Slott Report Mailbag: The Tricky Balance of Retirement Planning Funds on the Move

Thursday, April 17, 2014

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag includes questions about retirement planning funds on the move, namely withdrawing funds and dealing with its tax consequences. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Hi,

I have been contributing to a non-deductible IRA for several years. Originally, my intention was to convert them to Roth. But since I have other Rollover IRAs from previous 401(k)s, as I understand, if I do the conversion, I will have to pool all these IRAs together for that purpose, which will trigger a large tax bill, because the balance on the Rollover IRA is 3 times the amount of the non-deductible IRA. What should I do?

Also, a related question: when I retire in the future, and start to withdraw money from my IRA, do I also need to pool these IRAs together and proportionally pay tax on the part that’s taxable? Is there a way to pull out only the principle in the non-deductible IRA without paying any taxes?

Thanks,
Mike

Answer:
Under the pro-rata tax rule, you must add together, or “pool”, all of your non-Roth IRAs. So, when you take any IRA distribution, it will be mostly taxable. But there is one exception to the pro-rata rule. You can roll over all of your pre-tax IRA funds to a company retirement plan, if the company plan allows this, and leave the nondeductible portion in the IRA. Then the remaining IRA funds will all be tax-free, which could be converted to a Roth IRA at no cost.

2.

I am 55 years old. My company was sold to another company. Can I withdraw my 401(k) without penalty? I do not want to roll over my 401(k). Thank you for your assistance.

Mitchell

Answer:
Whether you can withdraw your 401(k) plan will depend on whether or not that plan is terminated. Most times, the plan gets incorporated into the plan of the new company. If you do not meet the plan requirements for taking a distribution, you will not be able to move your funds out of the plan. Generally, if you are age 55 and no longer working for that employer, then the 10% penalty won’t apply to any distribution you are allowed to take.
 

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