Personal Investment & Financial Planning Q`s/401K after 70 1/2 rollover?

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QUESTION: Hello John,

I'm 72. I retired when I was 69, and haven't worked since. Before turning 70, I contacted several times my ex-employer's HR and the investment company that holds my 401K, and asked them what should I do about the 70 1/2 distribution in order to avoid tax penalties, but they said I had to do nothing, but now I got a distribution from the fund. They're keeping almost $200 tax from approx. $900 distribution, so I'm getting only about $700.

What I'd like to do is get the money out and move it to either an IRA or Roth-IRA, but all the information I find about doing so, talks about people at a younger age. At my age, what would be the pros and cons of a rollover to an IRA vs a Roth-IRA?

Thanks in advance,

Richard

ANSWER: Hi Richard. To clarify how IRAs work, you are not required to draw from an IRA account until April of the year following the year in which you turn age 70 1/2. Once this date arrives, you are then required to take a minimum amount out of the account each year based on the governments withdrawal table. With IRA rollover accounts, the amount withdrawn is typically considered 100% taxable income (unless prior non deductible contributions were made to the account) and in most instances, the custodian/investment company of the account will withold a small amount of taxes unless you instruct them not to.

On to the Roth IRA; what you could consider doing is taking the IRA account and converting this to a Roth IRA. In doing so, the amount you convert from the ordinary IRA to the Roth IRA will be considered TAXABLE INCOME in the year of the conversion. So, instead of avoiding taes all together, you accelerate the taxes you pay and the Roth IRA can then grow tax free with no minimum distribution required from the Roth IRA account in the future.

On to your specific question; the most common advantages of people converting to a Roth IRA during retirement is #1) if they can convert $$ to a Roth and pay less in taxes now than they may pay later on in life when withdrawing from the traditional IRA, #2) if they are interested in conserving a bucket of money for their beneficiary who will then be able to withdraw this tax free when they receive it upon the death of the account owner.

Generally speaking, the advantages of converting to Roth IRAs are greater the younger a person is, however, there are instances where converting at retirement age does make sense. However, it is case by case specific. I hope this helps.

---------- FOLLOW-UP ----------

QUESTION: Hello John,

I'm a little confused... In your answer where it says "To clarify how IRAs work, you are not required to draw from an IRA account until April..." did you mean "401K" instead of "IRA"?

Thanks in advance,

Richard

Answer
Hi Richard. Sorry for any confusion. The rules for 401k plans and IRAs are the same, except, 401ks do not always require minimum withdrawals if a person is still working. If a person is still working, then 401k withdrawals can be delayed until April of the year after the year in which you retire. I hope this helps clarify.

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John D Smith, CFP

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I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related comprehensive wealth management and investment concerns.

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I have been providing fee only investment management and comprehensive wealth management services for the past 19 years.

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I have a degree in Financial Planning & Counseling and I am also a Certified Financial Planner practitioner.

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