401k Ira

Frequently Asked Questions

1. QUESTION:
   401k & IRA?
   My job offers matching to 4% but I have 10% going into it.
   Should I just keep the matching 4% going into my 401k and then put the rest (6%) into an IRA?

   I know We get a tax break if we put money into a IRA but not a R-IRA because there will be not tax on the Roth on the back end but
   Do we get a tax break on the money we put into our 401k?

   • ANSWER:
     You get the same tax break on a 401(k) that you get on a traditional IRA. And a 401(k) typically has higher contribution limits than an IRA. There’s really no benefit to splitting your contributions between an IRA and a 401(k) UNLESS you contribute to a Roth IRA.

     As you already know, the tax benefit of a Roth is on the back end. If you are young you will be far ahead at retirement time with a Roth. If you are nearing retirement age a traditional IRA may be a better bet.

     You should always contribute at least enough to a 401(k) to get the full employer match. That is FREE money to you and you should never pass it up. If I were in your shoes (actually, I’m in about the exact same situation) I’d do the 4% to the 401(k) and the remaining amounts to a Roth IRA as long as your income is within the limits to contribute to a Roth while covered by an employer plan.

2. QUESTION:
   What are some ways to reduce my taxable income other than contributing to a 401k, IRA, and Roth?
   I don’t want to participate in my companies 401k, however I still want to make regular contributions towards and investment for my future as well as reduce my taxable income. Each year I contribute my maximum contributions into my Roth and IRA and will continue. I need an alternative for my 401k contributions. I want more control and transparency.

   • ANSWER:

3. QUESTION:
   Can I have an IRA and also a 401K plan at the sametime?
   Can I have an IRA and also a 401K plan at the sametime?

   I am planning on getting a Traditional IRA plan so I can put away 00 tax free for this year. However, my company may possibly introduce a 401K plan soon.

   If I invest 00 in an IRA account this year, and if my company introduces a 401K plan a little later this year, am I allowed to contribute to both IRA & 401K plans in the same year?

   FYI, my filing status is married filing jointly and my wife has a 401K plan at her work place.

   Would appreciate any guidance here. Thanks.

   • ANSWER:
     If you participate in your employers 401k or pension plan, the box labeled “RP” on your W-2 will be marked. Why is this important? If this box is marked on your W-2, then it is possible that some or all of your contributions to your Trad IRA will not lower your taxable income. You will still be allowed to make the IRA contribution, but you will not be able to deduct it on your taxes. The contribution will be called “post-tax” and you’ll have to fill out a form 8606 when you do your tax return. When you ultimately pull money out of your IRA when you retire, the amount you contributed “post-tax” will not be taxed again…only the gains will be taxed.

     Since the gains will be taxed, you are better off (as stated by another answerer) to put the money into a Roth IRA (if you are able). The Roth IRA also lets you put money in post-tax, but all money taken out in retirement is not taxed…including the gains.

     1) You and your spouse can put ,000 into your respective Traditional IRAs regardless of income or boxes on W-2s. You can put in ,000 if you are 50 or older. You can NOT put in more money than you earned…so if you only earned ,300, you can only put in ,300 in your IRA. You can include your spouses income to determine the minimum amount. For example, if you earned ,000 and she earned ,000, together, your ,000 far exceeds the ,000 maximum, so you will be able to put in the maximum. Just because you earned less than ,000 is irrevalant.

     2) Whether or not you can deduct your Trad IRA contributions depends on several things.

     3) If neither of you have any “RP” boxes checked on any of your W-2s, then you can deduct the entire contribution you both made to your respective Trad IRAs.

     4) If you do have boxes checked, then there is a complex formula you need to use to determine how much if any of either of your contributions are deductable. Please refer to Publication 590 from the IRS (see link below). If, for 2007, your combind AGI is ,000 or less, you can both deduct any Trad IRA contribution. If your combind AGI is greater than 6,000, then neither of you can deduct your contribution. Between these two numbers, you must refer to the publication or contact your tax preparer.

     5) If your contributions will not be deductable, try to put money into a Roth IRA instead. If you are not allowed to put money into the Roth, the non-deductable contribution to the Traditional IRA is your only recourse. Please max out your 401k before making non-deductable Trad IRA contributions.

4. QUESTION:
   I contributed to my 401k and IRA in 2007 and Turbo Tax says I cannot deduct my IRA Contributions. Why?
   I made 72K Gross Adjusted Income in 2007 and made contributions to my company 401k and my IRA but turbo tax says I cannot deduct my contributions to my IRA. Why can’t I?

   • ANSWER:
     You made above the income limitation to deduct your contributions.

     The phaseout for deductible tradtional IRA contributions begins at k and ends at k.

     At your income, ignore the Traditional IRA and contribute to a Roth IRA instead.

5. QUESTION:
   If I bequeath my 401k or IRA to my children, will they have to pay inheritance tax also?
   Followup to answer to “Can 000 per year per child be gifted without inheritance tax even if the money comes from an IRA or 401k?”

   Is it state specific?

   • ANSWER:
     yes they will pay tax on it.

6. QUESTION:
   Does the IRS allow to invest in a 401K Plan and also a Roth IRA account at the same time?
   I just signed up for a 401K Plan with my company and am also considering investing in a Roth IRA Account. My question is, does the IRS allow simultaneous investments in the 401K & Roth IRA? My filing status would be married filing jointly. Thanks.

