Costco Connection

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Ask Suze Orman

Also:
■ IRA rollovers
■ Deducting IRA losses

Borrowing from yourself

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Q&A with Suze Orman
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By Suze Orman

WE HAVE $22,000 in credit-card debt spread over four cards. We owe $300,000 on our home and have a 30-year fixed-rate mortgage at 5. 25 percent. I have $102,000 in a 401(k) and I am thinking about borrowing at 5 percent from myself to pay off these credit cards. What do you think?

Dave Y. Howell, MI

Suze will answer
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Suze Orman’s TV
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BORROWING MONEY from a 401(k) is one of the biggest mistakes you can make, for two reasons. First, if you are laid off because business is slow, you typically would have to repay the loan in just a few months. If you failed to repay the loan, it would then be treated as a withdrawal, and you will owe income tax on that money. If you are younger than 55 at the time you are laid off, you could also owe a 10 percent early-withdrawal penalty.

The other reason is that the money in your 401(k) came from pretax contributions. When you repay the loan it will be from regular income that has already been taxed. Then, years down the line, when you retire and withdraw that “repaid” money, you will pay tax on the withdrawal, as all withdrawals from traditional 401(k)s are taxed as ordinary income. That means you are paying tax again on those repaid loan dollars.

I would much rather you consider other alternatives. Is there any chance you could take on a part-time job to generate more income? Of course, I am assuming you have already taken a fine-toothed comb to reduce every possible expense. As I explain in my new book, The Money Class, standing in the truth of what is real for us today is the centerpiece of building a more secure tomorrow.

BRIAN BOWEN SMI TH

tional IRA, but there should not be a penalty in most cases.

The only reason for a penalty that I can think of is if your broker has invested your IRA in an annuity—and I sure hope he hasn’t—but he may be referring to some sort of penalty or surrender charge for cashing out. He might have invested your money in a B share mutual fund that has a penalty fee if you cash out early, usually before five to seven years. Or he may be trying to talk you into not touching your money so he can keep earning commissions or fees on it. You need to find out exactly what you are invested in, and whether there is, in fact, a real penalty, so you can make an educated decision.

If you do not have confidence in this broker, and you determine there is no real penalty or it is not too prohibitive, please look into doing a direct IRA rollover. You can move the money to a new account at a discount brokerage. As long as the money stays in an IRA, there will be no tax or penalty on making the switch. You will owe tax only on your withdrawals from your IRA account.

That said, I want to make sure you are clear about your true losses. As you probably know, the IRS requires that retirees make annual required minimum distributions (RMDs) from traditional IRAs in the year after they turn 70½. You should have been receiving those distributions for the past 10 years. (In 2009 the IRS allowed retirees to skip their RMDs if they wanted to avoid the withdrawal during the bear market.) Given that the overall performance of the stock market during that stretch has been pretty flat, those withdrawals could partially explain why your balance is lower. That doesn’t mean you shouldn’t be concerned; but I want you to be aware of all the factors at play here.

I AM 81. In 2001 my IRA account was $76,000. Today, with the recession, I have $23,000. My broker tells me to leave the account alone because taking money out of my IRA will cause serious penalties. My own thought is better to pay a penalty than be left with nothing. What do you advise?

MY HUSBAND and I have a 401(k) that lost approximately $140,000 over the last year. We also have an IRA that lost more than $12,000. When filing our taxes, are we eligible to deduct any of those losses?

Christie K.
Puyallup, WA
Laura P.
Long Island, NY

I HAVE NO IDEA what your financial adviser is
taking about. There is absolutely no tax penalty if
you make a withdrawal from your IRA. Once
you are age 59½, you can withdraw money from
an IRA and not be hit with the IRS’s 10 percent
early-withdrawal penalty. You will owe income
tax on any money you withdraw from a tradi-
o
h
NO. YOU CAN’T deduct losses on investments
inside a tax-deferred retirement account. C