IRAs for Dummies



Okay first and foremost, you’re not a dummy!  But I wanted to make a simple post with simple explanations about IRAs.  This isn’t the be all end all of IRA stuff.  But hopefully it will give you a little clue about them.

A traditional IRA lets you put money away for retirement and you can get a tax deduction for the money that you put into the IRA.  For example:  if you’re in the 25% tax bracket and you put $1,000 into an IRA then you will save $250 in taxes for the year you put the money in.  (The tricky part is that there are limits as to how much is deductible if you or your spouse have a retirement plan at work.  There are also complications if you’re using the married filing separately status.  I’m not covering that here.  If this sounds like you, give me a call and I can help you figure it out.)
A Roth IRA lets you put money away for retirement but you don’t get a tax deduction for the money you put in.  $1,000 into a Roth IRA gives you no tax savings.  (There are income limits for contributing to a Roth, the phase out starts at $167,000.  If you’re under that income level, you’re fine.)
Generally, the most you can contribute to an IRA in a year is $5,500.  If you’re married, you can contribute $5,500 for you and $5,500 for your spouse, even if your spouse doesn’t work.  You can’t put more money into an IRA than you earned (so if you only made $3,000 that’s going to be your maximum contribution.)   If  you’re over 50 years old, you can contribute up to $6,500 to your IRA.
Remember, the $5,500 is a maximum.  It’s fine to contribute less.  Most accounts are going to want at least a $1,000 to open, but you don’t have to have $5,500 to put into an IRA. Its not an all or nothing kind of investment.
When you take money out of your traditional IRA, the money you take out is taxable.  So, once again if you’re in the 25% tax bracket and you take $1,000 out of your IRA then you’ll pay $250 in taxes.  The concept is kind of like:  take a tax deduction now/pay taxes later.  Here’s where it’s tricky…if you take the $1,000 out before you are 59 1/2, not only will you pay the $250 in taxes, but you’ll also pay a 10% penalty making the total tax you pay $350.  There are exceptions to the penalty if you use the money to buy a house or pay tuition.  You will pay the tax no matter what, but sometimes you can escape the penalty.
With the traditional IRA you are playing a gambling game.  You’re betting that your taxes are higher now and will be lower when you retire.  That’s a good bet for many people.  So the traditional IRA is a good thing.
When you take money out of your Roth IRA, the money you take out is not taxable.  So, if you take out $1,000 from your Roth and you’re in the 25% tax bracket, you will pay zero tax on that $1,000.  If you take the $1,000 out before you turn 59 1/2, you may pay a 10% penalty on the earnings but not on the whole $1000.  Roth IRA means tax-free income later.
I really like the Roth IRA for a couple of reasons:
  1. 1.  It’s especially good for young people.  The Roth is a great savings tool that can be used for buying a home and paying college tuition.  If you invest in a Roth when you’re in the 15% tax bracket but wind up taking the money out when you’re in the 25% tax bracket:  zowie!  You win!  It’s like a little tax bonus.
  2. 2.  Even if you’re more mature and already in the 25%  tax bracket or higher, I still like the Roth.  When you’re retired and receiving social security payments, your social security isn’t taxable until you cross a certain income threshhold.  Once you cross that line, your social security becomes taxable and it’s like you’re paying double taxes.  For example:  let’s say your pension and social security put you right at the line where if you make any more money your social security would be taxable.  Once you cross that line you’ll pay tax on your social security income.  If you take money out of your traditional IRA, let’s use the $1,000 example again, and you’re in the 15% tax bracket, you won’t pay 15%–you’ll pay even more because now your social security will be taxed too.  It’s not exactly double, it’s more like one and  a half times more.  (Kind of a funky equation.)  Bottom line:  once you start receiving social security payments, extra income is actually taxed at an even higher rate than your real tax rate because they start taxing your social security.    Ouch!  Ask any senior citizen who’s been hit with this.  It hurts.
  3. Now  if your retirement income is so far over the threshold that you don’t need to worry about additional tax (because you’ve maxed out your taxable social security), or if it’s nowhere near the threshhold, then it’s not really an issue for you.  But for many seniors, extra taxable income can be a big problem for them.  The Roth IRA can be a real lifesaver when you’re older.
If it’s not completely obvious yet, I’m a big Roth fan.  That said, if you need a tax deduction now, then traditional IRA is the way to go.  For example:  one  year, I needed to lower my personal income by $310 to claim a $2000 tax credit.  That’s a no brainer, of course I spent $310 on a traditional IRA to save $2,000.  I put the rest of my retirement money into a Roth.  You can do stuff like that when and if you need to.
There’s so much to know about IRAs and it can be really confusing.  This little post is just the tip of the iceberg.  For detailed information about IRAs, the IRS has a book called Publication 590.  Here’s a link to it:  Pub 590
Okay, I confess, that publication looks a little intimidating.  It’s 110 pages long.  But if you look at page one, the chapters and sections are set up based upon the questions people ask.  Look for your question and it will tell you the right page to find your answer.  It’s not so scary when you know that in advance.

