Pension Maxima Investment Advisory, Inc.
Bonnie Yam is a Chartered Financial Analyst and an Enrolled Agent. She graduated from Smith College with a BA in Mathematics and Economics. She received an MBA in Finance from University of Chicago. Before starting her Qualified Plan business seven years ago, she was a Financial Manager for Time Magazine, New York and a Hedge Fund Research Analyst for Cheetah Investments, Hong Kong.
Bonnie has extensive experience in investment management, investment fiduciary and investment education. She is a member of ASPPA, NATP, CFA Institute and NYSSA.
Bonnie and her team specialize in qualified plan consulting for new and existing plans. Her goal is to help plans maximize retirement savings and attain positive retirement outcome. In the past 15 years, she has worked with companies big and small, and collectively, her and her team have been able to help companies control cost, increase plan effectiveness, and help employees save.
Bonnie assists small business owners in maximizing their business value through five steps of value maturation. Business owners need to assess their personal readiness, business attractiveness, and business readiness. Bonnie and her team incorporate personal financial planning, business planning, business de-risking, exit strategies in conjunction with tax strategies to help business owners maximize their cash out value.
BA, Mathematics & Finance, Smith College
MBA, Finance, University of Chicago
Assets Under Management:
Pension Maxima Investment Advisory, Inc. is an investment adviser that is registered with the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 and has made notice filings in those states where required to do so. Pension Maxima Investment Advisory, Inc. does not offer its services to residents of any jurisdiction in which EBS is not currently registered and/or is not a notice filer, unless exempt. The information provided is intended for use by citizens and residents of the United States only. It is not directed to any person residing in, any citizen of, or any form of organization operating under the authority of any country or jurisdiction in which Pension Maxima Investment Advisory, Inc. is not registered as an investment adviser, unless exempt.
Yes. Just open an account with any online discount broker or a Schwab or Fidelity closest to your house. One good thing about having a retail location is you can always walk in to ask questions. Once the account is set up, you can trade online. There are fixed costs for each trade ($7 to $15). Typically, they are not expensive, but don't trade too frequently or make many small trades because that will eat up your investment return.
You need to familiarize yourself with some trading terminology.
Market: Trade is put in the market right away
Limit: Trade is only made when certain price strikes. So if you want to buy at a lower price or sell at a higher price, you can preset the trading price.
A lot of people choose to keep the mortgage even though they can afford paying it off early. One main reason is the tax write-off. Let's say you pay $3750 in mortgage payments, half of that is interest, so $1875. That interest is deductible off your income from Schedule A. Assuming your tax level is 28%, your tax savings from interest rate deduction is $525. That is real money to you regardless of what happens to the market.
I think your bigger question is how to get more "safe" return from your savings. If you are very risk adverse, I would recommend a high credit, low duration (less than 1 year) municipal bond fund. Depending on your state, that can fetch you 2% to 3% after tax (but subject to AMT). It is triple tax free (Federal, State and Local). It is also very liquid. Unlike a CD, you can cash out anytime.
There is a penalty-free distribution option called Section 72(t) distribution. You must first roll your 401(k) into an IRA, then apply the 72(t) distribution. The 72(t) withdrawal is a series of "substantially equal" payments are calculated based upon your life expectancy. Once the distribution begins, it must continue for a period of five years or until you reach 59 1/2, whichever is longer. There are three methods you may use to calculate the substantially equal period payments:
- Minimum Distribution Method
- Amortization Method
- Annuitization Method
For further guidance, check out IRS website. Here is a calculator for the 72(t) distribution. Although you can avoid the 10% penalty, the distribution is still subject to income tax unless the money is taken from a Roth account.
Note: If the 401(k) distribution is used to pay off mortgage interests, the mortgage interest can be used offset tax from your 401(k) distribution. And that is great from tax planning perspective!
First, let's talk about distribution:
In general, there is a 10% penalty on early withdrawal, ie. before 59 1/2, unless you fall under the following criteria.
1. Hardship Withdrawal
The following items are considered by the IRS as acceptable reasons for a hardship withdrawal:
- Unreimbursed medical expenses for you, your spouse, or dependents.
- Purchase of an employee's principal residence.
- Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
- Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
- For funeral expenses.
- Certain expenses for the repair of damage to the employee's principal residence.*
There is no 10% early withdrawal penalty, but you are still subject to income tax.
2. 72(t) withdrawal
You must take at least 5 substantially equal periodic payments (SEPPs). The amount is dependent on the owner’s life expectancy as calculated through IRS-approved methods. Also no 10% penalty, but you are subject to taxes on withdrawal.
You are allowed to borrow up to 50% of account value or the max of $50,000. There is interest levied on the withdrawal, also loan installation and loan modelling fees (could be a couple hundred dollars.) You have 5 years to payback, but the repayment is using after tax money, so unless it is a Roth, you would be paying taxes twice. In other words, less criteria to satisfy, but quite expensive.
In summary, here is the order of decision. If you fulfill the hardship requirement, then I will take the hardship first. You also get the most money here. If I do not fulfill the hardship requirement, but the 72(t) equal payments can satisfy my cash needs, then I elect the 72(t) distribution. At least here, I can avoid paying the penalty. Also, after 5 years, I will be over 59 1/2. I can start taking distributions without paying the penalties. I will do borrowing last because I want to avoid paying double taxation.
The second answer is where you can put your money. There are many, many choices. You do not need to keep your money with your prior employer. You might want to ask what are the expenses for keeping the money there, like expense ratios, participant fees etc. If it is cheap, maybe you want to keep it there, but this is an area where I can surely help.
Withdrawal from profit sharing account is treated as ordinary income. Whatever you withdraw will be added to your total income for the year. I would try to time my withdrawal so I would not bump up my tax rate too much. Let's just assume that you are at the cusp of the 15% income bracket or income at $37,950 (for single).
Here is the tax impact on the $100,000 withdrawal:
Income Bracket Additional Withdrawal Tax Rate Tax
$37,950 to $91,900 $53,950 25% $13,475.0
$91,900 to $191,640 $46,070 28% $12,899.6
Total Additional Tax $100,000 $26,374.6
The question is how can you minimize the tax bite? If you are buying a house, you would be incurring mortgage payments. Since mortgage interest is tax deductible, you would be able to write off some of the additional tax bite.
Example (totally hypothetical):
Additional Income from withdrawal: $100,000
Mortgage Interest Deductions: $50,000
Additional Income after deductions: $50,000
Additional Tax (probably 25%): $12,500 (still a lot better than $26,374.6)
I am just illustrating the calculations. You should get more exact calculations by consulting a tax accountant. My guess is if you have additional cashflow somewhere else, it would make sense to do the withdrawal in two installments, but again, I have no numbers to based off on for the calculations.