Pros & Cons of Rolling Your 401k into an IRA

This hour starts off with a brief discussion about dividend paying stocks – do you understand how they work? Then, Joe and Big Al answer your biggest financial questions, from how to claim a loss on a Roth IRA to the pros & cons of rolling over an employee retirement plan into an IRA (individual retirement account).

2:04 “Most [people] don’t understand that when the dividend is paid, the stock price falls by that amount.”

4:55 “It’s not necessarily the best idea to focus solely on dividend paying stocks…with dividend paying stocks you’re paying taxes as you go.”

6:58 “It’s only a matter of time that the dividend stock prices go up because of demand.”

Question Corner

Q1 (11:05) “I have a Roth IRA, open for over ten years now. I have contributed about $15,000 but lost about 80% of it due to some stocks that I invested in. Can I claim this 80% loss in my tax return?”

A1 (11:47) “The answer is no. You cannot take a loss in a Roth IRA – it’s a special kind of retirement account where neither the income, dividends, principal or growth are taxable, but the same works if you lose money. It’s not deductible. It’s an account that really is not taxed either direction.”

Q2 (15:39) “I was recently told by more than one financial advisor that I should roll my employee retirement plan now that I’ve left the company, into an individual IRA. When I called that company to do just that, I was told by their advisor not to roll it over. He explained that I began investing in 2007/2008 when the market was low. If I were to roll over into an individual IRA today, I would be buying in when market prices are high, thus buying fewer stocks/bonds (whatever prices comprise the plan). He also said, since your plan has averaged a 5.1% gain this year, why would I want to lose that? Can someone speak to this logic for NOT rolling over?”

A2 (16:49) “There are pros and cons of rolling over a 401(k) plan into an IRA. The pro is if you have an advisor that you trust and have an organized overall strategy with, it makes sense to roll it over and have that individual or their team manage your overall assets for you to create that income, do tax loss harvesting, conversions and everything else. The con is that there’s going to be cost involved in this – including the cost and fees of rolling it over plus internal costs of working with an advisor.”

20:01 “A huge advantage of IRAs if you have a bigger choice of investments.”

Q3 (24:43) “Are profits from trading options (or stocks) in a non-qualified brokerage account subject to the 10.4% FICA tax?”

A3 (25:20) “If you’re classified as a trader, then it could be considered ordinary income subject to self-employment tax, but for most of us we’re not necessarily traders. That’s going to be investment gains and investment losses. When it comes to FICA taxes, if you are a professional trader then you have to pay self-employment tax which is actually twice as much as what the rest of us pay in terms of being employed. The reason it’s twice as much is because when we are an employee, the employer pays half of our tax and we pay half.”

Q4 (26:41) My wife and I are both 60 years old. We have taxable investments valued at $900,000, 401k and IRAs valued at $1,200,000, and a Roth valued at $23,000. We would like to retire in about 8 years. A co-worker said he heard that it is possible to pay no income tax in retirement, even on Social Security benefits. With my situation how is that possible?”

A4 (27:43) “Here’s what I would do. Convert the $1.2 million into a Roth IRA from now until age 70. Push out your Social Security until age 70. Save x amount of dollars into your brokerage account. Try getting two-thirds of your $1.2 million into a Roth, pay the tax now and get that two-thirds into the Roth over the next ten years. Tax-loss harvesting could be a huge benefit because it won’t show up on your tax return. It would be a little difficult to get that much converted and pay no tax; you may want to consider paying the taxes and staying in a lower tax bracket.”

32:21 “A lot of people retire at 62 or 64 and are in a very low [tax] bracket, and could be doing Roth conversions all the way until age 70 1/2 and then be in a much better spot and in some cases pay little to no taxes.”