51 thoughts on “IRAs for Dummies

  1. Hi Jan,
    Thank you so very much for replying. It’s awfully kind of you to give adviceTwo people that they would otherwise have to pay for.. Yes he is under 55 he’s only 38. We live in North Carolina. He was staying in a hotel paid for by the company in Raleigh North Carolina. Our home town was an hour and a half away. Back in October 2016 Hurricane Matthew hit our hometown extremely hard. North Carolina was deemed a disaster area and the county we were in wad hit harder than any county in the state. The place we were renting flooded and at that point because the landlord was going to take his time fixing it my daughter and I packed our things and went to stay with him in the hotel. Right before he was terminated we had found a place to rent so we could be near his job. We were going to use his next two paychecks for a deposit and then he was terminated. This is what sent us to my mother’s house. Deciding to move closer to the beach where he has found a new job. Reading through some articles and about 401 it mentioned living in a place deemed a disaster area. At this time I read so much I honestly can’t remember what it said LOL. However I didn’t know if there was some type of loophole because of us losing our home during Hurricane Matthew that would help with rolling it over or taking it out rather. Just to make sure I have what you’re saying correctly. Removing it for medical reasons will be tough and the easiest thing to do would be to roll it over into a IRA so he could then “use for tuition” , Other than those options the only other option is to pay the Hefty fines? Is that correct? I read in the pack the employer sent they automatically keep 20% for the taxes. Is it guaranteed the taxes will be 20%? I was under the assumption they will be more. If we just take it out and pay the penalties and fines I had figured that we were looking at about $9,500 , with the info I gave does this seem about right? I know I am asking a lot and again I am more grateful than you know for the advice and quick reply. I have yet to fill out the paperwork but it has to be done as soon as possible we’ve got to get a place to stay before school starts so that my daughter has stability and structure. Again, thank you kindly for your reply and information.

  2. Hi Cara,
    I’m sorry. It sounds like you’ve been dealt some rough times. Right now he’s got about $13500 in the 401(k).

    I’m guessing that he’s under 59 and 1/2. That’s the first question – because you have to be over 59 and 1/2 to avoid that extra 10% penalty.

    I’m also guessing that he’s under 55 also — if not – there’s an exception where he could take the money from his 401(k) after being separated from service. So – that would help. But, your daughter is only 12 so I’m thinking he’s younger than 55.

    You may be able to avoid the penalty with the medical expenses – but that’s really difficult to get that. The medical expenses have to be over 10% of your adjusted gross income (AGI) – and, when you take the money out of your IRA or 401(k), then your AGI goes up. It’s stupid in my opinion, but I don’t get to write the tax laws. The medical exception works for both IRAs and 401(k)s.

    The other exception to the penalty is using the funds for college. That only works if the money is coming from an IRA – so if you’re going to have tuition costs, then it may make sense to move the money to an IRA first before taking it out.

    Now here’s the important thing: hopefully your husband will get a loan for his tuition. Let’s say the tuition is $10,000. He uses the loan for the tuition and he uses the IRA money for your other expenses. You still have a tax document showing that you spend $10,000 in tuition. The IRS will allow you to use the IRA money without the penalty – there will still be tax, but the 10% penalty is gone.

    I can hear people saying right now – “but she’s not using the IRA for tuition, she’s using the loan for tuition so she still have to pay the penalty.” No, she doesn’t! The IRS doesn’t know that. And, more importantly, they don’t care. She could be using the student loan to pay living expenses and the IRA money to pay the tuition. How is anyone to know?

    And I’m not being slimey. I actually worked on a very real case for a very real person who was having some financial troubles. Sound familiar? There was a problem with her tax return and when I spoke with the IRS agent about her situation, it was the IRS agent to came up with the idea. (Yes, there really are nice IRS agents who try to help people.)

