Tag Archives: Roth IRA

Questioner asks: “Should I roll my SEP IRA into a regular IRA or a Roth IRA?”

There are two issues to consider in answering this question.

  1. If you roll a SEP IRA into a regular or rollover IRA, assuming you do it right, there are no taxes to pay and your money will continue to grow tax deferred until you begin taking withdrawals.  At that point you will pay income tax on the withdrawals.
  2. If you decide to roll it into a Roth IRA you will owe income tax on the amount rolled over.  However, the money will then grow tax free since there will be no taxes to pay when you begin taking withdrawals.

If you roll your SEP into a Roth, be sure to know ahead of time how much you will have to pay in taxes and try to avoid using some of the rollover money to pay the tax because it could trigger an early withdrawal penalty – if you are under 59 1/2 .

It’s up to you to decide which option works best for you.  If you are unsure, you may want to consult a financial planner who can model the two strategies and show you which one works better for you.

As always, check with a financial professional who specializes in retirement planning before making a move and check with your accountant or tax advisor to make sure that you know the tax consequences of your decision.

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Do you have questions about retirement? You’re not alone.

Charles Schwab recently conducted a survey of people saving for retirement and found that saving enough for retirement was the single most force of financial stress in their lives; … greater than job security, credit card debt or meeting monthly expenses.

A new survey from Schwab Retirement Plan Services, Inc. finds that saving enough money for a comfortable retirement is the most common financial stress inducer for people of all ages. The survey also reveals that most people view the 401(k) as a “must-have” workplace benefit and believe they would benefit from professional saving, investment and financial guidance.

Most people who come to see us have concluded that they need professional help.  They have some basic questions and want answers without a sales pitch.

survey_image1

They know that they need to save for retirement but don’t know exactly how.

  • The want to know how much they need to save.
  • They want to know how they should be investing their 401(k) plans.
  • They wonder if they should put money into a Regular IRA or a Roth IRA.
  • They know they need to invest in the market but are concerned about making mistakes.

Only 43 percent know how much money they may need for a comfortable retirement, which is significantly lower than awareness of other important targets in their lives, including ideal credit score (91%), weight (90%) or blood pressure (77%).

“With so many competing obligations and priorities, it’s natural for people to worry about whether they’re saving enough for retirement;” said Steve Anderson, president, Schwab Retirement Plan Services, Inc. “Roughly nine out of ten respondents told us they are relying mostly on themselves to finance retirement. It’s encouraging to see people of all ages taking responsibility for their own future and making this a top priority.”

But you don’t have to go it alone.  At Korving & Company we are investment experts.  And we’re fiduciaries which mean that we put your interests ahead of our own.

Contact us for an appointment.

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What’s the Difference Between an IRA and a Roth IRA

A questioner on Investopedia.com asks:

I contribute about 10% to my 401k. I want to know more about Roth IRAs. I have one with my company, but haven’t contributed any percentage yet as I am not sure how much I should contribute. What exactly is a Roth IRA? Additionally, what is the ideal contribution to a 401k for someone making $48K a year?

Here was my reply:

A Roth IRA is a retirement account.  It differs from a regular IRA in two important aspects.  First the negative: you do not get a tax deduction for contributing to a Roth IRA.  But there is a big positive: you do not have to pay taxes on money you take out during retirement.  And, like a regular IRA, your money grows sheltered from taxes.  There’s also another bonus to Roth IRAs: unlike regular IRAs, there are no rules requiring you to take annual required minimum distributions (RMDs) from your Roth IRA, even after you reach age 70 1/2.

In general, the tax benefits of being able to get money out of a Roth IRA outweigh the advantages of the immediate tax deduction you get from making a contribution to a regular IRA.  The younger you are and the lower your tax bracket, the bigger the benefit of a Roth IRA.

There is no “ideal” contribution to a 401k plan unless there is a company match.  You should always take full advantage of a company match because it is  essentially “free money” that the company gives you.

Have a question for us?  Ask away:

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Retirement Plan Contribution Limits for 2016

One of the most common questions we get from clients throughout the year has to do with retirement plan contribution limits.  We put together this quick-reference chart, which shows the limits for most people:

2016 IRS Retirement Plan Contribution Limits

Not much has changed from 2015, except that the income limits for Roth IRA contributions have increased by $1,000.

For the official IRS announcement, click this link to the IRS website.

If you want more clarification on what all of the above means for you, contact us.

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Roth 401(k)s catch on with younger investors

From the current issue of Financial Planning magazine:

As Roth 401(k) plans continue to spread, young workers increasingly are voting to go Roth. In the first quarter of 2013, 10% of all participants in Wells Fargo-administered defined contribution plans contributed to a Roth 401(k), when available, up from 8.9% a year earlier. Leading the way were employees under age 30: 16.9% chose the Roth route, a jump from 15.2% participation in last year’s first quarter. (Only 4% of participants in their 60s chose the Roth version this year.)

