FINANCIALconnection
Ask Suze
Orman
Also:
■ IRA rollovers
■ Deducting IRA losses
Borrowing from yourself
E-mail your personal-
finance questions to:
suze@costco.com.
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Q&A with Suze Orman
The Costco Connection
P.O. Box 34088
Seattle, WA 98124-1088.
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
selected questions in
this bimonthly column.
She regrets that
unpublished questions
cannot be answered
individually.
Suze Orman’s TV
show airs Saturday
nights on CNBC. Suze
can be contacted at
www.suzeorman.com.
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
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MAY 2011 ;e Costco Connection 17