    So, I’m thinking that if you can – move the money to an IRA before you withdraw it. (If you can do that without a lot of fees.) I’m guessing that you’re going to need the whole amount, but if you can get by without taking all of it – well that’s better. But – you need to eat, feed a kid, etc. I get that.

    One last thing – I don’t know what state you’re in, but maybe a professional could help you with those penalties. (Maybe not – some states are impossible.) The IRS has a “first time abatement”. Kind of like a get out of penalties free for the first time you mess up. It’s at least worth a call and asking. If they say no, you’re no worse off then you were before.

    Good luck with the new job and school!

  3. Hi, first of all want to tell you THANK YOU KINDLY for information you shared through the article and all of tbe answers. Wow! Researched this topic for hours and this page gave me more understanding than all the others combined. But I do have a question I a question and have to make a decision ASAP. My husband was terminated from his job of 9 years which I must say was very unfair but that’s another story. It has left us in a very bad place financially. We had to move for him to find a new job however we have absolutely no money saved and one daughter that is 12. Therefore we are staying with my mom temporarily and he is already found another job but we have no choice but to remove his 401. We have car payments behind and also need money to get a new home. We literally are down to Counting change. That said he was in the hospital for 3 weeks after having emergency surgery. This happened two weeks before he was terminated. We were already looking at borrowing against it because of medical reasons. He is going to start college this upcoming semester. We are basically homeless. So what I’m asking what is the best way to withdraw this money to keep from paying the lowest amount of penalties and taxes. We are already going through tax issues with the state because they have been garnishing his wages for 4 years and have taken over $11,000 for penalties because he failed to file two years straight. So I’m trying to sort this out already that the state. I feel they have taken way too much money another story. Forgive me for rambling it’s just so much information. His your today gross income at this point is $15,000. He is 100% vested and his pre tax deferral rate is 6% if that matters. I was thinking we should just try to take it out for medical reasons because his medical bills are well over $20,000. He has a balance of $13,466.33 in his 401. Any help would be greatly forever appreciated thank you so very much.

  4. Hi Chong,
    If you cash out your IRA you’ll pay your regular income tax rate on the $1700, plus another $170 for the penalty. It’s not all that bad. Just make sure that you withhold some tax from the payout and you should be fine.

  5. Hello,

    I have worked for this company for about a year before I left and I have only about $1,700 in my fund. Can I cash it out. I would have to pay the %10 and the penalty right? what about the taxes stuff from it? how does that work? Just trying to make sure if I cash it out that I don’t get to pay during tax time. Thanks


  6. Hi Candice,
    First, I’m not allowed to give investment advice so make sure you talk to your financial advisor about where you should put your QDRO money.
    That said, you don’t actually have to take the money out until your reach age 70 and 1/2. So, there’s nothing you HAVE to do, at least not yet. But there may be things you WANT to do. So do talk to your financial advisor about your funds and what you can be doing with them.

  7. Sorry Jan four the typo but i took it out i didn’t withhold any tax, does it matter what i use the money for towards, e.g. books gas, food… ? And does this affect my fasfa I’m trying to apply for and when i do my income taxes will it effect me from getting any money back ?

  8. Thank you Jan for the reply so if i can’t it out i don’t need to make them tax it, or it won’t effect me getting back income tax during tax season.?? Because i know books are going to be a bit much, i did apply for fasfa would that effect it, sorry for all the questions.

  9. Hi Mike,
    Go ahead and take the Roth out and use it for school. You don’t need to withhold taxes on it. You’ll need to report it on your return, but it won’t be taxable. The only part that would be taxable would be the earnings and since you’re using it for school, that eliminates any penalty so it’s all good.

  10. Hi, quick question I’m starting school so i have about 2700 in my roth ira, I’m looking to withdraw that to have money for the semester coming up. Im 28 and I’m currently employed i make about 28,000 a year in gross income. Will this affect me when i do my income tax?? Im really clueless to how this works. I want to withdraw the money because i need to fix my car and pay for school deposit and books whatever financial aid doesn’t cover. If i have them take whatever tax from early withdrawal will i have any other payments to make when i do income tax??

  11. ty very much i figured about the same and yes i will be homeless, ill be taking the money out to survive. appreciate your quick responce time i will remember you.

