Investing for retirement

September 12, 1997: 3:13 p.m. ET

Expert answers your questions about IRA's and 401(k) plans

NEW YORK (CNNfn) -- Here are answers to CNNfn readers' retirement planning questions for Avery Neumark, a financial planner with Rosen Seymour Shapps Martin and Co.
     What are the basic differences between a regular IRA and a Roth IRA? What are the guidelines for rolling money from one into the other, and at what money level and age group would it be a beneficial move?
     In a regular IRA, pre-tax dollars are contributed to the IRA: in other words, you contribute dollars and it is, in most cases, deductible for income tax purposes. The amounts grow tax-free, and when withdrawals are made, income tax is paid upon withdrawals. In a Roth IRA, after-tax dollars are put into the IRA, but when withdrawals are made, the amounts withdrawn are completely tax-free, including the earnings that were never previously taxed.
     The new law provides that a regular IRA may be converted to a Roth IRA; in other words, you would take your regular IRA into which you contributed pre-tax dollars, pay tax on what is in the IRA now and convert it into a Roth IRA, and when withdrawals are taken out from the Roth IRA, those withdrawals would be tax-free.
     Each taxpayer must make an evaluation and weigh the advantages and disadvantages of paying tax currently on the conversion of the IRA to a Roth IRA versus the advantage of the earnings in the Roth IRA being tax-free. (If the conversion is made before 1999, the tax can be spread over four years.) A taxpayer who has adjusted gross income of $100,000 or more cannot covert a regular IRA into a Roth IRA during that year.
     Can children open an IRA? If not, is there a way to save for their education while minimizing the taxes on gains?
     If children have earned income, they can open an IRA. The new law does provide methods for parents and grandparents to save for education through new education IRA's and tax credits.
     I am changing jobs. What are the rules for the 401(k) money I have with my current employer? Would it be better to roll it over to a Roth IRA, or put it in the 401(k) plan at my new employer?
     If someone is changing jobs, there are a number of options available. If you like the investments of the previous employer's 401(k) plan, you can leave the money in the previous employer's plan and take advantage of the investment options of that plan. You could also take a lump sum withdrawal from the 401(k) plan, and either roll it over into your new employer's plan if the new employer has a plan, or into an IRA. It may pay to roll the 401(k) monies into a regular IRA, pay the tax and convert it into a Roth IRA to take advantage of many years of tax-free earnings.
     Should retirement savings be allocated differently than my regular portfolio?
     Retirement savings should definitely be allocated differently than a regular portfolio. Usually, the regular investment portfolio has a percentage of assets invested in "risky" investments. Retirement savings should be more of a conservative allocation over a long period and have good performance, which is the main goal.
     I don't have a retirement plan right now, but plan to start one in a few months. I'm 25 years old. Should I choose my company's 401(k) plan, which matches quite well but is not vested for several years (longer than I plan to be here), a current IRA or a Roth IRA? Or something else?
     Setting up a retirement plan depends on your employment status. If you are an employee earning income from an employer, your choices really are the employer's plan, be it a 401(k) plan or other plan, if you are eligible, and an IRA. A 401(k) plan has a higher contribution level. If you are not eligible to participate in an employer plan, then you may be eligible for a current IRA or a Roth IRA.
     What are the rules for using current IRA or Roth IRA funds to put a down payment on a house? Are there penalties?
     Under current rules, withdrawing from a regular IRA before age 59-1/2 will impose income taxes on withdrawn amounts, plus a 10 percent excise tax. Beginning in 1998, the excise tax is waived for down payment on a house up to $10,000. The new law provides that in a Roth IRA, one can withdraw up to $10,000 from a Roth IRA for the down payment without a penalty.
     I contribute about 4 percent to my company's 401(k) plan. I also want to start an IRA. Are there limits to how much I can contribute, and which kind I should open?
     The general rules for an IRA is that no one can contribute more than $2,000 a year to an IRA. You must also check to determine whether you earn over a certain amount of money and if you are a participant in your company's 401(k) plan, you may not be eligible to contribute to a deductible IRA. This depends on your adjusted gross income. This amount is being increased under the new law.
     How can I determine whether a self-employment IRA or Keogh is better for me?
     Typically, a Keogh plan is better than an IRA, since there is more flexibility to contribute greater amounts to a Keogh plan. Secondly, the design of the Keogh plan is more flexible than the design of an IRA.
     My wife and I have been putting our retirement money into a combination of 401(k) plans, IRA's and SEP's. We have a sufficient nest egg and we'd like to retire early. Is there a way to withdraw all or half of the annual interest without the early withdrawal penalty?
     The Internal Revenue Code provides that if amounts are withdrawn from an IRA in a series of substantially equal payments, there would be no penalty regardless of age.
     I have three 401(k) plans that I no longer contribute to, from former jobs. Can I eliminate this clutter by rolling them all into one plan, and if so, what should I do with them?
     Your choices are the following: You can take the distributions from the different 401(k)s and roll them into one IRA, of which you control all the investments. The only caution on this is that you should look into the old 401(k) plans, and if you are very happy with the investment options, you may want to leave such amounts in a particular plan. If you are currently employed and have a 401(k) plan, you may want to roll over the amounts into your current employer's 401(k) plan. Basically, your choices are to roll them into an IRA or to the current employer's 401(k) plan.
     If all or a portion of an IRA is tax-deferred, do the beneficiaries have to pay tax on the account after the death of the contributor?
     Yes, the beneficiaries of an IRA upon the death of the account-holder, when they receive IRA distributions, must pay income tax on the amounts they receive.
     Is it possible to have both a current and a Roth IRA at the same time? This way I can continue to let my IRA grow tax-deferred, yet enjoy the benefits of the new plan. What are the limits for contribution?
     You can have a Roth IRA and a regular IRA at the same time. However, the total amount that they contribute to both in one year is no more than $2,000.