Questions and Answers: 401(k) and IRA
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Roth IRA Rollover

Roth IRA Rollover

I plan to retire in less than 2 years. I have a substantial amount of money in traditional IRA accounts. I would like to roll it over into Roth IRAs, but do not want to trigger a higher tax bracket or the dreaded AMT tax. Since any amount rolled over to a Roth would be added to my taxable income, does this mean the amount would also be considered in my Social Security wages for benefit calculations? If so, it might be advantageous for my year of retirement to be only a partial year. Then my rollover might not trigger a higher tax bracket and working only a partial year would not have a negative impact on my social security benefits.

Thanks

Susan from Bridgeport, CT

Answer

Answer

Hello Susan,

Any amount converted from a Traditional IRA to a Roth IRA will be considered "ordinary income" in the year of conversion. You might want to consider only converting the amount that will not increase your current tax bracket and convert over several years. However, remember that if you are over 59 1/2, only the amount you convert will be tax-free, because the earnings must be in the Roth for 5 years and you must be over 59 1/2 for them to be tax-free.

If you are planning to use your IRA funds for retirement income and you are within 2 years of retirement, you might want to go to a Financial Advisor to discuss the advantages and disadvantages of converting your Traditional IRA to a Roth because you will be paying a substantial amount in taxes up front when you could just "pay as you go" as you withdraw your funds. A Financial Advisor should, also, be able to run an illustration for you to show you graphically the advantages and disadvantages of a conversion.

Good luck in your retirement,

Jan Jaffin
401K Early Retirement

401K Early Retirement

Hi there. I am considering an early retirement when I turn 55. The company I work for has a 401K option where one can withdraw without the 10% penalty. My question has to do with taking a different job after I retire from my current position. If I take a job with a different company after I retire and quit or get laid off before 59 1/2, can I still get access to my original 401K money without the 10% penalty?

Thanks

Jim from Scranton, PA

Hi there.  I am considering an early retirement when I turn 55.  The company I work for has a 401K option where one can withdraw without the 10% penalty.  My question has to do with taking a different job after I retire from my current position.  If I take a job with a different company after I retire and quit or get laid off before 59 1/2, can I still get access to my original 401K money without the 10% penalty?
Answer

Answer

Hello Jim,

As long as the funds are in your original plan, then the rules of that plan apply whether you take a job with a different company or not. You will, of course, have to pay taxes on any withdrawal you make.

I would recommend that you check with the customer service department of your investment company to see if there are any other provisions that you need to know about.

Best regards,

Jan Jaffin
Converting Roth IRA into an Annuity

Converting Roth IRA into an Annuity

Hello, I am 52 and planning to retire at age 55 ( I am a federal employee under the older Civil Service Retirement System). My question concerns annuities. A salesman is recommending I convert my Roth IRA to an annuity so there is a guaranteed 5% return (compounded). I could make much more if the investments I choose for the annuity do well – there is a 1% reduction on those excess returns in the form of a company fee. Wouldn’t I incur a penalty by transferring the Roth IRA into the annuity? I’ve never heard of doing this and an internet search didn’t turn up much information. These are funds I don’t plan on spending until much later in life.

Thanks

Brent from Seattle, WA

Answer

Answer

Brent,

It sounds like you already have a Roth IRA, but since you used the term "convert," I just want to make sure you do not currently have a Traditional IRA, and the salesman is recommending you convert the Traditional IRA to a Roth IRA and then purchase the annuity he is recommending. For purposes of this answer, I will "assume" the former is true and that your IRA is already a Roth IRA. Purchasing a variable annuity with a rider guaranteeing lifetime income is a very good option for someone wanting to guarantee he/she will have a specified amount of income for the rest of their life, especially if you can wait 5 to 10 years to begin the income stream. However, I would like to clarify the terminology you are using as presented to you by the person making the recommendation. These "living benefit" riders come in many forms, such as GMIB(Guaranteed Minimum Income Benefit), GMWB(Guaranteed Minimum Withdrawal Benefit, GMAB(Guaranteed Minimum Accumulation Benefit), and they do add to the expense of the annuity. It is important to understand which Rider your advisor is recommending and the additional cost of the Rider. These Riders are too complicated for me to explain in this response, however, you should ask your Advisor to explain it in detail to you.