  12. Hi Dennis,
    So if you’ve got $3400 in your retirement account and you know they’re going to tax you 10% that’s $340 right there. But I can’t guess your tax bracket because if you’re losing your job, it all depends on whether you work again or not.
    That said, I’d assume at least another $340 in regular taxes. So that’s $680. So if you withheld 20% for taxes then you’d get $2,320.
    But you said you really needed the money. How much do you need? And can you make up the tax later? Because, let’s say you had to have that whole amount or you’d be homeless or something horrible–I’d take the whole some without withholding the tax. Yes, you’ll pay it at tax time, but an emergency is an emergency.

    But, let’s say you really need that money to go to Disney World, well then I’d make sure you withheld the tax and maybe spend less on the trip.
    But only you know what’s best for you.
    But bottom line, if you withhold 20%, then you should get a check for $2320. If you’re in a higher tax bracket than 10%, then you’ll still have a balance due. But once you get a new job, you can do some calculations to increase your withholding if that’s going to be necessary.

  13. im a uw wisconsin employee, my lte job is being terminated and i have around 3200 in my retirement account ira. if i collect my money at termination im to exspect a 10% penalty and then to pay the percentage of whatever tax bracket im in? i claim 3 for deductions and make around 24000 a year can u respond to the ammount of actual cash you think i will recieve after penalties? i really will need the money

  14. Hi Gataxry,
    The form you need is the 8606.–2010.pdf That’s the form.

    Here’s the instructions.–2010.pdf

    Now if you have more money in other IRAs then it won’t be a simple matter of the $20,000 not being taxed, there’s a whole formula at work here. You might want to get some professional help with this, it’s a little funky.

    But if the only IRA funds you have are what you just wrote about, and you’re good at following IRS directions (which don’t make much sense half the time) then give it a try. The logic should hold that 20K isn’t taxed and $11K is. If it works out that way then you probably did it right.

  15. i put 2000 (money that i already paid tax on )a year for 10 years into a ira from 1970 to 1982 (i was working during that time) w/ a broker. then forgot about it until 2010 and with drew all of it.
    it total about 31000. i did not reduce my tax each yr by the 2000 .can i deduct my 20000 that i had already contributed paid tax on and just pay tax on the 11000. just now filing taxes on my 2010 taxes…. what 2010 work sheet can i use or do i just subtract it out and put the the 11000 on line 15.b,, in the income
    1040 section or put it in the adjusted gross income part line 32 ira deduction or put it in the 1040 section line 50 retirement savings contributions credit say
    go read the instructions there is nothing there i can make out. guesses are welcome.

  16. Hi Kelli,
    I’m sorry about your fiance’. I hope he’s feeling better soon. There is an exception to the 10% penalty related to medical expenses. Bascially, the medical expenses have to be more than 10% of his adjusted gross income. Let’s say your fiance’ made $30,000 this year. If his medical expenses were $5,000 then he could keep $2,000 from the 10% penalty.

    ($30,000 times 10% = $3,000. $5,000 of medical expenses minus the base of $3,000 = $2,000. That’s the amount that could be excluded from the 10% penalty.)

    The problem is, when someone is sick, it’s not just the medical expenses, it’s the housing, and meals, and all the other stuff that the bills pile up.

    One other thing, if he’s unemployed, you can exclude his health insurance payments from the penalty also. So maybe you’ve got something there as well.

    Good luck.

  17. We’ve come across some tough medical issues just recently (4 ER visits for my fiancé in the past month– we live together in the house we just bought, two of those ER visits were in the last week, an ambulance ride, and an emergency procedure last week, and him barely being able to work 15-20 hours per week for several weeks now, and no paid time off because of not being at this employer for a year yet). We have no other option than to start with a small IRA of his ($3300) that was a 401K rolled over from a previous employer so we can start to pay these bills and keep our head above water. What are the taxes and penalties involved? I believe it to be a penalty of about $300, and then taxes should be about 10%? Is there anyway to avoid the penalty? Thanks in advance.

  18. Hi Miranda,
    I’d just take the money out. Yes, you’ll get hit with the penalty (10%) but I’d spend the money on some interview clothes too. Good luck.

  19. I’m 23 and for the past few years i’ve forgotten about my 401k and 403b plans until recently. Theyve rolled over to an ira by my previous employer. Unemployment has taken it’s toll to the point where i can’t afford new, decent interview attire. Hair dye..everything to look presentable! No other income available to me to afford necessary items. Only $1,000 or so altogether in my accounts profile. This small amount will benefit me more now rather than when im old because i remain jobless and unexperienced in most cases.

