Tax and financial advice from the Silicon Valley expert.

How can I get more assets in my Roth or IRA account?

When advisors suggest considering investing in alternative investments in a Roth or IRA account, people often object, “I don’t have very much available in my Roth or IRA to invest!”

(For this discussion, a “Roth” account is a Roth IRA account and an “IRA” account is a regular IRA or individual retirement account. An “employer plan” is a qualified retirement plan relating to your employment, including 401(k), profit sharing, 403(b) for nonprofit, 457 for government, and other less common plans.)

The advisor may then ask, “Do you have a 401(k) or other retirement plan at work?”

“Yes, I have a 401(k) account with about $100,000 in it.”

It may be that the $100,000 401(k) balance can be transferred to a Roth or IRA account. (Of course the transfer to a Roth would be taxable. See “Should You Make A Roth Conversion in 2010?”

Pension portability has been tremendously increased by the Economic Growth and Tax Relief Act of 2001 and the Pension Protection Act of 2006. With a few limitations, funds can be transferred from employer retirement accounts to a Roth or IRA account and, in some case, from a Roth or IRA account to an employer retirement account. The old “lump sum distribution” rules for rollovers are gone. Even partial rollovers are permitted and you don’t have to be more than age 59 1/2 to qualify if the distribution is made as a direct “trustee to trustee” transfer.

The employer account must permit such a transfer, so that can be an issue. Perhaps the employer can be persuaded to amend the plan to permit such transfers.

The only way to transfer non-deductible employee contributions from an employer plan to a Roth or IRA is through a direct “trustee to trustee” transfer.

Required minimum distributions and hardship distributions can’t be rolled over from an employer plan to a Roth or IRA.

The advantage of having the funds in a Roth or IRA account is to have the ability to make alternative investments for more diversification, such as investing in pre-IPO stock, real estate, and private money mortgages. (See “Permitted Investments For Roths and IRAs”.

The disadvantage of having the funds in a Roth or IRA account is the assets have less bankruptcy protection. Employer plans have superior asset protection. Consult with a lawyer about this before going ahead with a transfer from an employer retirement account to a Roth or IRA. It may be you should be transferring assets to the employer plan instead of the Roth or IRA!

What about inherited employer accounts? After 2009, beneficiaries must be permitted to rollover the balance to a beneficiary Roth or IRA account. The IRS surprised tax advisors by permitting a direct transfer of an inherited employer retirement account to a Roth account in Notice 2008-30, because inherited IRA accounts can’t be converted to Roth accounts. (Internal Revenue Code Section 408(d)(3)(C).) (Again, such a transfer would be subject to income tax.)

So, open your mind. You may have more investment flexibility with your retirement funds than you thought.

We can help you explore your alternatives. To make an appointment for an initial consultation, call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays and Fridays from 9 am to 5:30 p.m. Pacific Time.

IRS Circular 230 Disclosure:
As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Tax and financial advice from the Silicon Valley expert.