Foxstone Blog

6 Rules for Tax-Free Roth IRA Distributions


Sarah Brenner, JD - The Slott Report

Roth IRAs offer a trade-off. You decide to pay taxes now on your contribution (or conversion) in exchange for tax-free earnings down the road. Don’t miss out on Roth IRA benefits by making mistakes when you take a distribution. Here are six rules you need to know to make sure money comes out of your Roth IRA tax-free.

1. Aggregate your Roth IRAs. For tax purposes, all of your Roth IRAs are considered one Roth account. There is no tax benefit gained by keeping conversions in a separate Roth IRA from your contributions. This is sometimes called the aggregation rule.

2. Follow the ordering rules. Funds leave your Roth IRAs in a certain order. Contributed amounts are distributed first. Converted amounts are distributed next, first in, first out. Last out would be earnings.

3. Contributions are always available tax and penalty free. Not only do your contributions come out first, they are always available tax and penalty free. This means that if you need to tap your Roth IRA, you can easily access contributions without adverse tax consequences.

4. Converted funds may be subject to penalty. Converted funds are always distributed tax-free. This makes sense since you already paid taxes when you converted them. However, amounts that were taxable at conversion may be subject to the 10% early distribution penalty if you are under the age of 59½ at the time of the distribution and the conversion was less than five years ago. This five-year clock begins separately for each conversion you do. What if you are over age 59 ½ when you take converted dollars from your Roth IRA? Then, you have no worries about this five-year clock.

5. Qualified distributions of earnings are tax-free. Earnings are not subject to tax if the distribution is a qualified distribution. Your distribution is qualified if it is made after you have owned any Roth IRA account for five years AND you are over the age of 59½, or are dead, or disabled, or taking the funds for a first-time home purchase.

6. Watch the five-year clock for qualified distributions of earnings. The five-year period for qualified distributions of earnings can be confusing. It is different than the five-year period for penalty-free distributions of converted funds that is discussed above. It does not re-start with each Roth IRA contribution or conversion. If you contributed $1 dollar to your Roth IRA for 2014, and then in 2016 you converted your one-million-dollar traditional IRA to the Roth IRA, then as of January 1, 2019, all the Roth money would be considered to have been held for five years. Your Roth IRA 5-year clock began on the first day of the year for which the first dollar of Roth contributions was made.
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Happy Holidays!!


Happy Holidays from Foxstone Financial.

Know Your 401(k) Options When Leaving Your Job


October 8, 2018

Whether changing jobs or retiring, many investors struggle with the decision about what to do with their 401(k) assets when parting ways with their employer. While everyone’s situation is unique, here’s a quick summary of your options and what to consider. With decades experience helping investors make sound financial decisions, the Foxstone team is happy to lead you through the decision-making process to select an option that makes sense for you.

Option #1: Leave Your Assets in Your Prior Employer’s 401(k) Program

While this is the easiest option since you don’t need to move anything and your assets will remain tax-deferred, many companies don’t allow departing employees to keep their assets in the plan so be sure to check to see if this is a valid option. In addition, you’ll still be restricted to the same limited set of investments options that your current 401(k) offers and likely won’t be able to make additional contributions as a former employee. You’ll also be tied financially to a company you’ve left.

Option #2: Roll Your Assets into Your New Employer’s 401(k) Plan

While this option is only available to job changers (not retirees), it’s one to consider if your new employer allows it. The advantages of this option are the ability to keep your tax-deferred retirement assets in one place and make additional tax-deferred contributions. The disadvantage of a limited set of investment options is similar to the prior option.

Option #3: Roll Your Assets into a Traditional IRA

This option works well for many investors and is one the Foxstone team suggests for many clients. You get to keep your assets tax-deferred and you often get access to a much more robust set of investment options. Many investors prefer the added flexibility and control over their retirement savings that this option provides compared to a traditional 401(k) plan.

