Mary – the rules on this strategy are much more strict and limiting. Can you find a loan, credit, or borrow? You have transaction costs and an opportunity cost if stocks rise. This is the reason it’s so important to have a comfortable short-term cash reserve buffer between yourself and long-term assets.
Hi Mary, this is a flat communication method so I hope this is read as intended. You need a planner I think because clients working with planners have far fewer financial emergencies that would cause them to dip into a retirement account on a temporary basis. Depending on your age, you may incur an early withdrawal penalty. A cash advance on a credit card would likely be cheaper - I highly recommend you see a planner before tapping your retirement accounts.
Mary - You would first need to trade to cash in the IRA. Once in cash you are eligible to take a distribution of cash for 60 calendar days. Be careful the IRS tracks those days closely. You are limited to the number of times this can be completed in a 12 month time frame
Well Corey I won't worry about you a bit - you and your girlfriend have bright futures - thanks for participating and the best to you both.
Mary - you are contemplating an extremely risky move, which could lead to stiff penalties, not to mention the opportunity cost of the time out of the market. I would recommend against this strategy. I'd advise you to meet with an hourly, fee-only planner to see if there are any other alternatives.
Corey, you should call you lenders and discuss the situation. If the private ones are high rate and / or variable, I would do all I could to lower all payments and have a strategy of paying down the private ones with the highest rates first. It sounds like you're on your way to paying them off, and you've got a great financial lesson that will stay with you that hopefully you can use to help others, and your future family. Best of luck!
Joe – you may be able to convert, your plan must allow it and they do not have to. You should sit down with an advisor to see if that is the best option for your current and long-term tax plan. I often find if Roths are desired there are ways to gain Roth assets on my checklist prior to an in-plan conversion. Contributing to the Roth 401k, a Roth IRA and / or converting a pre-tax IRA are higher on my list. You can always undo those.
Joe, your plan has to allow in-plan conversions/rollovers.
Joe - first of all, you need to check your plan documents to see if the conversion is permitted. If not, at the very least, change your new contributions to the new Roth 401k option. If it is offered, you will owe income tax on the amount being converted. This will require a conversation with your CPA to see if it makes sense now and for the long-term. Try to pay the cost of the conversion with outside assets if possible, so you don't see your balance shrink.
Joe - before you do such a conversion, if it's possible, be sure to carefully consider the tax bill you would face. Remember than you probably wouldn't be able to get cash out of the plan to cover the additional taxes. It sounds like a case for some software to examine the pros and cons, both short term and long term.
HV_04 – this is more a ‘can you sleep at night’ if the market is down 40% and you’re paying 4% question than a financial question. I find too many people do not have the stomach to sit through a market like we have today, earning 0% and having negative investment returns, while paying interest. Many during the crash did the WORST possible thing and sold stocks at the bottom to pay-off the mortgage, while previously they were convinced of the long-term mortgage strategy. Yes, it’s in your financial interest in my opinion to carry a very long, low-rate mortgage, but you need to do some mental exercises to convince yourself you will stick with it. If you’re likely to sell with the market down, it’s OK to pay extra on the mortgage.
HV_04 - Good question. If you have the funds to pay off your mortgage, you should examine how deploying that cash will impact other parts of your plan, like your rainy day fund, or ability to fund retirement, either now or in the future. My bias is that with such low mortgage rates available, if you are paying interest of 3-4%, it mike make sense to hold on to the mortgage if you can earn higher rates of return. If the money is sitting in savings earning essentially 0%, then it might make some sense to pay it off, especially is you're debt-averse.
HV - there is a financial answer and the 'other' answer. Most of my wealthy clients like to have paid off properties. The math may indicate it would be 'smarter' to keep a mortgage but they don't want one. We know that mathematically owners 'pay rent' to themselves and enjoy all the carrying costs (HOA, mtnce, improvements). Generally the folks who have paid off mortgages also have a very high level of flexibility in the rest of their finances - in other words they haven't paid off the property and then find themselves house rich, cash poor.
Wow, those first two hours flew by! Thank you for asking such great questions -- keep them coming!
HV_04 - Ah, the age old question of paying off the mortgage. I tell my clients that it's not always what the numbers tell you. Sure there's the cost of the loan (mortgage interest paid), the benefit of the mortgage interest deduction on your taxes, and the opportunity cost of using those dollars to pay down the mortgage instead of staying invested in the market. However, what allows you to have peace of mind? Some of my clients just prefer to have their homes paid off no matter what the numbers say. If you are in a position to pay it off and it makes you sleep better at night, go for it! If you do decide to pay it off, I'd recommend keeping a HELOC (home equity line of credit) open and available should you need to access the equity in your home.
Joining us now are Michael Gibney, Frank Boucher, Michelle Mabry, David Strege and Timothy LaPean. Welcome!
