IRA Planning for Those Near or at Retirement

Episode: 60
Originally Aired: September 21, 2011
Topic: IRA Planning for Those Near or at Retirement

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Please note: *This podcast episode aired in the past and some of the information contained within may be out of date and no longer accurate. All podcast episodes are intended to be used and must be used for informational purposes only. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment strategy or plan will be successful. Investment advisory services offered by Lange Financial Group, LLC.


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  1. Introduction of Retirement Planner and Attorney Jim Lange
  2. Strategies and Psychologies Differ Depending on Your Age
  3. Roth Conversions Might Make Less Sense in Lower Tax Brackets
  4. First Step in Considering Retirement: Can You Afford It?
  5. How Much You Need to Live Comfortably Is a Critical Factor
  6. Health Issues Can Influence Pension Decisions
  7. Money Sometimes Is Better Left in a 401(k) Than Moved to an IRA
  8. What to Do With After-Tax Dollars in Retirement Plans?
  9. Roth Conversions Can Save Thousands, But You Lose Liquidity
  10. NUA — Company Stocks You Own — May Get Special Tax Treatment
  11. Consider Purchasing a Low-Fee Immediate Annuity

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at Now get ready to talk smart money.

1. Introduction of Retirement Planner and Attorney Jim Lange

Hana Haatainen-Caye: Hello, and welcome to The Lange Money Hour, Where Smart Money Talks. I’m your host, Hana Haatainen-Caye, and, of course, I’m here with Jim Lange, CPA/attorney and best-selling author of the first and second editions of Retire Secure! and now his new book, The Roth Revolution: Pay Taxes Once and Never Again. Jim’s books have been endorsed by Charles Schwab, Larry King, Ed Slott, Roger Ibbotson, Jane Bryan Quinn and dozens of additional financial experts. Jim has been quoted 30 times in the Wall Street Journal. Jim is the president of a CPA firm that prepares tax returns, a law firm that drafts wills and trusts, and a registered investment advisory firm that provides investment services. Tonight’s show is about how IRA and retirement plan owners should plan when they are near retirement, and then how retirees should prepare for their IRA and retirement plans. But before I turn it over to Jim, I want to remind our listeners that the show is live, so please feel free to call in with your questions for Jim. The number is (412) 333-9385. Good evening, Jim.

Jim Lange:  Good evening.

2. Strategies and Psychologies Differ Depending on Your Age

Hana Haatainen-Caye: Let’s start out with a basic question: Why do a show for people who are about to retire, or are already retired?

Jim Lange: Well, the first reason is more strategic. There are strategic differences that listeners should employ when they are getting ready to retire that are actually much different than, let’s say if they have 10, 15, 20 years ahead of them. So there are strategic differences that I do want to go over, and we’ll cover those point-by-point in the show. The other thing is there is a psychological difference when you are getting ready to retire or you have already retired, and that is, right now, if you are about to retire or you are already retired, maybe you’re getting Social Security or you will get Social Security, and maybe there is a pension, but other than those two things, you’re basically going to have to rely on your portfolio to support your lifestyle for the rest of your life, and, if you’re married, for the rest of your spouse’s life.

So these are some scary things, and I think that there’s a lot of people who certainly need guidance and need good objective guidance, both on the strategic side and on the psychological side, so I thought it would be appropriate to do a show that really concentrates on some of the strategies that people who are about to retire, or already have retired, should employ, and that’ll be the focus of it. But I will also just say that psychologically, and particularly today with the market down, we can’t do a lot to control the market, but what we can do is, we can be smart about taxes, we can be smart about our spending, and we can do, I think, proactive steps to do what most people’s financial goal is, at least the basic goal, which is to live comfortably for the rest of your life, and, if you’re married, for the rest of your spouse’s life.

Hana Haatainen-Caye: OK, well, let’s first look at what people who are still working but are planning to retire soon should do. What are some of the strategies they should be employing, and specifically, how do those strategies differ from strategies of younger workers who are planning to work longer?

Jim Lange: OK, let’s say that you are a younger worker, you know, even in your 40s and 50s or younger, and I don’t want to say it’s simple because there’s still a lot of choices that you have, but the general idea when you are younger is to accumulate money for your retirement. So, I’m always telling younger workers to put money in their Roth IRAs, if they’re less than 50 to put $5,000 in their Roth IRAs, to put as much money as they could afford either into their 401(k) at work, or, and this is actually one of the differences that we’ll talk about, their Roth 401(k) at work, the idea being that they have a lot of years to continue working. They should be putting money away for their retirement. I don’t want to say it’s simple because maybe it’s not so simple, but basically, putting money in Roth IRAs and then having the choice between putting money in a traditional 401(k) or a Roth 401(k) is sometimes some of the most important things as well as investment choices.

