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Moving With $3M in a 401(k)? What Nobody Tells You · TaylorMade Retirement with Taylor Demars, CFP®

• 0:00
  SPEAKER_01: Today's content is pulled from Taylor's YouTube channel.
• 0:04
  SPEAKER_01: If you want to watch the video version or catch more great content, subscribe by clicking the link in today's show description.
• 0:13
  SPEAKER_01: Welcome to Taylor Made Retirement, where we explore what it takes to build a retirement that works for your money and your life with third generation certified financial planner Taylor DeMars.
• 0:28
  SPEAKER_00: If you have$3 million in a 401k and you're planning a move, don't list your house yet.
• 0:33
  SPEAKER_00: Your advisor probably told you you're just fine, and on paper, you probably are.
• 0:38
  SPEAKER_00: But fine isn't a strategy.
• 0:40
  SPEAKER_00: Most people in your position are about to hit a tax wall that turns a simple relocation into a six-figure mistake.
• 0:47
  SPEAKER_00: Say you need$150,000 for a down payment on the new place.
• 0:50
  SPEAKER_00: If you pull that from your 401k, you have to withdraw closer to$215,000.
• 0:56
  SPEAKER_00: Why?
• 0:56
  SPEAKER_00: Because the withdrawal stacks on top of your current salary, pushing every dollar on that down payment past the 24 or even 32% federal bracket.
• 1:06
  SPEAKER_00: Plus your state's income tax on top of it.
• 1:08
  SPEAKER_00: You're not just paying taxes, you're voluntarily moving into a higher bracket for a 90-day cash need.
• 1:14
  SPEAKER_00: That's not a wealth problem.
• 1:15
  SPEAKER_00: You have the money, it's an engineering problem, and nobody's engineering it.
• 1:20
  SPEAKER_00: I'm Taylor Demars, third generation retirement planner and tax strategist.
• 1:24
  SPEAKER_00: And today we're going to look at a couple who we not only saved 65 grand on a South Carolina zip code, but how optimizing this transition saved them hundreds of thousands in taxes over the course of their retirement.
• 1:36
  SPEAKER_00: Let me show you what I mean.
• 1:37
  SPEAKER_00: David is 62, Karen is 60, and they've got about 2.8 million across their 401ks and IRAs.
• 1:44
  SPEAKER_00: They have a paid-off home in California worth about 1.45 million, and a grandbaby in South Carolina that Karen can't wait to be near.
• 1:52
  SPEAKER_00: In fact, she's already browsing Zillow.
• 1:54
  SPEAKER_00: She's texting her daughter pictures of houses every other day.
• 1:57
  SPEAKER_00: While David is more stressed about the transition, he's up at 11 p.m.
• 2:01
  SPEAKER_00: running spreadsheets, but getting different answers every time.
• 2:05
  SPEAKER_00: But it wasn't the move that brought David and Cared to meet with us.
• 2:08
  SPEAKER_00: In fact, David had been thinking about retiring later that year, but he could also see himself working a couple more years.
• 2:15
  SPEAKER_00: What's really been eating at him is a different question.
• 2:18
  SPEAKER_00: If he got laid off tomorrow, or if there was a health scare, would their plan actually hold up?
• 2:23
  SPEAKER_00: Could they retire in the short term if they had to?
• 2:26
  SPEAKER_00: That's the question underneath the question.
• 2:28
  SPEAKER_00: The move just made it more urgent.
• 2:30
  SPEAKER_00: And the prior advisor did a great job at what many advisors do best, helping them through the growth and accumulation phase.
• 2:37
  SPEAKER_00: 30 plus years of disciplined saving, good investment management, and nearly$3 million in pre-tax accounts.
• 2:44
  SPEAKER_00: That's real.
• 2:45
  SPEAKER_00: But accumulating assets and transitioning them into retirement are two completely different skill sets.
• 2:51
  SPEAKER_00: When David asked how the move fit into the plan, his advisor's answer was, You're fine, you've got plenty of money.
• 2:57
  SPEAKER_00: But nobody explained to him the tax side.
• 3:00
  SPEAKER_00: So when they sat down with me, Karen said something I hear all the time.
• 3:04
  SPEAKER_00: She said, Well, we're past age 59 and a half.
• 3:06
  SPEAKER_00: We can finally use the 401k without a penalty.
• 3:09
  SPEAKER_00: Our advisor said, We're fine, let's just pull the money we need for the down payment and get it over with.
• 3:14
  SPEAKER_00: And she's technically right.
• 3:16
  SPEAKER_00: There's no penalty, but penalty-free doesn't mean tax free.
• 3:20
  SPEAKER_00: And the only asset they have that's big enough to cover this$150,000 down payment is the one that costs 35 cents on the dollar to touch.
• 3:28
  SPEAKER_00: And that's when David asked me what most every client asks at this point.
