Thursday, January 1, 2009

What to do with your 401(k) when you're not working

It's not your typical 401(k)rollover to an IRA. You left your job for whatever reason and for whatever other reason you're not moving into a new job. So what do you do about your 401(k)?

You could just do nothing. You could just keep it in your previous employers plan. Of course, they won't put any money into it. So it would probably just sit there. (Well it wouldn't be idle, most likely it would be losing money.) Lots of people do continue to hold old 401(k)s just because it's easy. But many employers have started charging fees to former employee plans in order to encourage them to leave the plan.

You could take the money. Oh this isn't the best idea, but you aren't working so you think you need money, right? It's just a shame to throw a big chunk that you've earned to penalties and taxes. Don't do it.

Or, open an IRA. The good thing about an IRA is that you can roll the money over without penalty. The bad thing is that your money will just sit there. You can't contribute anymore to your little nest egg since the government stipulates that you must earn to save, i.e., you must earn an income to contribute to an IRA. But WAIT!! There is a way around this......

You can open a Spousal IRA. This is like a joint savings account. And you open either a Roth or Traditional. Here's the deal....
A nonworking spouse can make a deductible IRA contribution of up to $5,000 for 2008 ($6,000 if age 50 or older as of 12/31/08) as long as the couple files a joint return, and the working spouse has enough earned income to cover the contribution. However, the deductibility of the nonworking spouse's contribution is phased out for couples with adjusted gross income (AGI) between $159,000 and $169,000, provided that the working spouse is covered by a qualified retirement plan (via a job or self-employment). The working spouse's ability to make a deductible contribution for 2008 is phased out starting at AGI of $85,000.

Okay, translation...
So if you open a Spousal IRA and you are not working you can contribute up to $5,000 for 2008 ($6,000 if age 50 or older as of 12/31/08). Where you came up with that money is not a topic for this post. Your spouse can also contribute if their AGI is less than $85,000 and is already contributing to an employer sponsored retirement program [401(k)].

Why would you do this?
Well, you might be looking to get out of a losing/dormant 401(k) without giving it to Uncle Sam. It also gives you the ability to put more away than you might with just your spouse's 401(k). And of course there are the tax advantages.

The Spousal IRA has actually been around since the early 1980's, but is just now gaining popularity.

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