   • ANSWER:
     Yes, as long as your modified AGI is less than 6,000. At that point, phaseout limitations occur.

     You can contribute 00 (00 if you are 50 or older in 2007).

7. QUESTION:
   What are some additional tax shelters I can use when my 401k and ira donations are up to their limits.?
   I’m about to receive 0K from an investment and I want to pay the least amount of taxes on this money. I’ve already maximized my 401K and IRA contributions. What are some other options?

   • ANSWER:
     If you own your property and its in an area where you have some wildlife contact

     wildlifelandtrust.org

     they can arrange for you to have huge tax breaks on your property and home if you leave it as a reserve for wildlife when you pass on

8. QUESTION:
   How can I roll over a 401K to IRA if I’ve moved to France and no longer have US residency?
   We moved in August, so have spent most of the year in the US and will be paying taxes there this year. It’s my husbands 401K and he’s a Danish citizen (I’m american) but also US green card holder. All IRA rollover applications say non-residents need not apply. They are closing his company in the states and we have to do something this month!

   • ANSWER:
     If you are already a resident of France, you can’t. You have to take a withdrawal first so it can be taxed (possibly 30%). You know the IRS wants their money.

9. QUESTION:
   Can a pretax 401k to IRA rollover be used for housing loan?
   I live in Missouri. I rolled over my pretax 401k in to an IRA and have made no further contributions. Can I take a loan against this IRA for primary housing penalty free? Thanks.

   • ANSWER:
     No.
     You can not make a loan or take out the money out of an IRA.
     There is a little known rule.
     You can take out the money – but only if you make sure you replace it in full within a 60 day period.
     *** Not sure why this rule was ever allowed *****
     /

10. QUESTION:
    Can I contribute to individual roth ira and 401k roth ira at the same time ?
    I’ve contributed the maximum allowed for the 401k roth ira (500). Can I contribute another (00-00?) to an individual roth ira account? Or any other individual ira account in the same year?

    • ANSWER:
      The short answer is yes, you can still contribute to individual Roth and Traditional IRAs. However, when you are covered by your employers retirement plan there are limits to how much you can contribute. The limite is dependent on your modified adjusted gross income and your age.

      See IRS document Publication 590, page 14 for explanation. http://www.irs.gov/pub/irs-pdf/p590.pdf

      If you have a spouse who makes less or no income, you may also save money (and reduce your taxes) by opening an IRA for your spouse.

      Best wishes.

11. QUESTION:
    Should I file for bankruptcy or make an early withdrawal out of my ira or 401k to survive this economy?
    I can take an early withdrawal and just pay the taxes or I can file for bankruptcy and save the 401k and ira. Which one makes more sense?

    • ANSWER:

12. QUESTION:
    Can 000 per year per child be gifted without inheritance tax even if the money comes from an IRA or 401k?
    The gift giver is 67 years old with 401k and IRA. The receivers are her children. What kind of taxes can be avoided, and which still must be incurred, and at what rate then?

    Thanks so much.

    • ANSWER:
      If you take money out of your IRA or 401K, you’ll pay income tax on the distribution. After that, it’s yours to do whatever you want with it, so yes you can give each of your children up to K a year of that money that came out of the IRA or 401K without any futher tax consequences to you, or any tax to them.

      You can’t give them an interest in your IRA or 401K while you are still alive – that can only be done as an inheritance, not a gift.

13. QUESTION:
    Can I rollover my 401k to an IRA if I have a second full time job with better medical benefits but no 401k?
    1st job benefits and working conditions are decreasing.
    2nd full time job has great medical insurance and no 401k plan. I’m not sure how long I’ll be at my 1st job but I know I will stay with my second. I want to make my transition easy.
    Switch medical asap and roll over my 401k to IRA so I have no benefit ties to my 1st job.

    • ANSWER:
      wow what a situation.

      You cannot roll the 401k to an IRA until after you leave the first job. (there is a requirement for seperation from service on all 401K plans)

      switching the medical should be pretty easy and when you do finally leave the first job simply ask for a copy of their roll over paperwork from HR for your 401k.
      Once you leave you fill out the form and determine where you want the IRA to be held, complete the roll over and you’re done!

14. QUESTION:
    Is now a good time to Invest in 401k and IRA?
    I have been thinking about maximizing my contribution to 401k (,000) and IRA (,000) since the market is down? Is it a good idea to start investing now or is the market headed for even worse meltdown?
    I am 25 years old.

    • ANSWER:
      There’s no way to predict what will happen with the stock market. The idea behind a 401K or IRA is that you are investing for the long-term. If you are retiring in the next few years, the stock market may not be the best place to put your money. But there may be other options to put your money into – such as bonds or fixed earning investments.

      If retirement is a long time away, the stock market is low right now and if even if it goes lower, your odds of buying low and making a good return on your investment over the long haul are pretty good. I’m maxed, still some time from retirement and haven’t changed course. Just be sure to diversify and don’t put it all in your own company’s stock. If you worked for GM, you might be screwed now.

      Part of it is having the guts to stick with it and ride it out when you are young during bad times and then getting more conservative as you get closer to retirement. You don’t make money if you buy when the market is high.