3. Roth Conversions Might Make Less Sense in Lower Tax Brackets

As you approach retirement, it becomes a lot different. So, let’s take some very specific things. One thing is, as you are getting ready to retire, one of the differences is is what’s going to happen to your tax bracket? So let’s say that you’re working now, and let’s assume, for discussion’s sake, that you are at the height of your earning power, that is, you’ve received steady raises or even if you’re flat for the last five or 10 years, you’re still in a much higher tax bracket than you will be after you retire. If that happens, then it becomes very important to recognize that, OK, now I’m in a higher tax bracket. I’m going to be in a lower tax bracket. What are some of the things that I can do differently than, let’s say, somebody who was planning to work another, five, 10, 15, 20 years? Well, one thing, being in a higher tax bracket changes the math on what are the best strategies. Earlier, I said that if you are going to be working for a lot of years, and there’s no hard rule of thumb, but let’s just say, for discussion’s sake, 10 years or more, and that you are away from retirement and that you are in a higher tax bracket, or, at least in the same bracket that you will likely be in for a long time, it makes sense to put money into the Roth IRA and Roth plans because you have many years of the higher income to accumulate the money.

If, on the other hand, let’s say that you’re about to retire in a year or two years and your income tax bracket is going to go way down after you retire. Well, in that case, the Roth strategies don’t make as much sense because instead, if you put money into a regular 401(k) or a regular 403(b) for our friends in the non-profit world, you’re going to be getting a tax deduction at a higher tax bracket or a higher tax rate, and that’s going to be much more beneficial than putting money into a Roth IRA. The other thing is, and we’ll get to this when we talk about what happens after you retire, the Roth IRA conversion plans can be done after you retire when you are in a lower tax bracket. So, for example, in terms of Roth IRA conversions, and I know that I have a reputation for being a big Roth IRA conversion fan, I would prefer having a reputation for being the guy who runs the numbers and then makes a recommendation based on those numbers, but in this specific case, what we find is that the people who are making money at a higher tax bracket are better served to wait until after retirement when they’re going to be in a lower tax bracket to make their Roth IRA conversions.

So let’s say, for discussion’s sake, you’re in the 25 percent or 28 percent bracket now while you are working, if you made a Roth IRA conversion, you would have to add income and pay tax at 25 percent or 28 percent or maybe, depending on how much the conversion would be, might even throw you into a higher bracket. If, on the other hand, you say, “Well, OK. What I’m going to do is I am going to wait until after I retire to make my Roth IRA conversion,” and then, let’s say, after retirement, and particularly for people who are retiring before age 70, they will no longer have their wages, they will no longer have their income from maybe a business or et cetera. Let’s assume, for discussion’s sake, and we’ll get into the issue of Social Security, that they’re not taking Social Security yet. They might have a very low income and they might be living off of their savings. In that case, they might be in the 15 percent bracket or even lower. If that is the case, it makes a lot more sense to do a Roth IRA conversion after they have retired in a low bracket. So, the strategies of doing a Roth IRA conversion, or when to do a Roth IRA conversion, becomes completely different for somebody who is very close to retirement than for somebody who A) either has many years to go, or B) is already retired. So those are some of the reasons that I wanted to do a special show and that I think deserves serious attention on this.

Hana Haatainen-Caye: OK, and you’re talking about the people that are getting prepared to retire. What are some of the things that people should do at retirement?

4. First Step in Considering Retirement: Can You Afford It?

Jim Lange: All right. At retirement, and this, by the way, is a critical issue. So, let’s say that you … and first of all, when I say “at retirement,” let’s assume before you have announced to your company that you are retiring, or before you have filled in the paperwork, because it might sound kind of basic, but this is very important. Let’s assume, for discussion’s sake, that you are thinking of retiring, or you think that, yes, this is what you want to do. You’ve thought about it a lot. Maybe work isn’t as much fun. Maybe you think that you can afford to retire and you’re planning on stopping work. Before you tender your resignation, the one thing that I think that you really have to do is to determine if you can afford to retire, and by the way, this is no joke and this is a true story. I had a client who came to me and he said, “Jim, you know, you’ve been helping me with my taxes for more than 20 years and I really trust you, and now that I’ve retired, I wanted to come to you and find out all your best strategies.” And I looked at how much he had in his portfolio, and I knew how much he wanted to spend, and my immediate reaction was, “What should I tell this guy? He should’ve kept his job.” And it’s a real problem.

