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Financial Planning Newsletter• April 1 2010 


Financial Planning Newsletter
April 2010

ALL ABOUT IRA'S - part 2

Okay, I realize that this is a little early for the April newsletter, but I am ready to be done with March and move on to Spring, so here you go:

This month we continue our series on IRA's. To expand the discussion we will also be covering some key aspects of the 401k plan as a comparison to features of the IRA. Especially as it relates to taking money out and/or borrowing funds.

401k's and Rollover IRA's:

By now most are clear that a 401k is a retirement plan that is offered by your employer, as such you are a "participant" in this plan. When you leave that employer you then have the option of:

  • leaving the money in that old 401k
  • rolling it to your new employers 401k
  • or moving the money into your own "rollover" IRA.

There are many reasons that rolling old 401k's into your own Rollover IRA can be beneficial, mainly for the fact that you can monitor more frequently and have a wider choice of investments. However, there may be a case when the second option may save you in a pinch.

As much as us planners try and steer folks away from taking money out of their retirement accounts early, the simple fact is life happens and sometimes the money is needed. To help you understand the good, bad and ugly regarding early distributions from your retirement plans here is a breakdown:


  • with an active 401k (one at your current job) you can borrow money from the account if needed. Normally 1/2 the value up to $50k. The plan administrator then puts you on a automatic payment plan where they withdraw money from your paycheck to put back into the account each payroll period. You don't owe tax or penalties when borrowing from a 401k, as long as you pay it back.
  • As noted above when you leave an employer you have several options for your old 401k. Most elect to do a Rollover IRA which is generally the best choice. But when might it not be the best choice? if you need money, because you can't borrow from your IRA account. So simply put, if you envision that you might need to borrow from your 401k in the near future move it into your new employers plan so that you have something to borrow from
  • Old 401k's: just note that you cannot borrow from these. You can cash out if you need money but be prepared to pay ordinary taxes + a 10% penalty.


If you need money from an IRA and you are not over 59 1/2 then generally it is going to be a painful experience with taxes. Since you can't borrow from an IRA, you have just a few options:

  • if it is labeled as a "rollover" IRA and hasn't been rolled over in the past 12 months you might can roll it back into an active 401k and then borrow from it (see above).
    • 60 day rollover: for short term needs you can take a distribution from your IRA, as long as you get it back in the account within 60 calendar days you avoid taxes and penalties.
  • if you recently rolled it over from an old 401k plan you are not allowed to roll it again within 12 months per the IRS. (rolling is going from a 401k to an IRA, don't confuse with tranferring between IRA custodians), so here are your options:
    • one time distribution: a very painful event in that you will pay ordinary income taxes plus a 10% penalty. But only on the amount you remove.
    • SEPP distribution: this is an agreement with you and the IRS that you will use their calculations and take a certain dollar amount out each year for 5 years or to age 59 1/2 whichever is longer. You pay taxes but no penalties, the problem is that you drain a good portion of your retirement account and you can't stop the distribution.


Obviously, in a perfect world we would leave our retirement accounts alone until retirement. However in the current economic environment you need to know your options if you get in a bind. Remembering some of the above rules may help you avoid making a large taxable mistake.

Estate Tax update:

As most of you are aware, Congress did not issue any patch for the estate tax this year. As it stands there are currently no estate taxes if someone dies in 2010, no matter how large their estate. To go along with this there is also a change in the step-up basis for inherited assets that could cause issues for folks.

Another potential issue for those with large estates is that if you have a marital (or bypass trust) written into your will, you may need to have an attorney review. If the wording says to put up to your personal exemption amount into the bypass trust and the remainder to your spouse, you may have a very angry spouse. Since there is unlimited personal exemption your entire estate could conceivably go into the bypass trust.

If you or someone you know has a sizeable net worth, it would be a good idea to have them sit down for a review with their estate attorney.


James A. Daniel,

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation for financial services. Consult with your financial professional if you have any questions.

The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.

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