Beyoncé’s announcement of her Renaissance World Tour has triggered an odd tax discussion as you can see from the tweet below.
Amanda Orson like Beyoncé was born in 1981. Orson, currently CEO of Curve US, counts herself an elder millennial. Curve sponsors a one-of-a-kind digital wallet that empowers you to maximize rewards from your existing cards and gives you extra cash back or crypto.
Ms. Orson seems to be turning being an elder millennial into a “big sister” role passing hard earned wisdom to the younger members of her generation. And the tweet about using 401(k) money to purchase tickets for one of the concerts in Beyoncé’s upcoming tour sort of triggered her. She explained to me why it is a very bad idea. She had three reasons — the penalty, the tax and the future — and being a CPA and all, I can add a little detail.
I am going to use Ticketmaster prices for the August 1 concert at Gillette Stadium in Foxborough, Mass., which is the closest venue for me. I understand that there are sometimes football games there, but probably not in August. At any rate, the lowest price tickets are $166 each, which is way more than I would spend on a concert ticket, but never mind that. If you can’t scratch together that much without dipping into the 401(k) you are in really serious trouble, but there are much more expensive seats available.
Let’s say you want the pure/honey on stage risers. Two tickets for you and your date there will be slightly more than $7,000. We’ll assume you can cover the rest of the expenses out of current earnings. Here is why a young millennial should not pull that seven grand out of their 401(k).
The Penalty
Code Section 72(t) imposes an additional tax on amounts received from qualified retirement plans, which would include your 401(k). There are exceptions to the tax the most notable one being a distribution on or after your attaining the age of 59 1/2. Even an elder millennial like Ms. Orson is far from that threshold. Other exceptions are death and disability. You can also do a plan to withdraw everything in equal periodic payments over you life expectancy. And then there is withdrawing an overfunded amount. There are a couple of other arcane exceptions, but basically you are quite likely stuck paying the penalty, which is actually a tax — meaning it is assessed without any need of supervisory approval.
The Tax
You are also increasing your adjusted gross income by $7,000. That will likely increase your taxable income. You would think that it would be a matter of just multiplying by your marginal rate, but it is actually more complicated than that. Reilly’s Sixth Law of Tax Planning – Don’t do the math in your head. There are numerous computations that involve AGI. One you probably don’t have to worry about that I do is that within a certain range AGI increases make more of your Social Security taxable. And some of them are not even tax related. For example, the required student loan payment under income based repayment keys off adjusted gross income. Obamacare premium credits are based on modified adjusted gross income which starts with, you know adjusted gross income.
The Future
The main reason Orson does not want you to take that seven grand out of the 401(k) for those really great seats is the future growth that you will be giving up. If you can get an inflation adjusted return of 7% over the next 30 years, which is within the realm of reason given historic performance of the S & P 500, that $7,000 will become more than $53,000 in today’s dollars. Who knows what that will be in 2053 dollars?
In Orson’s view, many members of her generation do not grasp the concept of the power of compound returns. She also recommends that you be diligent about living below your means. You should not increase your lifestyle automatically as your income increases. Owning a house can be a good idea. If you need a car, though, try to limit yourself to one that you can pay cash for.
As we were going over all this, I kind of felt like there was another avocado toast moment going on. In case you have forgotten about the remark by Australian real estate mogul Tim Gurner that caused such a flap, here is a 2017 piece by Sam Levin in The Guardian – Millionaire tells millennials: if you want a house, stop buying avocado toast.
“We are coming into a new reality where … a lot of people won’t own a house in their lifetime. That is just the reality.” Asked if he believes young people will never own a home, he responded: “Absolutely, when you’re spending $40 a day on smashed avocados and coffees and not working. – Tim Gurner as quoted in The Guardian.
When I asked Orson how she learned the principles of living below your means and saving, she told me that it was from the school of hard knocks after she graduated from The Citadel. Growing up in the 1980s and 1990s with Baby Boomer parents was not how she learned these principles, which are actually kind of timeless. She may have picked up a bit from her grandparents. OK Boomers, one more thing for us to feel bad about.
Started As A Joke
I contacted “malcolm” whose tweet got this going. Here is what he has to say:
“It was just a joke between me and my friends that I decided to tweet about. I love Beyoncé, but I wouldn’t consider withdrawing from my retirement savings to see her. But if she wants to send me a ticket or two I certainly wouldn’t say no haha. I’m a recent college graduate, barista, and aspiring actor, so if I’m familiar with anything it’s having no expendable income.”
Although it may have started as a joke, it still may serve as a teachable moment. Orson’s advice on living with in your means and having compounding returns work for you rather than against may be timeless. Yet it bears repeating.