The Fiduciary’s Corner: Answers to Recent Client Questions

November 23, 2017  |  

The Fiduciary’s Corner: Answers to Recent Client Questions

I have the pleasure of regularly meeting with clients to discuss their personal financial situations. Each client’s circumstances are unique, which is part of what makes this job so fun.

As you might imagine, I field some unique questions in these meetings. I’ve made a habit of writing down the questions that might benefit other readers of this blog, and will begin sharing them in what I’m calling “The Fiduciary’s Corner”. I’ve written about our Fiduciary duty in the past, so I thought the name was appropriate.

I won’t dive too deep into each question but will provide some actionable advice that I hope you’ll find helpful.

If you have questions you’d like answered in this blog, please feel free to email me. I’ll try to address them in an upcoming post, or will follow up with you personally.

At what age can I begin withdrawing from my 401(k) without penalty?

As most people know, you must wait until age 59 ½ before withdrawing from a 401(k) without incurring a 10% penalty. This answer may seem obvious, but it’s not complete.

There is a second way a person can get penalty free access to funds in their 401(k). It’s called the rule of 55. Per the IRS, the 10% penalty does not apply to withdrawals from 401(k)’s if made after you’ve separated from service, and the separation occurred in or after the year you’ve reached age 55.

Example: Mary is 56 and is retiring from her accounting position at Comcast. She has a large 401(k) and would like to begin using these funds to meet her cash flow needs. Since she left Comcast later than age 55, she can begin taking distributions immediately from her 401(k) without incurring a 10% penalty (federal taxes would still apply).

Keep in mind, the rule of 55 does NOT apply to IRA’s. Therefore, my suggestion is if you leave an employer after the age of 55, keep the funds in that employers 401(k) until age 59 ½ before rolling over to an IRA. That way, you have the option of taking penalty-free withdrawals if needed.

If I freeze my credit, does it mean I can no longer use my credit card?

No. A credit freeze simply restricts access to your credit report. Most lenders want to see a copy of a credit report before granting you credit. Therefore, a freeze makes it more difficult for the bad guys to open accounts in your name.

If you plan on taking out credit, you can simply lift the freeze temporarily, or allow just specific creditors access to your credit report. It’s an extra step you must take each time, but it’s also an extra obstacle a thief would need to overcome before opening credit in your name.

To institute a credit freeze, contact each of the three major credit bureaus (Experian, TransUnion, Equifax) to set up, with the cost being about $10 each.

See this helpful frequently asked questions list from the Federal Trade Commission for more information.

Can I contribute to both an IRA and 401(k) in the same year?

Yes, there is no restriction from contributing to both an IRA and 401(k) in the same year. The $5,500 limit for an IRA is mutually exclusive of the $18,000 limit on 401(k)’s (increasing to $18,500 in 2018). However, you may be precluded from participating in an IRA if you earn too much money. Consider the following:

While 401(k)’s don’t have these restrictions, they are subject to certain testing which could impact a high wage earners ability to contribute the full IRS limit.

Keep in mind, you may be able to contribute to a Roth IRA through the “back door”. See the past blog I wrote for a summary of this process.

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About Patrick Runyen

As a Wealth Manager at Independence Advisors, Patrick Runyen, CPA/PFS, CFP® works closely with clients to implement wealth management solutions. He leverages his technical financial planning and consulting experience to assist clients with investment counseling, retirement planning, estate planning, wealth enhancement, asset protection, tax planning, and other personally significant financial decisions. CLICK HERE TO ASK PAT.

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