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Candie’s Ask Hubby Question:

Hi Hubby,

I have a question about finances and IRAs. I recently retired from city government and I am now making more retired than I was working. But I couldn’t sit at home and my CPA told me that he would figure out how much more taxes I had to have taken out of my checks, which I did. When he figured this out, he said I fell into a new tax bracket, and if I wanted to work a part-time job, up to 20 hours a week that would be fine, as long as I put the money into an IRA.
[1] I want to know which IRAs are best.
[2] I want one that I can take the money out of and not pay a penalty, if there are such a thing, and one that you can put a certain amount in, such as my part-time paycheck which is not a lot.
[3] Is there a minimum and maximum amount that a person over 50 can put into an IRA?
[4] Can you have multiple IRAs?
[5] I am going to start traveling again and I would use that money for the payment of the trips I want to take.
[6] My new part-time job does have a 401k plan but it is my understanding that you can not take the money out of it until you retire.
[7] Would it still be wise to put some money into the 401k, because they match a certain amount but I am not sure how much yet. Can you please advise me on what would be the best way for me to go. Understand that I am investment stupid so you will have to talk down to my level when explaining. I don’t understand the difference between a bond and a stock, so that should tell you something.
Thanks, Ann’s Hubby

Hubby’s response:

(Editorial note: Bracketed numbers (e.g. [1]) were added to the original question to make my response easier to follow.)

[1] That is a very broad question, and is a function of your investment goals, risk tolerance, need for liquidity, years to retirement, etc. It seems to me that you should consider a fund that has a targeted retirement date like Fidelity Freedom 2030 Fund (fundresearch.fidelity.com)

[2] Except for a first home purchase and certain college expenses, withdrawals taken prior to age 59 ½ will incur a 10% penalty plus regular state and federal income taxes for a Traditional IRA (A Roth IRA would not help you avoid getting pushed into the next tax bracket]. Sorry. You do have flexibility in how and when you make your contributions. You can wait until April 15 of the following year, if you wanted to for some reason.

[3] No minimum IRA contribution. Maximum IRA contribution is $6,500 for 2013.

[4] Yes, you may have multiple IRA accounts if you want (and/or multiple investments within the same IRA account, if that is what you meant).

[5] If you don’t leave the money in the account, it kind of defeats the purpose of saving for retirement. At the very least, don’t start taking money out of your IRA until you reach 59 ½ years of age.

[6] I urge you to consider the 401(k) instead of an IRA. You can contribute up to $22,500 (depending on the terms of your employer’s plan and how much you earn in a year). Plus, you can usually borrow money against the value of your 401(k) prior to 59 ½ years of age at a reasonable interest rate. If you really think you will want to withdraw money before retirement, this is a penalty-free way to do so.

[7] An employer match is FREE money. Free money is good. You should at least contribute the minimum amount needed to get 100% of the employer match.

Candie, your questions are very common. Your HR department and/or the firm managing the 401(k) plan should be able to help guide you through. Happy travels.

Disclaimer: This information is not to be considered legal or financial advice. It is for discussion purposes only.

And there you have it folks, this week’s installment of Ask Hubby.

A few things:

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