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Q&A: Facts to Know Before You Retire

© Ann Needle

As I write for clients I hear a lot of the questions that come up from employees. One of the most common sets of questions comes from the group within five years of retirement age as they grapple with what they need to do before they leave work for the last time.

Today I'm answering some of the most common questions from pre-retirees, with plans to elaborate on some of these in later articles. If there's anything you find here (or elsewhere) of particular interest as you head into retirement, let me know. I'll be happy to answer any questions, or write the up in future pieces.

Q: I heard that the Roth IRA is a terrific deal for retirees. Should I roll over my 401(k) before I retire?

A: For many U.S. retirees, the Roth IRA spells some big advantages. Unlike a traditional IRA, a Roth doesn't require you to begin taking the money out at any point, earnings can be tax-free, and heirs get this money without a tax bill. But consider that your income determines whether you can use a Roth IRA in the first place, and rolling all or part of a 401(k) into an IRA means you will not be able to select "forward-income averaging" on the distribution, something that could cut your tax bill substantially.

Though this is definitely a topic I'll expand on later, this is one situation where you should probably call on a financial planner for help-the scenarios are endless. He or she can weigh your 401(k) distribution options against the Roth IRA's advantages in your situation. And a planner may cost less than you think (yet another topic for future discussion). Start comparison-shopping planners in your area by checking out the "Find a Fee-Only Planner Near You" link on the National Association of Personal Financial Advisors' home page at http://www.napfa.org.

Q: Is a variable annuity a good investment after retirement?

A: As a retiree, you would probably be drawn to the fact that a variable annuity doesn't require you to begin withdrawals at 70½, so you can keep on avoiding taxes that have been deferred on any earnings until withdrawal. But tax-law changes have made these accounts less attractive. Now, annuity assets are taxed at income tax rates upon withdrawal, while long-term capital gains on taxable accounts are normally capped at 20% for assets held more than 12 months. And, there's talk of trimming this rate even further.