Showing posts with label retirement investments. Show all posts
Showing posts with label retirement investments. Show all posts

Thursday, September 11, 2014

Should You Rollover Your 40l(k) into an IRA?

In the July, 2014 issue of "Money" magazine, there was an article about "the one retirement move you must get right."  What they were talking about is how you should handle the money in your company 401(k) when you decide to retire and in the years prior to retirement.  If you make the right decisions, your money will ideally last the rest of your life; if you go wrong, you could run out of funds just at the point when you are the most vulnerable.

Can You Totally Rely on the Advice of Your Current 40l(k) Provider?

It may seem natural to simply follow the advice of your 401(k) provider and allow them to handle an IRA rollover for you.  In fact, that is what approximately half of all retires do.  This works out well for the providers because rollovers are very lucrative for financial advisers, brokers, insurance agents and fund companies.  Handling an IRA is twice as profitable as running a 401(k).  As a result, your 401(k) provider has a huge incentive to encourage you to let them transfer your funds into an IRA.  However, converting to an IRA is not always the best idea for the account holder.

This is a time when many people who have contributed faithfully to a 401(k) for decades are now uncertain about the best way to convert that savings into retirement income.  The amount of money involved can be significant.  Workers over the age of 60 who have been earning over $100,000 a year had an average 401(k) balance of $414,000 in 2013.

Common Misconceptions About Converting to an IRA

The Government Accountability Office had an undercover investigator call 30 plan administrators and ask them what he should do with an old 401(k) for a former employer.  Much of the advice he was given was misleading and, in some cases, completely untrue.

In several cases, the investigator was told that he would not be able to keep an old 401(k) and must convert the money into an IRA or accept a cash payout.  In general, the truth is that you can usually keep it, as long as it is worth at least $5,000.

About one-third of the plan administrators told the undercover investigator that the funds could not be rolled over into a new employer's retirement plan.  In truth, you can almost always roll the proceeds of one retirement plan into a new one. 

Personally, I found this misconception particularly interesting because it happened to me when I worked for a California public school.  The Human Resources Department at the district office told me that I could not roll my savings from one state retirement plan into another one.  However, when I contacted the two retirement plans directly, they both told me that it was simple and completely legal to move the money into my new retirement plan and they sent me the short forms necessary to complete the transfer. 

My own experience, combined with the research in the "Money" magazine article seems to indicate that there is a lot of confusion about the process, even among people who should be knowledgeable about handling retirement savings.

The Difference in 401(k) and IRA Fees

Many large 401(k) plans have very small fees.  Once you transfer you assets into an IRA, you can expect the fees to increase, especially if you add premium services such as individualized advice.  The employees and reps for these companies have large incentives to get you to sign up for these services, since they receive substantial commissions.  Therefore, it may be wise in many cases to keep your money in your 401(k) as long as possible.  However, there are exceptions.

What Should You Do With Your 401(k)?

According to the "Money" magazine article, here are your best choices for handling your 401(k):

*  If you work for a large Fortune 500 company, keep your money in their 401(k) as long as possible.  Some companies match your deposits, so it is especially advantageous to hold onto your 401(k).

*  If you change jobs from one major firm to another one, move your savings directly from your old 401(k) into the new one.

*  On the other hand, if you are with a small company, your 401(k) may have high fees.  In addition, if the money is invested in company stock, that could be a risky choice for your retirement funds. If this is the case, it is possible that you should switch to an IRA, pay lower fees and invest the principal in an index fund.

*  Listen to the advice of your 401(k) investment manager if you want to optimize the mix of stocks and bonds in your plan.  Periodically re-balancing your account is important for your financial security.  Their advice is often offered over the phone and can help you determine the right mixture of stocks and bonds for your age, health and situation. Later, your plan administrator can help you determine how much you can withdraw each year after you retire.  Expect to pay an annual fee of 0.6% a year, or more, in addition to your regular fund fees.

*  Another choice is to buy a target-date fund in your 401(k) plan.  It will automatically adjust your portfolio so that the investments become less risky as you age.

*  If you have at least $250,000 you may wish to consult with a local investment adviser.  This is a good idea for people who like to talk with someone face-to-face.  You can hire an adviser by the hour and pay a one-time, up-front fee in the range of $800 to $1500 for the advice you need rather than spend 1% to 2% a year for the remainder of your life.