In addition, ask your Advisor, to clarify his terminology of guaranteeing you a "5% return," because that can be very misleading, and it sounds like he is proposing a "Guaranteed Minimum Accumulation Benefit." If so, the "5% guaranteed return" would only allow you to elect a lifetime income after a certain number of years utilizing that guarantee, and yes if your investments perform well, you could realize more than the 5% guarantee. The additional cost of these guarantees will, of course, lower your overall return.

As mentioned, these Riders can be complicated and often difficult to understand, therefore I recommend you have the Advisor give you a detailed explanation.

With regard to your question about a penalty, if you currently have a Roth IRA, there would be no IRS penalty for you to put the funds into an annuity if you "roll over" the IRA directly into the annuity.

One last thing I would like to mention, I would hesitate purchasing an annuity from anyone I refer to as a "salesman." An annuity with these types of features should only be purchased through a true "Financial Advisor," who you feel is taking your entire financial situation into consideration, and not looking to merely "sell" you a product.

If any of the above assumptions are incorrect, please let me know and we will look at your situation again.

Best regards,

Jan Jaffin
Converting Roth IRA into an Annuity - reply

Converting Roth IRA into an Annuity - reply

Jan,

Thanks for taking the time to answer my question about rolling over the Roth IRA (I have all Roth IRA savings having converted a traditional IRA balance some years ago). Your advice is spot-on, he did rush the decision, I need more information. It is a Xxxxxxx product but he also represents a couple other companies. No mention of a waiting period to lock in the guaranteed return was made. Having bought and cancelled whole life policies in my youth, I am hesitant to make any snap decisions. And I agree a financial advisor with my best interest in mind is the place to go for such a decision.

Brent

Answer

Answer

Brent,

I'm glad I could be a bit of help. I don't feel comfortable recommending specific companies or products through this venue, but annuities are my specialty, so feel free to ask any additional questions. Good luck to you.

Jan Jaffin
Converting Roth IRA into an Annuity - follow up

Converting Roth IRA into an Annuity - follow up

Jan,

If you have any recommendations on how to find a fee-only financial advisor, I would be most appreciative to receive it. My father was extremely complimentary of your response and we decided this is the way to go for such an important decision and complicated set of products. He started a similar annuity a few years ago and was surprised at how taxes are applied to distributions and really didn’t need the insurance that comes with a VA. So, I think professional independent advice is the way to go.

Brent

Answer

Answer

Brent,

You are correct, you do need to seek professional unbiased advice. Trusting your retirement assets to an individual to invest is an extremely important decision. There are many good Financial Advisors who will work with you to find the best way to invest your retirement funds, both fee-based and commissioned. My recommendation would be to contact some of the better known brokerage firms and banks in your area, and ask to meet with a Retirement Specialist. Then schedule an appointment and interview the Advisor to determine your comfort level with him/her. Ask them how they are compensated, and then make your decision. If they rush to make a recommendation and pressure you to make an immediate decision, that person may only be trying to "sell" you a product. This may take some time and effort on your part, however, it will be worth the effort if you find a person who will work to make sure you have the right retirement vehicle for your particular situation and a person in whom you have complete confidence.

As far as your father's annuity is concerned, it sounds like he has a non-qualified annuity. In a non-qualified annuity, the earnings come out first and of course are taxable at ordinary income tax rates. Your situation is different, if you do not take distributions from your Roth IRA until you have held it for 5 years and you are age 59 1/2, there will be no taxes due when you begin taking distributions. In addition, if you are only interested in income and not a death benefit, be sure to let the person you consult know that you only need a lifetime withdrawal benefit and not any additional death benefit. There are many options available with variable annuities, and your Advisor should only add the one(s) important to you, because each Rider will cost extra and take away from any potential earnings.

Best Regards,

Jan Jaffin
IRA Withdrawals

IRA Withdrawals

Hello, I am Wayne. I have a IRA CD in a Credit union. I am currently getting about 4% interest paid monthly. QUESTION: Can I have this interest paid to me monthly without having a IRA Penalty and be in penalty under the IRS?

Thanks

Wayne from Dover, DE

Answer

Answer

Wayne,

I assume you have a traditional IRA which has before tax money. If so, any money you take from your IRA, will be taxable at your ordinary income tax rate. In addition, if you are under age 59 1/2, there will be a 10% IRS penalty on any money withdrawn. If your IRA is a Roth IRA or has after tax money in it, please let me know and I will go over the rules applicable to those scenarios.