So now we get into the issue of … and I don’t want to make this show a show specifically on the safe withdrawal rate, but I think that it’s really important for people to understand before they retire, they have to think this out and make sure that they have enough money. We’ll cover Social Security separately. I do not want to count on Social Security, not that I want to ignore it, but I don’t want to count on it as my sole means for my retirement income. So what I’m going to try to do is to determine how much money I might need to have before I can comfortably retire, and this gets into the issue of the safe withdrawal rate. So, let’s say, for discussion’s sake, that I need $40,000 a year to live comfortably, in addition to Social Security, and let’s assume, for discussion’s sake, that there is no pension involved. So, I need to take $40,000 per year from my portfolio. Well, depending on how old you are and how long you think you’re going to live, the old rule of thumb is that you could take what’s called the safe withdrawal rate, and by the way, this is a really important issue and this deserves separate shows in and of themselves, and by the way, Hana, I will mention that we have three shows dedicated to the safe withdrawal rate, and I would refer interested listeners to those shows.

One is with a guy named Bill Bengen. Bill is probably the classic safe withdrawal writer and thinker in the area. Another one was with Geoff Considine, and then the third one was with a guy named Paul Merriman, and all three of those shows, we concentrated on the issue of the safe withdrawal rate. They are all, by the way, along with all the other shows that we have done, available in our archives, and what you would do if you wanted to listen or actually just read the transcripts is go to and then go to the area that says “Listen Now,” and then what you can do is you can find all the shows that are listed, and I usually have the name of the guest, if there is a guest, and what the show is about. So, if you’re interested in safe withdrawal rates, I would probably start with the Bill Bengen show. But anyway, we’re not going to do a show dedicated to the safe withdrawal rates, but you can’t talk about retirement without it.

So let’s assume the old rule of thumb is 4 percent for a 30-year retirement. There are some people, including Bill, who think that maybe you can go a little bit higher than that, but let’s be conservative. So, basically, the question then becomes if you need $40,000 a year, and by the way, for discussion’s sake, I’m going to include income taxes as part of your need. So, you’re spending even less, maybe closer to $35,000. If you need $40,000 a year, that means you need a million dollars to retire. Now, this is not including Social Security, so if you’re getting Social Security … but even if your Social Security is even $20,000, $40,000 plus the $20,000 is $60,000. That’s $5,000 a month. That’s not an excessive lifestyle. The $5,000 a month is really … that’s kind of, I don’t know if there is such a thing as normal, but that allows you to pay the mortgage or the rent and gas in the car and food on the table and some entertainment, but it is not a fantastically luxurious lifestyle.

5. How Much You Need to Live Comfortably Is a Critical Factor

So if you have a half a million dollars in your retirement plan, or a half a million dollars in combined savings and Roth IRAs and a retirement plan, you can’t take $40,000 a year and be assured that you’re not going to run out of money in 30 years. You can only take — again, if we’re going to use the 4 percent rule — you can only take out $20,000, and if $20,000 plus Social Security plus a pension is not going to do it, you can’t retire. Sorry, I don’t mean to be the professor of harsh reality, but that’s just the way it is, and I sometimes see the names of books, and I don’t want to name any particular book or name any advisor, you know, start late, retire early, all this stuff, and I don’t care what you do. If you don’t have enough money, you can’t safely retire. There is no magical investment. In fact, if you put your money into really risky things and you lose that, then you’re really in trouble. I had a client who bought some wrong land in Florida and he lost his shirt on it, and he thought, “Well, I had to do this to make up for the fact that I don’t have enough money for retirement.” Of course, he told me about this after he already did it, but I would say one of the most important things is to come up with some type of financial plan, whether you do it on your own, or, of course, a guy like me would prefer that you do it with the appropriate financial professional, to make sure that there is enough money to support the lifestyle that you want to lead the rest of your life, and if it isn’t there, don’t tell the people that you are going to retire.

And the other trap that I have seen is, a lot of times, companies, and even different governments, and I’ve seen this in the education area, will promise some type of health benefit, let’s say, from retirement until Medicare kicks in, and people say, “Oh, I’d better hurry up and take that because, otherwise, it might not be here.” So, they retire maybe earlier than they should have or could have, and what they’re not taking into account is all the additional money that they would be earning if they waited. So that is a really big issue. Do you have enough money to retire? Or even for retirees, how much money can you safely spend? Again, this isn’t going to be about safe withdrawal rates, but I will just say that that is so important and is so easily overlooked.

