Posted by Don Martin on Fri, Oct 12, 2012 @ 09:33 AM
Rollover 401k to IRA or keep the 401k? How to decide?
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Reasons in favor of rolling the 401k to an IRA:
*Have freedom to invest and control over your investments
*Know what you are buying (some 401k’s have “private mutual funds” which are hard to understand and poorly disclosed assets).
*Have freedom to hire an advisor to manage your assets
*Have freedom to invest in “alternative investments” such as directly owned timber farms, real estate, small businesses, etc. if you use the right custodian.
*May be able to get mutual funds with lower fees in your own IRA if you buy “I” (Institutional) class mutual funds instead of using the funds available in a 401k. (These usually require a $100,000 minimum per each fund or else the services of an investment advisor.)
*Can roll a traditional IRA to a Roth to make it tax free (it’s called a conversion). You need to pay taxes on this transaction using funds outside of the IRA or else more taxes and penalties will apply. You can’t do a conversion of traditional 401k to a Roth 401k; a Roth 401k can only be funded through workplace payroll contributions.
Protect your 401k nest egg
Reasons to keep your 401k:
*Can withdraw without penalty at age 55 if unemployed after 55th birthday (actually it’s January of the year you turn 55, so it could be sooner than your 55th birthday). An IRA requires waiting until age 59½.
*Can borrow up to $50,000 at 50% LTV from your 401k. IRA’s don’t allow borrowing. However there are tax inefficiencies with borrowing from a 401k so it should only be used if you really need the money.
*Some 401k’s at a few large employers have negotiated access to low cost “I” class mutual funds that are hard for retail investors to get. Before closing a 401k one should examine the list of choices of funds to see if any of these are available.
*Some Custodians allow a one person business to create new 401k and rollover old 401k’s into the new one. Then the new 401k could have the same freedom or possible more freedom to invest as an IRA. But you need to own a business to do that.
Bottom line is that investors in most cases need the freedom that comes from having control over assets by rolling a 401k into their own personal IRA. However, if your job is shaky and you are between age 55 to 59 you may want a 401k so that you can make penalty free withdrawals if unemployed.
I wrote an article “Are your funds trapped in a 401k?” and “Buying a business with a 401k”.
Investors should seek independent financial advice. 
Posted by Don Martin on Mon, Dec 05, 2011 @ 03:10 PM
Roth conversion season requires tax planning
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Roth conversion season is here. You can convert a traditional IRA to a Roth IRA anytime but most people prefer to do it close the end of the year so as see how it will impact their taxes. If someone has less than normal income it may be a good year to do a Roth conversion because they are in a lower than usual tax bracket. Even if someone is in the maximum tax bracket it may still be a good idea to do a Roth conversion because in future years tax rates will be higher starting 13 months from now in 2013.
There is no way to know what is the best way to decide how much of a traditional IRA should be converted to a Roth because futures changes to the tax code are unknowable. If someone was in the 15% tax bracket and thought their lifetime average of income was going to be in the maximum tax bracket then of course it would make sense to do a Roth conversion for an amount that would not push their taxable income into significantly higher tax brackets. But what if someone is a steady income earner who anticipates a reasonable income in retirement and feels his annual income will not change that much. What strategy should that person do for Roth conversions? The answer maybe “tax diversification” which means to diversify assets into different tax strategies: put some in a Roth, and some in a traditional IRA. I have never seen a clear, convincing article or white paper justifying why someone should use a particular strategy.
One argument in favor of Roth’s is that they have no Required Minimum Withdrawal. Another is that they allow early withdrawal with no penalty if the account has been in existence for over five years. But it would a bad idea to do a withdrawal from a Roth.
Don't pay too much taxes with an incorrect Roth conversion strategy
One CPA said there could be a national sales tax, so he asked, why bother to contribute to a Roth? But I doubt the income tax would be repealed for upper-middle class people and replaced with a sales tax.
The problem with Roth conversions is that they require cash to pay the tax and the cash can’t be taken the account unless the tax and early withdrawal penalty (if under age 59.5) is paid. The taxes paid now for a Roth conversion could have been left in a traditional IRA and allowed to compound for many years.
Related to having an IRA is the topic of 401K’s. I wrote an article “Three things you must know about protecting your 401k”. You can roll your IRA into a 401K if your employer allows it. That might be unwise, since you have more freedom to invest in an IRA. But a 401k allows penalty free withdrawals at age 55 if one becomes unemployed after the first day the year a person turns 55. A 401k allows a five year loan; an IRA only allows a 60 day temporary withdrawal.
An IRA is an "Individual Retirement Account", so you should should seek independent financial advice. 