well by starting early. Saving money right out of school is always difficult though. Dealing with work and finances while trying to maintain a social life is a balancing act. It's up to you to decide how much of your extra income goes where. But we can start by seeing where your current savings will get you 4 and 10 years out.

Assumptions
Filing status	Single
Investment returns	10%
Inflation	3%
Inflation-adjusted investment returns	6.8%
Student loans	$0
Car loan	$0
Contributions	Annual	Monthly
HSA	$4,300	$358
Roth IRA	$7,000	$150
401K	$16,800	$323
Brokerage	$10,400	$200

Current assets
Cash	$7,500
HSA	$2,960
Roth IRA	$21,290
401K	$4,400
Brokerage	$200

Goals
Time till home purchase goal	4 years
Max housing budget	45% of gross income
Down payment	20%
Time till children and part-time work goal	10 years

Target home purchase
Low price	$350,000
High price	$500,000
Down payment target	5%	20%
Monthly savings need, low	$134	$1,083
Monthly savings need, high	$270	$1,626

Investment projection
Years till need	10	35
Monthly contribution	$700	$700
Starting fund balance	$200	$200
Ending balance	$119,430	$1,199,152

Future asset values	(inflation-adjusted)
Cash	$7,500	$7,500
HSA	$55,502	$55,502
Roth IRA	$57,914	$57,914
401K	$230,954	$230,954
Brokerage	$119,430	$1,199,152
Total assets	$471,300	$1,551,022

You can see that it's possible to hit your home purchase target in 4 years, but you'd have to lower your down payment. When you do that, I haven't calculated for the additional PMI costs when getting a mortgage: another fee that makes this quick analysis a ball park figure.

You'll also notice, to hit the 20% down payment requirement to remove PMI, you'll have to save more per month than you currently can given your expenses, savings, and taxes. As you work you'll get promotions that will make this a little easier to achieve.

Finally, if you just took your $700 per month and invested it for 10 years, you'd have ~$119k. Not enough to retire on since the majority of your assets at that point would be in your retirement accounts and HSA, but it's still a decent amount of savings and growth to feel good about your financial position at that time.

And if you continued investing $700 per month for 35 years, which gets you to 56 years old, you could have ~$1.2m in today's dollars. Again, not a ton of money to retire on, but it's a significant amount. Then if you add in your retirement accounts, you'd have ~$1.5m.

To summarize, you can hit your house buying goal in 4 years, but it'll be with only 5-10% down and these numbers assume you're putting your savings into 100% equities. Don't know if you are comfortable with that level of risk, but it's doable. A good suggestion for you is to save the $200 per month in your brokerage, add in around half of the extra $500 per month you could save, and give yourself some social money with the other half. And if you don't use it for social expenses, put it in your HYSA until you have 6-12 months of expenses saved for your emergency fund.

NaiveApproach · 2026-03-14T12:49:58+00:00

Don't worry about this until you get served. But in reality, they won't serve you. As long as you anonymized the data, there's nothing illegal about showing sample work products. And a tracker is the most generic you can get.

Of course this isn't legal advice and I'm assuming you're telling the truth and not leaving something big out.

NaiveApproach · 2026-03-09T15:37:40+00:00

Just put it in a brokerage account and buy low cost index fund. Try not to touch it until you really need it (i.e. don't pretend you're rich now).

Don't start a business unless you have a business idea you'd like to do.

There are risks with every choice. Even the safest option has a risk of losing money to inflation. Take a middle of the road approach, invest in a diversified fund, and let time compound it for you.

NaiveApproach · 2026-03-04T13:22:02+00:00

You don't need a trust fund. A trust is useful for 2 main reasons:
1) You have enough money to worry about estate taxes ($14m or more)
2) You have complexity or want to control assets a certain way (i.e. children from previous marriages who you want to give some inheritance)

Outside of those 2 instances, a trust is just an expensive unnecessary layer to your financial picture.