6. Health Issues Can Influence Pension Decisions

All right. Anyway, so I’m off my safe withdrawal soapbox. Let’s go to some of the specific things. Let’s assume, for discussion’s sake, and there are different possibilities. Maybe you are with a company or a government agency, and specifically, I have the school districts in mine, but let’s say you are with a government agency or with a company where you have a traditional pension. Now, this is dying and fewer and fewer employees are going to be retiring with pensions, but there are still a lot of companies, and particularly in Pittsburgh, that do offer traditional pensions, and what I mean by that is at retirement, you get X dollars per month every year for the rest of your life. If you are married, then you sometimes have a choice. Well, you can take a smaller pension, but if you die, then your spouse will get the pension benefit, or sometimes, there’s a hybrid like, well, you’ll get a certain amount, but if you die, your wife or your husband will get 50 percent of what you have or what you would have received. So, that’s going to be one issue, which is should you take a — I sometimes call it a one-life or one-person option — or two-person options?

Now, if the goal, and what I would say is the normal goal, if you’re married, is to provide for both husband and wife for the rest of both of their lives. And unfortunately, there’s a lot of bad information out there and there are some insurance people who would have you believe it’s much better to take a single life, and then take the money that you’re saving because you’re getting a higher pension benefit. Take that money and then use that to buy a life insurance policy, so if you die, your spouse, instead of getting your pension, they will get a life insurance benefit, and I would agree with the insurance professionals that that is an option that should be considered, but it isn’t a slam dunk and it should never be presented as a slam dunk. That, in my opinion, is one of the situations where you have to run the numbers and you look at somebody’s individual circumstances.

So, even just for example, let’s say that you are married and your spouse has some very significant health problems that would lead you to believe that they do not have a normal life expectancy. Well, in that case, you might lean to take a one-life, but you still might want to buy some life insurance just in case you do pre-decease them. On the other hand, let’s say that you are married and your wife or your husband, their family lives to 100 years old and they’re healthy as a horse and they’re just doing great. Well, in that situation, I would probably lean towards having a two-life pension that would secure them an income for the rest of their lives even if you die first. Now, those are obviously pretty basic and pretty extreme examples, and then also you have to look at the deal that each pension provider would make. Then you also have to ask yourself, well, how solid is the pension? I’d be a lot happier with a PSERS or an SERS, and that’s State Employee Retirement System, and in Pennsylvania, those employees’ pensions actually are guaranteed by the Constitution, and, let’s say, for example, a teacher would not get their pension. You’d have to have a politician not get their pension, and I don’t think that’s going to happen. So, I think that the Pennsylvania system is pretty solid. On the other hand, other companies might not be as secure, so I think that is an issue.

So one of the issues that I think we have to take a look at is probably, if there is a pension involved, does it make sense to do a one-life pension or a two-life pension or some hybrid combination of the above, and I don’t think it’s a slam dunk. I think it’s one of those things where you have to run the numbers and look at individual circumstances.

Hana Haatainen-Caye: OK, Jim, before you go into talking about 401(k)s and whether to leave the money in or take it out, I wanted to take a break. When we come back, we’ll continue the conversation. We’ll be back in a minute with Jim Lange on The Lange Money Hour.


Hana Haatainen-Caye: Welcome back to The Lange Money Hour. This is Hana Haatainen-Caye, and tonight, Jim is sharing some insights into some of the most critical decisions IRA and retirement plan owners can make, either right before or after retirement.

Jim Lange: OK, we were talking about things that people should do right at retirement, and we talked a little bit about making sure they had enough money to retire, and then we talked about pension options. And by the way, before we get into the next quantitative issue, or the next substantive issue, let’s do maybe not such a substantive issue, but it’s a real psychological issue. Sometimes, both locally and around the country, I give talks on IRAs and retirement plans and sometimes the audiences are groups of people who are about to retire, and often I’m not the only speaker, and one company had basically a day of speakers and one of the speakers had a talk called “Stay Out of the Kitchen,” which I thought was very good, and the idea was that, at the risk of being sexist, a lot of husbands drive their wives crazy by hanging around when the wife is not used to them being there. By the way, you guys can’t see it, but Hana’s just shaking her head. She agrees completely! So, one is to stay out of the kitchen and not micromanage what your spouse is doing.

OK, back to substantive issues. One of the next big issues that you’re going to have, and unfortunately, now that you are retired, and let’s say, for discussion’s sake, you’re in your 60s and you have a substantial 401(k). In fact, a lot of my clients, their 401(k), or for our friends in the non-profit world, a 403(b) plan, often with TIAA-CREF as the primary investment vehicle, sometimes Vanguard and Fidelity, but usually, more often than not, TIAA-CREF. You are now the target of many financial advisors and many different types of financial professionals who are all of a sudden very interested in contacting you because they want you to take your money and do something with them, whether it’s to have the money managed, whether it is to buy a financial product, and you are likely to get deluged with information and sales pitches, and most of the information and sales pitch in one way or another is going to involve you taking your 401(k), or at least a portion of your 401(k) or your 403(b) plan, and rolling it into an IRA, and before we even get into some of the trickier issues, let’s just talk about some of the strategic issues of, does it always make sense to take money that is in your traditional 401(k), or, again, people in the non-profit world, the 403(b), and roll it into an IRA? And what I fear that most advisors are going to say is, “Yes, it always makes sense,” and I’m going to try to, rather than to be the advisor who is trying to constantly get the most assets under management, or to try to sell the most products or whatever, I’d prefer giving you what I think is the right answer, which, frankly, many financial advisors might not want me to mention, or they might honestly disagree with me, but anyway, here’s what it is. One of the things is, sometimes, the money, or at least a portion of the money, is better off in the 401(K) or the 403(b) than money outside.

