Retirement Q&A: We Answer Your Questions

by the Schwab Center for Financial Research
March 10, 2009

Each month, we receive thousands of questions from Schwab clients. Here, we tackle the top questions on retirement, with answers and guidance that we believe will address some of your most pressing concerns.

If you have a question that doesn't appear below, we have more Q&As on timely topics in the box at right. If you have a question that we haven't already addressed, you can submit it using the Editor Feedback form at right—we may include it when we add new questions and answers.

To talk to a Schwab investment professional about your particular circumstances, please call 800-435-4000.

On retirement

I'm 55 and unemployed. Can I withdraw from my 401(k) without incurring a 10% penalty?
Is the stable value fund in my 401(k) account safe from loss in a bear market or economic downturn?
I was recently laid off and I'm not sure what to do with my 401(k). Should I move it to my IRA or leave it for the time being?
Are retirement target funds a good investment for my 401(k) account in this economic environment?
When rolling over a 401(k) that includes after-tax money, can that after-tax money be rolled over into a Roth IRA and the remainder into a regular IRA for 2008? Will there be any income tax considerations?
Will Congress place a tax on IRA and 401(k) account balances?
Is the government going to take control of my IRA and 401(k)?
Should I convert my regular IRA to a Roth IRA, especially now when the market is down?
Under what conditions would it make sense for a 75-year-old retiree to convert a traditional IRA to a Roth IRA?
Can a mandatory IRA withdrawal be made directly to a charitable organization?
Can I short sell exchange-traded funds (ETFs) in a Roth IRA?
Can I contribute to a 401(k) after the age of 70½ if I'm still working full time? Conversely, am I still required to take a minimum distribution from my 401(k) if I'm working full time?

I'm 55 and unemployed. Can I withdraw from my 401(k) without incurring a 10% penalty?
According to IRS rules, if you take a distribution from your 401(k) before age 59½, you may be liable for a 10% additional tax on the distribution.

One of the exceptions to this 10% penalty is taking a distribution after separation from service if the separation occurred during or after the calendar year in which you reached age 55.

So, if you left your job (for any reason) in the year you reached 55, you shouldn't have to pay the 10% penalty. But, if you left your job in a year when you were 54 or younger, you may still be subject to the 10% penalty. Check with your plan administrator and your tax professional.

Is the stable value fund in my 401(k) account safe from loss in a bear market or economic downturn?
Chances are your stable value fund won't lose money, but it's not a guarantee. Stable value funds are designed to protect investors by utilizing "wrapper agreements" to provide return stability and preservation of principal and accumulated earnings.

These wrap agreements ensure that participants can withdrawal assets from stable value funds at par value without penalty or principal loss. The wraps are typically provided by multiple insurance companies and/or large financial institutions and stable value providers will often employ numerous wrappers to further diversify and reduce loss potential.

Additionally, most stable value funds invest in high quality, diversified fixed income instruments (typically with short-to-intermediate duration), which further protects against losses from market volatility and economic stress.

I was recently laid off and I'm not sure what to do with my 401(k). Should I move it to my IRA or leave it for the time being?
You actually have three choices (not counting cashing out of your 401(k), which is usually a bad idea):

Leave your money in your old 401(k) even though you don't work at that company anymore (but make sure you're comfortable dealing with your former employer and keeping track of the record keeping for those investments).
Roll over the money directly into your new employer's 401(k) when you take a new job.
Roll it over directly into an IRA.

For a complete discussion of the pros and cons of each choice, see "What to do With Your 401(k) When You Change Jobs."

Are retirement target funds a good investment for my 401(k) account in this economic environment?
They can be. Target date mutual funds are single-fund solutions and, as such, are typically well diversified—which means a good retirement target fund may be right for just about any economic or market environment.

When rolling over a 401(k) that includes after-tax money, can that after-tax money be rolled over into a Roth IRA and the remainder into a regular IRA for 2008? Will there be any income tax considerations?
Yes, beginning in 2008, you can roll over assets from a regular 401(k) directly into a Roth IRA if your adjusted gross income is $100,000 or less and you're not married and filing separately. You should be able to perform a partial rollover (taxable assets are deemed to come out first when rolling over to a traditional IRA).

For a detailed discussion, see the IRS Web site—the sections on rolling over retirement plan assets to a Roth IRA in IRS Publication 575, Pension and Annuity Income and IRS Publication 590, Individual Retirement Arrangements are most helpful.