15. QUESTION:
    Should I ask my family for financial help or should I cash in my 401k and/or IRA to pay for my medical. insur?
    Should I ask my family to help me pay for my cobra medical insurance or should I cash in my IRA/401k to pay for these bills. I am only 48 years old with 2 kids and a disabled wife so I will be taxed heavily on the distribution and I only have about ,000 total anyway. What should I do?

    • ANSWER:
      You need to grow up and start taking care of your life. If you only have 000 in retirement, what are you going to live on in 15 years. Leave the money there.

      Your main priority should be looking to find a new job!!

16. QUESTION:
    Rollover a 401K and IRA into one account?
    My Mom has a 401K account from an employer where she recently left. She also has a regular IRA at a mutual fund company. We’d like to combine those into one account, can it be done and then later setup for retirement withdrawals?

    I’ve seen Rollover IRA’s but they appear to be used for holding when moving from one employer to another.

    • ANSWER:
      You can roll-over a 401k permanently into an IRA, but I would check to see if you mother is eligible to roll it all over into a Roth iRA, which has more tax advantages than a traditional IRA. Either way, there is no 20% penalty if she rolls it directly into a Roth, or Traditional IRA or to her new employer’s plan.

      Also, if she chooses to rollover into a Roth IRA first, she will only be able to roll that “roll-over IRA” into another employer’s plan. She cannot roll over a co-mingled IRA with pre and post tax dollars into an emplyer plan. She can always leave it in the IRA permanently though.

      Since your mom left her old employer already, it won’t matter, but the only downside to rolling over a 401k into an IRA is that if you leave an employer after age 55, your early withdrawls from a 401k are not subject to the 10% penalty tax. If you roll it over into an IRA, any withdrawls before age 59 1/2 are subject to the 10% penalty tax.

17. QUESTION:
    Question on withdrawing from my 401k/IRA for a down payment on first home.?
    If I am putting my first home and I withdraw from my 401k/IRA, am I limited to the exact amount I put down? Or can I withdraw up to the k max to cover other expenses? What kind of records do I need to keep for that and where does it go on my taxes?

    Answers to any or all of these is greatly appreciated.

    • ANSWER:
      You cannot do a penalty-free distribution from a 401(k) for a first time home purchase. That is ONLY from an IRA. And you must use the full k towards the purchase of the home to avoid the penalty.

18. QUESTION:
    What is the total combined tax deduction for 401k and IRA together for joint filing – can I mazmize both ?
    Just wanted to know if I can maximize bith 401K plan of 14,000 for me and also contribute to IRA of 4000 each for myself and my wife ? Is this possible. My salary is around 75,000.

    • ANSWER:
      Yes, you can contribute the max to both.

19. QUESTION:
    When is a good time in your life to start a 401k or IRA?
    I am in college working towards my degree. Meanwhile i have a part time job. I know that you should not even consider contributing to a IRA or 401k until you have a full time dependable income. What are the differences between the two? Is it possible to start either a IRA or 401k with a part time job?

    • ANSWER:
      Well, you should always be putting money away in interest accruing accounts, no matter what. The general rule is that you should be putting away 10% of your gross income (what you make before taxes and other deductions are taken out). But where to put it?

      As another answerer mentioned, 401(k)s are company sponsored, but even though you only work part time check to see if where you work offers one for you. It doesn’t matter if you aren’t planning on staying with your current job; your 401(k) doesn’t disappear when you quit/are fired, you can cash out (incurring some fees and taxes) or you can roll it over to another 401(k) or an IRA.

      If you cannot start a 401(k) where you are, the other option is an Individual Retirement Arrangement (interchangeably known as Account), or an IRA. You have two options here, a traditional IRA, and a Roth IRA. The main difference I found between the two was that the money put into a traditional IRA is most likely tax deductible (the amount of money you put in is not counted as taxable income come tax time), but you will be taxed when you make withdrawls at retirement, and the opposite is true of a Roth IRA; you put after tax money into the account, and you are not taxed when you make withdrawls after retirement.

      As for when you should start either, the correct answer is right now. As soon as possible. The magic of compound interest is incredible. In the link I’ll provide below is a wonderful collection of articles that I consider must reads on IRAs, and retirement investments in general. I pretty much guarantee that all of your questions can be answered by reading through this article and parts 0-4 as well.

      If neither a 401(k) or an IRA sound good right now, or if you want as much time as possible to decide what to do, start putting away 10% now into a savings account which offers excellent APY (annual percentage yield). Online banks like www.INGdirect.com have savings account options with 1.40% APY. You can even set it up to make automatic deductions on a certain schedule. Get used to making deposits, and when it’s automatic, you don’t miss what you never had, right?

      Good luck, and I hope this helps!

20. QUESTION:
    What is the best for Roll over my previous 401K to new employer 401K or IRA ?
    I just got a new job and want to know what is the better saving ways to roll over my previous employee 401K.
    Which way is better between rolling over my previous employer 401K to new employee 401K Plan or personal IRA?
    My new employer pay all the expenses on the 401K plan which is a great saving for me on maintainance expense compare to personal IRA which I will have to pay.
    Please explain in detail why should I convert to my new employer 401K or Personal IRA as following.

