Ask Liz Weston

Get smart with your money

Retirement Savings

Q&A: Where should you put your extra cash? Here are some ideas

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Dear Liz: At 82, I am selling my house and moving to a senior community. For the first time in my life, I will have a substantial amount of cash. Given my age and the fact that certificates of deposit and savings accounts are currently paying more than 5% interest, does it pay for me to start investing in other ways?

Answer: How you figure out what to do with your money is mostly the same whether you’re 28 or 82.

You start with your goal and your time horizon, or how long you have until you need the money.

For example, you may have to put aside some of the home sale proceeds to pay capital gains taxes if your home has appreciated more than the $250,000 that’s normally exempted from tax. Since the tax bill will be due within months of the sale, you shouldn’t take unnecessary risks with this cash. A high-yield savings account would be a good solution for any money you need to keep safe and liquid.

You also may want to earmark some money for long-term care. This goal is much more ambiguous, because it’s impossible to predict how much you’ll need or when. You may want to consult an elder law attorney, who can discuss your options.

Once you settle on a figure, you’ll want that money to be somewhere safe and readily accessible. Certificates of deposit that mature at different times could be an option, as could the high-yield savings account mentioned above.

If you have a goal that’s many years in the future, you could consider a mix of stocks and bonds. Stocks in particular offer long-term returns that historically beat inflation.

Most working people who want to retire will need to invest in stocks to accumulate and maintain a sufficient nest egg. They can take the risk of losing money in the short term because they have many years ahead for their investments to recover.

And that’s where your situation differs from that of a 28-year-old. The average life expectancy for an 82-year-old male is about eight more years, while the average life expectancy for an 82-year-old female is around nine more years, according to the Social Security Administration.

You may have enough time left to ride out a bad market. But if you don’t have to take such risks to achieve your goals, consider playing it a bit safer.

Q&A: What to know about buying a house using retirement funds

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Dear Liz: My husband and I are thinking of purchasing a house near us. Can we use any funds from our retirement accounts to make the purchase? We would like to use this money along with some savings so that we do not have to carry a mortgage.

Answer: You don’t mention how old you are, whether you’re currently homeowners or what type of retirement accounts you have, which are all important factors.

If you’re under 59½, withdrawals from IRAs and workplace plans such as 401(k)s are typically taxed and penalized. You can avoid the penalty, but not the taxes, if you’re considered a “first-time home buyer” and you withdraw up to $10,000 from your IRA to buy a home. (“First-time home buyer” just means you and your spouse haven’t owned a home within the last two years.)

This exception doesn’t apply to workplace plans such as 401(k)s. However, if you’re still working for the employer who provides the plan, you could consider taking a loan from your account.

Loans typically must be repaid within five years, but your employer may offer a longer payback period for the purchase of a primary residence. If the employer permits plan loans, the loan limit is typically the lesser of $50,000 or half the vested account balance, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

An exception to the 50% cap is if 50% of your vested account balance is less than $10,000, Luscombe said. In that case, you can borrow up to the lesser of $10,000 or the balance in your account.

If you have a Roth IRA or Roth 401(k), the amount you contributed can be withdrawn for any purpose without taxes or penalties, Luscombe said.

Q&A: How new rules let you roll unused 529 college savings into a retirement plan

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Dear Liz: I have about $3,000 left in my daughter’s 529 college savings plan. My ex-wife has about $8,000 left. Our daughter has graduated and is not planning to get an advanced degree. It’s my understanding that new rules allow unused 529 money to be rolled into a Roth IRA in the child’s name, after taxes are paid upfront. Would this be a good move?

Answer: Possibly, and you won’t have to pay federal taxes on such rollovers, which will be available starting in 2024.

The Secure 2.0 Act, which passed into law late last year, created this new provision that allows the owner of a 529 account to transfer up to $35,000 in unused education funds to a Roth IRA for the account’s beneficiary, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

The 529 account must have been established for at least 15 years for a rollover to be possible. No contributions or earnings from the previous five years can be transferred to the Roth. Also, the $35,000 is a lifetime limit that can’t be transferred all at once — it’s subject to most of the annual Roth contribution rules. In 2023, for example, the maximum that can be contributed to a Roth IRA is $6,500 for people under 50 and $7,500 for people 50 and older, so it will take a few years of transfers to reach the $35,000 lifetime limit.

The IRS has yet to issue needed guidance, including how the law will affect beneficiaries like your daughter with two 529 plans. But you and your ex probably will have to coordinate these transfers to avoid exceeding the annual contribution limit. Also, if your daughter contributes her own money to an IRA or Roth IRA, that contribution would reduce the maximum that could be rolled over from a 529. If, for example, the limit is $6,500 and your daughter contributes $5,000, you’d only be able to roll a maximum of $1,500 (assuming your daughter is under 50).

