Are Education Withdrawals Legal?The government isn't going to allow IRA withdrawal for education, nor will many employers. Your retirement is in your hands. Put away 10 percent to 15 percent of your income. Use tax advantaged plans first, such as 401(k)s and IRAs. Educate yourself. Books, magazines, TV and the Internet are good ways to learn about personal finance. Q: My spouse and I have a number of IRAs and we want to know if we can pool them to make things simpler. A: I understand your desire to eliminate any unnecessary accounts for both the reason of convenience and expense, since many IRA accounts carry an annual fee. Let me start by explaining that you may not combine your IRAs together with your spouse's since IRAs are designed to be specific to individuals. There are four different types of IRAs that may be consolidated: traditional IRAs, non-deductible IRAs, Roth IRAs and rollover IRAs. You may combine all your existing IRAs of the same type into one IRA in your name. You also may combine all of your spouse's IRAs of the same type into one account. Therefore, the minimum number of IRAs for two spouses who have all four types of IRAs is eight. If you combine a traditional IRA with a recently converted 401(k) IRA, you lose your 'conduit' status (the right to roll this over to another 401(k) plan). You must also never make any new contributions into the existing 401(k) rollover IRA or you will lose the existing conduit status. However, if you are one of the many who never intend to roll their IRA into a new qualified company plan, this rule may not be relevant. Please remember when you roll any 401(k) assets to an IRA, use a trustee-to-trustee transfer to avoid possible IRS withholding. Roth IRAs follow the same basic rules as traditional IRAs when attempting to combine for expense and convenience reasons. You may not combine a traditional and Roth IRA because of their different taxation methods. Q: I have stock options granted me by my company, which I have to exercise within five years. I have confidence in the performance of my company, but I also know that having this much of my investments in one company is risky. What else should I think about in deciding whether to exercise them now or wait? A: Stock options are an incentive provided to selected employees, allowing them to buy company stock at a preset price (strike price) within a certain period of time. So even if the stock price goes up dramatically during this period, you can buy the stated number of shares at the old strike price. Besides the performance of the stock, the primary variable is the tax treatment. Some options are taxed as capital gains but most are considered earned income and therefore are subject to income and Social Security taxation. Under current tax law, taxation of long-term capital gains does not exceed a 20 percent tax rate. If you are in a higher tax bracket, exercising them early would allow all future appreciation to be taxed at the lower capital gains rate. However, this is usually offset by the fact that you either control fewer shares (the ones you sell to pay the tax) or have to use out-of-pocket dollars. The growth benefit of controlling additional shares gets greater the more the stock in question outperforms the market as a whole. |