    1) Account Maintenance cost.
    2) Withdrawn after retired at 60 years old.
    3) What other cost compare with employer 401K and personal IRA

    Thanks
    Alex

    • ANSWER:
      Alex,
      I would suggest you roll the 401k to an IRA. The reasons why are three fold:
      1) The possibility for unlimited investment options (stocks, bonds, mutual funds, cds, etc) in a self-directed IRA account.
      2) The opportunity for you to control it. Not tied up in your employer’s plan. Also you will never have black-out periods nor forced changes of 401k vendor (which happens at many companies).
      3) Availability if you are still working after 59 1/2 to pull funds from the IRA without triggering a loan (like a 401k).

      As far as the costs go, I think you are misinformed. It may seem that you are getting your 401k mutual funds for free. Actually, each of them charge internal management fees that can range from .2%-2%. You never see it b/c it is taken out of the funds performance.

      To answer your questions:
      1) Annual fees can range from as low as [FAQ-ANSWER] for some no-load mutual fund companies to around – for a self-directed IRA through a full-service advisor.
      2) Regardless of whether you have an IRA or 401k…after 59 1/2, you can withdraw either plan without 10% penalty. You only pay taxes.
      3) If you buy CDs or bonds, the comission is built in to the price. If you buy stocks, you pay a comission on the buy & sell. If you buy mutual funds, you have a few options: a) no load=[FAQ-ANSWER] upfront (but no service) Ex: Fidelity, Vanguard b) A,B,C shares through a full service broker Ex: American Funds, Franklin Templeton
      If you know what you’re doing, you can do fine with a no-load family. If you need a little hand-holding, then check out broker satisfaction at JD Power for best broker. Hope this helps!

21. QUESTION:
    401k to IRA account without penalty for buying first time home?
    I am leaving an employer with approx. ,000 in my 401k plan. If I roll over that money into a IRA and use it to purchase my first home will I still be subject to the 10% penalty? I realize I will be paying the taxes on these funds. I’m not retirement age yet…only 47 right now.

    • ANSWER:

22. QUESTION:
    Save for a home or contribute to 401k and IRA?
    I’m a recent college grad, just started working and have no debt. I want to buy a house but I dont like a lot of money. If I max out my 401k or IRA I wont have much money left. What should I do, start saving for a house in a savings account or contiunue to contribute to my 401k and IRA?

    • ANSWER:
      Do both. It shouldn’t be hard.

      With retirement, you MUST BEGIN EARLY.

      With houses, like anything, bigger down payment equals smaller mortgage payment. As to which to do first? If you are making bank and have a hot career path, I’d buy the house. If not, max retirement and save the rest until you can get into a home.

23. QUESTION:
    Can 401K or IRA be garnished to pay spousal support?
    if I have no job to pay spousal support can my 401K or ira be garnished? State of California.
    It was already split and this is my half. What California law says it’s prohibited, if you know?

    Thanks everyone

    • ANSWER:
      Yes, it can be in some states. There are strict limitations upon it, but retirement accounts can be garnished. You may not be protected in California. You should consult an attorney about this to be certain that your accounts are in order.

24. QUESTION:
    What is there a maximum amount I can contributed to both my Roth IRA and 401k?
    For 2007 I contributed ,000 in my Roth IRA and ,500 in my 401k. Did I exceed the Maxium amount?
    Is there a combined amount that one can contribute to the plans? Or are they seperate?

    • ANSWER:
      You’re fine, you hit the max on both. For 2008 you can put 00 in the Roth.

25. QUESTION:
    What taxes will I pay on a rollover IRA and 401K if I cash out?
    My husband had 00 in a 401k (most was contributed this year) he lost his job and it was rolled over into an IRA. We did not do the rollover within 60 days. He is disabled and will not be going back to work.

    Here are my questions – 1. Will we have to pay taxes on the 401K since it was not rolled over within 60 days. 2. If we cash out the IRA now, would we have to pay taxes on both the 401k and the IRA?

    • ANSWER:
      Yes and if he is under the age of 59 1/2 the 10% early distribution penalty will also able plus the federal income tax at your marginal tax rate.
      Sound like the money that is the 401K is the same funds that was deposited into the IRA this year and the amounts are being withdrawn in the same year so NO that amount would not be taxable again because the IRA was not an IRA account for the year 2010.
      Hope that you find the above enclosed information useful and good luck.

26. QUESTION:
    Texas bankruptcy: Can you keep your home and 401k/IRA?
    I have a friend that has a large business debt he is personally responsible for and is not able to pay it. He’s considering bankruptcy and thinks he has to forfeit his home (residence) and retirement accounts in 401k and IRAs. I think those may be protected. Who is right, are could we both be wrong?

    • ANSWER:
      It all depends on what type of a company he has? Is it and S Corp, C Corp, DBA, or LLC. If its a sole propreitorship, DBA then he is correct his personal assets can be liquidated.

27. QUESTION:
    What is the difference between an IRA and 401K ? Which is better?
    I currently have a simple IRA @ work my understanding is that my boss meets 100% of what I put in @ end of year ! My credit union offers simple IRA and Roth IRA but isnt that the same as a 401K? Wich one is better?

