What Should My Brother-in-Law Do With Pre- and After-Tax Retirement Funds? | Ed Slott and Company, LLC

What Should My Brother-in-Law Do With Pre- and After-Tax Retirement Funds?

By Sarah Brenner and Beverly DeVeny
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This week's Slott Report Mailbag answers a consumer's question about how much community property rules tie into his and his wife's retirement accounts and works through Tom's brother-in-law's delicate strategy involving pre- and after-tax retirement funds. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.


1.

Based off your article on community property and your IRA, would a spouse have a community property interest in a retirement annuity?

Answer:
That is a good question! Community property is everything a husband and wife own together. In general, this includes all money earned and property acquired during the marriage. If a “retirement annuity” is an annuity that is an IRA or company plan, the general rule is that assets held in a retirement plan will be community property to the extent that contributions were made to the account and earnings accrue during the marriage. Keep in mind the community property rules are complicated and vary by state. It is always best to check with an attorney in your state who specializes in community property.


2.

My brother-in-law just recently retired and is considering rolling his company sponsored 401(k) into an annuity, which will guarantee him 3% for five years. He has roughly $500,000 with half being after-tax and half being pre-tax. What advantages or disadvantages do you see in rolling this into an annuity? Also, I suggested to him that he needs to make sure that he rolls the after-tax monies into a Roth IRA. Are there such things as Roth IRA Annuities and Traditional IRA Annuities?

Thank you so much.

Tom     

Answer:
Hi Tom,

Your brother-in-law can take advantage of a rule that would allow him to roll over the pre-tax portion of his funds to a traditional IRA and convert the after-tax funds to a Roth IRA. If he does this, both transactions will be tax-free. If he is interested in annuities, there are many Roth and Traditional IRA annuity products that are available.

However, before pulling the trigger, he will want to consult with a knowledgeable financial advisor to explore all options. This is a big decision and he will want to know whether rolling over and converting are the right moves for him. Also, he will want to consider all investment choices. An annuity may or may not be the best investment for him. An experienced advisor can help make that call too.

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