Answers in Financial Planning

Dan,

You should be able to payoff your outstanding loan in your 401(k) account with your current employer by writing a check for the outstanding balance and interest. You will need to check with your HR department to find out what specific forms you will need and also to determine the payoff amount. As long as you are still employed with that company you will not be able to transfer your account to an IRA rollover. Once you terminate employment you can either transfer your 401(k) assets to an IRA rollover or to your new employer’s 401(k) plan without tax liabilities or penalties. However, if you subsequently withdraw the funds from the IRA rollover account you could face a potential penalty of 10% if you are younger than 59 1?2 , and the withdrawal will be treated as a taxable event. It would be wise to work with your accountant to determine the best options for your specific situation.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Hi Melodie! I'm not quite sure what you are asking, so I'm guessing here. Did you want to know how to view your 401(k) account information and balance? If so, check with your Human Resources department. They will have information on how to access your plan information online. I like Gina's answer as it relates to viewing the plan in context of how it works. You may also want to see how it is incorporated into your overall retirement planning.

Marvin,

I'd love to help you out on that question, but... you've not provided much information here, aside from your name and your question.

A couple of things that would help, is, who your employer (or previous employer) is.

Which Company handled the plan you were involved with, etc...

If you can give us some more information here, maybe we can help. My crystal ball just isn't working well with all the tornadoes here in the Midwest.

Best Regards...

Rod

Hello Melodie, The first step is to understand your personal planning. What are your goals, your cash flow. If the company offers a match, when will their contributions on your behalf be vested (meaning if you work for them for the time envelop allowed in the plan, for example seven years, then you receive a percentage of their contribution each year until you have successfully completed working for the company for the full vesting period where their contributions are 100% in your account. Each contribution you make however cannot be lost back to the plan. If you happen to stop working for the company during that vesting period, you can roll your contributions and any vested contributions to your personal IRA. Please give me a call for more specifics on your personal planning situation.

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.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

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.

Is this money you will need in the near future? The reason I ask is if the answer is no, I believe a a properly positioned group of uncorrelated exchange traded funds would be prudent. Also, you could use the etf portfolios to take advantage of much stronger upside with great diversification as well. Check out Ishares and vanguard for listings of many etf's. If not experienced with these, please seek a professional and/or do your own research.

Past performance does not guarantee future results. Focus on reducing the cost of your cash flow and building accessible pools of money in a variety of areas (equity, real estate, bank funds, qualified and non-qualified assets, cash value, etc). The question really is - what is the COST to use your money, when you need to spend it. Many factors to consider here, your age, income, savings potential, personal inflation rate. Take a look at this blog post for further understanding that one product is not the answer - it is the integration of many.

It's my advice that the Social Security Administration will rarely if ever advise you on any money owed to you by anyone. What you describe sounds like an attempt to get some information from you that somehow will help “them” in an attempt to get your personal information.

Problems with tracking down a previous advisor is one of the best reasons to roll that money out of the plan as soon as the relationship has terminated. If you have not been receiving statements from the current provider, chances are that have been looking for you also. Call or email your previous employer's H.R. department and ask for contact information for the current provider. That should start the ball rolling. Remember you do not have to cash in the plan. Those funds can be rolled out to your current employer's plan or to an IRA.

I am not a fan of wrap fee programs, if that is how you would be doing this. Fees tend to be high, and for some reason, performance often seems to come in less than advertised. You get a ton of confirmations, and 1/5 of your money with one manager is not enough diversification. The idea of customized management is a near-myth unless you have millions to invest.

The CANSLIM program has a long history but it is pretty aggressive, focusing on the highest momentum stocks after they have had big moves already. If you go ahead, make sure this approach is something that you are comfortable with and fits your investment situation and personality.

I would rather you did no-load mutual funds with a fee-only adviser.

Call the HR person or department at your former employer. They should be able to direct you to the plan provider. You might also look through you financial records to see if you can find an old statement. Alternatively, you might also contact a former co-worker and ask them for the provider's contact information.

You may receive a distribution from your 401-k when one of the following events occurs: •The participant dies, becomes disabled, or otherwise has a severance from employment. •The plan terminates and no successor defined contribution plan is established or maintained by the employer. •The participant reaches age 59½ or incurs a financial hardship. • Plans with loan provisions would allow you to borrow up to a maximum 50% or $50k from your account and avoid possible taxable income issues

In some circumstances, the plan administrator must obtain the participant’s consent before making a distribution. Generally, consent is required if the participant’s account balance exceeds $5,000. Depending on the type of benefit distribution provided for under the 401(k) plan, the plan may also require the consent of the participant’s spouse before making a distribution. A plan may provide that rollovers from other plans are not included in determining whether the participant’s account balance exceeds the $5,000 amount.

