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Financial Planning Question: 403(b) to Roth IRA

Q: I have an IRA and I am currently contributing to my 403(b). Since I make a tad too much to contribute to a Roth IRA, I would like to open a non-deductible IRA and then convert it to a Roth. I am confused about the tax liability. I have heard that there is a formula for deriving my taxes on any gains that includes all retirement accounts rather than just any earnings on the new IRA from the time I open it to the day I convert. Is this true? If so, what is this formula.

A: As requested, here is the formula to calculate the Tax-Free amount of a Roth conversion:

Tax-free Percentage = Total Non-deductible Contributions divided by (Sum of year-end value of all IRA accounts + Conversion Amount


$100,000/($200,000 + $100,000) = $100,000/$300,000

 Tax-Free amount of Conversion = 33.3% (or $33,333)

 Please be advised you do not include the balance of your 403(b) plan in the calculation. Only the IRA accounts.

Retirement Planning Question: IRS 55 Rule

Q: Does the IRS "55 Rule" mean that if I retire in the year I am 55 years old that I qualify for the Rule. For example, If I turn 55 in November and it is now August- that I could retire and my 401(k) would fall under this Rule until I am 59 1/2. This way (if needed) I could access some of my 401(k) without the 10 percent penalty. I plan on retiring just a few months before I turn 55.

A: Great question, please refer to the following link:

Additional exceptions to the 10% additional tax, Item 1 states:

Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50.

As long as separation occurred in or after the year you reached age 55, the IRS allows you to take distributions from your 401(k) without paying the additional 10% tax.

Please keep a few things in mind:

  • Confirm with your 401(k) plan administrator that you can keep your funds within the plan.
  • Distributions from the 401(k) will still be subject to ordinary income tax (federal & state).
  • If you do rollover your 401(k) into an IRA, the 10% additional tax will be in effect until you reach age 59 1/2.

Retirement Planning Question: Lump Sum vs. Pension

Q: I'm 60 years old and was recently downsized from my employer of 38 years. I have a pension, but I have not activated it yet. I am wondering if I should take the lump sum or the annuity.

A: The first question when it comes to taking a lump sum vs. a monthly pension is: what is the payout percentage?

Generally, that if the annual pension payment is 6% or more of the offered lump sum, it is may be better to keep the monthly pension. If it is less than 6%, it may be better to take the lump sum.

Here's an example of how the math works:

•Monthly survivor benefit = $1,000/month

•Annual survivor benefit = $12,000/year ($1,000/month x 12 months)

•Offered lump sum = $190,000

•Annual survivor benefit / offered lump sum = 6.31% ($12,000 / $190,000)

To clarify, this is just a simple way of making this decision based on the payout percentage. There may be other circumstances in your particular situation:

Do you have other income sources to meet your expenses in retirement (social security, other pensions, rental income, or portfolio income)?

Do you need a quick injection of cash?

Do you want to invest the lump sum for a future beneficiary (children, grandchildren, charitable organization)?

What is your tax situation (lump sum will be taxed as ordinary income and may move you into a higher bracket, unless lump sum would be tax deferred rollover to IRA)?


Retirement Planning Question - RMDs and IRAs

Q: I will turn 70.5 years old in 2016. Since I will be required to take a Required Minimum Distribution from my traditional IRA, after setting aside for taxes, will I be able to place the excess money in my Roth IRA?

A: Please be advised two things determine whether you can invest in a Roth IRA:

1.       Your current-year income

2.       Your tax filing status

First, you must have “earned” income. That’s income you make from working- typically in the form of salary, hourly wages, or profits from a small business. If you have earned income, you then need to make sure you aren’t going to make more than the federal government allows for Roth account holders. Once you determine these two factors, you can make a decision about investing excess money in your Roth IRA.


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