How to Roll Over Your 401(K) To A Traditional IRA
When you leave your job, your 401(k) balance can come with you. You may be tempted to keep some or all of the money instead of rolling it over, but that is rarely a good idea. If you cash out your 401(k) plan balance, you generally pay the income taxes due on the entire amount withdrawn, as well as a 10 percent penalty tax, unless you are at least 59½ or unless you are retiring from your employer at age 55 or older.
If, however, you want to keep the money in place for retirement, a good strategy to consider is rolling the funds over into an Individual Retirement Account, or IRA.
The process is simple:
- Find an IRA investment (such as an annuity, a bank CD, or a mutual fund) that’s appropriate for you. You will have to do some research or talk to a financial professional to find out which options are right for you.
- Contact the administrator of your former employer’s plan and arrange the direct rollover to the custodian of your new IRA. (The exact procedure may vary a little from company to company, but don't worry – they've all dealt with this request before.)
- Sign documents to directly rollover the funds to your new account.
- The funds will arrive in your IRA for investment as you chose in step 1.
A word of caution: You can receive a distribution of your account balance from the plan instead of arranging for a direct rollover. This might not be the best idea. If you take a distribution, the plan administrator will have to withhold 20 percent of the distributable amount for federal income taxes. That is a credit toward taxes that may be due when you do your income tax return. When you do this indirect rollover, you can increase the rollover amount, from your own funds, equal to the 20% withholding amount. Doing a direct rollover, however, avoids this negative consequence. If you roll over the amount of the check you receive without adding that 20 percent back, then the amount withheld will be treated as a taxable distribution. You will generally have to pay income taxes on that amount as well as a 10 percent penalty tax if you are younger than 59½.
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Prior to rolling over assets from an employer-sponsored retirement plan into an IRA, it's important that customers understand their options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees, and any potential penalties.
Adi Khorsandian, a State Farm agent providing insurance and financial services, can be reached at (813) 991-4111 or visit www.adikinsurance.com
PLANNING FOR HEALTH CARE COSTS
Discussing worst-case scenarios with family is never easy. These tips from Merrill Lynch Wealth Management outline four conversations every family should have right now.
“When my mom and dad started having health problems about a decade ago, my wife, Maddy, and I said, ‘Do we want to have a discussion about our own long-term care?’” recalls Dr. Ken Dychtwald. “And we both realized we did not want to talk about it, because it is a horrible discussion to have. You know — what happens if you have a stroke, or you can no longer walk?”
Not even experts in the field of aging, like Dychtwald and his wife, Maddy, co-founders of Age Wave, an organization that studies the challenges of aging, want to think about frightening health-related “what-ifs” when it comes to their personal lives.
“My generation — the boomers — prefer to think of ourselves as indestructible,” Dychtwald says. “But, you know what? We said to ourselves, ‘It is not fair to either of us or our kids not to have this discussion.’” So the Dychtwalds did their homework. “We made some important decisions. For one, we decided to buy long-term-care insurance.”
Talking about how you will pay for your future health needs is just one of several critical conversations related to health and wealth that family members should be having. “For many, it is the missing piece of the retirement puzzle,” says Dychtwald.
Yet as important as these conversations are, the vast majority of people are not having them. Seven out of 10 couples age 50 and older have not discussed how much they will need to save for health care in retirement; and only one in five people age 50+ has talked about long-term-care plans with their adult children, according to a 2015 Merrill Lynch study conducted in partnership with Age Wave.
Here are four questions that can help you start having these important family conversations. Sit down with your spouse, your children, your parents and your siblings. Talk about your expectations. Make plans together. Then, should one of you become ill, you can all concentrate on one another instead of worrying about the finances and whether you are doing the right thing for everyone concerned.
1. Where will the money come from?
It is never too early to talk about the potential costs and other consequences of medical care for yourself, your children or your parents. The considerations should include possible outlays for such expenses as home health care or changes to your house to accommodate a disability.
“Once Maddy and I had our talk, we felt better,” Dychtwald says. “We may not be able to wave a magic wand and make ourselves perfectly healthy for the rest of our lives, but at least we know that we are covered should one of these things happen to either of us.”
Though long-term-care insurance was an appropriate choice for the Dychtwalds, it is not right for everyone. There are a number of other financial choices you can consider, from hybrid forms of life insurance and Health Savings Accounts to simply saving and investing more for eventual medical costs.
A logical next step, after you discuss these issues with your family, is to review your choices with a financial advisor to help ensure that your retirement and any legacy you hope to pass on will not be threatened.
2. Will our parents have the care they need as they grow older?
In addition to considering their own future, many people struggle with aging parents’ unwillingness to face their limitations. The best response is to ask specific questions: At what point would it make sense for you to stop driving, or to have a caretaker come in to help with meals?
Michael Liersch, head of Behavioral Finance and Goals-Based Consulting at Merrill Lynch Wealth Management, advises bringing these issues up long before safety concerns arise, and then positioning yourself as your loved ones’ ally.
“Often when you first broach the topic, you will be rebuffed,” says Kate Wilber, professor of gerontology at the University of Southern California Davis School of Gerontology. “That is normal. It does not mean the door is closed. This will likely take more than one conversation.”