If a distribution in excess of $1,000 is made, and the participant (or designated beneficiary) does not elect to (i) receive the distribution directly or (ii) make an election to roll over the amount to an eligible retirement plan, the plan administrator must transfer the distribution to an individual retirement plan of a designated trustee or issuer and must notify the participant (or beneficiary) in writing that the distribution may be transferred to another individual retirement plan.

Will,

Congratulations on making the decision to establish a 401(k) plan for your company and its employees. In addition to savings for yourself and your employees you may also be eligible to claim tax credits for some of the costs to set up the plan. These credits can typically be used to offset up to 50% of plan start up costs up to $500/year for the first 3 years. Qualified costs include those necessary to establish the plan, administer and educate employees about the new plan. In our experience, there are not any specific laws as to the date you establish the plan however the IRS has more favorable views on plans established at least 90 days before year end as that allows participants an opportunity to contribute during the current year.

Since there are several factors to consider regarding the type of 401(k) plan that may best suit your needs, it is important to work with an experienced retirement plan advisor to determine the best structure and recordkeeping platform that is cost efficient and provides a diversified investment menu. If you need additional guidance please contact us at 415-345-8185 or email peter@karpcapital.com. Our website provides information on various types of plans here http://www.karpcapital.com/services-businesses.htm .

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Their are three ways to maintain your investment in your old 401-k account. First is to keep the funds in your former employer's plan. The second is to roll the funds over to a self-directed IRA or to your new employers 401-k plan. The third option is to distribute the funds directly to you which will generate a taxable income event and if under 59 1/2 years old a 10% penalty. If you are doing option #2 or 3 you need to contact the plan's Third Party Administrator (TPA) or your former employers Human Resources Department depending on the size of the company and plan. They will forward you a document that reflects which option you have chosen for your funds. Transfer of funds should take from 7-21 days to complete.

Liz, As everyone has correctly stated, it's important to find out exactly what IRAs were inherited and who is listed as the beneficiaries for each IRA. It is equally important for your sister to discuss how best to inherit her IRAs. In addition to whether she rolls the IRA into her own IRA or a beneficiary, if she is well off financially, she might also want to consider disclaiming one or both of the IRAs and allowing them to be passed to children or grandchildren, if any are named as contingent beneficiaries. Because children and grandchildren would be required to take smaller distributions (due to their age) than your sister from a beneficiary IRA, their inheriting an IRA would allow it to grow tax-deferred for longer and create greater wealth. it's also important to make sure the IRAs are transferred properly. Direct transfers are usually best, and are the ONLY way to transfer IRAs inherited by children and grandchildren. A non-spouse beneficiary can't do an IRA rollover. If a check is sent to your sister for an IRA rollover, make sure she does the rollover within 60 days. Otherwise, she would end up liquidating her inherited IRA. Inheriting IRAs is more complex than most people realize and it's easy to make costly mistakes and oversights. Work with a financial advisor who knows a lot about IRAs and how to inherit them properly and effectively.

Hello Liz,

You are correct. A Roth IRA is different from an IRA (also known as a Traditional IRA). They will each have their own account number, because they must both be reported to the IRS.

Each separate account will have its own beneficiary. It is possible that the financial advisor mentioning only one account was a simple oversight on his part (not a particularly forgiveable one, but possibly an oversight nonetheless).

It is also possible that your sister was the beneficiary on only one of the accounts, and another person is the beneficiary of the other account. If this is the case, then the financial advisor was correct in mentioning only the one account on which your sister is the beneficiary - because she would have no rights to any knowledge or information on the other account since she has no ownership interest in it.

There are multiple options for a spouse when it comes to inheriting an IRA or Roth IRA. She has the ability to disclaim (not accept) the IRA, but this is rarely the best option. She can "roll" the IRA into an IRA (or Roth IRA) of her own, in her own name, and essentially become the new owner of the account. Or, she can "roll" the IRA into a Beneficiary IRA and continue to be treated as the beneficiary of the IRA instead of the owner. This is known as the "Inherited IRA" or "Stretch IRA."

Which option she should choose is important because it determines at which point she must take distributions (withdrawals) from the IRA. She should consult in depth with the financial advisor (and possibly a tax advisor) before making a decision.

Jon Castle http://www.WealthGuards.com