7. Money Sometimes Is Better Left in a 401(k) Than Moved to an IRA

So let me give you two local examples, probably two of the bigger employers in the city of Pittsburgh. I’ll lump all the universities and non-profits together because the answer is pretty much the same for both of them. So, let’s say you are about to retire from the University of Pittsburgh or Carnegie Mellon, or from many of the non-profit organizations where you have a retirement plan, typically in a 401(a) or a 403(b) or some combination thereof, that is funded with TIAA-CREF. Now, what is TIAA? It is a bond fund. What is CREF? It’s basically a stock fund. Without even getting into all the rules, and by the way, there’s some important rules that you have to know. I sometimes call that one of the risk mysteries of life, which is how to get your money out of TIAA-CREF after you retire. And what I’m about to say will also apply to people in the private sector.

So, let’s say, for example, you work for Westinghouse and you have money in the Westinghouse 401(k) plan, and at least a portion of that money in the Westinghouse 401(k) plan, and this might be true of really most big companies, they will have what is called a GIC, which is a guaranteed income contract. So, you have some money in a fixed income fund. The equivalent in the non-profit world is money in the TIAA fund. Now, if you think about what is going on with these funds, whether it’s TIAA or the Westinghouse GIC or even other guaranteed income contracts, is you have a fixed income fund that typically has a guaranteed rate of return, and, in addition, was purchased when the income from bonds and other fixed income was higher than it is today. So, let’s say, five and 10 years ago, when bonds were paying a lot more than they are today, these bond funds and guaranteed income contract funds were actually buying bonds, and they still own them, and that is, you still own them. Now, does it make sense, just from a common sense standpoint, to take money out of one of these guaranteed income contracts, hand it over to a financial advisor, who, let’s say, for discussion’s sake, isn’t charging an outrageous fee, but let’s even say is charging 1 percent, and let’s also assume that, in the end, you’re going to want to have some combination of stocks and equities and bonds and fixed income funds. You’re going to certainly want to end up with a certain portion of your portfolio in fixed income or bonds.

Well, maybe what probably makes more sense than taking all the money out of the 401(k) plan is to leave some money in the 401(k) plan, particularly the money that is in the guaranteed income-contract funds, or, in the case of the non-profit, in the TIAA funds because that is paying a higher interest rate than you can get out on the free market. And particularly, if you’re going to have to pay an investment fee, it really often doesn’t make sense to take money that is well-invested in a guaranteed income contract in your 401(k) or your 403(b) and roll that into an IRA. Now, that said, does that mean that you should leave the money there? No, I’m going to try to be a little bit like King Solomon here and split the baby.

The guaranteed income-contract portion is often a good candidate to stay where it is, as is the TIAA in the non-profit world. But what about the CREF money, or what about money that is not part of a fixed income fund where you very well might do better outside of the 401(k)? You have to be very careful about fees, and by the way, this is a huge area now where there’s going to be increased scrutiny on the fees for 401(k) providers, and that’s something I would encourage every 401(k) owner, even if you’re younger and you have a lot of years left of working, it would behoove you to understand all the fees that the 401(k) provider is charging. So, I think that that will also be important in retirement. But you also have to be very cognizant of the fact that if you are having some help investing the money, you have to really understand how the person, or the financial advisor, is charging you, or how they are being compensated. And by the way, it is 100 percent legitimate and perfectly fine to say, “How are you making money by working with me?” And if they say something like, “Well, the company’s paying me,” or “Well, there really is no fee. It’s all part of it,” I’d be very leery and I’d really try to find out how that person’s being compensated because it is possible that that person is actually getting more than the money that was being paid in the expenses in the 401(k). Now, if they can justify it based on performance, that might be another factor. But let’s start with one advantage of you’re often better from an investment standpoint of keeping at least some of the money in the 401(k) in the fixed income area.

