When an individual begins receiving retirement benefits based upon his or her own record has a lasting effect on the amount of all retirement benefits that this individual will receive, including Spousal Benefits. This is due to the fact that the Spousal Benefit, when the retirement benefit is present, is an offset amount based upon the difference between the maximum Spousal Benefit (50% of the other spouse’s PIA) and the PIA of the first spouse.

The early retirement benefit amount calculation is fairly straightforward (at the link you’ll find a detailed explanation). The individual’s PIA is reduced by a factor based upon the number of months prior to Full Retirement Age that he or she has applied for benefits.

Knowing the individual’s PIA, the next factor in the calculation is the other spouse’s PIA, and the maximum amount of Spousal Benefit will be 50% of that PIA. This factor is available if the individual is at least Full Retirement Age. The reduction in overall benefits is the difference between 50% of the second spouse’s PIA and the first spouse’s PIA. This is also known as the excess Spousal Benefit.

Example

Okay, this is confusing as all get-out without an example. Let’s say Dick and Jane are a married couple, with PIAs of $2,200 and $800 respectively. Dick and Jane are both age 66, Full Retirement Age. Jane started receiving her own retirement benefit at age 62, which is reduced to $600 since she started early. Dick intends to delay his retirement benefit to age 70 for the maximum benefit. So at age 70 (for both of them) Dick files for his own, delay-credit-enhanced benefit, in the amount of $2,904.

How much of a total benefit will Jane receive when Dick files, under these circumstances? Here’s how it works:  Jane’s PIA is subtracted from half of Dick’s PIA – $1,100 minus $800 = $300. This amount is the excess Spousal Benefit for Jane, which is added to her own benefit to produce her total benefit. Adding $300 to $600 equals $900. This is $200 less than 50% of Dick’s PIA (remember the pat answer from before?).

Another Example

Okay, what if there are a few changes to the above example: Dick is two years older than Jane – she’s 64 and he’s 66.  He files for his own benefit at age 66, his Full Retirement Age, which results in Jane getting the Spousal Benefit at her current age of 64, through deemed filing. She can’t delay receipt of the Spousal Benefit, in other words.

Here is the way this calculation works (and some shorthand for the reductions):

• Determine Jane’s reduced monthly benefit ($600)
• Take Jane’s unreduced PIA and subtract it from half of Dick’s unreduced PIA ($1,100 minus $800 = $300). This amount is referred to as the excess Spouse Benefit amount.
• If Jane is under Full Retirement Age (FRA), determine the number of months before FRA – in her case, it’s 24, as age 64 is 24 months before age 66.
• Multiply the excess Spouse Benefit amount by the amount determined by subtracting her number of months prior to FRA from 144. ($300 times (144 minus 24) equals $36,000).
• Then divide that number by 144 ($36,000 divided by 144 equals $250). $250 is then added to her own retirement benefit amount to come up with the total benefit ($250 plus $600 equals $850).

Now, taking this one step further: If Jane is eligible for the Spousal Benefit more than 36 months before FRA (such as if Jane was 62 when Dick is 66 and he files at that age), then the above calculations would be changed slightly:

• Determine Jane’s reduced monthly benefit ($600)
• Take Jane’s unreduced PIA and subtract it from half of Dick’s unreduced PIA ($1,100 minus $800 = $300). This amount is referred to as the Excess Spouse Benefit amount.
• If Jane is under Full Retirement Age (FRA), determine the number of months before FRA – in this case, it’s 48, as age 62 is 48 months before age 66.
• Multiply the excess Spouse Benefit amount by the amount determined by subtracting her number of months greater than 36 prior to FRA from 180. ($300 times (180 minus 12) equals $50,400).
• Then divide that number by 240 ($50,400 divided by 240 equals $210). $210 is then added to her own retirement benefit amount to come up with the total benefit ($210 plus $600 equals $810).

It should be noted that if Jane had not filed for her own benefit before FRA and she waits until FRA to file for the Spousal Benefit, she will be eligible for a Spousal Benefit equal to 50% of Dick’s PIA – assuming that Dick has filed for his own benefit.

Hope this helps to clear things up a bit. If not, please leave your questions in the comments section below and we’ll work together to come up with answers.

