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.
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 it pays directly to the new tax-deferred account.
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. “To Roth or not to Roth” is really a question of when you want a tax break. 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)?
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.
Whether you prefer dark chocolate, milk chocolate, German chocolate, or sugar-free chocolate cake, each one is unique. Each has a different flavor and it used in different situations. For example, how many 5 year-olds will appreciate a German chocolate birthday? Would a milk chocolate cake be the healthier choice for a person with diabetes?
Likewise, just because something in the financial world looks appealing, doesn’t make it the best thing in every situation. Be sure you thoroughly understand all aspects and consequences of your financial decisions before you actually make them. At the end of the day, you don’t want all those extra calories and sugar sneaking up on you!