Now, if we go further, let’s talk about other advantages. There are two other advantages of having money in a 401(k) or a 403(b) over an IRA, and those advantages are, Number 1, you sometimes have superior creditor protection in a 401(k) or a 403(b) than you do in an IRA. So, let’s say that you are being sued for running over Ben Roethlisberger’s foot, and he sues you for $100 million and your insurance doesn’t cover it all. Well, in that situation, your IRA might protect you anyway, but you will be better protected if that money is in an ERISA plan, which is a 401(k) or a 403(b).

The other thing is, in the event of death, your heirs can make a Roth 401(k) conversion of the inherited 401(k) or 403(b), but they cannot make a Roth conversion of an inherited IRA. So there are some real benefits of having money in the 401(k) or the 403(b) and leaving it there. Now, that being said, there’s a very good chance, particularly if you’re with a good ethical advisor, that you can do better from an investment standpoint, at least with the equity portion of the money that you accumulated in an IRA over and above the 401(k) performance. So, I’m not saying, “Oh, just always keep it there,” I’m just saying, “Don’t automatically transfer it out.”

8. What to Do With After-Tax Dollars in Retirement Plans?

Then we have to talk about some of the, let’s say, more subtle features. One of the issues that comes up is what about after-tax dollars inside a retirement plan, and this, by the way, and I’ve been doing this for 30 years, and I’ve seen this mistake happen so often and it really frustrates me, is that many times, either because the retiree, or the person about to retire, doesn’t know, or because the advisor, who, in my opinion, should know, doesn’t know, is they don’t know what to do with after-tax dollars inside a retirement plan. There’s a lot of people who have what is called after-tax dollars inside a retirement plan, and what that is is money that you have contributed to a retirement plan for which you did not get an income tax deduction. That is conceptually the same as the old non-deductible IRAs.

Actually, we still have non-deductible IRAs today, but these days, a lot of people are making non-deductible IRAs and then, assuming they have no other IRAs, then making Roth IRA conversions of those immediately after contributing them. But conceptually, a lot of people have after-tax dollars inside retirement plans. By the way, I will tell you, in practice, that the company where I routinely see this is Westinghouse. So, a lot of my Westinghouse retirees, and let’s just say, I’m not sure what the average is, but to pick a nice, even number, let’s say that there’s a million dollars in their 401(k) plan. Many of these retirees will have maybe $50,000 of after-tax dollars inside their retirement plan. If they do nothing and if they ignore the fact that they have already paid income taxes on the $50,000, they’re really going to end up paying an extra tax on $50,000. Now, usually, that doesn’t happen, but a lot of times, what does happen is they are advised to pull that $50,000 out of the retirement plan. So, let’s say, again, going back to our million dollar example, they have a million dollars in their retirement plan, or, let’s say, 401(k), and of that million dollars, $950,000 is a traditional retirement plan and $50,000 represents after-tax money. What they are often advised to do is to take the after-tax, that is, the $50,000, and then take the remaining $950,000 and roll that into an IRA, and they say, “Well, that’s pretty good! I got $50,000 out and I didn’t have to pay any tax.”

But that’s actually usually the wrong move. We’re not going to have time on the air, but it also very often makes sense to, instead of taking the $50,000 and spending it or doing that, if you have other money you can spend, it will often make more sense to do a Roth IRA conversion of that $50,000, and again, I don’t have time for the details, but if you do a Roth IRA conversion of that $50,000, and if you use … I don’t want to call it a trick, but let’s call it a technique, and it’s not a secret, it is in my book The Roth Revolution: Pay Taxes Once and Never Again, you could very often make a Roth IRA conversion of that $50,000 without having to pay the tax, and over time, that could end up being tens, maybe hundreds, of thousands of dollars better off for your family.

Hana Haatainen-Caye: OK, Jim, let’s take another quick break. When we come back, we will look into some investment options. We’ll be back in a minute with Jim Lange on The Lange Money Hour.


Hana Haatainen-Caye: Welcome back to The Lange Money Hour, Where Smart Money Talks. We have Bob from Bethel Park on the line who has a question about a Roth IRA. Hi Bob.

Bob: That’s correct. Hey Jim, I’ve been listening to you for a couple of years now, and I’ll be honest with you, I was a lot more hopeful when you started hitting the air here, and I felt that I had a good plan, and I guess maybe it’s the stock market and the lack of returns, but it kind of is a daunting task when you talk about a million dollars because that’s about what you were laying out there earlier. I’m 55 now and I’m approaching retirement. It’s going to be a few years yet, but I’m afraid it’s just going to continuously be further out as we go along here as we have dismal to no returns, if not losses, in the stock market.

