I am a tax preparer and have a 40-year-old client who, four years ago, needed money because of a layoff and burnout from the corporate world. She began taking substantially equal distributions from her individual retirement account. By following IRS guidelines that base the withdrawals on her life expectancy, she has been able to tap her IRA without paying penalties, although she still owes income taxes on the withdrawal.
The problem is that the value of her account has decreased so much that it's possible she will deplete the account much sooner than we expected. I have researched this subject at great length and cannot get a definitive answer as to what her options are. Can you help?
It's possible your client can benefit somewhat from new Internal Revenue Service guidelines that have changed the way most IRA distributions are figured. But first the two of you need to take a hard look at this woman's portfolio. She's obviously heavily invested in stocks, which usually makes sense, given her age. Once she started withdrawing money from her IRA, however, and depending on it for her living expenses, she should have radically shifted her asset allocation away from stocks and into bonds and cash. In essence, she was converting herself from a young wage earner, with decades ahead to save for retirement and ride out market swings, to a retiree who should have been most concerned about preserving principal.
The problem here is that to preserve principal, she must give up much potential for future growth, and she's way too young to do so. Even if she manages to scrape by without entirely depleting her retirement funds, she won't have much left when she hits real retirement age. This is yet another reason that tapping retirement funds early is such a bad idea.
And as you know, she's pretty much stuck with a bad plan. Now that she's started taking substantially equal distributions from her IRA, she's required to continue doing so until age 59 1/2 .
She might be able to reduce the amount somewhat by using the new IRS life expectancy tables, which permit smaller future payouts, according to retirement tax expert Nicholas Kaster.
Although the IRS hasn't given definitive instructions, Kaster, who works for the tax research firm CCH Inc., has studied the new regulations and believes they allow taxpayers to satisfy the substantially equal periodic payment requirements by using the new mortality tables.
Once you've figured out her new withdrawal amounts and have suggested she reposition her investments, you might encourage her to get over her burnout and get a job. She's going to need to set aside a sizable amount of money on her own to overcome the damage she's already done, and will continue to do, to her retirement funds.
My husband and I each have three 401(k) accounts from current and past jobs. I have thought about rolling them over into one account, but I'm not sure whether the entire amount or only the vested portions would roll over. We are not yet fully vested in any of the accounts. When you roll over a 401(k), does the full amount get transferred, or only the vested portion?
Unless your previous employers were somehow related to your current ones, you probably stopped vesting the minute you left those old jobs.
Vesting is the process in which you gradually become eligible for the money your company contributes to your 401(k). Though you always are fully vested in your own contributions and can access them when you leave a job, it generally takes five to seven years to become fully vested in an employer's contributions. Vesting can continue if you leave one arm of a corporation for another but typically stops if you leave your employer entirely.
You can always roll old 401(k) accounts into IRAs or into a new employer's plan if the employer accepts such rollovers. It's generally a good idea to consolidate those old accounts, because you can simplify your life and keep better track of your investments at the same time. If you roll over your 401(k) into an individual retirement account at a brokerage, you'll have more investment choices. But your account may be more vulnerable if you should get sued or declare bankruptcy.
Though 401(k)s are protected from creditors, IRAs may not be - it depends on your state's laws. That's why it may be best to leave your 401(k) where it is, unless your investment choices in the plan are truly awful. You can't combine your accounts with your husband's, however. Retirement plans are strictly a his-or-hers arrangement, with no commingling allowed.
Liz Pulliam Weston is a contributor to the Los Angeles Times, a Tribune Publishing newspaper.