August 25, 2020 By

The 2 costs that can make or break your nest egg

If you earn a decent income but have trouble saving, the culprits could be the roof over your head and the car in your driveway.

Retirement savers who contribute more to their 401(k)s often spend less on housing and transportation than their peers, according to a study by the Employee Benefit Research Institute and J.P. Morgan Asset Management.

Better savers also spend less on food and drink, but housing and transportation are bigger expenses that tend to be less flexible. Once you commit to a place to live and a car payment, you’re typically stuck with those expenses for a while.

In my latest for the Associated Press, how your house and your car could be affecting your retirement savings.

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August 24, 2020 By

Q&A: Here’s why two 401(k) accounts aren’t better than one

Dear Liz: I changed jobs more than three years ago and did not roll over my 401(k) when I started a 401(k) account with my new employer. I’m perfectly happy having separate accounts. However, I’ve read some IRS rules that I cannot understand about being penalized for not contributing to a 401(k) for five years. So my question: After turning 59½, will I face any sort of penalty or loss when I begin withdrawing funds from a 401(k) account that has been sitting idle?

Answer: There’s no penalty for not contributing to an old 401(k). In fact, you cannot contribute to an old 401(k). Once you leave the employer that sponsored the plan, you generally can’t put any more money into it.

What you may have stumbled upon are IRS rules that apply to employers who sponsor 401(k) plans that have a profit-sharing component.

Employers aren’t required to make contributions to these plans every year — there may be years when there’s no profit to share — but their contributions have to be “recurring and substantial.” If the employer hasn’t made contributions in three of the past five consecutive years, the plan could be terminated, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

That obviously doesn’t apply to your situation, and if you want to continue managing two 401(k) accounts, you’re welcome to do so. But consider rolling the money into your new employer’s plan, if it’s a good one and accepts such transfers. That would mean one fewer account you need to track and also could give you access to more money if you wanted to take out a loan.

Filed Under: Q&A, Retirement Tagged With: , ,
July 20, 2020 By

Q&A: Retirement accounts and taxes

Dear Liz: I am 41 and have had a traditional IRA for about two decades. I funded it for the first 10 years, taking a tax deduction for the contributions. Since I’ve had a 401(k) with my employer for the past several years, I obviously cannot take a deduction for the IRA amount, but I could still put money in. My 401(k) is fully funded, as is my husband’s. Does it make sense to also fund our IRAs with post-tax, nondeductible amounts? I realize any gains we make will be taxed at withdrawal, but I also know that as long as the money stays in the IRA, it can grow tax deferred.

Answer: First, congratulations on taking full advantage of your workplace retirement plans and still being able to contribute more.

You potentially can deduct contributions to IRAs when you have a 401(k) or other workplace retirement plan, but your income must be below certain limits. You can take a full deduction if your modified adjusted gross income is $104,000 or less as a married couple filing jointly. After that, the ability to deduct the contribution starts to phase out and is eliminated entirely if your modified adjusted gross income is $124,000 or more. (If you don’t have a workplace retirement plan but your spouse does, the income limits are higher. The deduction starts to phase out at $196,000 and ends at $206,000.)

If you can’t deduct contributions, you can look into contributing to a Roth IRA — but that too has income limits. For a married couple filing jointly, the ability to contribute to a Roth begins to phase out at modified adjusted gross income of $196,000 and ends at $206,000. If you can contribute, it’s a good deal. Roth IRAs don’t offer an upfront tax break but withdrawals in retirement can be tax free. You also can leave the money alone for as long as you want — there are no required minimum withdrawals starting at age 72, as there typically are for other retirement accounts.

If your income is too high to contribute to a Roth, you could still contribute to your IRA or to any “after tax” options in your 401(k). But you might want to consider simply investing through a regular taxable brokerage account. You don’t get an upfront tax deduction but you could still benefit from favorable capital gains tax rates if you hold investments for a year or more. Furthermore, you aren’t required to take withdrawals. That flexibility can help you better manage your tax bill in retirement.

Filed Under: Q&A, Retirement, Taxes Tagged With: , ,
May 26, 2020 By

Q&A: When a Roth IRA makes sense

Dear Liz: I have some money saved in a brokerage account, over and above my maximum 401(k) contribution. I just turned 60. Is it advantageous to move that money into a Roth IRA or should I keep it in the brokerage account?