• 3:32
  SPEAKER_00: What are we supposed to do?
• 3:34
  SPEAKER_00: We need the money for the house.
• 3:36
  SPEAKER_00: And it's not just a common question, but one rooted in deep concern.
• 3:40
  SPEAKER_00: While relocating, you're facing a window, maybe 60 days, 90 days, or even six months, where you own both the old house and the new one.
• 3:49
  SPEAKER_00: And here's what that window actually looks like in the dollars.
• 3:52
  SPEAKER_00: You're double paying property taxes, double paying insurance, utilities, maintenance, etc.
• 3:59
  SPEAKER_00: And for David and Karen, we're talking over 10 grand a month in combined carrying costs on the two properties.
• 4:05
  SPEAKER_00: That burns through their cash pretty fast.
• 4:08
  SPEAKER_00: And when the cash runs low, people start to do things they never do with a clear head.
• 4:13
  SPEAKER_00: David and Karen's California house is worth 1.5 million.
• 4:16
  SPEAKER_00: If they get anxious after 60 days of double payments and drop the asking price by just 5%, that's 73-ish grand gone.
• 4:25
  SPEAKER_00: Drop it by 10% a month later because they're panicking.
• 4:28
  SPEAKER_00: That's$145,000 wiped because they couldn't stomach the carrying costs for another 30 days.
• 4:35
  SPEAKER_00: Or they can pull 100 grand from the 401k for some breathing room, but we already know what that looks like.
• 4:40
  SPEAKER_00: That's another 30 to 35 grand going straight to the IRS on top of the carrying costs that triggered the panic in the first place.
• 4:47
  SPEAKER_00: Maybe they even accept a lowball offer with bad contingencies just because they're feeling cornered.
• 4:52
  SPEAKER_00: And I've I describe these because I've seen them happen more than once.
• 4:56
  SPEAKER_00: And it's a real liquidity trap.
• 4:58
  SPEAKER_00: And it's not just about the 41k being expensive to touch, it's that without that accessible cash during the transition, you end up making panic decisions on top of the house that costs multiple of what those carrying costs would have been.
• 5:11
  SPEAKER_00: And so this is exactly the scenario David was worried about when he asked me whether the plan would hold up.
• 5:16
  SPEAKER_00: But when you have a plan, when the overlap is budgeted and the cash flow is mapped out before the process even starts, the pressure seems to disappear and you can hold firm on that pricing and wait for the right buyer.
• 5:27
  SPEAKER_00: And you avoid those other panic decisions.
• 5:30
  SPEAKER_00: So here's what that looked like for David and Karen.
• 5:33
  SPEAKER_00: Before David retires, before they list the California house, they open a home equity line of credit against it.
• 5:39
  SPEAKER_00: They drew 150 grand for the down payment on the South Carolina home.
• 5:43
  SPEAKER_00: And when the California home sells, whether that's 60 days or six months later, they pay off the HELOC from the sale proceeds.
• 5:50
  SPEAKER_00: Done.
• 5:51
  SPEAKER_00: Now the interest cost on a 90-day bridge for about 8.5% interest, roughly$3,500.
• 5:58
  SPEAKER_00: But compare that to over$60,000 in taxes from a 401k withdrawal or the lost$100 plus thousand dollars in lost equity from panic selling the house.
• 6:08
  SPEAKER_00: The HELOC saved David and Karen around 95% compared to the tax hit, and it took the pressure off, so they never had to consider dropping their price.
• 6:18
  SPEAKER_00: But here's the catch: the HELOC has to be opened while David is still employed and before the house hits the market.
• 6:24
  SPEAKER_00: Once he's retired with no W-2 income, qualifying gets harder.
• 6:29
  SPEAKER_00: And once the home is listed, a lot of lenders won't issue one.
• 6:32
  SPEAKER_00: This is a six-month ahead move, not a last-minute fix.
• 6:36
  SPEAKER_00: Now, while saving 60 grand on the year of the move is no chump change, the real tax opportunity came over the years after they made the transition altogether, making the 60 grand feel more like an appetizer.
• 6:48
  SPEAKER_00: In fact, I like to think of retirement decisions like approaching this busy intersection where everything converges at once.
• 6:54
  SPEAKER_00: The home sale, the home purchase, the 401k, Social Security timing, and more all hitting at the same time.
• 7:01
  SPEAKER_00: And what we just covered is how to make sure the cash crunch doesn't blindside you.
• 7:05
  SPEAKER_00: But while we covered that pitfall that David avoided, he didn't expect the tax savings he was leaving on the table over the years after they made the transition.
• 7:13
  SPEAKER_00: Now, if you're planning a move in the next year or two, the planning window for this matters.
• 7:18
  SPEAKER_00: If you want to map out the financial side of this transition, click the link in the description to book a call with me so we can walk through how to make it possible for you.