More Information To Help You Make Wise Decisions

In the next three weeks, I will also post a series of articles that cover how to choose a good investment adviser, how to use an annuity as part of your retirement income and advice for people who manage their retirement funds themselves.

If you are planning your retirement, use the tabs at the top of this page to find links to hundreds of additional articles on financial planning, where to retire, medical concerns, family relationships and more.


"The One Retirement Move You Must Get Right," Money Magazine, July 2014, page 44.

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Wednesday, May 1, 2013

Traditional IRA vs Roth IRA

As you save money for retirement, you may be confused about whether you would be better off sticking with a traditional IRA or moving your money to a Roth IRA, instead.  Both are great retirement tools, and there are advantages to each.  Recently, the April, 2013 edition of the AARP Bulletin addressed this very question (pg. 28). While there is no answer that is right for everyone, learning a few important facts about each type of retirement savings plan may help you make the decision that will work best for you. Here is some information that will help you compare the two.

Traditional IRA

The traditional IRA is what most of are are accustomed to using for our retirement savings.  They are a great way to save tax deferred income that you will be able to withdraw when you retire.  Here are some facts you should know about this type of savings:

You can put $5500 a year in an IRA or $6500 if you are age 50 or older.

When you initially invest the money in the IRA, that money is not subject to income taxes.  This reduces the amount of taxes you owe in the current year.  The taxes are deferred until you withdraw the money. This will reduce your tax liability during your working years, which can be a major benefit to families who want to save for retirement and reduce their taxes at the same time.

However, if you make early withdrawals, they may be subject to taxes and penalties (there are some exceptions).  When you die, any remaining money that is passed on to your heirs is also subject to income taxes.

You will not pay income taxes on the money until you begin to withdraw it when, presumably, you will be taxed at a lower tax rate than you currently pay.  On the other hand, once you do begin to withdraw your IRA savings, the additional income could increase the tax rate some people actually do pay on their retirement income.  In other words, if your Social Security income alone is low enough that you would not be required to pay taxes on it, adding annual disbursements from your IRA could mean that more of your income is subject to taxation.  This will not apply to everyone, but it could apply to people who will be withdrawing large amounts from their IRA's.

Mandatory withdrawals are required beginning at age 70 1/2.  You can no longer contribute to a traditional IRA after that time.

Roth IRA

The Roth IRA works quite differently and is an excellent retirement option for people who expect that their tax rate will be about the same after retirement as it is now.  However, the taxes on the money that is invested in a Roth IRA are not deferred.  Savers must be willing to pay income taxes on the money during the year the money is earned.  Here are some additional facts you will want to know about a Roth IRA:

You can invest up to $17,500 this year, and $23,000 if you are age 50 or older.

As mentioned above, when you put the money in your Roth IRA account, you will still include it as part of your earnings on this year's tax return, and you will pay income taxes on it.

The Roth IRA has the advantage that you can make early withdrawals at any time, without penalty, so you can treat your Roth IRA as a savings account.  Since you already paid taxes on the principal, you do not owe taxes or penalties on your initial investment when you withdraw it.  In addition, if you hold the money in your IRA for at least five years and you reach the age of 59 1/2, the dividends and capital gains you earned  on the money over the preceding years will be also be tax free when you withdraw these funds.  

Paying the taxes up front can be a big advantage if you expect to hold the investment for a long time and you believe that your investments could increase substantially in value.  This can potentially give you the income you need in your later years while keeping your tax rate low.  In addition, your heirs can inherit the funds tax free.

You do not have to withdraw your money at age 70 1/2.  In fact, if you are still working at that age, you can continue to contribute to the Roth IRA.  

Can You Change Your IRA Designation?

If you have money in a traditional IRA and you want to put it into a Roth IRA, it is possible to make the change as long as you are willing to pay taxes on the money during the year when you make the transfer. 

If you don't want to pay taxes on all the money you have in your traditional IRA in one year, you can spread the transfer out over several years.  

Which IRA is right for you?  That depends on many factors.  As always, you would be wise to discuss this decision with your CPA and your investment adviser.  No one choice is right for everyone.

If you want to learn more about factors that could affect your retirement planning, you may also be interested in reading the information in the index articles listed below.  Each one contains links to a number of helpful articles on that topic.

Gifts, Travel and Family Relationships

Great Places for Boomers to Retire Overseas

Great Places to Retire in the United States

Health and Medical Topics for Baby Boomers

Money and Financial Planning for Retirement

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