  20. Hi Karl,
    I can give tax advice, it’s against the law for me to give financial advice. I cannot recommend any type of investment over another.

    That said, the issue of converting your money from a 401(k) to an IRA isn’t a scam. There are advantages to having your money in an IRA over a 401(k). But, this might be a case where you want the stick with the 401(k)–what I would do is check the fund fees. What does it cost you to stay in the 401(k) versus what will is cost you to have your assets in the IRA?

  21. Hi Marie,
    I think you need to sit down with a tax person and a financial planner. You deserve a proper review of your assets.

    My knee jerk gut reaction is–if you can withdraw your tradtional IRA money tax free–why bother to roll it over into a Roth? If you do that, you’ll pay tax on the rollover.

    But obviously I don’t understand your whole situation, and you deserve to have someone who knows the whole picture sit down with you.

  22. Hi Jan, I retired from the phone company in Nov 2013, and I’m 58 years old, feel older, all those poles and manholes, take a toll. Question, I moved my pension from Fidelity to a Pinnacle Asset ( financial advisor, converted it to an IRA) and left my 401k with Fidelity. I have cash that I can live on for a couple of years and I’m being solicited by Fidelity to convert my 401k to an IRA. What to you think ? Sham scam or legit ?

  23. Just retired at 69 and have a 401K that I need to roll over. My tax accountant said I can take 10,000 a year from an IRA without paying taxes if I need it because I won’t have much of an income other than social security which I will begin at age 70. Should I roll over to a Roth? What kind of cost will I incur? Unfortunately I don’t know much about this. Thank you for your assistance.

  24. Hi Renee’,
    You technically have until April 15th to open an IRA. But I strongly suggest that you do it before then. If you wait until the very last minute, your IRA request might not go through on time. So definitely contact your finanacial advisor by April 1 just to make sure you’ve got plenty of time to get the paperwork done correctly.

    As far as reducing your taxes–only the Traditional IRA will lower your taxes. The Roth is great for getting tax free retirement income–but is doesn’t affect your taxes now.

  25. Hi Michaela,
    It sounds like your account got hit with a management fee–$45 is what I pay every year on my IRA account. That’s a fairly normal charge. The thing is, when you’ve only got about $1000 in there, the $45 takes a pretty big dent.

    While I would like to see you keep your IRA and contribute more to it–well, paying off credit cards is a wise use of money. But you’ll have tax consequequences. First, you’ll pay tax on the withdrawal (or redemption–that’s the word you want to use with your company-redemption.)

    So, if you and your husband together are in the 25% tax bracket–that’s $279 in taxes.

    Then, you’ll have the 10% early withdrawal penalty, so that’s another $116 in taxes. That’s almost $400. So–you’ll really only have about $700 left to pay that credit card bill. So–what’s the best thing for you to do?

    Now, if you’re in the 15% tax bracket–well then you’ve got less tax to pay–and it makes taking the money out of the IRA more attractive.

    One more thing, most companies have a fee for closing your IRA account as well, so you’ll want to find out what that is and realize that’s another cost of closing the IRA.

    Whatever you decide–it’s your decision and you do what you think is best for you.

  26. Hello,

    I am 28 years old. I spent almost 2 years at my first job out of college. I had a 401k with them. Eventually, I received paperwork asking if I wanted to roll it over into an IRA account.

    When it initially rolled over, the total amount was $1,211.23.
    Well, I ignored the account for a while because, honestly I forgot about it. I was just looking into it, and the total in the account now is $1.166.23. Its in a Money Market Fund A with Oppenheimer Funds.

    I am currently unemployed and I really need the money to pay off a credit card in order to avoid late fees. Is it a good idea to cash out of this account? Will I owe money on my taxes at the end of this year? – I should also point out that I got married in September, so from now on my taxes will be filed jointly with my husband, as he makes a lot more money than I do and we’ve decided that filing together might help get us into a lower tax bracket.

    In addition, I dont understand how to withdraw the money. Everytime I call the hotline, they ask if I want to perform a “redemption” or “exchange”.

    As you can see, I am clueless when it comes to taxes/funds/etc etc.. All help is greatly appreciated!