• 7:27
  SPEAKER_00: Now, like most people, you're probably thinking that once you sell the house, to take the proceeds and pour them into the next one.
• 7:33
  SPEAKER_00: Pay cash, be debt-free, move on.
• 7:36
  SPEAKER_00: And after 30 years of paying off a mortgage, that instinct runs deep.
• 7:40
  SPEAKER_00: But for someone with$2.8 million locked behind a tax wall and very little cash sitting outside of it, that instinct might be the most expensive one they carry into retirement.
• 7:50
  SPEAKER_00: And to understand why, you have to see what happens to that$2.8 million of tax-deferred money if David and Karen continue to let it grow as is.
• 7:58
  SPEAKER_00: Because we ran the numbers.
• 8:00
  SPEAKER_00: Even after pulling$96,000 a year for their lifestyle needs, the$2.8 million doesn't shrink, it grows.
• 8:07
  SPEAKER_00: By the time David hits$75 and required minimum distributions kick in, that balance has ballooned to$4.8 million.
• 8:15
  SPEAKER_00: Their first RMD alone is about$196,000.
• 8:19
  SPEAKER_00: Stack Social Security on top of that, call up$250,000 in total income, and they're in the 24% federal income tax bracket plus state income taxes every single year, losing a quarter of every dollar to Uncle Sam, whether they need the money or not.
• 8:35
  SPEAKER_00: And here's the part that keeps me up at night for clients.
• 8:38
  SPEAKER_00: If something happens to David, and we think about this because it's our job to do so, Karen files as a single filer on her taxes for roughly the same income.
• 8:48
  SPEAKER_00: The tax brackets compress, and that same 200-ish grand and RMDs that was taxed at 24% as a couple is now pushing them into the pushing her into the 32 or even 35% brackets when she's filing single, otherwise known as the widow's penalty.
• 9:04
  SPEAKER_00: And at that point, there's nothing she can do about it.
• 9:07
  SPEAKER_00: So to be blunt, this isn't just about David.
• 9:11
  SPEAKER_00: If David passes first, that 4.8 million in pre-tax assets will absolutely crush Karen as a single filer.
• 9:17
  SPEAKER_00: The tax move that we're considering building into this move is the only way to diffuse that widow's penalty before it starts.
• 9:23
  SPEAKER_00: And it isn't just about this house in South Carolina.
• 9:26
  SPEAKER_00: It's about making sure Karen isn't taxed on 35% on money.
• 9:29
  SPEAKER_00: She didn't even want to withdraw.
• 9:31
  SPEAKER_00: Now, here's what most people miss.
• 9:33
  SPEAKER_00: The home sale proceeds, at least the portion covered by the capital gains exclusion, are the only large pool of tax-free flexible dollars David and Karen have.
• 9:43
  SPEAKER_00: If they pour all of it into the new house, they just locked the most powerful tour in the retirement plan inside of a building.
• 9:49
  SPEAKER_00: Now, before you sick Dave Ramsey on me to bang down my door, stay with me for a minute.
• 9:54
  SPEAKER_00: Because what we showed David and Karen challenged their instincts too.
• 9:58
  SPEAKER_00: Because instead of paying cash for the South Carolina home, they take a mortgage and keep a significant portion of the sale proceeds liquid.
• 10:05
  SPEAKER_00: And here's what that does: they make a reasonable down payment on the new home.
• 10:09
  SPEAKER_00: The remaining proceeds go into what we call a bond bunker, a five-year runway of income that protects them during an inevitable market downturn, giving their portfolio time to recover.
• 10:19
  SPEAKER_00: For David and Karen, the home sale proceeds supply most of that runway, which is vital because it solves for sequence of returns risk, meaning that if the market drops the day they move into the South Carolina house in retirement, they're forced to sell stocks at a loss just to pay for their new utility bills.
• 10:36
  SPEAKER_00: But here's where it gets interesting.
• 10:38
  SPEAKER_00: Because they're living off of those tax-free sale proceeds, their 401k withdrawals for spending drop to zero, which means the 12 to 22% tax brackets are now wide open.
• 10:49
  SPEAKER_00: And that's when they start doing Roth conversions, moving money from the 401k into a Roth IRA at 12 to 22 cents on the dollar, instead of waiting for the RMDs to inevitably force them into the 24, 32, or even 35 cents on each dollar being taxed.
• 11:06
  SPEAKER_00: So over the next several years, David and Karen are able to convert roughly 700 grand.
• 11:11
  SPEAKER_00: And the tax on those conversions on an average of say 22%, around$154,000, which feels like a lot.
• 11:19
  SPEAKER_00: Until you compare it to what happens to that same$700,000 if it stays in the 401k and gets forced out later at 30 to 35% taxes.
• 11:28
  SPEAKER_00: That's close to$245,000 in taxes on the same dollars.