But really, the purpose of my call today, Jim, was about the Roth. You know, I have some money in a bank account. It’s not earning anything. What are the advantages to putting it in a Roth? I mean, somebody told me actually if you put the money in a Roth and something comes up that you didn’t foresee that that money, at least the initial principle, you wouldn’t have a penalty for withdrawing because it was after taxes. Is that right, Jim?

Jim Lange: Well, let’s take it one step at a time, and let’s do the simple question, which is a Roth contribution. Since you are older than 50, that means you’re allowed to contribute up to $6,000 — if you were younger, it would be $5,000 — into a Roth IRA, and whether your wife is working or not, you could also put $6,000 in for her. So, the first question is, does it make sense for you to put $12,000 into a Roth IRA? And you said you had some money that was either being invested or wasn’t even doing that much.

Bob: Right.

9. Roth Conversions Can Save Thousands, But You Lose Liquidity

Jim Lange: All right. So, the advantage of putting the money in the Roth IRA is that that money that you put in the Roth IRA will grow income tax free for the rest of your life and for the rest of your wife’s life. If you don’t spend that money during your lifetime, and frankly, a lot of people in your generation, because you are a little bit conservative financially, you’re not going to spend all your money, and let’s say that you end up … and in a different talk, I talk about which assets to spend first, and I usually encourage people to spend the Roth last. There’s a reasonable likelihood that you will end up dying with that Roth IRA, or at least part of it, in which case that could go to your kids or even grandkids, and you could get 10, 20, 30, 50, 80 years of tax-free growth on that Roth. And the numbers, by the way, are astounding.

Now, to be fair, we have to say, “All right, what is the downside?” And you actually alluded to it, which is reduced liquidity. Because you are not yet 59½, if you put that money in a Roth IRA, and let’s say you need that money, and you then withdraw that money, just like a regular IRA, you’re going to have a pay a 10 percent penalty. So if you put money in a Roth IRA and you need the money and the purpose of the money is not one of the exceptions, boom, you’re going to have a 10 percent penalty. So, I think a lot of times, what the issue is, is can you afford to be without that money between now and 59½? And personally, I would rather see you put some money in a Roth IRA, and if you really needed the money to maybe do a home equity loan or to get it from somewhere else, I like the idea of money going into the IRAs.

Bob: OK.

Jim Lange: All right?

Bob: Can I ask one more question, too, on that? My employer used to match our 401(k) contributions, but I guess times being what they are and the profits being not what they’d hope they’d be, they have pulled off of that, and my next question, I guess, is with the 401(k), if I’m not getting matching, I know it’s before taxes, but what are your thoughts about making an investment in that area before the Roth, or should I go with the Roth first and then, because I’m not getting matching on 401(k), what are your thoughts on that?

Jim Lange: Well, let me tell you the two easy situations, and then I’ll tell you the hard one, which is your personal situation. So, right now, we’re going to assume that you are in a situation where you are working for an employer who isn’t matching, or by the way, this answer would apply equally to somebody who is matching, all right? In either case, let’s assume that there is some money available to put into a retirement plan, and let’s say there’s three possible choices: one is a Roth IRA, two is a traditional 401(k), and three, assuming your employer is enlightened enough, the employer offers a Roth 401(k). All right, is that fair?

Bob: Which they do, yes.

Jim Lange: I’m glad to hear that you’re working for an enlightened employer. Maybe they’ve heard me before. By the way, I actually have a talk coming up to a couple hundred HR and benefit people, and I’m going to plead with them to get their companies to offer a Roth 401(k), or in the public sector, a Roth 403(b). All right, so anyway, let me tell you the easy case. The easy case is for people younger than you and have longer than a 10-year investment horizon. In that case, I’m really going to be a fan of the Roth IRA because they’re going to have all those additional years of tax-free growth. Another easy case is going to be the person who is just about to retire. So, let’s say instead of being 55 years old and having maybe a 10-year working expectancy, that you’re maybe 65 years old and you’re just about to retire. In that case, I don’t want you doing a Roth. I would rather have you do a traditional and get a tax reduction, and then do a Roth conversion after you’re retired and you’re in a low tax bracket.

Bob: Very good.

Jim Lange: Very good, except I haven’t answered the question for you because you’re in-between. So, you’re one of those “it depends.” That’s the lawyer’s favorite answer: It depends. So really, what you have to do, for your situation, I don’t want to get too personal on the radio, you have to look at your existing bracket now, what you think your bracket is going to be in retirement, and then you have the other uncertainty of what’s going on politically. You know, you have both Romney and John Huntsman who submitted, let’s say, their answers, and neither of them are taxing capital gains, and Romney doesn’t want to tax interest or dividends, and frankly, you’d have a different answer if that became law. So, the in-between people, and probably 55 is a good definition of someone in-between, it’s probably a little harder and it’s going to depend on individual circumstances.