Best regards,

Jan Jaffin
IRA Contribution Limits

IRA Contribution Limits

During 2009, I worked for 2 months for a company that offered a 401k. During that time, I contributed $1927. Then, I went to work for another company that does not offer a 401k. I am 54 years of age. How much can I contribute to my IRA? Also, my wife worked for a company that offered a 401k, again, for 2 months. She contributed $1267. She did not work for the rest of the year. She is 45 years of age. How much are we allowed to put into her IRA? Thanks,

Answer

Answer

The simple answer to your question is, you may both contribute to a Traditional IRA for 2009 (up to April 15, 2010). Taxpayers age 50 and over are allowed to contribute an additional $1,000 as a "catch-up" contribution. Therefore, since you are over age 50, you can contribute $6,000, and since your wife is under age 50, she can contribute $5,000.

The question is whether you can deduct the IRA contribution from your taxes. The answer to that depends on your modified adjusted gross income for 2009. I am assuming you are married, filing jointly. If so, since you both had a qualified retirement plan available to you during 2009, if your MAGI is $89,000 or less, you can have a full deduction. If your MAGI is more than $89,000, but less than $109,000, you can have a partial deduction If your MAGI is $109,000 or more, you may not deduct any of your contribution. If you are in the $89,000 to $109,000, there is a formula in IRS Publication 590, which will tell you how much you may deduct.

For a Roth IRA, generally you both may contribute to a Roth IRA as long as you had taxable compensation for 2009, and your modified adjusted gross income is $176,000(married filing jointly). The limits are the same as for a Traditional IRA, $5,000 each, plus an additional $1,000 for taxpayers age 50 and over. Please remember, you cannot contribute the maximum amount to a Traditional IRA and Roth IRA, you may only contribute a TOTAL of $5,000 each (plus the $1,000 catch-up for yourself).

The key here is that you are able to contribute to a Traditional IRA, regardless of your income or availability of a Qualified Retirement Plan.
Out of the Country, Out of Luck?

Out of the Country, Out of Luck?

Here's a question I'm sure you've never encountered. I am 50 years old. I worked in the USA from 1987 - 1995. During this time period I was employed and contributed to a 401k plan along with my employer. In 1995 I moved to Europe (Greece) with my family and have since been employed in the private sector (no affiliation with USA what-so-ever).

My question is as far as the 401k plan I left behind (worth $40,000 now) what can I do about it other than wait out my retirement? Can I contribute to it from where I am?

Nick from Greece

Answer

Answer

Dear Nick: From your e-mail, it sounds like you are a non-US citizen. Generally, qualified retirement plans, such as a 401(k) are non-transportable (i.e. they cannot be rolled over to a qualified plan in another country). Your first course of action should be to obtain a copy of the Plan document and review the options available at termination of employment. If you have the option of taking a full withdrawal, you may be subject to U.S. as well as Greek taxes, and of course, you would have to pay the 10% early withdrawal fee if you take the funds before age 59 1/2.

As far as the ability to contribute to that 401(k) from where you currently are, you would not be able to make additions to it unless you are still employed by the same company and are being paid in U.S. dollars. 

My advice would be to review your 401(k) plan document and then consult a tax adviser to determine the tax implications of taking a full withdrawal if that option is available to you.  Otherwise, waiting until after age 59 1/2 may be your best course of action.

Good luck, and if your circumstances differ from what I surmised from your e-mail, please give me more details, and I will try to be of additional assistance to you.
Out of the Country, Out of Luck? - follow up

Out of the Country, Out of Luck? - follow up

Thank you Jan,
 
By the way, I am a US citizen (dual citizenship). I dont think that changes anything from what you described though. Are you aware of any list of overseas tax advisors? There must be since there are US resident employees who work for US companies here.

Nick from Greece

Answer

Answer

Dear Nick:
You are correct, the dual citizenship alone does not change anything.  The only way you would be able to roll your 401(k) to an IRA is if you have a US residence.

As far as a tax advisor, I would recommend you go into a local bank or brokerage firm and ask to speak with a Financial Advisor.  Most banks have Financial Advisors who can assist with matters such as these.
Good luck!

Should I Convert?

Should I Convert?

I’ve been hearing and seeing a lot about “Roth IRA conversions” recently. I think taxes will be increasing in a year or so, and am thinking about converting my traditional IRA to a Roth IRA now, so I can take tax-free distributions when I retire in about 7 years. My taxable income this year will be approximately $110,000 and I am currently age 61. My questions are: 1) am I too old to think about an IRA conversion and 2) should I think about “converting” my IRA this year or wait until next year?