Option #4: Take a 401(k) Distribution in Cash

While this option may seem exciting at first, there are many tax implications to consider. The money you take out of your 401(k) plan will be taxable, subject to a 20% mandatory federal withholding rate and also potentially subject to early withdrawal penalties.

 

We suggest consulting with an experienced financial advisor like Foxstone Financial to discuss your options in more detail and for help with the paperwork needed to implement your desired choice.

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About Foxstone Financial Foxstone Financial is a Denver-based investment advisor that uses the latest artificial intelligence investment technology, decades of market experience and a network of specialized partners to serve clients that expect better than average.


 
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Using Technology to Help Clients Understand Their Risk Tolerance


September 28, 2018

A few years ago, the Foxstone Team started using an innovative new investment technology that helps clients understand their “true” tolerance for investment risk. It’s called Riskalyze and it’s built on decades of behavioral economic work and an academic framework that won the Nobel Prize for Economics in 2002.

Finding Your Risk Number
After inputting key attributes and data about the client, their portfolio and their financial goals, the Riskalyze tool calculates a unique Risk Number (1-99) based on the investor’s unique circumstances. What makes Riskalyze so special is that once the client’s Risk Number is determined, the tool highlights what it means in terms of potential performance gains in strong market conditions and potential losses in down market conditions. It’s these hypothetical performance ranges that gets our clients talking more thoroughly about the risk levels they’d be comfortable with and gets all of us aligned about the proper risk profile for their portfolio based on their unique situation as an investor.

Aligning Your Portfolio to Your Unique Tolerance for Risk
Once our client has a more thorough understanding of risk, risk tolerance and what it means regarding investment performance ranges, the Foxstone Team uses their Risk Number as an important input in the development of an investment strategy and portfolio. In addition, the client’s Risk Number is used in the monitoring and management of the portfolio over time.

While many advisors still rely on generic risk tolerance inputs (age, investment experience and portfolio size) to categorize clients into generic risk tolerance categories like conservative, moderately-aggressive and aggressive, the Foxstone team thinks there is a better way and we have brought in a powerful tool that uses cutting-edge investment technology to do it. Our current clients are certainly glad we’re using Riskalyze and they can’t believe how much better they understand investment risk and their tolerance for it.


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About Foxstone Financial
Foxstone Financial is a Denver-based investment advisor that uses the latest artificial intelligence investment technology, decades of market experience and a network of specialized partners to serve clients that expect better than average.
 
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Avoiding Ponzi Schemes – 4 Easy Ways to Protect Your Investments


September 21, 2018

A several years ago, Foxstone Financial’s Chris Ravsten was interviewed by the Denver Business Journal about ways investors can protect themselves and their investments from Ponzi schemes. With a few high-profile schemes being uncovered this summer, we thought the time was right to republish Chris’ suggestions for investors.

Here are 4 easy ways to protect yourself & your investments from Ponzi schemes.

1) Never Make Your Checks Payable to the Individual Advisor or their Firm
Instead make your checks payable to a regulated third-party organization (bank, clearing house, brokerage firm, mutual fund, insurance company, etc.) that will be the custodian of your investment account.

2) Statements Should Always Come From a Third Party
If your advisor is doing things properly, your investment statements should always come from a regulated third-party organization which has custody of your money. Statements should never come directly from your investment advisor or be on the advisor’ letterhead. 

3) Have Real-Time Online Access to Your Account
Another important protection is to make sure you have access and log-in credentials to always see your investment account online at your advisor's third-party custodian. That way you can always verify what your advisor is telling you is indeed accurate. 

4) Be Skeptical & Ask Hard Questions.
If an investment advisor's story or performance sounds too good to be true, it could be. Do your homework, ask lots of tough questions, check unbiased references and if you don't get reasonable answers, look elsewhere

The majority of advisors out there are honest, helpful people that keep their clients’ best interests in mind, and they should have no issues with the protective suggestions we have outlined.

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About Foxstone Financial
Foxstone Financial is a Denver-based investment advisor that uses the latest artificial intelligence investment technology, decades of market experience and a network of specialized partners to serve clients that expect better than average.
 
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