Check with your plan administrator and IRA custodian, and be sure to consult your tax professional.

Will Congress place a tax on IRA and 401(k) account balances?
Congress will be looking at several aspects of retirement savings in 2009, but we don't believe taxing account balances is part of the mix.

Is the government going to take control of my IRA and 401(k)?
While there has been some talk in Washington about substantial changes to IRAs and 401(k) plans, we don't think there is real momentum behind these proposals at this point. In October 2008, a witness at a Congressional hearing on 401(k) plans floated the idea of turning the system into something more government-run, but it was just one idea presented and does not have a champion in Congress yet. There have been no serious proposals that involve seizing IRA funds for any purpose.

Should I convert my regular IRA to a Roth IRA, especially now when the market is down?
First, do you qualify?

If you're married and file separately, you can't convert to a Roth IRA.
For 2008 and 2009, your modified adjusted gross income must be $100,000 or less (there is no income limit beginning in 2010).

Whether you should convert is another matter. Generally speaking, it makes sense if you have a long time horizon, expect to be in the same or higher tax bracket when you withdraw the money, and can pay the tax due from sources other than your IRA.

Now may be a particularly good time to convert—because the prices of many investments are down significantly, your tax hit may be lower. Of course, it doesn't have to be an all-or-nothing decision. For more information and to crunch the numbers yourself, see "Is a Roth IRA Right for You?"

Under what conditions would it make sense for a 75-year-old retiree to convert a traditional IRA to a Roth IRA?
Converting to a Roth IRA is primarily an income tax decision. Given the current bear market, the tax hit would at least be easier to swallow than it previously might have been.

Aside from potential income tax benefits, however, converting part or all of a traditional IRA to a Roth IRA could also be advantageous as an estate-planning strategy if you have significant IRA balances you don't plan to tap during your lifetime.

Although the value of a Roth IRA will still be included in your gross estate, because there are no required minimum distributions (RMDs), the account could grow larger than it otherwise might under traditional distribution rules—leaving more for your heirs. Also, your beneficiaries can make withdrawals free of income tax during their lifetimes.

What's more, the income tax you pay on conversion (preferably from assets other than the IRA) will reduce your gross estate. In effect, you're prepaying income tax on behalf of future beneficiaries without it really counting as a taxable gift. And, as of 2005, if you're 70½ or older, you are no longer required to include RMDs from a traditional IRA when calculating the $100,000 income test for conversion. (Distributions are still taxable, of course.) For more, see "Is a Roth IRA Right for You?"

Can a mandatory IRA withdrawal be made directly to a charitable organization?
If you're at least 70½ years of age, Congress recently extended through 2009 your ability to donate up to $100,000 from your IRA directly to charity. That's likely better than taking a taxable distribution and then claiming a charitable deduction. Check with your tax professional to confirm which approach makes sense for you.

Learn more at Schwab Charitable.

Can I short sell exchange-traded funds (ETFs) in a Roth IRA?
Although you generally can't sell short in an IRA account (because you need a margin account to sell short and borrowing within an IRA is prohibited by IRS rules), you can make a cash purchase of an ETF that holds short positions.

Can I contribute to a 401(k) after the age of 70½ if I'm still working full time? Conversely, am I still required to take a minimum distribution from my 401(k) if I'm working full time?
You should be able to contribute to a qualified employer plan regardless of age as long as you’re still working there, but check with your plan administrator to be sure. Additionally, as long as you have earned income and are under 70½, you can also contribute to a traditional IRA. (Whether the contribution is deductible or not depends on your income if you’re also an active participation in an employer-provided plan.) There are no such age restrictions for Roth IRAs.

Working past age 70½ does not affect the required minimum distribution (RMD) rules for traditional IRAs—RMDs are still required whether working or not. (There are no RMD requirements for Roth IRAs.) However, the rules for qualified employer plans, such as 401(k)s, are different.

If you continue to work past age 70½ (and do not own more than 5% of the business you work for), you should be able to postpone RMDs from your current employer's plan until after you retire (no later than April 1 of the year after retirement). Be sure to check with the plan administrator, as employer rules may vary.

Important Disclosures

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.

The current and future portfolio holdings contained in a mutual fund is subject to risk you should be aware of prior to making an investment decision. Past performance is no guarantee of future results, and your investment value and return will fluctuate such that shares, when redeemed, may be worth more or less than original cost.

Exchange-traded funds (ETFs) are subject to risks similar to those of stocks. Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

(0309-7725)

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