Luke DeBoer is the Founder of Thinking Wealth.
Luke earned his Bachelors of Science in Finance at St. Cloud State University and his MBA at The Carlson School of Management at the University of Minnesota with a concentration in Tax, is a CFP®, and is currently in the process of becoming a Certified Benefits Professional.
Check out the Way to Wealth blog on thinkingwealth.com for deeper insights.
BS, Finance, St. Cloud State University
Assets Under Management:
What I'm writing here is not advice and should only be read with the knowledge that it is informational only. If you want my advice as to how anything I write might apply to you personally you should reach out.
Good range of questions here. I'll start from the top and work down.
1) If you roll the assets to a Traditional IRA (assuming the assets are all pre-tax to start with), then there will not be any current tax liability.
2) You can convert as little or as much as you'd like to a Roth IRA (the $5,500 cap is only for contributions, not conversions). This likely goes without saying but I'll say it anyway, just because you can convert all of it doesn't mean you should convert all of it.
3) You cannot claim a deduction on rolling assets into a Traditional IRA, only if you contribute new dollars (and there are limitations even on that).
Now that those are out of the way, I'd like to encourage you to be thoughtful about Roth conversions as they can be an awesome way to reduce your total lifetime tax liability. There are many effective strategies that can be employed and I won't go through all of them. However, I'll share one common form of this.
What you can do is "fill-up the tax bracket." So let's pretend some things are true to explain the strategy. Let's first pretend that you know that your taxable income will end up being $10K away from the 25% tax bracket for the year. Let's also pretend that you are sitting on some cash in your savings account that you don't have any plans for. Let's finally pretend that you are fairly certain that your retirement income is going to be putting you in at least a 15%+ bracket. What you could do is convert exactly enough to bump you up to the next bracket, in this made-up scenario that would be $10K. You know that this will cost you 15% at the federal level (ignoring state taxes, if applicable) so you set aside $1,500 from your savings for your future tax bill.
There are other strategies that can be effective, of course, but the main point is that you should make sure to be thoughtful of your approach.
There are several layers to this.
- You technically cannot borrow from an IRA. You can take a distribution and put the money back within 60 days without a taxable event occurring though (some restrictions apply). So in effect, it is kind of like a 60-day, no interest loan...but still just 60 days.
- You can take your contributions out of your Roth without any tax or penalty. So if, hypothetically, $40K of your $100K in your Roth were contributions (and necessarily the remaining $60Kwould be growth), you could have a tax-free withdrawal of $40K available. However, the remaining $60K would be both taxed and penalized (assuming you are under 59 1/2).
- Now, should you do this? Tough to say without seeing your whole picture. However, consider that one of the "costs" of withdrawing from your Roth is the missed opportunity of future tax-free growth. So it's not necessarily an apples-to-apples comparison in your scenario of interest paid vs. penalty paid. That being said, I'm not usually terribly excited to see people withdraw Roth assets early, regardless of the reason.
Hope this helps and good job saving that much!
I would guess that there is a miscommunication on Fidelity's behalf. You unfortunately cannot continue to contribute to your old 401(k). As Wyatt mentioned, they likely mean that you could roll it over to an IRA and contribute that way.
With that being said, the Simple IRA will be your next best bet if you are looking at contributing more than the $5,500 ($6,500 for 50+) allowed in a Traditional or Roth IRA.
You may have the option to choose the custodian who will hold your funds as well. There are two types of Simple IRAs - the 5305, in which the company chooses where the funds are deposited or the 5304, in which you get to choose where your funds are deposited. Your employer should be able to tell you which one.
Congratulations on the new job!
Interesting scenario you have here. On the one hand, if you do collect $1,900 off of the $32K value (if I'm reading the situation correctly), then you have a very attractive distribution rate of almost 6%. On it's own, that seems like a pretty good signal to keep the policy. However, there are some other things you should probably consider.
1.) Will that $1,900 continue to increase? Does that 5% guaranteed income benefit continue to grow post-annuitization? I would doubt it. If it does, is it growing 5% simple on the original balance or is it 5% compounded? If it's simple, then that 5% really isn't as attractive as it initially sounds.
2.) What is your purpose for these dollars? Do you need the income from it or are you hoping to keep this growing? If you don't need the income it could make sense to liquidate the policy.
The moral of the story is that financial planning is rarely black and white. Your scenario is very much one of those gray areas.
Hope this helps!
There are two things that I think must be stated when considering your question:
1.) Returns come at a cost - always. That cost could be a risk of day-to-day fluctuation of value (e.g. investing in a bond fund), it could come in the form of inflexibility (e.g. putting your money in a cd may pay more, but at the cost of the flexibility of use) or it could even come in the form of possibility of total loss (e.g. investing in a bond that defaults).
2.) It's very difficult to give a reasonable suggestion on possibilities without knowing what the purpose of the money is. If it's a rainy-day fund, then that would yield (pun intended) a different answer than if it were for a down-payment on a home 5 years from now.
I know I didn't give you a specific source for higher yield, but hopefully you consider (if you haven't already) these two items before committing your funds to an investment vehicle.
Best of luck in your search for higher interest, know you aren't alone!