Top Myths on Retirement Plans: IRAs, 401(k)s Professor David J. Demko, PhD AgeVenture News Service 12/30/98 Medicare is changing. Drastically. And soon. This January 1998, in fact. If that's not enough to boggle your mind, there are hundreds retirement planning firms vying for your patronage. Then there's all those retirement planning options offered by your employer. IRAs. 401(k)s. Mutual funds. It's enough to give even the best of minds a mental hernia. So do yourself a favor. You have to start somewhere. Begin by getting the low-down on typical retirement plans. To help you along your way, Nolo Press has published "IRAs, 401(k)s & Other Retirement Plans" by Twila Slesnick and John Suttle (Nolo Press, 1998, $21.95) who offer hundreds of enlightening tips about retirement plans. Here's dozen of 'em designed to boost your Retirement IQ and jump-start your planning. 01. Can you take money out of your 401(k) BEFORE you retire? Most 401(k) plans allow you to borrow money from the plan. Some will even let you take out money for special circumstances, like paying for medical expenses. 02. If you take money out of your IRA before you are 59 1/2 must you always pay a penalty? There are many ways to get money out of your IRA without paying a penalty. You can take the money in installments over your life-expectancy no matter how young you are. You can also take money out for certain college expenses or to help buy a first home. 03. When making withdrawals from your IRA, must you take cash? Or can you take shares of stock or corporate bonds or certificates of deposit? You are permitted to take "property" such as stock shares or corporate bonds out of your IRA instead of selling them first and taking the cash. This rule is helpful when you want to continue to hold certain securities. 04. Is it a good idea to name your "estate" as beneficiary of your 401(k) or other retirement plan? Naming your estate as beneficiary limits the options your heirs will have for taking money out of your retirement plan after you die. For example, your spouse might not be able to roll over the plan into his or her own IRA. 05. Can you change the beneficiary of your IRA after you turn 70 1/2? You can always change your beneficiary. It's up to you to decide who gets your money after you die. However, you might not be able to change the method for computing how much money must come out of your IRA each year. 06. After age 70 1/2, are you required to take money out of your 401(k) every year? If you continue to work past age 70 1/2 you are not required to take money out of your 401(k) until you actually retire. 07. After age 70 1/2, are you required to take money out of each IRA you own? If you own several IRAs, a special rule allows you to total the amount that you are required to take from each IRA and then take the grand total from just one. Or you can take the total from several IRAs in any amounts you like. 08. If your children are the beneficiaries of your 401(k) or other retirement plan, can they roll over the plan into their own IRA when you die? A spouse is the only beneficiary who is ever allowed to roll over your retirement plan into his or her IRA. No other beneficiary may do so, not even your children. 09. If you children are the beneficiaries of your IRA, must they take all the money out of the IRA immediately after you die and pay taxes on it? With careful planning by you when you complete your IRA beneficiary form and again when you reach age 70 1/2, your children should be able to spread distributions out over a number of years, possibly even over their own life-expectancies. 10. Can distributions from a Roth IRA be delayed indefinitely? Although you are not required to take distributions from your own Roth IRA during your lifetime, all beneficiaries except your spouse must begin taking distributions after you die. 11. If you convert your traditional IRA to a Roth IRA and then withdraw some or all the converted amount in the next couple of years, are those amounts subject to income tax? Converted amounts are never subject to regular income tax after the year of conversion. You already paid the tax. However, they might be subject to an early withdrawal penalty if you take the money out too soon after the conversion and you are under age 59 1/2. 12. Once you reach age 70 1/2, must you take a specific amount out of your IRA each year, no more, no less? The amount that you are required to take out of your IRA after age 70 1/2 is a "minimum" required amount. You may take more, but you may not take less. There you have it. Just enough information to get you through your next cocktail party debate with your annoying know-it-all brother-in-law. If you print out these dozen tips and stick them in the vest pocket of your dinner jacket, then my money's on you to win any IRA debate, hands-down. However, for the long-term, I suggest that you run, not walk, to your nearest bookstore or library and get a copy of the "essential" reading in this valuable retirement planning resource book. "IRAs, 401(k)s & Other Retirement Plans" by Twila Slesnick and John Suttle (Nolo Press, 1998, $21.95). Read more articles in the AgeVenture News Archives Read more book reviews in Aging America Book Reviews