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Question for the Money Doctors

Question submitted on Dec 31, 2015.

Question

I have had a simple IRA for 20 years which I am contemplating rolling over into my employers new 401k plan (effective January 2016). Is there an advantage to keeping it separate? Also, I am maxing out my allowable deductions and "catch up". What other tax deferred vehicles are there (such as health care, life insurance, etc), if any? Would a Roth IRA make sense? I want to invest more than what I am currently investing in pretax savings. Does it makes sense to mix pretax and taxed savings/investments and, if so, what percentage of allocation is recommended, please?

Answer

This is a robust group of questions, not all which can be answered without more specific information.  In general, there are always advantages and disadvantages to rolling a Simple IRA into a new employer’s 401(k).  Some things to consider: 

  1. Planning – is your income particularly high where you may not qualify for a Roth IRA contribution?  If so, you may be able to roll your SIMPLE IRA to the 401k and not have any personal IRAs, thus allowing you to contribute to an IRA and do a subsequent Roth IRA conversion without adverse tax consequences.
  2. Investments – is there more flexibility in your SIMPLE IRA to choose how the funds are invested vs. the 401k, where there might only be a few pre-set options?  Also, you may want to review the historical performance of each account based on how the funds are invested.
  3. Account management – Are you comfortable with 2 separate accounts or would you prefer the administrative convenience of having only one account to monitor?

If you are looking for other tax-deductible, tax-deferred savings options, think about a Health Savings Account (HSA).  If you have a high-deductible health insurance plan, you can contribute tax-free dollars to an HSA and withdraw as needed for medical expenses.  Alternatively, you can make annual tax-free deposits and allow the balance to grow.  At age 65, withdrawals can be made for any reason without penalty, although non-medical reimbursements will be taxable, making it similar to a traditional IRA.

Roth IRAs make sense for many individuals, but many factors need to be taken into consideration in determining if it is the right account structure for your individual situation.  The advantage of the Roth IRA is that the original funds and any future earnings are free of tax, subject to specific IRS guidelines.

Furthermore, if you are saving significant funds annually, and have maximized the various retirement account strategies that apply to your situation (I.e. $24,000 401k for 2016 and $6,500 IRA or Roth IRA for 2016), yet are still seeking tax deferral on additional savings, there are several options including variable annuities, fixed annuities, variable life insurance and whole life insurance for example.  However, each of these approaches have different advantages and disadvantages to look at specific to your situation, and would require careful analysis and consideration.

Contact a CPA/PFS (Personal Financial Specialist) in your area through www.findapfs.org  A high quality advisor such as a CPA/PFS will be able to assist with recommendations for an overall plan that is customized to you.


For additional information visit http://www.360financialliteracy.org/

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