    • ANSWER:
      At 401k is sponsored and administered by your employer while an IRA is not. The contribution limit to a 401k is 500 while its 00 for an IRA in 2007. Since your 401k has employer matching than its much better to contribute to that over an IRA (no matching). This means that even if your investment choices in your 401K lose money over the year, the matched amount will cover you losses and more likely surpass them. I suggest you contribute as much as you can to your 401k.

28. QUESTION:
    When you rollover a 401k account to an IRA at the same brokerage, can you keep the same 401k portfolio?
    When you rollover a 401k account to an IRA at the same brokerage, can you keep the same exact 401k portfolio for your IRA? Will they do this for you automatically when you ask them to roll it over to the IRA? At least for now, I would like to keep the same exact portfolio I had for my 401k for my IRA. Thank you.

    • ANSWER:
      maybe. Depends on the brokerage firm. they will not do that for you automatically you will need to contact them arrange for that to happen providing they offer the same funds and investments in the IRA account as the 401k portfolio. Keep in mind there may be fees associated with them doing that for you.

29. QUESTION:
    Can you rollover a 401k to an IRA without leaving your job?
    Just wondering if it was possible to do this. It would definitely be great to sock away the money in the 401k, get the match, and then roll it to an IRA where I could actually get some decent investment options.

    So, does the IRS promote sound investing (let you roll over and make your own choices) or job instability (quit jobs as frequently as possible to be able to put your money where you want it)?

    Thanks.

    • ANSWER:
      I always wondered about that, because when I got laid off a few years ago, I rolled my 401K into an IRA where I have very flexible choices. My new 401K has fairly limited choices (most of them are bad) but I cannot withdraw funds, unless it is a “loan” (which has to be paid back). I suspect that is typical. But if I get laid off again, I can roll the new one over, too.
      Government regulations often have unintended consequences. When you reward certain behavior, you get more of it.

30. QUESTION:
    do ira and 401k accounts get taxed each year?
    If someone invested 00 in an ira and 401k account each, does this person owe money in taxes each year for federal and state? Or is it tax free?

    • ANSWER:
      No. For conventional 401(k)s and IRAs, the money is taxed when you withdraw it. For Roth 401(k)s and IRAs, you contribute after-tax dollars and withdrawals are not taxed.

31. QUESTION:
    Is it true the Government will soon be confiscating all 401k, IRA and other retirement savings?
    will there be a tax revolt if these scumbags steal our private retirement money like they’ve done in Argentina?

    • ANSWER:
      I agree that there is a tax revolt going on right now.

      However, taking it to this level is fairly unlikely.

      But at this point nothing will surprise me.

32. QUESTION:
    What’s the 2008 contribution limit for Roth 401k and Roth IRA combined?
    Like the question asks what is the combined total limit for the Roth 401k and the Roth IRA? I’ve read too much conflicting information that you can contribute the full 5k in the Roth IRA and 14k in the Roth 401K? Then I’ve checked with financial advisors and they indicate otherswise. Hm, please CITE sources with your response, need accurate information.

    Lastly, if anyone know what the combined limit between the Roth401k, Roth IRA and the traditional 401k also list it as well.

    Thanks!
    Can Icontribute to all three: Roth 401k, 401k and the Roth IRA?

    I know you can do the last two but what about all three?

    I am of course referring to just partial amounts so I don’t exceed the 15k annual limit and the as far as I know the 5k limit for the Roth IRA is considered separate. Thanks!
    Forgot to mention within the Roth IRA AGI limits and under the age of 50.

    • ANSWER:
      The 2008 limit for a 401k is ,500. If you’re 50 or older in 2008, you can contribute an additional ,000.

      The 2008 limit for IRAs is ,000. If you’re 50 or older on 2008, it’s ,000. However, your ability to contribute to a Roth IRA is reduced or eliminated if your modified adjusted gross income exceeds a certain amount. The amount depends on your filing status. See IRS Publication 17 for details. You can download it from www.irs.gov.

      The combined limit is the individual limits added together (,500 or ,500 depending on your age and subject to adjustment if have a Roth IRA and your modified AGI exceeds the limit).

      The limits apply regardless of whether the account is a Roth, traditional, or if you put some money in one of each. For example, let’s say that you want to fully fund your IRA, you’re under 50, and your modified AGI is less than the limit for a Roth IRA. You can put ,000 in a traditional IRA. You can put ,000 in a Roth IRA. Or, you can put some in both accounts as long as the total contributions to both accounts combined does not exceed ,000.

33. QUESTION:
    How do you rollover a 401k into an IRA if there is a loan against the 401k?
    I just got laid off and I have to pay back k into my company 401k in a month.

    What are my options so I avoid the tax and penalties if I don’t pay on time? I heard I can rollover the difference into a rollover IRA. Is this true?

    • ANSWER:
      If you do not payback the loan, then unfortunately it will become a taxable distribution. This means that when you file your income taxes the outstanding loan balance will need to be included in your Gross Income. How this affects your return will depend on what tax bracket you fall into. Also, depending on your age, you may have to pay a 10% penalty on the distribution (,400).

      For more information, I would seek the opinion of a tax professional on your individual tax situation.

34. QUESTION:
    What are the tax implications for Canadians for 401k and ROTH IRA at retirement?
    How do taxes work when Canadians who may have worked in the US withdraw money from their 401k or ROTH IRAs at retirement? Someone told me that a 401k can be withdrawn (and taxed in the US), but when the money is taken to Canada it will not be additionally taxed. However, the ROTH IRA would be taxed as new income in Canada. Is this true? If so, this defeats the whole purpose of the tax free growth provided by the ROTH IRA.

