Answers in Financial Planning

John, stable value funds fluctuate much less than bond funds, but they still participate in interest rate risk. In a rising interest rate and rising inflation environment, you could see your returns decrease, even to the point of being below the rate of inflation

If you are concerned about safety or income, a stable value fund may be a compelling choice. It is generally most suitable for people at or near retirement, as it is a conservative investment and there is not very much growth potential

Liz, it sure is different. Take a look at her statements. I know they are sometimes difficult to read, but look for the different lines that say IRA or Roth IRA. There should be different account numbers. If they exist, simply point it out to the financial advisor.

Both IRA’s and Roth IRA’s have named beneficiaries. If you are a named beneficiary, you can claim the account directly from the financial institution.

I wrote a guide about the differences between the two. Please review Should I Convert to a Roth IRA It explains the differences between the 2

IRS laws now allow you to do a Roth conversion from a 401K to a Roth 401K, but only if your plan has a Roth 401K option AND allows you to do the conversion. Current statistics show that more than half of all plans will NOT allow you to convert. You will need to check with you HR department or the plan provider. I like the Roth IRA even for people in their peak earning years. Considering the fiscal condition of the government, I think there's a high probability that most people's tax rates will be same or higher in retirement. Also, I think traditional iRAs are a better deal for the IRS than for the individual. I would rather forgo a tax deduction on $2,000 today in exchange for the ability to receive $2,000 or $3,000 tomorrow tax-free. But, I would still consult with your CPA and financial advisor before doing a conversion. They may know if reason why you would be better off not converting.

Jack, there are 2 points to consider. the first is if your employer offers a Roth, and the second is if they will allow a conversion.

I have trouble believing that your employer does not offer a Roth option. To this point, you should be able to easily direct future contributions to a separate Roth 401k account.

As to being able to convert your current traditional 401(k) account to a Roth; the HR person you spoke to may or may not be knowledgeable on this subject....he or she really may or may not have even understood what you are trying to do. I would direct that question to the plan administrator. Their contact info should be on your statement. If not, just call HR and ask for their phone number. The plan administrator is the one who would execute such a conversion.

You mentioned not paying more taxes. Keep in mind that if you participate in a Roth, the monies going in will be taxed as ordinary income, regardless of whether it is new contributions or a conversion.. And you mentioned early withdrawal or distribution fees. You should not see any, except, as you mentioned a possible custodian maintenance fee.

Hi Jack! I'm a fan of Roth 401(k) plans, so I can see why you would want to do this. You have already taken the first step in contacting your HR group. It sounds like your company retirement plan does not allow a conversion, so you have to abide by the plan rules. However, if your company does offer a Roth 401(k) type of plan in addition to a regular 401(k), you should be able to discontinue contributions to the regular plan and begin designating any new contributions to the Roth 401(k). While this does not impact the savings in your current account, you can make a change so that going forward, your contributions will grow tax-free and be tax-free upon withdrawal.

Dan,

OK it looks like everyone else has dished up the required "lecture" about taking retirement funds earmarked for your future and using them for today, as well as having adequate emergency funds, so I'll avoid those topics. Here is a possible solution:

1) First, make sure your NEW job has a 401(k) that accepts rollovers from old 401(k)'s. Make sure your new 401(k) also allows you to take a loan from it just like your existing 401(k) does. Make sure you can IMMEDIATELY enroll in the new company's 401(k) - that there isn't an extensive waiting period before you can enroll. Then take the new job.

2) Borrow the money from your relative that you mentioned.

3) Use the money you borrowed from your relative to pay off your existing 401(k) loan. If you don't do this - the loan gets automatically "forgiven" when you leave - but the money you pulled out is treated as an early withdrawal with a 10% penalty in addition to being taxable.

4) Change jobs and roll your OLD 401(k) into your NEW employer's 401(k).

5) Borrow the amount of money you need to pay off your relative from your NEW 401(k).

You will now find yourself in EXACTLY the same position that you are now - except with a different job. No big deal. NOW work diligently to get that 401(k) loan paid off, as 401(k) loans can effectively "job lock" you if you don't have the money to pay them off.

The "rollover IRA" concept that you mentioned is, in fact, correct - it is known as a "Conduit IRA." However, you must roll the "Conduit IRA" into your new 401(k) and THEN take a loan from the 401(k) - you cannot simply withdraw the funds from this IRA to pay off your relative or to pay off a 401(k) loan without the 10% tax penalty.

Jon Castle http://www.WealthGuards.com

Hi Dan! As I read your question, I see two things that jump out. One: the word loans (plural). Two: this has happened more than once. The comments you have received already are on point, and I would like to recommend that you work on saving 3 to 6 months worth of income for an emergency fund. If you are taking loans from your retirement plan, you are either overspending on a regular basis, or you don't have ample funds to cover emergency situations. Pay off your loans as soon as you can, then work toward building your emergency fund. This will protect you from running into this issue in the future. Good luck!

