Is it OK to leave my money in my 401(k) until I’m 70? My wife and I retired from our work three years ago at age 57. We have employer retiree health insurance for both of us at a $100 per month. We own our home and have no debt. Between our two pensions and about $20,000 my wife makes working part-time, we have plenty of income to do and buy what ever we want. As we don’t need the money from the 401(k) (and may never need it due to the addition of Social Security next year), I would like to pretend it doesn’t exist and just leave it alone. Is there any big downside to doing this?

Answer:

Yes, but you have to start taking those distributions at 70. The IRS isn’t going to let you continue to stash the money away after April 1 of the calendar year in which you turn 70 1/2. Under tax law, you have to take minimum distributions from your 401(k) that year. The IRS says these minimums are designed “to make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries.” Read that to mean that the government doesn’t want you to take the tax breaks you get on a retirement plan and just pass it on to your heirs.

So, how much do you have to take? There’s a formula you use to divide the value of your 401(k) plan by a divisor based on your life expectancy. You can find the uniform life expectancy table at http://www.irs.gov/publications/p590/ar02.html#d0e12457.

See the IRS’s Publication 575 at http://www.irs.gov/pub/irs-pdf/p575.pdf for more details.

I currently have three young children under the age of five. I save about $150 a month, which I put into a 529 plan. I know this is not going to by any means pay for their college educations, but am I going to be penalized (i.e. less grant and loan money) when it comes to finance their educations because I have saved?

Answer:

The simple answer is “yes,” but that shouldn’t put you off these plans. Perhaps the biggest drawback of 529 plans is that they’re often used against you in the college-finance decisions. Here’s out it works: Under the federal methodology for financial aid, a 529 plan - named for the part of the tax code that allowed these college-savings plans - is treated as an asset of the person who contributed to it - namely you. That means they can count 5.6% of the account balance as assets for financial aid purposes.

Private colleges may have different rules, but under what’s known as an institutional method, colleges may add as much as 5% of the assets in a 529 plan.

Obviously, then, the decision to continue with a 529 depends on what you expect your own assets to be at the time the kids go to college. But most other alternatives to college savings also carry a “penalty” when it comes to financial aid.

One last point: If you come to believe that any of your children might not go to college, a 529 isn’t the right place to save money. Currently, 529 plans can only be used for college (though you can reassign the plan to another beneficiary to other family members, though regular gift-tax rules apply).

Many retirement planners and financial advisors suggest a Roth IRA if you want to start putting something extra aside, particularly if you’re an older worker.

“I think the Roth IRA is not recognized enough” Nancy Langdon Jones, a certified financial planner in California, told FOXBusiness.com. “It’s just such a great retirement vehicle.”

Why? The tax structure. When you contribute to a regular IRA account, you can be taxed on your initial contribution and whatever profits are generated over time.

With a Roth IRA, if the account has been open five years and you are older than 60, you can’t be taxed on any earnings from it–only on your initial contribution, which comes from your already earned, non-deductible income. And if you have done well and saved and your net-worth is high, you can leave the money to your heirs – income-tax free.