www.youtube.com/watch?v=VkFPRAh1vOc

This is kind of a funny little question. About 329 people asked this. “I’m 57½ and I’m retiring from my company. Can I start taking money out of my 401k?”

And the answer to that is so complicated, so before you start making this decision, don’t run out there and do anything that I say without talking to a qualified financial planner.

But let me address it like this:  The IRS says that as long as you’re 55 years of age or older and you retire from the company and your money stays at that company’s 401k, then yes, you can start taking money out without the 10% penalty.

Now let’s say you’re 57½ and you take that money and you roll it over into your own individual retirement account or an IRA for short, can you start taking that money out? And the answer is, again, it’s complicated. If you take money out before you’re 59½, you’re going to be hit with a 10% Federal penalty on top of ordinary income taxes, and your state may also have a penalty on top of that. California has a 2½% penalty.

You can do something, however, called a 72t. That’s the section of the tax code that allows you to take money out of an IRA prior to age 59½ without paying the penalties. Now, in doing a 72t, you’ve got to understand that most CPAs do not understand how this things works, and I’d say even more financial planners have no clue. I’ve actually done them with clients based on their specific goals and specific needs that we needed to do with them, and they are very complex. So complex, in fact, one of my great clients we were doing a 72t with, and they took all the information to their tax planner the next year, and the tax planner said, “oh, Pete did everything wrong. You’re now going to get taxed on that money, the penalty.” And he called me up, flustered, “hey, my CPA says you did everything wrong. This is a great CPA. He knows his stuff.”

I replied, “Did you give him the letter that I gave you?” And he says, “well, no, I didn’t.”

See, one of the things we do, because we realize that most CPAs, it’s not that they don’t know this, it’s that they don’t do it like we do it, and they don’t do it as often as we do it. In fact, most CPAs, this may be the first time they’ve ever even heard of a 72t. We actually give our clients a step-by-step letter saying, give this letter, complete with all this documentation, to your CPA and it walks them through how to fill it out on the tax form so you don’t have to pay the penalty.

Are you ready for this? There’s two questions on your IRS form that allow you to avoid that 10% penalty, but you’ve got to know which two questions they are and how to mark them correctly. And quite frankly, most people just don’t know.

Now, one of the drawbacks of doing a 72t is this:  If you start a 72t, you have to do it for at least five years or until you’re 59½, whichever is later. So what that means is, let’s say you’re 57 years old. You start this 72t, you’re going to have to do that for five years. Not just until you’re 59½ but beyond that another three years, just to comply with the IRS regulations on this.

So it is very complex, how much money you actually get to pull out, because it’s not just, well, I’m going to pull out any amount I want. They’ve actually got a guideline, a formula that you have to follow that says, this is how much you get to pull out, and it’s based on many factors, including your age, how much money you have in the account on a certain date, and what the current mid-term interest rates are.

And if that wasn’t enough to throw you, that’s why I’m saying, most people don’t know how this stuff works, so before you implement that strategy, make sure you talk to a financial planner that knows exactly how it works. If you’re not working with one, feel free to give me a call. My number is 800-990-2734, or you can reach me via e-mail:  pete@petemitchellinc.com.

www.youtube.com/watch?v=Qc-J4XSBO4c

This question comes up more times than I can count. Can I roll my 401k into a Roth IRA?

And the simple answer is, not directly, but indirectly you can. And what do I mean by that?

Unless you have a Roth 401k, in which case you could roll it directly into a Roth IRA, but hardly anyone has a Roth 401k since they’re so new and there’s really not the same tax benefits to a company as a traditional 401k, which is why I don’t think you’re going to see them offered very much. But that’s a whole other topic for a whole other day.

A 401k has to be rolled first to a traditional IRA, because the IRS says you have to go from like product to like product, and what they’re talking about when they say “like” is the taxation on that product. And then you take it from the traditional IRA and you then place it into a Roth IRA.

Now know when you do that, that’s when you’re going to have this taxable event that comes up. And yes, there are ways to spread out your taxes. And yes, there are rules about being able to put money into a Roth IRA, so before you do it, make sure you talke to a qualified professional to see if it can be done in your situation, because every situation is different.

