By: Dr K C Gupta

RETIREMENT is an important topic for everyone – retirement SAVING for the young,
retirement INCOME for the old. The top sources of retirement income are Social
Security, IRAs & 401k/403b.

WORKPLACE PLANS are business & corporate 401k (pre-tax), Roth 401k (after-tax);
school, university & nonprofit 403b (pre-tax), Roth 403b (after-tax); & private & public 457. These allow significant annual contributions through payroll deductions (vs limited for IRAs). The law allows auto -enrollments, -escalations & default fund choices (typically, target-date funds (TDFs)). Loans from workplace plans become due on job change or loss.

Plans differ on investment choices & fees: mutual funds/OEFs (listed; supervised by
SEC) classes (retail, retirement, institutional); in-house funds, separately-managed
accounts (SMAs), variable annuities (VAs), or unlisted CITs (collective investment trusts;
supervised by OCC; lower ERs).

Stable-Value (SV) funds are guaranteed-rate products from insurance companies (John
Hancock, MassMutual, MetLife, NY Life, Principal, TIAA, etc) or from fund firms (Fidelity,
Goldman Sachs, Invesco, Vanguard, etc) or a unique G Fund in 401k-like TSP plan for
federal employees. The SVs guarantee principal & accumulated interest, but the
guarantees are from insurance companies.

Traditional defined-benefit (DB) pensions have almost disappeared; those that remain
may offer lump-sum payout or lifetime income. The defined-contribution (DC) 403b
plans & several 401k (due to SECURE Act) plans also offer annuitization (lifetime
income) options. Qualified longevity annuity contracts (QLACs) are allowed for limited
amounts from IRA/ 401k/ 403b; these deferred-income annuities are exempt from
RMDs.

After retirement or job change, 401k, 403b & government 457b can be rolled-over/
direct-transferred into T-IRA (nontaxable event) or R-IRA (taxable event); Roth 401k &
Roth 403b can be rolled-over into R-IRA (nontaxable event). Some plans also allow IN-
PLAN ROLLOVERS (while working).

EARLY WITHDRAWALS from the current 401k/403b are allowed after job changes from
55-59.5, an advantage lost by rolling into IRA. Another method is 72T/SEPP, but there
are several restrictions. Hardship withdrawals may be allowed. Otherwise, early
withdrawals before 59.5 have 10% penalty plus applicable taxes.

There is growing literature on portfolio withdrawal methods (DECUMULATIONS) that
include rising inflation-adjusted dollar amounts, percent of fluctuating portfolio balances
& more complex strategies.

SOCIAL SECURITY in 60s & RMDs in 70s also become important factors for retirement
income. Roth 401k/403b no longer require RMDs (SECURE Act) – so, the rule is now
similar to that for Roth IRA.

ANNUITIES from insurance companies may be used if other income venues are used
up. Types range from basic single premium immediate annuities (SPIAs) to fancy
guaranteed minimum withdrawal benefit (GMWB) annuities. They may be for specified
terms or lifetime, immediate- or deferred- income, with fixed or variable rate, equity-
linked, variable-annuities (that invest in stocks & bonds), etc. Annuities with more bells
& whistles are more expensive. Some annuity prospectuses may run 100-250 pages.

The DOL has addressed abusive rollovers from good 401k/403b plans into funds with
higher fees in IRAs or annuities. The DOL has also promoted PORTABILITY of plans on
job changes.

INDIVIDUAL RETIREMENT ACCOUNTS include T-IRA (traditional) with deductible &
nondeductible contributions & R-IRA (Roth) with nondeductible contributions. EARNED
INCOME is required for contributions except for SPOUSAL IRAs. The IRAs have lower
annual contribution limits & those apply to the combination of all T-IRAs & R-IRAs;
income limits apply & workplace plans may affect eligibility. All offer tax-sheltered
growth.

Roth versions have tax-free withdrawals in retirement. All except Roth accounts are
subject to required minimum distributions (RMDs); inherited accounts have complex
RMD rules. If the workplace plan is poor, then contribute enough to get employer match,
then use T-IRA/R-IRA, & then the workplace plan again.

ROTH CONVERSIONS from 401k/403b to Roth 401k/403b, & T-IRA to R-IRA, are
taxable; try to pay tax from taxable accounts. BACKDOOR ROTH conversion can be
used by those ineligible to contribute to R-IRA by funding empty T-IRA & then
converting to R-IRA; there shouldn’t be another T-IRA, & if there is, move the balance to
401k/403b if allowed by the plan. 

Withdrawals from T-IRA are taxed on pro-rata basis (using deductible & nondeductible
portions) & all T-IRAs held by a person are considered as one; contributions from R-IRA
can be withdrawn penalty- & tax- free at any time. Early withdrawal PENALTIES apply
before 59.5 but there are some exceptions (72T/SEPP, hardship). IRS Form 8606 keeps
track of BASIS (the nondeductible portion), contributions, withdrawals & conversions. 
There are over-50 CATCHUPS for 401k/403b & IRAs.

Beware that bankruptcy & creditor PROTECTIONS are the strongest for workplace
plans, good for Rollover T-IRAs, but may not be good for tainted/ mixed T-IRAs (with
mixed personal contributions & rollovers).

For more information, see https://ybbpersonalfinance.proboards.com/