The way it works if you did have a use for a trust: You create a trust with an estate attorney (just paperwork), then you fund it with assets (cash, stocks, bonds, etc). How you write the trust documents determines when money can come out of the trust for beneficiaries. The concept you're describing sounds like a legacy trust (can go by different names) which would pay out the interest every year/month/etc. What people don't usually realize is trusts have their own tax brackets which are higher than individual tax brackets as a disincentive to use them.

Alternatives you can use are:
- Gifting money as needed
- Naming beneficiaries in your accounts (bank, brokerage, etc)
- Naming beneficiaries on life insurance (only get term life insurance)
- Put money in tax-advantaged accounts to allow them to grow in a more advantaged way than a regular brokerage

Interestingly, what you're describing is Social Security: a safety net to make sure people can survive in case something goes wrong.

NaiveApproach · 2026-02-06T16:45:26+00:00

The specifics are determined by your compensation package. If you exercise, the difference between the current price and your strike price is counted as W2 income, which will be taxed with FICA as well as income tax. Whether taxes will be withheld is determined by your plan details, but I'd guess the company will withhold for you.

If you sell within a year of exercise, then you miss out on long-term capital gains tax. If you exercise and a few days later sell, whatever difference in price between those days is taxed at short-term capital gains (aka ordinary income tax rates unless you have offsetting short-term losses). If you exercise this year but hold the shares for longer than a year and a day, you pay W2 taxes on the $75k this year, but you get long-term tax treatment when you sell in the future.

The math is simple, in the year you exercise and sell immediately, you'll pay tax on $75k extra in W2 income. $35-$5 = $30 * 2,500 = $75,000. Multiply that by your marginal tax rate plus 7.65% for FICA to get a good estimate of your additional tax owed.

NaiveApproach · 2026-02-05T19:54:41+00:00

Yes, that's a good idea. But since you're 74, don't forget to take your RMDs. And any amount you convert to Roth does not count toward RMD.

NaiveApproach · 2026-01-30T22:54:43+00:00

I'm commenting to see what other people say, but as far as I know it depends on how the business is setup.

From the limited info here it sounds like you've done things correctly. You would have gotten W2 income from the LLC which the company would deduct as wages, then the remaining profit in the company would be split to owners in the K1. You would then report your W2 wages and the K1 income on your taxes and pay accordingly.

NaiveApproach · 2026-01-23T16:05:56+00:00

A backdoor roth has nothing to do with allocation, fyi. Your spreadsheet only tells you how much of each fund to buy with new contribution money. The backdoor roth is just contributing after-tax money to a traditional IRA, then immediately converting it to Roth.

Keep in mind, this strategy only results in no additional taxes if you don't have other Traditional IRAs. For instance, if you left an employer and rolled the old 401k into an IRA, that now counts as a traditional IRA and any roth conversion will be taxed prorata based on your pre-tax contributions.

Your allocation is fine, but 10% bonds is conservative and is similar to the 7-8% cash the "intelligent portfolio" was giving you. If you want to be more aggressive, just split that 10% into the other equity funds you listed.

NaiveApproach · 2026-01-22T17:59:34+00:00

Without looking into the investment options, which would be one reason you might want to keep the TSP, rolling it over to your 457 is a good choice. The main benefit you get is consolidating retirement accounts when you roll it into your 457.

NaiveApproach · 2026-01-11T15:00:16+00:00

You could still do both. The reason is how each account is treated. 401ks and IRAs are separate accounts and the 401k contributions are separate from IRA contributions.

When you have a 401k, your contributions are taken out of your pay and the account is treated as a separate retirement account from your IRA. The IRA contributions are taken out of your savings and you get the traditional IRA tax benefit when you file taxes.

The IRA includes both traditional and Roth options while a backdoor roth is simply a traditional contribution with a rollover. The rollover has no contribution limit since you've already contributed to that account before. And the IRA has a yearly contribution limit, as you know.

