Two Major Retirement Decisions

I know these are trying times for a lot of investors. But I hope the day-to-day swings don’t dissuade you from keeping your eye on the big picture. That’s especially true of your retirement planning.

So today, I want to take a break from all the minute-by-minute market commentary and talk about two retirement decisions that nearly every one of us is forced to make.

The first …

What Should You Do With Your
401(k) Plan When Leaving a Job?

Obviously, if you’re at least age 59Â½ and you plan on retiring, you can withdraw the entire amount and start enjoying it penalty free. Note that your employer will withhold 20% for taxes.

However, if you’re not yet retirement age (59Â½) and you’re planning on getting another job, you have four choices …

Choice #1. Cash out your plan. This is the absolute worst move, in my opinion. Sure, you’ll get some money right away. But you’ll also be responsible for taxes and most likely a 10% penalty to boot.

Choice #2. Leave the money right where it is. Most employers (or their plan administrators) allow this, though many impose a certain minimum account balance, such as $5,000.

This is a fine choice if you really like the options available through your old employer’s plan. However, from an administrative standpoint, it’s a pain because it will be one more account to keep track of.

Choice #3. Roll the money over to your new employer’s plan. If you’re going to participate in your new employer’s plan (and I hope you will!), then it’s likely that you’ll be able to bring your old 401(k)’s assets into the fold. That will allow you to keep all your retirement assets in one place. Plus, it will be much easier to see how your overall portfolio is allocated.

Choice #4. Roll the money into an Individual Retirement Account. Yes, you would still have one more account to keep track of. But you also have:

Unlimited investment options. You are no longer at the mercy of your company’s plan. In an IRA, you can buy stocks, bonds, mutual funds, ETFs, etc.
Low trading costs. Some employer pension plans charge exorbitant fees for managing your money, and often these costs are hidden. In contrast, there are plenty of no-fee IRAs available from deep-discount brokerage houses.

Only you can decide which option works best for your particular situation. But in my opinion, the rollover IRA option is going to be best for most people and circumstances.

Speaking of IRAs, the second very common retirement issue is …

Are You Better Off with a Roth or a Regular IRA?

Let’s start with the basic differences.

With regular IRAs:

You contribute pre-tax money and thus save on your current taxes by lowering your taxable income
Your contributions and earnings will be subject to taxation upon withdrawal
You must begin withdrawing money at age 70Â½

With Roth IRAs:

You contribute after-tax money and thus gain no upfront tax-savings benefit. But …
Your contributions â€” and earnings â€” will never be taxed again, so long as you meet the basic guidelines (eligible age of 59Â½ and held for at least five years)!
Plus, you never have to make minimum withdrawals, even if you live to be 110.

Both accounts …

Give you a huge range of investment choices, pretty much everything offered by your broker.
Can be funded until April 15 of the following year. In other words, you can put money in for 2008 as late as April 15, 2009.
Allow catch-up provisions for contributors over the age of 50. In 2008, the regular limit for either IRA is $5,000 and $6,000 for age 50+.

Important: You can only contribute to a Roth IRA if your Modified Adjusted Gross Income (MAGI) falls within certain levels. The eligibility for these accounts phases out at certain modified adjusted gross income (MAGI) levels. So there’s no way for some people to know if they’ll qualify until they’ve done their taxes.

Here are the two, major Roth IRA MAGI category limits for the 2008 tax year…

Single Filing Status: $101,000 or less for maximum contribution. Partial contribution between $101,001 and $115,999. No contribution over $116,000.
Married Filing Jointly: $159,000 or less for maximum contribution. Partial contribution between $159,001 and $168,999. No contribution over $169,000.

Regular IRAs, on the other hand, have no income restriction for contributions, though the tax deductibility can be affected by MAGI.

There are no age restrictions for Roth IRAs â€” as long as you have earned income you can start socking away money. Your ability to contribute is also not affected by any retirement plan you might have through your employer.

Just remember that you cannot max out both a regular and Roth IRA in the same tax year. Your total contributions to all IRA accounts (not counting rollovers and such) must fall within the ranges I mentioned earlier.

If you have extra money you want to park away, and you qualify, I heartily recommend using a Roth IRA.

Not only will your investments grow tax-free, but you’ll never have to withdraw your assets if you don’t want to.

Best wishes,

Nilus

P.S. There’s also a way to make Roth IRAs a very powerful tool for leaving piles of money to your heirs. My upcoming issue of Dividend Superstars, which goes to press this Friday, has all the details. If you’re not yet a subscriber, sign up now for as little as $39 a year.

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