Answer: If you suspect you’ll need this money within five years, then you probably should leave it in the brokerage account (and move it to cash, since money needed within the next few years should not be in the stock market). Otherwise, there’s little downside to moving some of the money to a Roth IRA, if you can, and plenty of upside.

Having money in a Roth gives you “tax diversification,” or a potentially tax-free bucket of money to draw from or leave alone as you see fit. That’s in contrast to 401(k)s, regular IRAs and other retirement plans, which typically require withdrawals to begin at age 72.

You can always withdraw an amount equal to your contributions without paying taxes or penalties. Once the account is at least 5 years old and you’re over 59½, whichever comes later, you also can withdraw any earnings without tax or penalty.

You can contribute up to $7,000 to a Roth this year, assuming you have earned income of at least that amount and your modified adjusted gross income is less than $124,000 if you’re single or $196,000 if you’re married filing jointly. (The contribution limit is $6,000 for people under 50.) If your income is above those limits, your ability to contribute to a Roth starts to phase out. The ability to contribute directly to a Roth ends when your modified adjusted gross income is over $139,000 for singles and $206,000 for married couples.

Filed Under: Q&A, Retirement Tagged With: , , ,
May 6, 2020 By

Wednesday’s need-to-know money news

Today’s top story: Is my money safe in a bank during the COVID-19 crisis? Also in the news: Helping home buyers keep their distance with e-closings, what kinds of credit card relief are available during the pandemic, and how to save for retirement while on unemployment.

Is My Money Safe in a Bank During the COVID-19 Crisis?
Should you be worried about your accounts?

Mortgage E-closing: Helping Home Buyers Keep Their Distance
Changes during the pandemic.

COVID-19: What Kinds of Credit Card Relief Can You Request?
Several options are being offered.

How to Save for Retirement While on Unemployment
Saving for the future is still important.

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May 4, 2020 By

Q&A: A shutdown reality check

Dear Liz: Recently a reader asked about withdrawing money from an IRA to pay credit card debt. You mentioned the many ways that was a bad idea, including the fact that retirement money is protected in bankruptcy court. Liz, the writer had only $10,000 in credit card debt. Bankruptcy should be a last resort. A lifestyle change or picking up a second job would be a better route to knocking out the debt.

Answer: “Picking up a second job” — really? Most people will be lucky to hang on to the ones they have in the coming months.

No one suggested that this reader should file bankruptcy, but anyone considering taking money from a retirement plan to pay debt should understand this major drawback — especially now. Bankruptcy experts expect business and personal bankruptcy filings to soar because of the pandemic.

You might want to check your other assumptions, as well. People typically don’t wind up in bankruptcy court because they refused to cut out their lattes or didn’t work hard enough. They get sick or disabled, lose their health insurance, get divorced, have a breadwinner die — or get stuck in a pandemic. Those with higher incomes and more savings may be better able to weather financial setbacks, but few of us are truly immune from their effects.

Filed Under: Bankruptcy, Coronavirus, Follow Up, Q&A Tagged With: , , ,
April 20, 2020 By

Q&A: Here’s why taking money from retirement accounts to pay bills is dumb

Dear Liz: I do not qualify for a coronavirus hardship withdrawal, but I have debt on several credit cards with interest rates above 23%. In 2019, I paid nearly $2,500 in interest charges. I would like to remove $10,000 from my IRA and use it to pay off the debt. I would then put the money that would normally go toward the credit card debt ($500 a month) to pay back the IRA. Would this repayment mitigate some of my tax charges from the withdrawal, and how long do I have to replace the funds, if any?

Answer: Coronavirus hardship withdrawals are available to a large group of people, including those who have lost their jobs or suffered other financial setbacks because of the pandemic, as well as people actually diagnosed with COVID-19, the disease caused by the novel coronavirus.

Coronavirus hardship withdrawals allow people to take out up to $100,000 from individual retirement accounts or 401(k)s without paying early withdrawal penalties or facing mandatory withholding. Income taxes must be paid on the withdrawal, but that bill can be spread over three years.

People who take such withdrawals would have the option of putting the money back within three years. If they can repay the money, they could amend their previous tax returns to get a refund of the taxes they paid on them.

If you don’t qualify for a coronavirus hardship withdrawal, then the rules on taking money from your IRA haven’t changed. You cannot take a loan from an IRA, and any money you withdrew would have to be returned to a qualifying retirement account within 60 days or it’s considered a withdrawal.

You would have to pay income taxes on the withdrawal, plus the 10% federal penalty if you’re under 59½. Most states also tax and penalize such withdrawals.