  27. Hi Fred,
    Good question. 74 is not too old to start a Roth IRA. That’s kind of the cool thing about Roth IRAs, they don’t have the age limits that regular IRAs do.
    The return on a Roth IRA is only as good as the return on the investment in general. For example, the return I’m getting on my Roth right now is pretty good (Thanks to my investment guy!) But years ago I had my Roth money in a fund that was really bad. Fortunately I got out of if before the company went completely under.
    I’m not allowed to give investment advice but I bet you can find a good financial advisor to help you out.

    My question to you would be–why do you want a Roth? Are you still working? You have to be working to put money into an IRA. What’s your goal? Roth IRAs are particularly good if you’re looking to have something to leave in an inheritance. They grow tax free–so that’s nice. Is that best for you or is there something that’s better suited to your needs?

    You can sit down with a financial planner and explain exactly what you want to do with your money and she can come up with a good plan that works for you.

  28. Hi Elsie,
    I’m sorry about your brother’s death.
    I’m going to tell you to see a tax professional in person. You’ve got some issues that need to be addressed.
    First question–how old was your brother when he passed? If your brother died after he was required to take minimum distributions, then you and your siblings may take required minimum distributions from the account using an IRS life expectancy table.
    If your brother died before he was required to take the distributions, then you must distribute all of the IRA within 5 years.
    Personally, I’m in favor of just distributing the whole thing and being done with it, but that’s my personal preference, not a tax advice kind of perference. There’s six of you so you all may have different opinions on the issue. If your brother was old enough for the required minimum distributions, you would lessen the tax bite by continuing the distributions–but you’d also be paying the accounting fees for the estate tax return. You’ve got a trade off there. (As an accountant, I like getting paid. Being a cheap person by nature, I’m inclined to take my money and run and be done with the accountant.)
    The quick and dirty answer is that the distributions from the IRA will be listed as taxable income to the estate and passed through to the beneficiaries. Each of the siblings will then receive a K1 form showing how much of the income will be taxed to them individually.

    Now here’s on more thing to think about. Is it possible to settle this before December 21, 2012? If the answer is yes, I’d lean even further towards distributing now. Given the possible tax changes, an extra $83,000 of income would have a worse tax effect in 2013 than it would now. But like I said, you’ve got 6 people to deal with and getting 6 people to agree (even the nicest, most agreeable people) isn’t always easy.

    Good luck.

  29. My brother passed away and left me as executor of his estate. It is under 500,000 and he has an traditional IRA that he left 100% to his estate. There are 6 siblings to divide it. How do I handle this? Will each of us have to cash in and pay taxes? Is there a way to lessen the tax bite?

  30. Hi Christina,
    Thanks for posting your question. I need to tell you that it is against the law for me to give investment advice. I’m licensed to talk about taxes, but not investments. Sorry.

  31. I have two IRA account that I have rolled over from two different jobs and now I am combining two into one. I just need to know if I should change the account to make more money or what I should do to reinvest into what types of accounts. I am 34 years old and in the future would like to contribute more money. I am just confused in what would benefit me and what is the smarter move for me.

  32. i Deborah,
    That’s a good question. (Code for, I had to go look it up, I had no idea!) I read it the same way you do. According to IRS publication 590 the two years are after the date your employer first makes contributions towards your plan. Here’s exactly what it says (I cut and pasted it.)

    Two-year rule. To qualify as a tax-free rollover (or a tax-free trustee-to-trustee transfer), a rollover distribution (or a transfer) made from a SIMPLE IRA during the 2-year period beginning on the date on which you first participated in your employer’s SIMPLE plan must be contributed (or transferred) to another SIMPLE IRA. The 2-year period begins on the first day on which contributions made by your employer are deposited in your SIMPLE IRA.

    After the 2-year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax-sheltered annuity plan (section 403(b) plan), or deferred compensation plan of a state or local government (section 457 plan).

    Back to me–not the IRS page anymore–I read that as you can transfer your SIMPLE plan into a traditional IRA–or if you want to convert to a ROTH–that’s open to you too (of course that will be taxable.)

    I wouldn’t say your broker guy is lying, I fgure it’s more like an honest mistake. (I did have to look it up.) Then again, the question is–what other mistakes is he making? If you generally trust the guy–I can understand his confusion on this one. If you’ve had other misgivings–maybe you should talk to a different broker–kind of like shopping for a car–kick the tires or whatever. (Don’t kick your broker, they don’t like that.)