There’s also some question about whether the beneficiary needs to have earned income equal to the amount contributed each year, Luscombe said. On the other hand, someone with a high income won’t be prevented from receiving these rollovers into their Roth IRA, he says. Normally, contributions to Roth IRAs have income limits, so this could be good news for higher-earning beneficiaries.

Plus, states may have to issue guidance about whether the 529 rollover to a Roth IRA is a qualified distribution for state income tax purposes, Luscombe said. If not, you might owe state taxes on the rollover even if no federal taxes are owed.

You have a few other options for unused 529 money. For example, you could change the beneficiary to a “qualified family member,” which could include yourself as well as the beneficiary’s spouse, child or other descendant, a sibling, stepsibling, in-law, aunt or uncle or their spouse, niece or nephew or their spouse, parents or other ancestors or a first cousin or the cousin’s spouse. Withdrawals would continue to be tax-free if used for qualified education expenses.

You also could withdraw up to $10,000 to pay student loans for the beneficiary or their sibling.

Or you could simply withdraw the money and use it however you want. You would pay income taxes and a 10% federal penalty, plus any state penalty, on the earnings. Some states offer a tax break on contributions, so you’d also want to check if there are tax implications for such withdrawals.

For many account owners, though, the Roth rollover option will be a good, tax-advantaged solution to help their beneficiaries jump-start or enhance retirement savings.

Q&A: How to plan retirement withdrawals

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Dear Liz: I am 65 and plan on working until 70 to get the maximum Social Security. I have a 401(k) worth about $290,000. How do I determine the maximum monthly payout I should take while being somewhat certain it will last until I’m 90? Our family has a history of longevity, typically living into the early 90s.

Answer: You may have heard of the “4% rule,” a guideline that suggests an initial withdrawal rate of 4%, with the amount adjusted each year afterward by the inflation rate. The rule stems from research by certified financial planner Bill Bengen, who in a 1994 research paper used historic market returns for a portfolio consisting of 50% stocks and 50% bonds to determine the maximum safe withdrawal rate for a 30-year retirement.

Some researchers believe a sustainable withdrawal rate should start closer to 3%, and others suggest higher rates if the account owner is willing to cut back spending in bad years.

However, most retirement accounts, including 401(k)s, are subject to required minimum distributions. These will start after you turn 73. (For people born in 1960 or later, such distributions will be required starting at age 75.)

The exact amount you must withdraw depends on your account balance at the end of the previous year as well as your age and life expectancy. The percentages you must withdraw could be slightly less or considerably more than 4% of your original balance.

Q&A: Inherited IRAs bring a tax bite

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Dear Liz: I have an IRA worth over $1 million and am taking required minimum distributions. When my kids inherit this, can they take it all out with no tax issues because it is an inheritance? Or will they have to take required minimum withdrawals when they are old enough?

Answer: Retirement accounts don’t get the favorable step-up in tax basis that other assets typically get when someone dies. Your children will pay income tax on any withdrawals from an inherited IRA and most likely will have to drain the account within 10 years.

In the past, IRA beneficiaries other than a spouse had to start taking required minimum distributions after the account owner’s death. They couldn’t put off required minimum distributions until their 70s, but they could base the distribution amounts on their own life expectancies. The so-called “stretch IRA” let most of the assets continue to grow tax deferred.

But the stretch IRA was eliminated for most beneficiaries by the SECURE Act, which Congress passed in December 2019. The reasoning was that retirement accounts were meant to support the original account owner in retirement, not to provide tax-deferred benefits to their heirs. There are certain exceptions for beneficiaries who are surviving spouses, minors, disabled, chronically ill, or within 10 years of the age of the original account holder.

Q&A: Roth IRA withdrawal rules

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Dear Liz: In a recent column you mentioned that you can take money out of a Roth IRA at age 59½ without a penalty. I believe a Roth IRA must be in force for at least five years before you can take money out, regardless of age. Is this correct?

Answer: At any time and at any age, you can withdraw an amount equal to what you contributed to a Roth IRA. So if you’ve contributed $5,000 a year for four years to a Roth, you can withdraw $20,000 without worrying about taxes or penalties.

The five-year rule kicks in when you start to withdraw earnings. You can avoid both taxes and penalties on these withdrawals if the account was established at least five years ago and you’re 59½ or older. If the account isn’t at least 5 years old, you must pay taxes on the earnings withdrawn but don’t have to pay the usual 10% penalty if you’re 59½ or older.

A five-year rule also applies to Roth conversions. Each conversion or rollover you make is subject to a separate five-year waiting period.