My mother has recently retired and has a small nestegg in the form of a 401K and some stock from the company she works for. She has asked me for advice as I am more financially savvy than she but, unfortunately, I have had little reason to think about what to do as retirement approaches. Therefore, I turn to any Dopers educated or experienced in this area.
My mom was told that she could access the money now but, of course, they would withold 20% for taxes. My advice to her was to roll it over into a traditional IRA and, when she does access the money, it will be in smaller amounts as she sees fit and she will be in a lower tax bracket. She spoke to a financial adviser at her bank who suggested an ING IRA called the Secure Index Five Annuity. Here is a brochure (warning PDF) http://www.ipg-us.com/Home/uploads/Five-PointtoPointCap.pdf
This seems like a good idea…she can potentially make about 5% per year depending on the market performance and there is no risk of losing money even in a down market. The only catch is that you can only access 10% of the money without penalty after the end of the first year and larger percentages over the course of five years…but, you can close the account without incurring any penalty. She doesn’t like the idea of having to close her account if she needs to access a larger percentage of the money and the potential for a withdrawal penalty is making her nervous. This is causing me no small degree of frustration. I just don’t know how to advise her and I fear that a financial adviser is thinking about his own bottom line more than my mom’s.
What I would like her to do is put the money somewhere that is tax deferred, where she has access to any amount of her total at any time, and has zero risk (or as close to zero as is theoretically possible) of losing value. Getting a decent return is not that big of a concern as the amount of money in the account precludes her making any serious money in interest. I was thinking along the lines of government bonds in an IRA but I don’t know all of the rules. By the way she is 66 and can withdraw from a retirement account without penalty. Can anyone offer any advice on types of accounts that meet my criteria? Or, is this unrealistic?
Also, can she liquidate the company stock she has in her retirement account and switch to another type of investment without having to pay a capital gains tax on the increased value of the stock? The brokerage she is currently with says she will have to pay for the increase in value. I’m starting to think the stock is not part of her 401k and may be just stock that she owns. If so, is there a way to sell the stock and move the money into an IRA without paying capital gains? Thanks all for any advice.
Since I am licensed to sell these products and you’re in a position where you’re actively considering the purchase of one, I cannot give any specific advice without being licensed in your state.
I can make four general observations, however.
One, an annuity like this tends to be a great idea as a supplement to other retirement options, but not as a full-fledged retirement plan itself.
Two, I do not care for the way this illustration has been presented and it makes me think the agent is inexperienced with this product.
Three, the 10% free withdrawals is a pretty common setup with this type of deal.
Fourth and finally, this is not what I would consider a go-to product. By that I mean that this product is not one of the top five that I would consider when encountering a client with similar needs. It does pay pretty well, though (in terms of agent commission).
Again, since I’m licensed but not in your state I can’t give you any specific advice. I apologize if this has been a little too vague to help, but I hope it points you in the right direction.
As far as a low-to-zero risk account where she can access all of her money at any time without penalty, I’m not trying to be snarky, but a savings or money market account is as close as you’ll get to that.
I am not licensed in your state and I am not advising you as an insurance/annuity professional with the intent to solicit your business. I cannot and will not be more specific than I have been here. Do not construe the above post as anything more than the educated opinion of an anonymous internet denizen. Again, I am NOT providing you with advice on the purchase or non purchase of an annuity product for you or anyone you know in your state. For all you know, I am a rogue bit of programming in the SDMB’s highly maligned database. Bleep bloop.
Unless she needs the money immediately, you should be able to leave the 401k where it is - at least long enough to figure out what to do with it. Another option, as you note, is to open an IRA and they will will take care of pulling the 401k into the IRA with no tax penalty, but you do have to figure how how to reinvest the 401k dollars.
This is not something to enter into lightly and a fair amount of research is in order to avoid what you fear - buying or investing in something that is better for the salesman/advisor than for your mom.
There are many books and websites to help in this and you can find independent advisors (who don’t sell anything or get a commission) who charge an hourly fee to assist & educate you and your mom.
As far as the stock goes, you probably cannot put it all into an IRA but certainly can sell it as needed. If the stock IS in the 401k, you can sell it without any tax as long as the proceeds stay in the 401k as cash or another investment. The tax only hits when you withdraw funds.
Yes, but she will be taxed on all of the money this year if she pulls it out now. Obviously she will have to pay taxes on the money eventually but I think it wiser to remove portions of the money starting next year when she will be in a lower tax bracket.
Thanks for your opinion! Without naming specific funds can you suggest a type of fund to place this money (i.e. treasury bonds in an IRA or something along those lines). Also, I am purchasing nothing if this makes you more comfortable.
I can’t personally, but if you PM me I would be happy to give you the name of someone I trust who is licensed in your state (and that comes with a whole 'nother disclaimer: I receive no financial compensation and have no vested interest in performing such a referral, nor do I accept any fiduciary responsibility for doing so). Be advised that since I run in insurance/annuity circles, anyone I refer will be more likely than not to advise the purchase of an annuity product. I think that’s a fine idea, but you should be aware of the bias going in.
In a previous thread on retirement savings, someone here suggested the idea of a deferred annuity. This would be something that might start paying out only after, say, twenty years. The idea is that such a thing would be cheaper than an immediate annuity and would allow you to spend down the rest of your retirement accounts knowing that if you’re still around in twenty years, you’ll still have a steady income. Otherwise, you’re always worried that you’re going to be 85 years old and broke.
I’m giving the same disclaimer as Soul. I work for a major online brokerage firm.
You can roll the funds from the 401k to a traditional IRA account at a brokerage firm. If the stock is held inside the 401k and it is sold, then there is no capital gains tax. If the funds are placed inside an IRA account, they can be invested in many different investments including bonds, stocks, money markets, and CDs.
I’ve forgotten all I learned about annuities, so I can’t help you there.
I’m not affiliated with any brokerage place so my disclaimer is “my advice is worth what you’re paying me for it”… but I agree here. To clarify though, yorick73 commented “Yes, but she will be taxed on all of the money this year if she pulls it out now. Obviously she will have to pay taxes on the money eventually but I think it wiser to remove portions of the money starting next year when she will be in a lower tax bracket.” - If the money is truly in a 401(k), then it would NOT be taxable if she simply moves it to an IRA at a brokerage firm such as Fidelity or Vanguard. So “this year” vs “next year” isn’t an issue.
I do think she (and the OP) should consider at least an hour or two of time with a fee-for-service investment professional to look at all the options of what to do with the money. Most likely, unless it’s a really small amount, she has the option of leaving it right where it is for the time being while she decides what to do with it.
No, my point was that moving the money out of a 401k into a money market or savings account would result in paying tax. If she were to do this, then next year would be better because she has earned income this year.
Ah - OK, then I misunderstood what you meant by pulling it out this year vs. next - yes, then her income would be lower next year and the tax hit would be overall lower.
Why not leave it in either the 401(k), or roll it to an IRA? Then it would only be taxable as she draws down the needed monies. If an annuity is what she winds up going with, then I’m pretty sure IRAs can own annuities. I don’t know all the details of how that works (e.g. passing it on to heirs etc.) of course.
Yes, the plan is to move it into an IRA. The 401k is heavily invested in stock which, for her age, is not good. I’m just not sure what kind of an investment vehicle to put it in within an IRA.