    Or maybe he’ll wake up tomorrow and call you and say, “Hey Deborah, remember I told you that you could only transfer money that’s been in the account for two years…well I did some research and….” Then I’d defifitely give him another chance.

  33. I’ve have had a Simple IRA through my employer for 7 years. I’m considering rolling over most of it in a Traditional IRA, or a ROTH (if an option). I’m unhappy with my advisor. But I have my financial advisor at the brokerage firm telling me I can do so, but because of the 2 year rule I can only roll over monies that have been in the account for 2 years, so funds that have been in there for 5 years. Of course I’ve put the most in the last two years. What I’ve read everywhere is the 2 year rule is simply since the day the accounts was opened – or the date of the first deposited contribution. Nowhere am I reading his interpretation. Is he telling me the truth?

  34. Hi Wagieh,
    You’ve maxed out your Roth and your wife’s Roth and you’ve maxed out your 401(k) contribution. I think you’ve got your bases covered. (Pat yourself of the back–good job!)
    I don’t know if this would work for you, but some people are also maxing out their Health Savings Account contributions. If a Health Savings Account would work for you–I’d talk to a financial advisor first–although there are tax benefits to contributing to one–I haven’t seen one with a really good investment strategy yet. Your financial advisor would have better information for you on that.

  35. I’m 57, file jointly. I have joint investment account, Roth IRA for my unemployed wife and myself and 401K with current employer. Is there a room and benefit from having additional IRA account as I maximized our contribution in Roth and 401k?

  36. Hi Paul,
    It sounds to me like you can make a “spousal” IRA contribution to your ROTH account. Even though you’re not currently working, because your wife is, you’re still allowed to contribute. And, because you’re over 50, you can make the stepped up contribution as well.

  37. I’m 62 and retired. Years ago I converted some of my traditional IRA to a Roth IRA. I have made no contributions to the Roth since the initial conversion. My wife remains employed. Her annual income is $100K. We file joint tax return.

    Can I make a contribution of $6K to my Roth IRA with money that is currently in a joint savings account?

  38. Hi Danny,
    Thanks for your question. Please forgive my snarky comment but, “What’s in it for your financial advisor?” I’m asking that because I’m thinking there’s not much in it for you. Here’s why, with a pension of $3,000 a month, you’re making around $36,000 a year. After deductions, that puts you pretty firmly in the 15% tax bracket. You could even take out more money and be in the 15% tax bracket.
    If you transfer $190,000 over to a Roth in one fell swoop–well that’s putting at least part of your income in the 33% tax bracket and the rest in the 25% to 28% bracket. That’s paying more tax now than you’ll normally pay in the future for that money, so…..why do it?
    That said, I am a big fan of Roth IRAs, and here’s where moving some money over might be a good idea. Since you’re only 58, you’ve got some time before you start collecting social security. Although social security isn’t taxable up to a point–after awhile it does start getting taxed. That’s where the Roth comes in handy, because money you take from the Roth isn’t taxed when you take it out so your Roth money won’t affect taxing your social security. (And, if you’re still getting $36,000 a year for your pension, then you are dealing with taxable social security anyway, so some tax free income would be nice to have.)
    But I wouldn’t move the whole $190,000 in one fell swoop. I’d take a few thousand at a time–keep your income in the 15% tax bracket. It makes no sense to me for you to pay more than 15% tax on that money.
    The quick and easy way to figure out how much to move would be to look at your last year’s tax return and the federal tax rate schedule. If you’re single, the 25% tax rate kicks in at $34,001 for 2010. I think it’s a little higher for 2011. Look at your “taxable” income on your 1040–that’s line 43. The difference ($34,000 minues your taxable income) is how much of your IRA you can transfer to a Roth and only pay 15% tax.
    The next question for you would be, “How much extra tax can I afford to pay?” Let’s say you could rollover $10,000 and still be in the 15% tax bracket. Well, that’s great, but it will also cost you $1,500 in taxes, so you’ll have to decide if you can afford that or not. And only you know the answer to that.

