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Chocolate Cake

by Craig Moser on January 17, 2020

Most of us have heard “everything in moderation”, especially when referring to healthy eating.   For example, you may love chocolate cake.  You may even have a slice once a week, and that’s okay.  After all, everything in moderation.  But would you eat a piece after every meal, three meals a day?  Would you give a toddler a piece of chocolate cake 30 minutes before bed?

When it comes to retirement, there are some things that are like chocolate cake.  In other words, you have to time things properly and do them in moderation to your keep retirement savings happy and balanced.

60-Day Rollovers

You can do one 60-day rollover each year.  The once-per-year rollover applies to IRA-to-IRA and Roth IRA-to-Roth IRA rollovers.  For clarity, an IRA rollover occurs when the IRA or Roth IRA custodian issues a check payable to you, the account holder.  You then have 60 days to redeposit the funds into an IRA or qualified retirement plan.  Failure to follow the rule means you’re responsible for any taxes and/or penalties.  A direct transfer is usually a better option because the check is paid directly to the new tax-deferred account.

Roth Conversions

Doing a Roth conversion may seem like a great idea.  But like that chocolate cake, they can have side effects you didn’t fully anticipate.  You can’t undo a conversion, so be sure you fully understand the ramifications.  For example, you pay taxes on money converted from your traditional IRA to a Roth IRA.  Do you understand how that may affect your taxes?  Do you understand the impact your age may have on a conversion and required minimum distributions (RMDs)?

Self-Directed Investments

It can be very easy to accidentally break IRA rules concerning self-directed investments.  For example, you can buy that condominium in Myrtle Beach with your IRA assets.  You can even rent it out for years and make a profit when you sell it.  However, allowing your parents to stay at the condo, even if they pay you rent, is seen as self-dealing and is prohibited.  If you make this mistake, your entire IRA is considered distributed and is no longer qualified.  Without careful oversight, it can be very easy to accidentally break the transaction rules.  As a result, the consequences may be significant.

401k Plan Loans

Some 401k plans don’t allow loans.  Others allow you to take multiple loans.  Generally speaking, the maximum you can borrow is the lesser of $50,000 or 50% of your vested balance.  It must be repaid within five years.  If you have more than one 401k loan, automatic deductions are taken from your paycheck to cover repayments.  In this scenario, borrowing from your 401k can become a vicious cycle.

Chocolate Cake

Just like chocolate cake, some things in the financial world can look very appealing.  While many can be, you don’t want all the calories and sugar to sneak up on you.  Be sure you thoroughly understand all aspects and consequences of financial decisions before you actually make them.

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