Bob: Thank you, Jim, appreciate it.

Jim Lange: All right, thanks for the call. I do appreciate it. OK, so what we were talking about, we were talking about after-tax dollars in a retirement plan. There is another feature, and by the way, I don’t have enough time. I’m looking at the clock now. We have time for a couple more points. I don’t have enough time to get into the issue of converting after-tax dollars in a retirement plan to a Roth IRA without having to pay the tax. I’ll just say it is a wonderful thing. We’ve done it many, many times in practice and people really love it. It’s kind of like tax-free money.

10. NUA — Company Stocks You Own — May Get Special Tax Treatment

The other thing that people have to take into account is whether they have any company stock. So, company stock actually has a technical name, and it’s called NUA, which is abbreviation for Net Unrealized Appreciation, and again, I’m not going to have time to go into all the details about NUA, but if you have in your retirement plan stock from the company that you have just retired from, there is a very good chance that that stock will be entitled to a special tax treatment, and to oversimplify, what will happen is, if it is done right, that stock can be treated as capital gain property, meaning that you would only have to pay capital gains rates on the difference between the fair market value today and the value that the stock had when the employer contributed it for you. So, A) you’re not paying tax on the full boat, and B) you’re paying capital gains rates, which might now be, depending on your tax bracket, between 5 percent and 15 percent, which is much less than ordinary income. So you certainly want to check for NUA. I will tell you, time and time again, it isn’t being done, and it’s really a shame and I’m sometimes embarrassed at some of the professional advice that people get from various advisors or — I don’t want to use the word salespeople — but I’ll just say that a lot of times, people don’t get the best advice, that people aren’t even aware that they are missing opportunities, and this show really isn’t about estate planning, but I will tell you that that is also an area where getting the wrong advice after a death is just terrible.

Frankly, that is one of the things that I’m going to be talking about at the workshop on estate planning in Robinson on September 24th at 9:30, and then we repeat again at 1. We’re really going to go into a lot of detail on estate planning. We’re going to talk about some of the problems with traditional estate plans and really hopefully give you some good information and not only tell you what the problems are, but then make recommendations for what we think is the best estate plan, and I will also just tell you that statistically, only 5 percent of people are handling the IRAs at death correctly. So, don’t be part of the 95 percent that blows the stretch IRA and pays way more in income taxes way sooner than they have to because things A) weren’t set up right, and B) even if they were set up right, people didn’t get the right advice after a death. So I’m really kind of a stickler on getting the right advice, and at retirement, that is another time that you really need advice, and I go around the country talking to other advisors trying to educate them, and I practically beg them you have to do due diligence and look to see if there’s a) any after-tax dollars inside your retirement plan, and by the way, a lot of people don’t know about this, and it even benefits people that don’t really understand it. So, you really have to ask questions and also get it in writing, and b) know what to do when you find that situation, and the same with company stock. So, those are two of the really important things.

11. Consider Purchasing a Low-Fee Immediate Annuity

Now, back to the strategy, and I think I’m really probably only going to have time for one more strategy, and I’m going to bring up a strategy that I think people should be aware of, but it might not be the exact right time right now. One of the things that people’s big worry is is running out of money during their lifetime, and particularly right now, a lot of us are feeling pretty miserable about the stock market and the hopes for getting even 6 percent or 8 percent over the next 10, 20 years, which I still hope that we will rebound to. But particularly if you’re conservative, and you don’t think that these rates are possible, one of the things that I’d like people who are about to retire, or have already retired, to look into is purchasing not a commercial annuity but an immediate annuity. That is, in effect, kind of like going to an insurance company and buying a pension plan where you put down a chunk of money and they give you a certain amount of money every month for the rest of your life, or, if you’re married, every month for the rest of your life and your spouse’s life. I like the concept, particularly for people who want to make sure they don’t run out of money. On the other hand, one of the things I don’t like is if you buy that now, you are likely more or less locking in a low interest rate that might not be to your benefit, and it might make more sense to wait, hope the interest rates go up, and then purchase, or, at least, look at the purchase of, an immediate annuity, and I’m talking about a low-fee immediate annuity that will provide an income source that, along with Social Security, will cover maybe some of your basics so that you can live comfortably for the rest of your life.

Hana Haatainen-Caye: Thank you, Jim, and thank you all for joining us for another episode of The Lange Money Hour, Where Smart Money Talks. Again, I’ll remind you what Jim said, the show will rebroadcast on Sunday morning at 9. Tune in to our next live show on September 21st when Jim will be speaking with nationally-renowned Section 529 plan expert Joseph Hurley. If you have kids or grandkids of any age and you’re wondering how to pay for their college, this is a can’t miss show.