  39. I am 58 years old and retired. I make about 3000 a mounth pension. My finicial advisor wants me to transfer, about 190000 from Ira’s to roth Ira’s, at such a late state of age is this a good idea

  40. Hi Ellen,
    That’s the million dollar question for everyone isn’t it? Do I cash it out or roll it over? Standard accounting answer 101: it depends. One thing you have in your favor is that you are over 59 and 1/2 so you don’t have to pay that pesky 10% penalty. That makes it a little easier to cash it out if you want to.
    Another major point that I’m hearing from you is that your fees are so high that you’re losing money on the investment. That doesn’t necessarily mean that you have to cash out, but moving the money to a better investment is definitely a good idea–no matter what you decide, I’m thinking moving the money is a good idea.
    You also have a third option that I’m not sure you were aware of: cash out part of it and transfer the rest into a better investment. I just wanted to make sure that you knew it wasn’t an all or nothing proposition.
    So these are the questions I would ask: 1. Do you need the money now? Because to be honest, if you’ve lost a job or have medical expenses or some other thing like that, really needing the money trumps whether you have to pay tax or not. 2. If you don’t have to have the money right now, then the question is, can you afford the tax? Will the extra income bump you into a higher bracket? How much can you take without hurting yourself?
    And my last question is, 3. can you afford to keep it in a retirement plan?
    Sorry, I’ve given you a bunch of questions and no answers. But how you answer those questions will give you the right answer for you. The standard thing they teach in tax school is that cashing money out of your IRA or 401(k) is “the dumbest thing you can possibly do.” But I’ve found that that’s not always true, and sometimes it can even be pretty smart. (Don’t quote me on that, tax people are supposed to say it’s bad, they’ll kick me out of the club.)
    Bottom line: if you can afford to keep your funds as retirement money, that’s a good thing, but you’ll probably want to roll it over into a better investment.

  41. Hi. I have a traditional IRA/ money market fund-A account that is losing money due to fees and since I no longer work for this particular company I should/would like to do something else with it. I am over 591/2. I also have retirement stock in that company and would like to do something with that also. The main thing is to roll it over or face the tax man if I cash it out right?

  42. Hi Linda,
    Thanks for your question. This is what would happen in your situation: if you took all of your money out of your IRA and put it into a savings account, you would have to pay income tax on the entire amount that you took. Even though the IRA has lost money, because it was originally in a 401(k), it’s all taxable. You wouldn’t pay any penalties on the money, just income tax.
    Here’s another option for you to think about. You can move your money out of the IRA investment that it’s in and put it into a different IRA investment–even one that is a high interest bearing savings account. That way you’ve got the best of both worlds–you’re still protected by the IRA shield, and you’ve got the savings account that you want. Then you only have to take out the IRA money (and pay tax) on what you need instead of a lump sum. Good luck.

  43. I have an IRA that I have had for 10 years. It was a rollover from a 401K when I changed jobs. The IRA has never increased, only decreased. I am now almost 61 and would like to know what I would face if I closed the IRA and put the money into a high interest bearing savings account.

  44. Hi Joan,
    Sounds like you’ve got a lot going on there. I’m guessing that the 401(k) rollover is due to the divorce and is part of the QDRO (qualified domestic relations order.) If you take the money and do a direct rollover into a retirement account-it won’t be taxable to you at all.
    You can, if necessary to pay your divorce bills, take the money-it will be taxable, but if you take it during the QDRO distribution, you won’t pay the 10% penalty for an early distribution.
    Whatever you do– DON’T do a direct rollover and then take the money out–that will land you in lots of tax trouble.
    This is one of those cases where you should get some face to face help from a tax person and your investment person. I’m a little leary here–most investment people are good wonderful people who will look out for your best interests. But, I wound up working on a tax case where the investment guy was (pardon my choice of words, but if the shoe fits…) the guy was a sleeze bag and was just trying to make a commission buck off of my client. That’s why I want you to get a tax person to look at your QDRO settlement before you cash any checks or deposit anything.
    It’s against the law for me to tell you how to invest your money. (I’m licensed to do taxes, I’m not licensed to do investments.) I can tell you the tax consequences of your different investment options. I just want you to use caution, expecially when I see the phrase “large sum of money” I always translate that into “large income tax bill”.
    If you want, you can contact me directly, I’ll be glad to talk about the tax side of your choices. You don’t want your personal business on an open message board.

  45. I’m sitting here today trying to get some money into an IRA before I file my taxes, so I can avoid paying any taxes this year. I’m disabled & live on a small pension & some alimony.
    But….after I do this now, I still have the dilemma of investing a large sum from a 401k I expect to receive soon, from a divorce settlement that must be rolled over into another acct..
    I don’t know where or what to put it in, so it will save me money, earn me money & help me avoid paying taxes too.
    Can you help me ?

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