    I am currently working in the US but am a Canadian Citizen and hence dont really know where i will be come retirement (40 years away) so I am not sure as to where I should invest. I am trying to collect details so I can make an informed decision.

    Thanks
    Mathew, I know how the taxes work if you remain in the US. I need to find how they work if you plan to take the money to Canada. Of course I dont know how things will work in 40 years, but how do they work now?

    • ANSWER:
      For US taxes the 401 k disbursements will be taxed at your tax rate when you retire and the Roth disbursements will be tax free. Who knows what the Canadian tax rules will be in 40 years.

35. QUESTION:
    What is the benefit of rolling a 401k into a IRA?
    I have a 401k from a previous employer and I’ve understood that rolling it over into a IRA is a good idea, but I’m not totally clear why. Is because you face more penalities the longer the account remains open? When I contacted the company managing my account, they said I could leave it open for the life of the account and that rates where competitive, which I’m certain is to their benefit, but I thought it was a question worth asking. Any help would be greatly appreciated.

    • ANSWER:
      I have a free downloadable book on retirement investing, available in PDF format from my website. Click on my profile and read my info to get the site. Just in case you were interested.

      Now, to answer your question, let me pick an exerpt from my book:

      “There is a type of account, called a Rollover IRA, which is considered the “universal recipient” for any before-tax money. (Actually, a Rollover IRA is a type of Traditional IRA. We just give it this fancy name to denote what most people use it for.) The drawback is that you cannot contribute new money to a Rollover IRA. However, you can consolidate all your before-tax accounts (from previous employers) into one Rollover IRA with almost any investment firm. You now have free reign over how you retirement money is invested. You are no longer bound by the limitations of your former employer’s plan. And if you become dissatisfied with your Rollover IRA, guess what? You can roll that to another Rollover IRA with another investment firm. Just keep rolling, and you pay no taxes.”

      “I highly recommend rolling your money from past employer accounts into a Rollover IRA or your current employer’s plan. Do not let that money sit with your old employer. In order to release that money, you will need approval from human resources. This could be tricky if you left years ago. Human resources at your old job may look at your paper work and say, “who is this?” To avoid hassles down the road, please rollover money soon after you sever employment. Just think, once you get money into a Rollover IRA, you no longer need human resource’s permission.”

      “Any money from previous employer plans should be rolled over to your current employer’s plan or a Rollover IRA. Personally, I like the Rollover IRA since you can choose whatever firm you want, as well as the option to convert it to a Roth IRA. You will eventually have all your money in an IRA, anyway. Very few people keep their money in their old job’s plan while in retirement. Do you already have a Rollover IRA, but with high-cost funds? If so, use a direct rollover to get that money into a firm with low-costs funds like Fidelity, Vanguard, or T. Rowe Price.”

      The beauty of a rollover IRA is that you can pick an IRA with almost any firm you want and can get your money into low-cost funds. Also, you have the option of eventually converting it to a Roth IRA, if you are willing to pay the taxes this year.

      I don’t think you would “face more penalties” based on the length of time you have the account open. If you are referring to tax penalties, realize that you cannot withdraw money before age 60 in either a 401(k) or an IRA without incuring a 10% tax penalty.

      If you do decide to rollover, please use a Direct Rollover. With direct rollovers, the provider of your old account sends the check directly to the provider of your new account. The check is made out to the trustee for the new provider. With direct rollovers you never see the check and are not subject to the 60-day rule or the mandatory 20% withholding. If something goes wrong with the transfer, the money remains with the old account and you can try again. Yes, it’s frustrating if this happens, but at least you don’t run the risk of incurring a taxable distribution. Keep in mind that direct rollovers are not always smooth. Mine took 3 months. You may need to moderate the process by making calls to both providers. Some providers hassle you because they don’t want to give up your money. Despite any hassles, a direct rollover is far better than taking all your money as a taxable distribution.

      Hope this helps some. Download my free book if you want more help. Chapter 24 addressed the issues of retirement accounts.

36. QUESTION:
    Can you rollover a 401k to an IRA and then take a distribution without paying taxes?
    I am leaving my job and want to use a portion of my 401k savings in the meantime. I was told that there is a way to roll the money into an IRA and then withdrawl without penalty. This seems odd to me, but definitely something worth finding out about.

    • ANSWER:
      This is a muti-facited question. If you are 59 & 1/2, you can roll over a 401-K to an IRA. You can withdraw any amount “penalty free”, but not “tax free” .

      If you are under age 59 & 1/2 you can “annuitize” the entire amounts and begin periodic withdrawals over your life expectancy. However, you cannot change the withdrawal amount until you have attained age 59 & 1/2 and a minimum of 5 years have passed from the 1st withdrawal. Again, this is “penalty free”, but not “tax free”.

      It is possible if your income level is low enough that you might not owe any taxes on the IRA withdrawal, but you would still owe the 10% premature withdrawal penalty if under 59 & 1/2.

      I would suggest that you contact a reputable investment advisor (A.G. Edwards, Edward Jones, Merrill Lynch, etc.) They should be able to help you navigate this area.

