David McPherson Answers Your Questions About Retirement Planning

July 1, 2008— -- Sharon from Spotswood, N.J., asked: "My husband and I have owned our own business for 26 years. Although we have not saved as we should have, recently we had to refinance to pay business bills. We are both in our fifties. How do we make the money and make up the lost equity from our home that we were counting on?"

McPherson answered: It's difficult to answer this question in detail without knowing more about your business, its profitability and how many people you employ. But assuming the business is profitable, I would suggest you start by making sure you're taking full advantage of the various retirement plan options available to small business owners. These options include SEP IRAs, SIMPLE IRAs and 401(k) plans. The right plan for you and your husband will depend on factors, such as how much money you can set aside each year, and how many employees you have. Regardless of which option you choose, each of these plans provides opportunities to cut your taxes now and allow your investments to grow tax deferred. A small business retirement plan is probably your best opportunity to make up the lost ground. Good luck.

Lisa from Cedartown, Ga., asked: "Should I rollover money from a 401(k) to a Roth IRA? I have this 401(k) from a part-time job. Thanks. What is the best way to start a Roth IRA if eligible?"

McPherson answered: If you continue to work at this part-time job, then you will not be able to rollover this money from the 401(k) plan into a Roth IRA. Generally, such rollovers from an employer-sponsored plan are allowed only after you leave a job. If you have left the job, then, yes, you may rollover directly from the 401(k) to a Roth IRA. This is new as of 2008. In prior years, you first had to rollover into a traditional IRA first and then do a conversion from the traditional into a Roth. If you remain in this job, ask your employer whether they offer a Roth 401(k) option. This may allow you to achieve the same goal without going through the rollover process. Just remember, any money you rollover into a Roth IRA from another retirement plan may be subject to taxes this year. The benefit of tax-free income in retirement very likely may be worth the cost, but it is something you need to factor into your decision.

Judi Schofield from Villa Hills, Ky., asked: "I will be 62 this July. I have a job as a nurse with good health care benefits and salary. I want to retire at 66 but I only have approximately $100,000 in 401(k)s. I owe about $60,000 on my home and I have been putting 17 percent pre-tax money in my account. My question is: Do I drop that amount and pay more on my home? I worry about having a place to live after retirement. I know some say the home loan is a good tax break but I am getting close and don't know what to do. Is my priority over the next four years increase savings or paying down my home? Thank you."

McPherson answered: Without knowing your exact retirement plans, it's tough to say exactly what you should do. But, in general, I would recommend you continue your current course of making substantial 401(k) contributions and paying down your mortgage at the same time. In the meantime, try to figure out what will be left on the mortgage in four years. In the ideal world, we would all retire mortgage-free. But if the balance on your loan will be relatively small in four years, then I would keep stuffing as much as possible into the 401(k). If possible, consider making extra principal payments on your mortgage while continuing to fund the 401(k).