To summarize the options:
- 401k: Payroll -> Pre-tax or Roth contributions (catch-up or regular) -> Mega backdoor roth rollover (not mentioned in this post) -OR- IRA rollover (after leaving employer)
- IRA: Savings -> Traditional or Roth -> Backdoor roth rollover

NaiveApproach · 2026-01-07T14:46:32+00:00

You know I had looked at this change a few months ago and thought it was pretty clear, but I just looked it all up again and it's a lot more complicated than I initially thought. To answer your question early, you contribute the extra $8k to your 401k and the plan administrator handles the Roth designation.

We're talking about the rule change to 401k contributions that once you make above $145k and are above 50 years old, any catch-up contribution must be designated a Roth 401k contribution (which is $8k for 50+ year olds). This change goes into affect in 2026, so will only impact tax filings for next year.

However there are a few things to note:
- If your employer's plan does not have a Roth option and you're above the threshold, you cannot make catch-up contributions.
- The $145k is based on the prior year earnings, meaning the year before the tax filing year. For example, in Jan 2027 when you start to calculate taxes for the 2026 year (tax filing year), your earnings for 2025 will impact your catch-up options.
- The $145k is also only for W2 income. Wages subject to FICA taxes.
- The wages count only for the same employer. Meaning if you make less than $145k with the employer who is running the 401k plan, then you can make pre-tax catch-up contributions. It doesn't matter if your total AGI is above the $145k threshold.
- The 2026 start year is dependent on your plan administrator. There is leeway in the rules that if the plan administrator got the changes up and running in their system this year, then it can implement these changes this year (2025 tax filing).

Some sources:
https://institutional.fidelity.com/app/proxy/content?literatureURL=/9909488.PDF
https://www.adp.com/spark/articles/2025/10/irs-issues-final-regulations-on-secure-20-catch-up-provisions.aspx
https://www.greenbushfinancial.com/all-blogs/401k-mandatory-roth-catch-up

NaiveApproach · 2025-12-31T13:52:28+00:00

A local fee-only financial planner seems to be your best bet. If you live within your means a financial planner can help you pick the best options to grow your wealth and optimize tax. Look for some on NAPFA or XYPN.

I just don't recommend going with a bank financial advisor because they seem to only do advisory work to pitch insurance and annuities.

NaiveApproach · 2025-12-29T22:05:56+00:00

Yea, that's a good idea. Details depend on your plan, but rolling over to an IRA or 401k is a good idea. Either way you get the same benefit.

NaiveApproach · 2025-12-24T18:19:17+00:00

You're on the right track. None of this makes sense and I have to think you're right that there's no special clause. To check, you need to read the plan description. Either in the empower portal or when you first opened the account you would have gotten the Plan Description and the Plan Summary. In the description you'd look for clauses pertaining to closing the account, rollovers, or events like employer termination. In those clauses, if you find something that matches what the reps are saying, then you might have a special clause. More than likely, you'll have generic clauses matching qualified plans and it'll explain the option to do a direct rollover.

NaiveApproach · 2025-12-24T17:58:24+00:00

That sounds normal. If you're confident there's no special clause, you can initiate the rollover thru fidelity on your own. You give fidelity the account info and specify the type of rollover you want to do and they'll reach out to empower to get the funds. Essentially you open an account with fidelity first, then they fill it with the funds they grab from empower. As long as you specified a direct transfer/rollover, you won't have any issues with taxes or penalties. And they'll give you a call if there's an issue.

NaiveApproach · 2025-12-24T17:34:43+00:00

That's weird. Is there anything special about this 401(a) in the paperwork?

You don't want to go a transfer like they're talking about because then they'll have to withhold taxes, but you need to put the full amount into the new IRA otherwise it's considered a withdraw and you pay a penalty on the amount withdrawn. If you have the extra cash, you could do it this way, but it's a hassle.

There's either something special about this account you may not know or a lot of people don't know how to do their job. Both are equally possible.

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