Question: I'm a 27-year-old with a major investment dilemma. At my job, the firm matches 401(k) contributions up to 9 percent, which is excellent because I contribute enough to qualify for the match. I have around $60,000 in my 401(k). I also have a Roth IRA and a brokerage account for stocks. Due to the limited investment options in my 401(k), I'd prefer to roll it over into another IRA. Diversification of investment funds is something I strongly believe in. Is this a viable choice, or is it a ridiculous concept with no merit? I'm aware of the tax implications but still ready to take the risk in exchange for greater investing possibilities.
Answer: You should be proud of yourself for being so committed to saving for retirement. Your early start should provide you with a wide range of possibilities as you get older.
For the time being, there is an easy answer to your question. Usually, you won’t be able to roll a 401(k) account into an IRA while employed at the company that offers the 401(k).
There are a few exceptions to this rule. Some plans enable such rollovers when you reach the age of 59 1/2. A few plans now provide "giant back entrance Roths," which let you contribute after-tax money to a 401(k) and subsequently convert to a Roth IRA "in service." That allows high-earning people to contribute to a Roth IRA despite the income limit that would normally restrict them from doing so.
When you quit your job, you'll have the option of transferring your funds to an IRA, but this isn't always the greatest option.
Most 401(k) plans provide enough alternatives for diversity, and you might be able to take advantage of low-cost institutional funds that aren't available through an IRA. You're also protected by federal law, which mandates that companies that sponsor 401(k) plans operate as fiduciaries or put your interests first. You can usually roll your 401(k) balance into a new company’s plan allowing you to borrow money from it. With an IRA, you can't do that.
401(k) rollovers, by the way, are tax-free. Only if you convert the funds to a Roth IRA will you have to pay taxes. A conversion may make sense, but you should consult with a tax professional first.
Shielding home sales proceeds from taxes
Question: My acquaintance has Alzheimer's disease and is currently residing in a secure assisted care home. After a year in that home, his sister ultimately sold his condo. Her tax advisor claims he will get a huge tax hit. I think it's completely medically necessary, and he'll need the money to pay his existing rent ($5,000 each month) until he passes away. I also wonder if some of the $5,000 should be deducted because it was only required due to his illness. What are your thoughts on the subject?
Answer: Your friend may not be able to safeguard all of the earnings from his home sale from taxation, but he will almost certainly be able to safeguard some of them.
Your acquaintance will be able to avoid paying taxes on up to $250,000 in-home sale earnings if he resided in his condo for at least two of the preceding five years before the sale. Even if he didn't make it to the two-year threshold, he'd probably be able to take advantage of IRS rules that enable partial exemptions when a sale is caused by "unforeseen circumstances."
Medical costs, including some long-term care costs, may be deducted if they exceed 7.5 percent of an individual's AGI. When a resident is considered chronically ill, assisted living costs can be deducted as medical expenses. That indicates they are unable to conduct at least two day activities (eating, bathing, getting dressed, getting into and out of bed, using a toilet, and remaining continent). Or they require supervision due to cognitive impairment, like Alzheimer's or other types of dementia. Personal care services have to be arranged in line with a licensed healthcare provider's care plan. Assisted living facilities typically prepare these care plans for their patients.