The rate at which government debt is rising and the belief that future tax rates may be higher than they are today, saving in a Roth plan which allows people to withdraw money tax-free is becoming increasingly attractive.

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Beneficiary Form Cautions

The Hook Law Center has a good explanation of the issues involved with beneficiary designations.  Many financial accounts allow you to name a beneficiary who will receive the assets directly without going through probate.  Keep this in mind when preparing a will because beneficiary designations supersede the terms of a will.

What kind of accounts commonly request that you name a beneficiary?

  • IRAs
  • 401(k) – or similar accounts
  • Pension plans
  • Life insurance policies
  • Annuities

Please read the article for more details.

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More Firms Roll Out Roths

Via the Wall Street Journal

Many employers are planning to add a Roth 401(k) option to their offerings of corporate benefits in the next 12 months, a new survey suggests, making it easier for workers to save money that can be withdrawn tax-free in retirement.

A provision in the tax law enacted in early January gives workers a chance to stockpile more tax-free earnings—but only if their employers’ 401(k) plans include a Roth option, along with the ability to move assets workers already have saved in tax-deferred 401(k) accounts.

This is a major benefit for young and even middle aged employees.

The attraction: While workers converting tax-deferred savings would have to count the assets converted as ordinary income, and pay an upfront tax bill, future earnings and retirement withdrawals generally would be tax-free. And even though Roth 401(k)s generally require mandatory retirement distributions starting at age 70½, retirees could roll the assets into Roth individual retirement accounts to avoid them.

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A Creative Plan to Keep a Cheap NYC Apartment

From the Wall Street Journal we learn the way that wealthy people who live in New York’s rent controlled apartments keep them.

 He was a married professor in his late 60s who lived in a four-bedroom place in downtown Manhattan high-rise. His rent was set at just $2,000 a month; a comparable apartment at a market rental rate would run about $10,000 monthly.

The problem: The rules governing rent-stabilized apartments in New York disqualify tenants who make more than $200,000 a year in adjusted gross income for two years in a row. And required distributions from the client’s retirement accounts were going to push him above that threshold.

The professor’s AGI was $170,000. But thanks to diligent saving during a long corporate career before he started teaching, the professor had managed to accumulate $3 million in a handful of IRA and 401(k) accounts.

He had another $1 million in a 430(b), giving him a net worth of over $4 million.  The problem?  He didn’t want to pay market rates for his apartment and …

As soon as he hit age 70 1/2, he’d have to start taking required minimum distributions on those accounts…. at about $100,000 a year–immediately putting the [him] well over the rent-stabilization income limit.

The answer:

  1. … transfer $1.5 million from his old tax-deferred accounts into his current employer’s 403(b) plan, which would shield them from RMDs as long as the professor stayed with his employer

  2. use the rest of the funds in [his] IRAs and 401(k)s to fund a Roth IRA conversion.

Suddenly the professor is too poor and can keep his rent controlled apartment.

Homework assignment: discuss the ethics of rent control.

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The benefits of Roth Conversions

Taxes have gone up and may well go up some more.  The recent tax increase on those making over $400,000 will do little to reduce the deficit.  The REAL money is with the millions of people making less.  The problem with IRAs and 401(k) plans is that the money that’s withdrawn in the future is taxed as ordinary income.  The money withdrawn from a Roth IRA or 401(k) is not taxed when withdrawn. 

Hidden in the fine print of the “Fiscal Cliff” legislation is a provision that allows people to convert funds in their 401(k) accounts into Roth 401(k) accounts without many of the limitations that were formerly imposed on these conversions. 

The American Taxpayer Relief Act of 2012 (the Act) allows 401(k) plan participants to convert funds held in their traditional 401(k)s into Roth 401(k)s. Like an IRA-to-Roth-IRA conversion, this move allows 401(k) account owners to pay the taxes on the funds when they are rolled over into the Roth—so that the funds can then grow tax-free within the Roth, where they can be withdrawn without tax liability in the future. The Act does not impose any limits on the amount that can be transferred from the 401(k) to the Roth.

These types of rollovers were always permitted, but, under prior law, a 401(k) account owner was permitted to convert only the funds that he could otherwise withdraw without penalty. This limitation effectively confined conversions to those people who had already reached age 59 ½, or who had died, become disabled, or separated from service. Other people were required to pay a 10% penalty if they converted where distributions were not otherwise permitted.

Conversions could be highly beneficial for younger savers. These people may not have reached their full earning potential and may fall into a lower tax bracket today than they expect to reach later in life. Further, these taxpayers have a longer period before retirement, meaning that the funds converted will have more time to grow tax-free within the Roth.

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