After 70 1/2 you are still allowed to make conversions from a traditional IRA to a Roth IRA.
Just be aware that the amount you convert will be taxable income in that year. Work with your tax preparer to determine the amount to convert that works in your overall taxable income situation.
Hi Jane. Yes, you can. I would recommend a thorough analysis, however. We have found very few instances where it makes financial sense to convert. Often, one of the aspects that tips the scales in favor of converting is whether you can pay the taxes due from other money, and not from the IRA. The "breakeven" point is longer if you net taxes from the conversion.
Jane, also don't forget to take your Required Minimum Distribution out of your IRA before you do a Roth conversion.
Tim, if one converts, does that satisfy the RMD?
Lizzie, You are doing a great job of saving. It looks like that 30K may be your emergency account. If so, don't fret too much over lousy interest rates. Consider that fund an insurance policy. What is really important is that your money be available when you need it with no chance of market fluctuation. On line banks and credit unions usually have the best rates.
Lizzie, Are you asking how to invest the proceeds in your Roth IRA. Because the Roth IRA proceeds have the ability to come out income tax free you want very good growth potential for those dollars. Depending upon the amount of fluctuation in values you can handle you should consider a higher mixture in US and International stocks. Then you can bring in bonds as you want to lower the volatility.
Hi Lizzie. Good for you for saving a high percentage of your paycheck! Have you done the analysis on whether it makes sense to direct some of that money to a traditional 401k? To get the most from your savings (after setting aside an emergency fund), I believe it makes sense to invest in a low-cost globally diversified portfolio. You can also take advantage of asset location, where you invest in tax efficient funds (US Large Growth) in your non-IRA and tax inefficient funds (e.g., REITs, Emerging markets) in your IRA.
The roth conversion cannot count towards the required minimum distribution. Also be aware that if this is a new roth IRA that is receiving the funds then you must wait five years before you are able to withdraw the growth tax free.
Michael, "Required distributions. You cannot convert amounts that must be distributed from your traditional IRA for a par- ticular year (including the calendar year in which you reach age 7012) under the required distribution rules (dis- cussed in Publication 590-B)." IRS Pub 590-A page 29
Thanks for clarification Tim and David!
Lee, You are giving up full access to the money for other purposes. Verify with the agent if this is actually a life insurance policy with rights to withdraw for qualified long term needs. Ask what qualifies for distributions and whether they will all be income tax free. Qualified long term care policies will have distributions that are all income tax free. Then determine if you can handle removing access to $100,000. Another note $100,000 invested with a 5% average annual return would require 19 years to grow to $250,000.
Hi Lee. I am not too familiar with that particular product from John Hancock, but I would urge you to do thorough research and ask as many questions as possible. Also, I would compare that product to a more traditional LTC policy. Lastly, Something to keep in mind is a LTC policy does not necessarily need to fully cover your expected LTC costs. You can opt for a policy with lower benefits (and, consequently lower premiums) that will enable you to supplement any long-term care costs.
Mary – the rules on this strategy are much more strict and limiting. Can you find a loan, credit, or borrow? You have transaction costs and an opportunity cost if stocks rise. This is the reason it’s so important to have a comfortable short-term cash reserve buffer between yourself and long-term assets.
Hi Mary, this is a flat communication method so I hope this is read as intended. You need a planner I think because clients working with planners have far fewer financial emergencies that would cause them to dip into a retirement account on a temporary basis. Depending on your age, you may incur an early withdrawal penalty. A cash advance on a credit card would likely be cheaper - I highly recommend you see a planner before tapping your retirement accounts.
Mary - You would first need to trade to cash in the IRA. Once in cash you are eligible to take a distribution of cash for 60 calendar days. Be careful the IRS tracks those days closely. You are limited to the number of times this can be completed in a 12 month time frame
Mary - you are contemplating an extremely risky move, which could lead to stiff penalties, not to mention the opportunity cost of the time out of the market. I would recommend against this strategy. I'd advise you to meet with an hourly, fee-only planner to see if there are any other alternatives.
Joe - before you do such a conversion, if it's possible, be sure to carefully consider the tax bill you would face. Remember than you probably wouldn't be able to get cash out of the plan to cover the additional taxes. It sounds like a case for some software to examine the pros and cons, both short term and long term.
Hi Jane. Yes, you can. I would recommend a thorough analysis, however. We have found very few instances where it makes financial sense to convert. Often, one of the aspects that tips the scales in favor of converting is whether you can pay the taxes due from other money, and not from the IRA. The "breakeven" point is longer if you net taxes from the conversion.
Lizzie, You are doing a great job of saving. It looks like that 30K may be your emergency account. If so, don't fret too much over lousy interest rates. Consider that fund an insurance policy. What is really important is that your money be available when you need it with no chance of market fluctuation. On line banks and credit unions usually have the best rates.
