Taking Money Out

So if you are presented with some silly IRA vs. Roth IRA worksheet, or see one in a financial planning article in a magazine, don’t bother. Go with the Roth.

Should you convert your deductible IRA to a Roth? Don’t bother. All tax angles considered, a minority may benefit a little from this strategy, but most will pay, out of pocket in the year that they convert, extra taxes and the 10% penalty with no real net gain during retirement.

There is another type of IRA, named Non-deductible IRA. Skip it, there are no advantages.
 

There are some reasons that qualify for early withdrawals without the 10% penalty (20% withholding will be done by the investment company). These include:

• Death

• Permanent disability

• Court-ordered divorce proceedings

• Extraordinary medical expenses

• Up to $10,000 for home purchase

• Leave company and over 55

• Higher education

See IRS publication 590, page 35 for details, and complete form 5329 with your tax return to claim these exemptions.

If your adjusted gross income is less than $62,000 and your spouse does not work, you may contribute an additional $3,000 to her IRA account, and you have until April 14 of the following year to make this contribution.

You can build a fortune by Investing only $3.40 a day towards your retirement, but not in a regular taxable account! This comparison assumes a 12% average annual return and a 28% tax bracket.
 

A client of mine revealed to me that his financial planner had explained that “the reason this stuff is so confusing is because it takes 4 years of study and training to learn it, to really understand it all. It’s very sophisticated.”

This planner had actually told him that in his case, an IRA wasn’t any big deal because he would be in about the same tax bracket as he’s in now, since tax brackets were likely to go back up and so he’s not really saving anything. What?

Everybody listen, tax deferred, whether in an IRA or a 401(k), means that you’re earning money with the government’s share of your paycheck.

So my client, not understanding anything about his investment options, bought the annuity and life insurance from the planner.

Now, 10 years later, he has no idea if he has suitable investments for his family’s situation. If your financial advisor can’t explain his or her suggestions in plain English, dump ‘em.

Annuities

I’m not going to explain all the kinds of annuities, only because you have better investment options. Here are some of the pitfalls:

• Income is fully taxed as you receive payments, there is no long-term capital gains preference.

• You can’t touch funds until 59 ½ without a 10% penalty.

• Do you really believe a portfolio manager at an insurance company is going to do better than a top mutual fund manager, most whom don’t even beat the S&P 500?

• Annuity funds available at your death are fully taxed, whereas gains from other investment accounts are not.

• The illustrations used to sell an annuity look great, but the growth is not guaranteed.

• The annuity offered to teachers from TIAA-CREF is actually a pretty good deal.

The glossary defines straight line and variable annuities.

Other Retirement Planning Topics:

1. Retirement Planning
2. IRA’s (Individual Retirement Account) – Traditional IRA
3. Roth IRA – Taking Money Out
4. Employer Sponsored Retirement Plans
5. Retirement Plans - Continued
6. 401K Savings
7. Notes for 403(b) Plan Participants
8. Senior citizens retirement resources
9. Retirement Plans for Small Business and Sole Proprietors
10. Simplified Employee Pension (SEP) IRAs
11. SIMPLE (Savings Incentive Match Plan for Employees) IRA
12. Your own 401(k) for the self-employed
13. Employer Retirement Plan Vesting and Contribution
14. Forgotten Retirement Benefits
15. Other thoughts about retirement accounts
16. Other thoughts about your retirement needs
    

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