      As a CPA for 31 years, preparing about 250 returns per year for income levels of poverty up to 0,000 per year I wish to reply to the guy that said “only the rich don’t pay taxes”. We have a “progressive” tax structure. The more you make, the more you pay. What you would call the poor pay little or no income tax (in fact they receive a subsidy known as “earned inome tax credit”). Middle income pays taxes, upper incomes pay a larger precentage of income, and the rich pay the highest as a percentage of income. If your income is above a certain limit (about 0,000) then you lose your itemized deductions and personal exemptions.

37. QUESTION:
    how do I make a withdrawal from my 401k/IRA and how long does it usually take?

    I am not employed either. Do I get taxed or anything for taking money out? Is it considered a loan?

    • ANSWER:
      First, what is your hardship?

      http://www.guideto401khardships.com/

      Read through all this (including the links) carefully.

38. QUESTION:
    Is it possible to put all money from 401k into Roth IRA while still employed at the company?
    I want to roll my 401k into a Roth IRA. Is it possible to do this while still employed with the same company that provided the 401k?
    I also heard there is no limit on how much can be rolled over into Roth IRA come 2010. Is this true?

    • ANSWER:
      1) The Pension Protection Act of 2006 specifically allowed 401k to Roth rollovers since 2008. The key is whether or not your 401k plan allows distributions while you are still working. Ask your HR Dept. if you can do this. If so:

      2) For 2009, there are income limits as to whether you can do a Roth “conversion”. You must have a Modified Adjusted Income of less than 0,000 (single or married), not including the conversion amounts. In 2010 the income limit will disappear.

      3) There is no limit on how much you can convert, only how much you are willing to pay taxes on. For 2009, any conversion amounts are taxable as ordinary income in 2009. If you convert in 2010, you can pay the tax over 2 years, 2011 and 2012. Look for an avalanche of conversions in 2010!

      4) Funds withdrawn from the Roth within 5 years of the conversion have a 10% penalty unless you’re over 59-1/2 or use the funds to buy a first house (,000 lifetime limit–,000 not 0,000). Earnings on the Roth are taxed as ordinary income if withdrawn in the first 5 years after conversion.

      This is not something for the not-detail-oriented! Talk to your HR Dept. first!

39. QUESTION:
    What are the pros and cons of transferring a 401k with an old company into a new 401k versus an IRA?
    I have a 401k balance from a company I was only with for a short while. I now have the option to transfer it to either the 401k with my new company or just an IRA.

    It seems to me since this won’t be involved in any matching that it doesn’t even matter which way I go. Am I missing anything obvious?

    • ANSWER:
      your new company, of course, will not match the money you transfer from your previous company. If you are a savvy investor, you should transfer your old company 401K to IRA, because you have more control of your money. you can buy any individual stocks from your IRA. If you put all your money to your new 401K, your choice will be limited to the 401K’s choice.

40. QUESTION:
    In rolling a 401K to IRA can I contribute to Higher Education cost?
    Hello. I have a 401k from a former employer and understand I can roll into an IRA. I have been told that I may be able to use a portion of that money to pay for my daughter’s college??????? Is this correct?

    • ANSWER:
      Please talk to your 401K/IRA administator. The rules are complex and you shouldn’t trust the information you get from a bunch of strangers on the internet. Good luck!

41. QUESTION:
    What are you choosing to build for retirement? 401K Roth IRA?
    I am trying to weigh my options here. I have a 401K and I plan on contributing toward a Roth IRA. I just would like to get more information on what other options are available to me. What is your choice at this time, why and what is your age?
    Thank you in advance.

    • ANSWER:
      I am 21 and started a Roth IRA a couple of years ago. A Roth IRA is a great place for me because the money going into the account is after-tax and I am currently in a low tax bracket. It may not be the best option for someone in a higher tax bracket because they would be paying more taxes on the money going into the account, versus paying less taxes on money coming out of a 401k or a traditional IRA when they are retired.

      A 401k, up to the company match, is by far the best place to put retirement funds because it is basically free money.

      As for other options:
      Cash Value Life Insurance (depending on health and age)
      Annuities

42. QUESTION:
    Best brokerage for rolling over a 401k to IRA?
    I have an old company sponsored 401K that I need to roll to an individual IRA and am looking for a brokerage firm. With the recent wall street mess, I’m having difficulty sorting through my options. I guess Merrill Lynch is out! ha ha Any suggestions/recommendations!

    • ANSWER:
      Fidelity’s pretty good if you want others to manage your money. They have a wide range of funds. I’ve heard good things about Vanguard as well.

      If you want to manage your $ yourself I like thinkorswim.

43. QUESTION:
    Which is better to do a Roth IRA or 401K or split?
    I am currently putting away 20% of my paycheck into my 401K at my part time job since I am eligible. They match 100% of the first 3% and 50% of the next 2%. Would it be better to only put in the 5% needed into the 401K and then put the remaining 15% into the Roth? I just figured since my tax bracket is going to be much higher when I am older(currently 21) wouldn’t it make sense to put into a Roth now? So that I am not taxed as much in the future? Also, is there a minimun needed to start a Roth IRA? I thought I heard 00. Best places to put into a Roth? My local credit union or a larger bank?