Even if you could qualify for a coronavirus hardship withdrawal, though, it would be a bad idea to raid your retirement account to pay credit card bills.

Not only is the tax cost high, but you’re also losing the future tax-deferred returns that money could have earned. A $10,000 withdrawal now could mean $100,000 less in retirement funds 30 years from now.

Also, you shouldn’t use an asset that would be protected from creditors to pay debts that could otherwise be erased in case you have to file for bankruptcy.

Too many people drain their 401(k)s and IRAs trying to pay their bills, only to find out too late that their retirement accounts are protected in bankruptcy. Meanwhile, the bills — including credit card balances, medical bills and most other unsecured debts — could have been wiped out.

If you can make your credit card payments but want to reduce your interest costs, you could consider a personal loan to consolidate your debt if your credit is good. If your credit is not good or you are struggling financially, you could contact a credit counselor about a debt management plan that would allow you to pay off your cards over time at lower rates.

You can get referrals from the National Foundation for Credit Counseling.

Another option for people struggling to pay off their credit card debt is to ask the issuers about hardship programs. Many are willing to offer forbearance, which allows cardholders to skip payments, or to temporarily reduce required payments.

If you’re struggling, though, you also should make an appointment with a bankruptcy attorney about your options. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys.

Filed Under: Q&A, Retirement, Saving Money Tagged With: , ,
April 15, 2020 By

How to raid your retirement funds in a crisis

In an ideal world, your retirement accounts would be left alone for retirement. You’ve probably noticed that we’re not living in an ideal world.

Early withdrawals can have serious repercussions, including big tax bills today and potential shortfalls in the future. In my latest for the Associated Press, alternatives to consider and what to do if you absolutely must touch your savings.

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April 6, 2020 By

Q&A: Volatile markets and retirement

Dear Liz: With the tumult in the stock market, I’ve been thinking of a strategy which may be safe but not prudent. I have about $315,000 in a trust account which pays me about $9,000 a year in dividends. I’m 81. If I sell all the stocks in my trust account, I could draw the same $9,000 for over 10 years, not counting about 2% growth on the $315,000. What are your thoughts?

Answer: Many people have discovered they’re not as risk tolerant as they thought they were. The volatile stock market has unnerved even seasoned retirement investors. Most, however, should continue investing because they won’t need the money for decades, and even retirees typically need the kinds of returns that only stocks can deliver long term.

There’s no reason to take more risk than necessary, however. If all you need from your trust account is $9,000 a year, you’d be unlikely to run out even if your money is sitting in cash. But you may need more than $9,000 in the future — to adjust for inflation, for example, or to cover long-term care costs.

One option to consider is a single-premium immediate annuity. In exchange for a lump sum, you’d get a guaranteed stream of monthly checks for the rest of your life. At your age, you could get $9,000 a year by investing about $100,000 in such an annuity. Because your payments would be guaranteed by the annuity, you might be more comfortable leaving at least some of the rest of your account in stocks for potential growth.

Filed Under: Investing, Q&A, Retirement Tagged With: , , ,
March 16, 2020 By

Q&A: Which to tap first: IRA or Social Security?

Dear Liz: I retired in 2015 but have not started Social Security. My wife and I are living on a pension and savings. I read an article saying that taking early IRA withdrawals and holding off on Social Security can help minimize the so-called tax torpedo, which is a sharp rise and fall in marginal tax rates due to the way Social Security benefits are taxed.

I made a spreadsheet to compare the cumulative income we could expect by starting IRA withdrawals now and delaying Social Security until age 70, versus starting Social Security now and delaying the IRA withdrawals. The spreadsheets indicate that by taking early IRA distributions and delaying Social Security, we would get a significant increase in total cumulative income as the years go by.

We feel we need a professional to verify our results and perhaps advise us as to which might be our best route, as well as getting an assessment of our income tax implications for the next five years or so. My wife thinks we should ask a Certified Public Accountant and is concerned about the price of a fee-only advisor.

Answer: Your findings are similar to what researchers reported in the July 2018 issue of the Journal of Financial Planning. The tax torpedo increases marginal tax rates for many middle-income households. One solution is to delay Social Security until age 70 and tap IRAs instead. That maximizes the Social Security benefit while reducing future required minimum distributions.

It’s always a good idea to get an objective second opinion on retirement distributions, however. Mistakes can be costly and irreversible. A fee-only certified financial planner should have access to powerful software that can model various scenarios to help confirm your results and guide your next steps.

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