3. Who will provide the caregiving, if it is needed?
Taking care of aging parents — or paying for their care — can be a large responsibility, and yet it is a responsibility that often falls unevenly in families.
Liersch recommends that siblings talk first among themselves about how they will share the caregiving role. “You want to be sure that both your parents’ and your own needs are considered,” he says. “Sometimes it makes sense to cobble together a combination of in-home and outside care.” That way, siblings can at least share the costs, if not the hands-on responsibilities.
4. What about end-of-life issues?
Having this conversation can help ensure that a loved one’s (or your own) wishes will be honored. Among the things to consider: Which medical treatments do you want to be used or avoided at the end of your life? Whom do you want to be your health-care proxy if you are unable to communicate your wishes? You can use a health-care power of attorney and a living will to document your choices.
Once you have discussed these tough subjects with your family, it is important to keep talking as years go by and circumstances change. “No one can predict their health future,” Dychtwald says. “But you can put plans in place to help prepare yourself for what might come.”
Having these important conversations is the first step to getting there.
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Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax, accounting or benefits consulting advice. You should consult your legal and/or tax advisors before making any financial decisions.
This material should be regarded as general information on health care considerations and is not intended to provide specific health care advice. If you have questions regarding your particular health care situation, please contact your health care, legal or tax advisor.
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Year–End Tax Tips
It’s tax time again (almost)! Below are some tips and reminders that may help with your taxes before the yearend:
Itemized Deductions – if you itemize deductions on your tax return, you may be able to deduct certain miscellaneous expenses (in addition to state/real estate/property taxes, mortgage interest, and charitable contributions).
Deductions subject to the 2 percent limit. You can deduct most miscellaneous expenses only if they exceed two percent of your adjusted gross income. These include expenses such as:
- Unreimbursed employee expenses;
- Expenses related to searching for a new job in the same profession;
- Certain work clothes and uniforms | Tools needed for your job/union dues
- Non-reimbursed work-related travel and transportation.
Deductions not subject to the 2 percent limit. Some deductions are not subject to the 2 percent of AGI limit:
Certain casualty and theft losses. This deduction applies if you held the damaged or stolen property for investment; gambling losses up to the amount of gambling winnings; losses from Ponzi-type investment schemes.
Retirement plans – maximize contributions to your participating retirement plans such as 401k, Simple, etc. If you are not a participant to any of the retirement plans, you may be eligible to contribute to the Traditional IRA accounts. If you are self-employed, you may be eligible to contribute to individual/Solo 401K/SEP-IRA plan etc. The 401k deferrals are $18,000 for 2016.
Sell loser investments - You can use capital losses to offset taxable capital gains, plus up to $3,000 in ordinary income. Remember, any losses you can't use to offset gains this year can be carried over into future tax years. Be cautious of the ‘wash sale rule’, which prohibits taxpayers from recognizing losses on sales of securities that are repurchased within 30 days.
Alternative Minimum Tax (AMT) - In certain cases, accelerating tax deductions can trigger AMT taxes. Ensure that the itemized deductions do not result in AMT calculations
Required Minimum Distributions (RMD) from retirement accounts – if you're age 70½ or older and required to take minimum required distributions from your retirement accounts, you need to do so before year-end. If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50 percent.
Social Security benefits -- Properly time claiming Social Security benefits. If you stop working, you can claim benefits as early as age 62. But note that each year you delay — until age 70 — promises higher benefits for the rest of your life. And, delaying benefits means postponing the time you'll owe tax on them, if applicable.
Estimated taxes/withholdings – Ensure that you have adequate tax withholdings from your employments; pay estimated taxes for any additional income.
Equipment purchase. If you are in business and purchase equipment (both old and new) you may make a ‘section 179 election,’ which allows to expense fully in the current tax year. The current deduction limit is $500,000. This means businesses can deduct the full cost of qualifying equipment from their 2016 taxes, up to $500,000 (subject to restrictions). The equipment must be purchased and put into use by midnight, 12/31/2016.
Qualified leasehold improvement property. Generally, this is any improvement to an interior part of a building that is nonresidential real property; in addition, qualified restaurant property and qualified retail improvement property that also satisfies the definition of qualified leasehold improvement property is eligible for bonus depreciation (50 or 100 percent) assuming all requirements are met.
- Standard Mileage Rate: The 2016 standard mileage rates for the use of a car (also vans, pickups or panel trucks) are:
- 54 cents per mile for business miles driven;
- 19 cents per mile driven for medical or moving purposes;
- 14 cents per mile driven in service of charitable organizations.
There are various limitations, thresholds and procedures for many of the deduction and filings. Please consult your CPA/Tax attorney/or tax consultant for proper guidance with the above subject matter.
In accordance with IRS Circular 230, the above information is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.
Suresh Kumar, CPA, MBA is the Principal of Kumar Consulting, PA, a CPA & Consulting firm licensed in the states of FL, KS and MO and maybe reached at (813) 421-5068 or firstname.lastname@example.org / www.kumarconsultingcpa.com