● Funding a retraining sabbatical. Michael Haubrich, CFP and president of the Financial Service Group, cited a middle-aged client who borrowed from her 401(k) plan to pursue a different career path that required retraining. He mapped out a two-year plan with her that included working with a career coach, taking assessments, developing new skills and actively networking. She has started her career search, confident of her success.
"We planned on her withdrawing only the amount that used up the 15 percent federal income tax bracket so adding the 10 percent early withdrawal penalty did not exceed 25 percent effective tax rate," Haubrich said.
● Converting to a Roth. "We had a client with a significant loss from a business who was able to do an in-plan Roth conversion of their 401(k)," said Marianela Collado, CPA and CFP with Tobias Financial Advisors. The business owner converted the full balance of his 401(k) to a Roth account and, while this would normally be a taxable event, the taxes were offset by the business loss. Now his Roth account will continue to grow and provide future distributions tax-free.
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The power of compounding. "When [my client] first came in to meet with me three years ago, he told me that he had been a forklift operator for Budweiser for the last 35 years," said Trent D. Porter, CPA and CFP with Priority Financial Partners. "I jumped to conclusions until he showed me his 401(k) statement, with just over $2 million in a target retirement date fund.
"Shocked, I asked what his secret was and he said he had been religiously putting away 15 percent of his paychecks since the day he started," Porter added. "It was a powerful lesson in not making assumptions, as well as the power of compound interest."
● Alpaca farming. On the subject of not making judgments, Frank Armstrong, III, CFP and president and founder of Investor Solutions, described an airline pilot client who withdrew all his individual retirement account rollover to purchase an alpaca farm. The fleece-producing animals — similar to llamas — promptly died, and he went bankrupt. "The story sounds funny on the surface, but was actually tragic," he said. "The events leading up to the demise of Eastern Airlines [in 1991] cut short many pilot careers.