That’s the reason why the tax code is as big as it is. It’s because there’s so many stinking rules out there, and you’re left trying to go on the Internet and find the right ones. Hey, the Internet’s going to get you so far, but at some point you’re going to have to talk to someone and explain to them your situation, and they can tell you definitively what your options are. But just know that it’s got to be that indirect way. You go first to a traditional IRA and then from the traditional IRA into a Roth IRA.

That’s how you get your money from a 401k into a Roth IRA.

I’m Pete Mitchell, and I look forward to sharing more on the markets with you later.

www.youtube.com/watch?v=Oq8z6JffTC8

Right now I have been getting a lot of questions from people asking, “When can I start taking money out of my 401k?” I think a lot of it has to do with the current state of the economy and people are just trying to find more ways to get more income and more money that they need to survive.

What I think most people want to know is, how do I take that money out and avoid that 10% penalty? And it’s a little bit complicated, but let me kind of give you the basic guidelines. You’re not allowed to take money out of your 401k and avoid the IRS penalty before age 59½. Now, one of the caveats to that is if your company’s 401k allows it, and you’re 55 years of age or older and you retire from your company, and you leave the 401k there at that company, then you can start pulling money out of your 401k without dealing with any IRS penalties.

Now that’s something that you’re going to have to find out from your HR Department, if they actually allow that in their 401k plan. Now what most people do when they leave a company is they take the money out of their 401k and wisely put it into their own individual retirement account or IRA. If you do that, then you will definitely have to wait until you’re 59½ before you start taking that money out. Because if you take that money out prior to that, even if you retire from your company, you’re going to get hit with that penalty. That special provision that allows you to start taking money at age 55 or older is only if you retire from the company and you leave your money in that company’s 401k plan.

So now the next thing that happens is someone will ask,”Well what if my company has closed its doors? What about then? Can I start taking my money?” Unfortunately, if your company has closed its doors, then your 401k has either already been transferred to an IRA or it’s been sent to you and you’ve got to make sure you transfer that money to an IRA or you’re going to get a tax penalty on all of those funds that have been sent to you.

So that’s just some information to keep in mind there.

www.youtube.com/watch?v=zmhRPRqZXyc

One of the questions I get is, can I use my 401k to buy a house? Now every Realtor that’s on my list hates my answer. Because my answer is, yes, you can use your 401k, but you probably shouldn’t.

And the reason is because of this whole thing called the time value of money. You see, you’ve managed to save a bunch of money inside of your 401k. If you start taking that money out to buy something else, it doesn’t get to grow inside of that 401k anymore.

Now, there are provisions that most companies have in their 401ks that allow you to do some first-time home-buyer purchases. In other situations your 401k may allows you take out a loan from your 401k, and I’ve actually done a whole blog post on the dangers of taking out a loan from your 401k —the things that, quite frankly, no one else will tell you—and that is the double taxation that goes on, the dangers of that type of thing.

One of the things that a lot of people don’t realize is, let’s say you just took $20,000 out of your 401k as a loan because you needed it for a hardship, and two months later you lose your job. Well, in most companies, that $20,000 that you borrowed is now all due on your last day. You’ve got to come up with $20,000. If you don’t, it’s considered an early distribution and of course now you’re going to get hit with a 10% penalty on top of ordinary income taxes for those monies that you’ve already taken out.

So the answer, can you take money out of your 401k is yes, you can take money out of your 401k. Should you take money out of your 401k? That depends on your exact situation and in most circumstances, you probably shouldn’t.

But before you start making these decisions, you need to sit down with a qualified financial planner who’s got your best interests in mind. That usually means they’re what’s called a registered investment advisor, not a commission-based planner, and sit down with them and explain to them your situation and get some unbiased advice on that.

I’m Pete Mitchell. I look forward to sharing more on the markets with you later.

www.youtube.com/watch?v=8AU1fVnmrn0

One of the questions that I get a lot is, “How much money can I actually contribute to my 401k?”

The answer to that is a little bit more complicated but I’m going to give you the loose guidelines, if you will. The basic guideline is this:  You can put away, as an individual, $16,500 a year into your 401k. Now, if you’re age 50 or older, you’re able to do a catch-up of an additional $5,500 per year into your 401k.

