Hi Laura. Yes, you can open the non-deductible IRA in the same year that you roll your pre-tax IRAs to your 401(k). (You can use your existing IRAs if you want, opening a new IRA is not required.) IRS tax form 8606 calculates your taxable IRA conversions using the IRA balance on 12/31. So, if your IRA balances are rolled to the 401(k) during the year, you won't have a balance on 12/31 and there won't be any tax liability to report on your tax return. Rolling up pre-tax IRA balances to a 401(k) is a great strategy for higher income investors that have pre-tax IRA balances.
Mark, here's one for you from William
Hi William. With concerns over the company stability, another option is to take the lump sum and make your own 100% survivorship annuity. This can be accomplished by purchasing an immediate annuity with the lump sum. The benefit is that you lock in your 100% survivorship annuity, but you do so with an insurance company that may be more secure than your employer. Depending on your income needs, this may or may not be appropriate. If Social Security, part time income, etc. is sufficient income, take the lump sum rather than the annuity. Later on, you can always take a portion of the lump sum and purchase an annuity if needed. Or, if your portfolio is large enough, the dividends and interest income from the portfolio might be all you need and you can skip the annuity all together. Congratulations to your daughter and her full academic scholarship!
Thanks, Mark. You can take this next question from Patricia
Hi Patricia. The TSP allows a Roth contribution or traditional contribution. So, you don't necessarily need to open a new account. I commend you for wanting to bump up the contribution. If you are in a higher tax bracket now than you'll be in during retirement, keep putting money in pre-tax as you have been. If your tax bracket is relatively low right now, put money into the Roth.
We have a follow-up from Patricia
Patricia - there are a couples ways to look at the mortgages. If the properties are rentals that you'll use to generate retirement income, then paying down the mortgage could make more sense. When you're retired, you'll then live off the rental income rather than having a mortgage to still pay. If generating income from the properties isn't critical, and the mortgage interest rate is under 5%, investing the cash in a diverisified portfolio should give you the ability to earn more than 5%. In other words, if you earn 7% in a portfolio and pay 5% in mortgage interest, you're still ahead 2%. If the mortage rate is over 5%, try to refinance first, or if you can't refi under 5% then pay down the mortgage debt.
Thanks, Mark. Whenever you're ready here's one from rshin
Hi Rshin. Great question. There's lots that goes into the retirement decision. If $60,000 provides your needed income and you don't need to touch your other investments, retiring now may be okay. Be sure to check if your civil service retirement pension has a cost of living adjustment i.e. the $60,000 increases each year with inflation. If $60,000 is not enough, you'll need to make up the difference with wages or taking withdrawals from the investments. You can use 72T distributions to avoid the 10% early withdrawal penatly, but not the income taxes on your retirement investments. It may be good to work with a local advisor if you want to use the 72T rules. If your income needs are well over $60,000, it may be best to postpone retirement for a few years.
Brent, here's a question for you from Robin
Robin: In your situation, I would feel comfortable using PIMCO Total Return Bond Fund as your bond allocation. It is a solid fund that mostly invests in high grade bonds. That said, if you want to to diversify your bond investments, you could open a separate IRA, contribute up to $6,000/yr, then buy another bond fund through that account.
Mark, you can take Gayle's question when you're ready
Hi Gayle. I reviewed the sample report. The www.maximizemysocialsecurity.com calculator doesn't factor in net worth, so I'd save the $40. Generally speaking, when income is needed, start the smaller Social Security check between you and your spouse first. Next, if the spouse with the higher Social Security check is at least full retirement age (as defined by Social Security), start spousal benefits based on the smaller Social Security check. If more income is needed, start the larger Social Security check last. Remember, Social Security is not part of your net worth, but your investment are. So, it's often best to preserve your net worth (investments) and start Social Security earlier even if that means you'll end up getting a little less from Social Security in the long run. By the way, your local Soc Sec office is a great resource. They can provide the options available to you even though they can't tell you which option to take.
Mark, as you answer Gayle's question, she also has a follow-up for you.
Gayle, I apologize. I see your original question now.
Gayle, your question is very long, detailed and personal. I am going to e-mail it to an advisor instead. Can you please send me your e-mail so that we can get back to you? Thanks.
Gayle, Mark has volunteered to follow-up with you over e-mail. Just send your e-mail as you're making your comments now (I won't post it publically)
Brent. Here's our next question from Peter Krieger
Hi Peter: I am not a fan of 401k loans, except in the most dire circumstances. I'm not sure of the purpose of borrowing from a 401k to fund an IRA, other than the tax deduction. One big drawback is that if you lose your job or want to switch employers, 100% the 401k loan has to be paid back immediately (typically). I generally don't recommend exposing yourself to that possible financial burden.
Here's our next question for you from JC
JC-Kuddos to you for aggressively funding Roth investment vehicles. At your age this is a very smart move. Granted nobody knows what income tax rates will be when you retire but the many, many years you have until retirement certainly justifies contributing to Roths now. I don't see higher incomes justifying investing in a traditional 401k or traditional IRA. The more you save, the more you will be forced to withdraw when you hit 70.5 if you are in a traditional 401k or IRA. Stay the course and invest all you can in Roths. They do not require minimum distributions when you hit 70.5. Hope this helps.
Brent, here's a follow-up from Robin. Here original question was:
"Hi - I am 52 years old and hoping to retire around the age of 67. My employer offers a 401K through Principal Financial Group. We are offered target date funds, retire view funds, several Large, small and International funds. My concern is we are only offered one Bond Fund, the PIMCO Total Return R Fund and a Fixed Income Guaranteed Option (av. 1.5). At my age I think I am supposed to have about 30% in bonds. Should I put 30% into this only PIMCO fund I am offered? If not, any advise will be much appreciated. Thank you."
Robin: For someone who is an active participant in an employer retirement plan, a contributions to a traditional IRA can be deductible, but is subject to income phase-out rules (meaning the contribution starts to become non-deductible). If you're single, the 2012 phase-out range is $58,000-$68,000; married filing jointly $92,000-$112,000. Roth IRAs have higher phase-out limits fro 2012: single $110,000-$125,000; married filing jointly $173,000-$183,000.
Thanks, Garrett. You can take this next question from Adam
Adam, Congrats on your ability to save and invest. I hope you are able to accomplish your goal of retiring by 50. There is a way to tap your retirement savings at age 50 without paying the 10% penalty. It is called a 72T Distribution. I will not be able to go into details here but it is good for you to look it up and consider. Basically you can withdraw a set amount each year until you reach 59.5. This amount is determined by the IRS based on your life expectancy and the amount you have in your accounts. You would still have to pay the income tax on the withdrawn amount. You would need to continue to make these withdrawals at the specified amounts until age 59.5. At that point, you can withdraw as much or little as you need until age 70.5. Hope this helps.
Adam, a lot of it depends on the sort of investments that you are choosing in your taxable accounts. Some investments will pay a lot in dividends and you will be taxed on those every year at varying rates depending on whether they are qualified or not. If you are invested in mutual funds you will have dividends and capital gains that will be passed through to you. It isn't as simple as saying all you pay is capital gains when you sell, though that is true for some investments. If your goal is to retire at 50 then you may want to have some taxable accounts too, but not at the expense of tax deferred accounts. Choose your investments carefully in the taxable accounts so as to avoid annual taxes and just incur the capital gains taxes you mention in your question.
Readers, please bear with us here as we transition advisors
Mark Ziety, CFP(R) from Shakespeare Wealth Management, signing off. I enjoyed the chat today!
Thank you for your help, Mark!