Quit your job? Here’s what you need to know: Advice from Allworth
Kris from Butler County: I took out a 401 (k) loan earlier this year to help with some expenses (around $ 6,000) and still owe money. Now I am thinking of changing jobs. What happens to this loan if I change jobs?
Reply: This is one of those cases where you need to recheck the details of your 401 (k) plan and the criteria around lending and loan repayment. According to a recent Vanguard study, about one in three plans allow former workers to continue repaying their loans according to the plan’s repayment rules. If your plan falls into this category, then it’s a pretty straightforward solution – just keep making payments the way you do.
Things get a bit tricky if your plan doesn’t allow for that kind of flexibility. In some cases, your plan may have a specific reimbursement policy that you must follow if you leave your job. And that deadline for paying the bagpiper could come quickly – some plan policies dictate that outstanding balances must be repaid immediately upon departure.
If you don’t (or can’t) repay before this deadline, the remaining balance essentially becomes a 401 (k) distribution which could be taxable and, depending on your age, potentially subject to a 10% early withdrawal penalty. You then have until tax day of the following year to repay the amount. In your case, if you quit your job this year, you would have until April 15, 2022 to repay (or October 15, 2022, if you typically file an extension).
Here’s Allworth’s advice: It’s essential to understand all the nuts and bolts of your plan rules before you leave your current employer. The advice of a financial fiduciary advisor – or tax specialist – can be a valuable asset during this time.
GS in Indian Hill: I want to save in a Roth IRA, but I am earning more than what is allowed. Is there a workaround?
Answer: As a reminder, a Roth IRA allows you to make after-tax contributions in exchange for tax-free income growth once you’ve held the account for five years and are at least 59 and a half years old. . However, as you mention, there are income eligibility limits: if your 2021 Modified Adjusted Gross Income (MAGI) is $ 140,000 or more as a single filer (or $ 208,000 or more if you are married and file jointly), you are not eligible to contribute at all.
One potential workaround is to do what is called a Roth IRA “backdoor” by converting money from a traditional IRA to a Roth IRA. This allows you to avoid the income limit and even the annual contribution limit. But that doesn’t mean you’re avoiding taxes. Since the money in your traditional IRA is pre-tax (in most cases) money, you will have to pay tax on that money when you convert. Ideally, the money you use to pay that tax bill should come from an outside source, not the money you convert.
Allworth’s advice is that a backdoor Roth IRA may be an option if you make too much money to contribute to a Roth IRA in the “normal” way. However, we should note that this maneuver could potentially be waived for high earners in the future depending on proposed legislation in Washington, DC.So remember: if you have access to a Roth 401 (k) through your employer, this type of account also gives you tax-free growth – and there is no limit on income eligibility.
Responses are for informational purposes only, and individuals should consider whether a general recommendation in these responses is appropriate for their particular situation based on investment objectives, financial situation, and needs. To the extent that a reader has questions regarding the applicability of any specific matter discussed above to their individual circumstances, they are encouraged to consult with the professional adviser of their choice, including a tax advisor and / or a lawyer. . Retirement planning services offered by Allworth Financial, an SEC-registered investment advisor. Securities offered by AW Securities, a registered broker / dealer, FINRA / SIPC member. Call 513-469-7500 or visit allworthfinancial.com.