There are ways to take money out of an IRA or 401K prior to age 59 1/2 but they are complex and probably would not be worth undertaking. If I were you, I would leave your money in the current plan until you can afford to pay off the loan or work out an arrangement with your relative to pay back his or her loan to you over time for a source other than your retirement account. It's never a good idea to liquidate a retirement account because you will lose future tax-deferred growth on the money you withdraw. You might also incur taxes and penalties. Also, because you are limited as to how much you can contribute each year, it might take you years to replenish the amount you withdraw. The fact that you've taken a loan from your 401K and do not appear to be able to pay it back anytime soon from your income tells me that you might be well advised to hire a financial advisor to help you come up with a plan to pay off your loan, help you maximize your investments inside your 401K and help you with your cash flow and budgeting (to avoid needing future loans).

Dan, you sure will. First, you took out a loan of pre-tax dollars, and are re-paying the loan with after-tax dollars. This ship has already sailed, but unless it is a dire emergency, you should not be taking loans from your qualified plan.

Assuming you are not 59 1/2, if you default on the loan you will likely be subject to income tax plus a 10% penalty. If you pay it back, convert it to an IRA, then take it out from the IRA, you will be also paying income tax plus a 10% penalty. If you are 59 1/2, the penalty won't apply.

Either way, you will be paying income tax plus a 10% penalty. It might be easier to just not get relatives involved.

Liz,

You have indicated that your sister has inherited her husband’s IRA and Roth IRA. What she does now could have far-reaching tax implications. The one thing she cannot do is ignore the tax issue. As a surviving spouse, you have one option that nobody else has: rolling over inherited IRA assets into your own IRA and treating these assets as if they were your own. This may be a good choice if she doesn’t have an immediate need for her spouse’s IRA assets and is looking to keep the money in a tax-advantaged account for as long as possible. If she has not reached age 701?2 but her spouse has, this option enables her to delay taking distributions until you reach age 701?2, rather than continuing her spouse’s minimum required distributions (MRDs).

If she is under age 591?2 and she does need to access some or all of the assets she inherit from a traditional IRA, she will be subject to a 10% early withdrawal penalty if she rolls those assets into her own IRA and then takes a distribution. If she finds herself in this situation, she can take withdrawals penalty free, even if she’s under 591?2 if she instead transfers the assets to an Inherited IRA, also known as an IRA beneficiary distribution account. No matter which option she chooses, the rules for MRDs will still apply. This means she must withdraw a certain amount of money from her IRA, including inherited assets, each year once she reaches age 701?2. Her tax consultant should be able to assist her.

Slightly different guidelines apply to Roth IRAs. Specifically, if she has inherited her spouse's Roth and she’d like it to continue to grow tax-free she should transfer the account to her own name and treat it as her own account. Why? Because with Roth accounts you aren't required to take any minimum withdrawals from your own account as long as you live

For estate planning purposes, the beneficiary of a Roth IRA has an asset which will grow at a compounded rate tax-free for their lifetime, and any withdrawals made will be completely tax-free. Note that the Roth IRA is still subject to Inheritance Tax and Federal Estate Tax at the owner's death. Your sister would be wise to work with a tax consultant and experience financial advisor.

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Ryan,

Lot of answers from well qualified people. But I am going to provide my 2 cents also.

Target Date Funds are turnkey funds for making life simple for Plan Sponsors and Employees. However, the answer to your question depends on who is managing the Fund and how they perceive the risks in bonds to be. It also depends on how this fits in your overall portfolio. If you are looking for simplicity and ease of use, these are great investment vehicles.

If your Target Date Fund has the fixed income portion invested in the broad bond market (tracking the Barclays Aggregate Bond Index), then there could be some issues, as this index is over weight U.S. Government Bonds, which will be a losing proposition in the next 5-10 years, as interest rates rise and these bonds lose value. For example, this index currently has a Duration over 5 and Yield To Maturity less than 2%, which implies that it will produce a 2% return if held to maturity, assuming interest rates do not rise. If interest rates do rise, based on Fed's tapering program, then one could lose principal as well.

Also, in some ways one could make the case that Domestic Equities are fairly valued. This is not to say that they could not keep rising from money flows and relative value trades. Needless to say it is a very challenging environment to add value both on the equity and fixed income asset classes.

The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

Target Date funds are like the new easy button of investing. On paper they seem like an easier way to invest and forget about it, however, there are many more sophisticated ways to increase diversification and protect against losses. Investing is like anything else in that slight improvements can have huge long term implications. For the reasons listed by my colleagues in their insightful answers and the fact that target date funds are missing many asset classes that provide opportunity for gains and sources to protect with uncorrelated assets I feel that they are much lacking and not an easy button at all.

Depending on the rates available, a stable value fund could be a beneficial part of a diversified portfolio. Within the bond portion of my mutual fund portfolios, I invest in a variety of fixed income funds including floating rate funds, strategic funds, short duration funds, intermediate term funds, foreign and emerging market bond funds, etc. A stable value fund could work nicely in coordination with these types of funds depending on your financial situation, goals, risk tolerance and time horizon. Remember that there are risks in all types of funds, even some money market funds have run into trouble in adverse market conditions. Also, I believe that the rates of interest stable value funds pay can change and some are less liquid than others. I have seen stable value funds in variable life, annuity and 401k products that had lock-up periods or reserved the right to delay distributions for up to 12 months in adverse market conditions. . So, do your homework and consider consulting with a financial advisor.