Fred from Milwaukee, WI

Answer

Answer

Fred: Your thinking about taxes increasing in a couple of year unfortunately is probably pretty accurate and given your time horizon for needing to access your IRA, a conversion to a Roth IRA is probably a good idea for you. However, you will not be able to convert to a Roth IRA this year (2009), because you cannot qualify for the conversion since your income is over $100,000. However, beginning next year, 2010, anyone will be able to convert to a Roth IRA regardless of income or filing status. As you are making the decision whether or not to convert to a Roth IRA, keep the following factors in mind:
Stretch IRA

Stretch IRA

I've heard about "stretch IRAs" for my children. I would like to set one up for each of my two boys, but I don't know if there are any special qualifications or who can set them up for me. Can you help?

Javon from Atlanta, GA

Answer

Answer

Javon: A "stretch IRA" is not a special kind of IRA you can set up for your children.  It is terminology used to indicate the IRA is a "beneficiary IRA," and can be "stretched" over the life of the beneficiary.  Setting up a beneficiary IRA is the best way to achieve maximum tax deferral after the death of the IRA owner.  At the IRA owner's death, any beneficiary can open a beneficiary IRA and "roll over" the proceeds to an inherited IRA.  Of course a spouse has the option of either rolling over the proceeds into his/her own IRA or a beneficiary IRA (if the spouse is under age 59 1/2, it is often a good idea to open the Inherited IRA so that he/she can take distributions when desired without the 10% IRS penalty).

The owner of the beneficiary IRA would then begin taking Required Minimum Distributions the year following the IRA's owner's year of death.  No matter what age the beneficiary is, the 10% IRS penalty will not be assessed on withdrawals from a beneficiary IRA, only ordinary income tax on the amount withdrawn will be due.  The beneficiary may withdraw any amount they desire, but they are required to take their Required Minimum Distributions based on their (the beneficiary's) life expectancy. Please remember to name your children individually as beneficiaries, and not your estate or some other entity.
Too Old for a 401 (k)?

Too Old for a 401 (k)?

I am in my late 60s and semi-retired. I work part-time to supplement my income. My manager keeps bothering me to do the 401k, but times are tough, and I figured I was too old for it to do me much good anyway. What do you think?

Della from Detroit, MI

Answer

Answer

Della: Actually now is a great time to continue saving for the future, and even in your late 60's, you could have another 20 to 30 years in retirement. You are fortunate to have access to a 401(k) to be able to save pre-tax dollars. Saving pre-tax means you will be able to save more with less money coming out of your take-home pay. In addition, if your employer matches a percentage of your contributions and you contribute at least the percentage that is matched, you will double your contributions and potential growth on that amount. That means if you contribute 5% and your employer contributes 5%, you will have an additional 5% of your salary working for you instead of being retained by your employer.

Unless you need every dollar you earn just to cover basic living expenses, such as food, clothing and shelter, you should make every effort to contribute the maximum amount possible to your 401(k), because even if you are age 67 or 68, you could still have many productive years ahead. In addition, if you receive a bonus at year end, consider contributing at least a portion to your 401(k), rather than perhaps spluring on that big screen TV so that you can live more comfortably when you are no longer able to hold even a part time job.
Stay Put or Roll

Stay Put or Roll

I am age 55 and have been laid off by my company. I'm not sure whether I will go back to work or retire early. Should I roll my 401(k) over to an IRA now or leave it with my employer?

Debbi from Austin, TX

Answer

Answer

Debbi: A lot of people are facing this dilemma today due to the high unemployment rate, and the decision of what to do with retirement money is not always clear-cut.  There are reasons to roll the money over to an IRA and reasons you may wish to leave it with your former employer.  One reason to leave it with your former employer is that anyone separating from "service" after reaching age 55 is allowed to take distributions from a qualified retirement plan without the IRS 10% penalty.

If you need to access any of the money and it is rolled into an IRA, you would need to meet certain conditions to avoid the 10% penalty.  You may want to consider rolling a portion of the 401(k) into an IRA, and leaving a portion in the 401(k) in case you need to access any of the money for living expenses.  Of course, there are conditions that may allow you to take distributions from your IRA without the 10% IRS penalty, and I have covered some of those conditions in a recent article.
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