Now, where this is not going to quite fit into place is, let’s say you’re working for a smaller employer that has a 401k. If your company has failed what is called a “top-heavy test” on the 401k and you are what they define as a “highly-compensated employee”—and a highly-compensated employee is an employee who makes more than $110,000 a year from that company—then you may not be able to actually put in the maximum amount.

Now, if you fall into this category, you probably already know it because your employer has already told you, “hey, we’ve actually failed our top-heavy test. You’re not going to be able to put all of that money in each year”, or maybe each year you get a notice from your HR Department saying part of your money is being returned to you because you’re not able to put in that amount of money. You probably know if you’re in that situation.

There are actually ways to combat this situation, so if you find yourself in that situation at your company, make sure you contact a financial planner like myself who can help you with that and show you some of your alternatives. And there are even ways to restructure the 401k so you don’t have to worry about that, but not everybody’s going to want to go for some of those changes.

Again, the average employee, $16,500, and if you’re 50 or older, that catch-up provision of an additional $5,500. I hope that helps.

I’m Pete Mitchell, and I look forward to giving you more information on the markets and investing later.

Do Americans need a new way to save for retirement?

www.youtube.com/watch?v=NLe8f9gv6u4

In fall 2009, TIME Magazine raised eyebrows with a cover article called “Why It’s Time to Retire the 401(k)”. Author Stephen Gandel, the magazine’s senior economic writer, argued that 401(k)s, 403(b)s and IRAs had proven themselves “a lousy idea, a financial flop.”

Citing data from the Society of Professional Asset-Managers and Record Keepers, Gandel noted that in 2009, the average 401(k) had a balance of $45,519. Moreover, 46% of all 401(k) accounts had balances of under $10,000. However, he failed to mention that the average 401(k) account has been held for less than a decade.^1,2

A 401(k) plan simply takes too long to succeed, Gandel argued, and is too susceptible to market forces; in a market downturn, he said, it is unfair that the most hurt are the most invested.

What might the alternative be? A New York Times editorial called for a radical move, contending that “the only way to avoid wide variations in [401(k)] outcomes would be to develop a savings plan in which the government shared the risk – say, by providing a guarantee that returns would not fall below a certain level.” The editorial called for shifting the retirement savings “risk that is currently borne by individuals onto corporations and the government.”³

Obviously, not everyone is going to agree with that. But arguments for something similar are gaining momentum. A group of retirement plan administrators calling themselves the ERISA Industry Committee is pitching an idea called the New Benefit Platform for Life Security, which sounds like kind of a super-IRA with some characteristics of an annuity.

In this concept, your employer would have nothing to do with your retirement plan (unless it wanted to match your contribution to it as a perk). Instead, you would set up your own portable retirement plan with a retirement plan administrator of your choice in the free market. Your “NBP” wouldn’t have contribution limits, and you could set it up like a traditional pension to produce a lifelong retirement stream upon retirement. It certainly sounds great – except for one drawback. Who knows if the company acting as your retirement plan administrator would be around 20, 30 or 50 years from now?⁴

Other voices are proposing retirement insurance, possibly even from the federal government. Prof. Teresa Ghilarducci, an economist at The New School in New York City, has offered the idea of directing 5% of the wages of all working Americans into a mass retirement fund, which would pay out 26% of your end salary annually for the remainder of your life. (A little social security to complement Social Security, so to speak.) A Harvard professor would like to set up Social Security so that we would get 20% more than our final pay in SSI.¹ At this juncture and with this federal deficit, who knows if these are anything other than pipe dreams.

The 401(k) is still a vital retirement savings vehicle. In fact, many financial advisors feel it is the most useful retirement savings vehicle available to most Americans. The problem is that many 401(k), 403(b)s and IRAs are underutilized – people invest too little, or too infrequently, or withdraw what they’ve saved and invested too often.

Reaction to market whiplash, or a prelude to real revision? Of course, had the stock market not suffered so badly in late 2008 and early 2009, people might not be talking about this at all. Whether history proves the 401(k) a great idea or not, the thing for pre-retirees (and journalists) to remember is that there is no one retirement savings or retirement planning “answer”. A 401(k) is simply one of the “clubs in the bag” that you can carry as you stay “on course” for retirement – ideally, a component of a diversified retirement savings strategy.