Q. I am 62 years old and I have a 401(k) that my employer does not contribute to. I just got a second job and would like to start an IRA. Is there a way to roll over or convert the 401(k) to a new IRA without paying taxes? I was also thinking of setting up a trust with me and my husband as the beneficiary. What’s the best way to go?
— Still working
A. There are several items to address here.
Let’s start with your retirement savings plans.
You can roll over your 401(k) without any tax being incurred as long as long as your employer does not have a rule forcing you to keep the money with them until you retire.
A 401(k) rollover can be a taxable event, but there will be no taxes owed if the amount withdrawn from one account is identical to the amount moved to the new account, said Michael Cohen, a retirement specialist with Certainty Retirement Advisors in Belvidere.
“A person does not begin to pay tax on that withdrawal until they actually take constructive receipt of the money, meaning that they keep the funds in their bank account for 60 days or more, or that they spend the money,” he said.
To avoid any issues, you can ask the 401(k) plan to do a custodian-to-custodian transfer so you never personally take hold of the money.
If you do the rollover, you have to decide what kinds of investments you want.
“If you feel like you want to keep taking risk with that money at age 62, then you can roll that 401(k) into an IRA with any brokerage firm,” he said. “Keep in mind that there will be no tax consequence to you for converting the 401(k) into an IRA, but that money will all be treated as ordinary income — 100% taxable — as you begin to spend that money in retirement.”
But at age 62, you may want to reduce the amount of risk you are taking, Cohen said.
If you wanted to convert some of the account to a Roth IRA, you will have to pay taxes on the conversion.
When it comes to setting up a trust, you need to have a conversation with an advisor who can look at your complete financial picture and help you decide any advantages or disadvantages based on your personal situation.
“We advocate that our clients have a revocable living trust as their guiding document upon death, and we guide them through the pros/cons and the process for doing this, as you will need to consult with a licensed attorney,” Cohen said. “A revocable living trust is not a fit for every person/couple, but if you have an average sized estate, you may see the benefits of attaining this set of documents.”
Email your questions to Ask@NJMoneyHelp.com.
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.
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