• 11:33
  SPEAKER_00: They save nearly$90,000 on just the conversion math alone, but that's not even the full picture.
• 11:39
  SPEAKER_00: That$700,000 on the Roth grows tax free and is estimated to be worth$1.5 million by the time David is 75.
• 11:47
  SPEAKER_00: Every dollar then comes out tax-free.
• 11:49
  SPEAKER_00: No RMDs on those funds.
• 11:51
  SPEAKER_00: And for Karen, that's the widow's penalty protection we're talking about.
• 11:55
  SPEAKER_00: The Roth money is something she can access without destroying her tax bracket.
• 12:00
  SPEAKER_00: So thereafter, they're able to pay down the mortgage in chunks across multiple tax years, not all at once, but staying within target brackets each year instead of just blowing through them.
• 12:11
  SPEAKER_00: Now I want to be really clear about something: that this was the right move for David and Karen because of their specific situation and preferences.
• 12:18
  SPEAKER_00: They had a large pre-tax balance where RMDs were going to be a problem, a long Roth conversion window before those RMDs start forcing money out, and the financial and emotional willingness to carry a mortgage temporarily when the math says it makes sense.
• 12:33
  SPEAKER_00: This is not the default recommendation for everyone making a move.
• 12:36
  SPEAKER_00: But for clients with a profile like David and Karen's, and I work with them a lot in this situation, it's worth running the numbers.
• 12:44
  SPEAKER_00: Because the difference between the pay cash path and the keep the proceeds liquid path isn't just about the mortgage, it's about whether you spend the next 20 years pulling from a tax-free Roth or getting forced into the same brackets you were in during your peak earning years with nothing you can do about it.
• 13:00
  SPEAKER_00: If someone you know is about to relocate before retirement and they haven't thought about how the move connects to their 401, feel free to send them this video.
• 13:08
  SPEAKER_00: A year's notice can change everything.
• 13:10
  SPEAKER_00: Now, here's the short version of the proper sequence for David and Karen's situation.
• 13:15
  SPEAKER_00: The HELOC and mortgage pre-approval happen while David is still employed.
• 13:19
  SPEAKER_00: He retires late in the calendar year, and then they sell the California home early the following year.
• 13:24
  SPEAKER_00: The transition year is noisy, with final paychecks, taxable gain on the sale, so it's not the right one for conversions.
• 13:30
  SPEAKER_00: The window opens the year after when the brackets are wide open and the sale proceeds are funding their lifestyle.
• 13:36
  SPEAKER_00: But without this playbook, David retires, Karen says, let's use the 401k.
• 13:41
  SPEAKER_00: They pull 200 plus grand for the down payment, and the transition year stacks up.
• 13:46
  SPEAKER_00: The 401k keeps growing.
• 13:48
  SPEAKER_00: By 75, they're sitting on$4.8 million in pre-tax assets, with$196,000 RMDs pushing them into the 24% tax bracket, and their surviving spouse being forced in the 35% tax bracket.
• 14:02
  SPEAKER_00: But with this playbook, the HELOC bridges the move for$4,000 of cost instead of$65,000 in tax costs.
• 14:09
  SPEAKER_00: The sale proceeds build the bond bunker and fund the Roth conversion sprint.
• 14:14
  SPEAKER_00: That$700,000 of tax-free assets moves into growing a$1.5 million Roth RA, making their RMDs drop, tax brackets drop, and the surviving spouse is protected.
• 14:26
  SPEAKER_00: This is the same couple, same wealth, same houses in California and South Carolina, but the difference is having a plan and someone guiding it through rather than just saying you're fine.
• 14:37
  SPEAKER_00: And remember, David didn't come to us just because of the move.
• 14:41
  SPEAKER_00: He just wanted to know if I had to retire tomorrow, would the plan hold up?
• 14:45
  SPEAKER_00: So when we ran the stress test on his optimized plan with the bond bunker funded, the Roth conversions underway, and the mortgage paying down on the schedule, the answer was yes.
• 14:55
  SPEAKER_00: Not just you're fine with no explanation, but a clear, modeled out, stress tested yes, which was the answer he was looking for.
• 15:03
  SPEAKER_00: Now, as you can imagine, you wouldn't build a house without a general contractor coordinating the plumber, electrician, the framer, etc.
• 15:10
  SPEAKER_00: And right now, you might be building the most consequential year of your financial life, but no one's the general contractor who's done it before.
• 15:17
  SPEAKER_00: And that's not your fault, it's just a gap in how the financial services industry works.
• 15:22
  SPEAKER_00: If you're planning a move in the next couple of years and you're looking for someone to map out the specific sequence for your situation, click the link in the description or scan the QR code on screen to book a call with me.
• 15:33
  SPEAKER_00: We'll walk through your numbers together so you can rest easy on this home stretch to your retirement.