    • ANSWER:
      I would definitely contribute at least the amount that your employer is willing to match. After that, add the ,000 max to your Roth IRA. I’m not sure how much you make, but you can contribute up to ,500 in your 401k and Roth combined. Anything over the ,000 that you have to contribute, add it to your 401k. The Roth contribution won’t lower your current income, but you will be able to withdraw it tax free at retirement. The additions to your 401k will reduce your taxable income.

      As far as where to contribute your Roth; I would probably call your local bank to start. At your age, not many financial planners will work with someone starting out. Once your account grows, you could always look into Fidelity or Vanguard as they won’t charge a sales load and all your money goes to work for you.

44. QUESTION:
    I have 401k from my employer, do I still qualified to open an IRA?
    I am contributing to my 401k on a regular basis, and also have 401k from my previous employer. Do I still qualified to roll over the “old” 401k to an IRA? Is there any guidelines?

    • ANSWER:
      Yep.

45. QUESTION:
    Researching 401K rollover to IRA — IRA info mentions maximum annual contributions. Do I have to contribute?
    My 401K is substantial, was employed for 12 years. Do I have to make annual contributions to a new IRA, once my rollover is established? Can’t the IRA act like a savings account? Is there a minimum contribution amount? I know the max is based on adjusted gross income.

    • ANSWER:
      You don’t have to make any contributions to an IRA. You can make contributions each year as long as you have earned income. If you are going to rollover your 401k to an IRA you should be all set as long as you don’t work at the company anymore.

      Good luck and happy investing.

46. QUESTION:
    Why does Suze Orman say to put your 401k rollover from previous employer in traditional IRA?
    Suze Orman gives advice that people should rollover your previous employment 401k into traditional IRA. Then she says that in 2010 to move this traditional IRA money to a Roth IRA.

    Several Questions:
    1. What is a “traditional” IRA?
    2. What is the logic/benefit to move it to a Roth IRA in 2010?
    3. Won’t it get taxed once it is moved to Roth IRA? If not, why not?

    • ANSWER:
      1. A traditional IRA is a tax-deferred account. You can contribute up to ,000 per year and reduce your taxable income. In other words, you pay no taxes on the contribution, but it grows tax-free until you withdraw it (at which it is taxed as ordinary income)

      2. Some think that our tax rates must go up since they are currently at historic lows. So pay a low tax now and then no taxes later (Roth). So, Bush’s tax cuts go away in 2010 so our taxes will go up in 2011 when Congress doesn’t renew them. Plus, in 2010, even high income people not normally eligible for a Roth will be able to convert.

      3. It will be taxed when you move it over. But you will never have to pay taxes on that money again!

      Note: you should not do this if you are close to retirement and have a large percentage of employer stock in your 401k.

47. QUESTION:
    What is the difference between a 401k & an IRA account?
    What is the difference between a 401k & an IRA account?

    Thanks,
    - Murphy

    • ANSWER:
      The 401K is through work and has higher limits.

      There is a subtle penalty difference is you are terminated from work at age 55 or older.

48. QUESTION:
    What is the difference between IRA and 401K Plan?
    If they are about the same, why do both exist? Are IRAs for the self employed while 401K is for the 9-5 grind???

    • ANSWER:
      401(k) is sponsered by an employer. They sometimes provide a match of funds. It has a limited number of funds to choose from

      An IRA is similar, but is self directed. You can pretty much buy what ever you want – stocks, bonds, mutual funds. CDs, etc

      there are special types of IRAs for self employed people that allow you to put away more than in a traditional IRA

49. QUESTION:
    Is there any advantage to rolling my 401k into a rollover IRA instead of my existing traditional IRA?
    I have an existing traditional IRA and two 401k’s from previous companies. I’d like to consolidate accounts.

    Is there reason I should roll the 401k’s into a rollover IRA instead of directly into my existing traditional IRA?

    Are there any consequences regarding maybe later converting the IRAs to Roth IRAs later?

    • ANSWER:
      The only thing you want to treat differently is any company stock from your 401k. Other than that it really does not matter where you put it and there is a lot to be said for having it all in one place.

50. QUESTION:
    what do you think about me moving my 401k into an ira now, to protect my profit, then start over on my 401k?
    im asking this for 2 reasons, alot of people are saying were heading for a recession & the market is gonna drop, and i havent put much of my own $ into my 401k, yet with my employer matching, & the fund itself doing so well, its current value is around 100k, ive only put about a third of that into it. can i move it into an ira now, before i retire or leave the company? and if so, is that a bad idea? i plan on starting my 401k over, and maxiing my contributions again, can i do this?

    • ANSWER:
      In the long run you will come out ahead if you leave your money in moderately aggressive mutual funds. Pulling your money out and putting it into a IRA (assuming you are going to put it in a CD or something), which is only allowed if you are leaving the company, will only allow you to keep up with inflation, maybe.

      Just remember…Buy low, sell high.

      I’d keep your money in your 401(k). If you are worried about a deep recession (which due to monetary policy is highly unlikely) you could move the money already in your account to a more conservative fund (a bond fund or a money market/cash equivalent fund) then once you feel we’ve hit rock bottom, move it back into aggressive funds and ride the earnings out of the recession.

      Personally, I’d leave my money where it is and ride the next few years out.

      Good luck