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When preparing your income tax return, you may find yourself asking the question – how do I determine if a charitable contribution is deductible? In addition, you may have questions about just how to file for the various deductions – such as non-cash deductions, like contributions to Goodwill for example.

The IRS has published tax tips listing factors regarding charitable contributions that you may find useful.

Deducting Charitable Contributions: Eight Essentials

Donations made to qualified organizations may help reduce the amount of tax you pay.

The IRS has eight essential tips to help ensure your contributions pay off on your tax return.

1. If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations or candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.
2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. (Beginning in 2026, a charitable contribution deduction of up to $1,000 for singles and $2,000 for married filing jointly, is available without itemizing and filing Schedule A. This deduction is for cash contributions only.) If your total deduction for all noncash contributions for the year is more than $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
3. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations.
5. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
6. Regardless of the amount, to deduct a contribution of cash, check,  or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization and the date and amount of the contribution. For text message donations, a telephone bill meets the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution and the amount given.
7. To claim a deduction for contributions of cash or property equaling $250 or more, you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash, a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgment requirement for all contributions of $250 or more.
8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.

For more information on charitable contributions, refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions. For information on determining the value of donations, refer to Publication 561, Determining the Value of Donated Property.

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We’ve discussed here in the past about how it is a perfectly legal maneuver to make a non-deductible contribution to a traditional IRA and then at some point later convert the same contribution to your Roth IRA (see Is it Really Allowed? for more). If you have no other IRA accounts, this conversion to Roth can be a tax-free event, especially if there has been no growth or gains on the investments in the account.

However (and there’s always a however in life) I recently came across a situation that was sent to me by a reader that alters the equation. The reader wanted to do just such a Roth conversion, but he also wanted to rollover some money from his 401(k) plan into an IRA. The question is in the timing – understandably, if he does the conversion from the traditional IRA to the Roth IRA, there will be no tax on the conversion, since he doesn’t have any other IRA accounts.

As we know, when taking distributions from an IRA (such as for a conversion) the taxability of the distribution depends upon the total amount of money in all IRAs, and how much is pre-tax versus how much is post-tax.

Here’s the example: Joe has an IRA with deductible contributions of $4,000 and subsequent growth of $1,000. He is no longer eligible for deductible contributions to his account, and he also is not eligible for contributions to a Roth IRA, both due to his income level. He wants to make a non-deductible contribution of $5,000 to the IRA and then later convert the money to his Roth IRA. When he does the conversion, his $5,000 conversion will be partly taxed – since half of his total IRA is non-deductible contributions, every dollar he converts is 50% taxed, and 50% tax-free.

So, if Joe did the same thing except that he starts out without any traditional IRA at all, and when he converts $5,000 from his traditional IRA to the Roth IRA, the entire amount of the conversion will be tax-free. Maybe.

Back to the question that the reader posed. What happens, tax-wise, if he does the non-deductible contribution and then later converts the money to Roth, followed later in the same tax year with a rollover of his 401(k) plan into an IRA?

Here’s what happens: The Roth Conversion will be partly taxable. Let’s say the 401(k) rollover amount is $10,000. At the end of the year, when the taxpayer files his tax return he’ll include a Form 8606 to determine taxability of his distribution (the Roth conversion). On Form 8606 will be a determination of the amount of his distribution(s) from his IRA that is deemed non-taxable for the year. This is done by developing a fraction against which his distributions are multiplied. The fraction is as follows:

Total Non-Deductible Contributions / (Year-End Account Balance + Distribution Amounts + Outstanding Rollovers Not Yet Completed)

The key to this equation that makes his Roth Conversion partly taxable is the fact that the divisor of the equation includes his Year-End Account Balance – not the account balance at the time of his conversion.

So, in the reader’s question, the equation looks like this:

$5,000 / ($10,000 + $5,000 + 0) = 33.33% or 1/3

In other words, only 1/3 of the conversion amount will be tax-free given the circumstances. If the rollover from the 401(k) plan is delayed to the following tax year, the full amount of the conversion distribution would have been tax-free, all other things remaining the same.

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Most discussions about the timing of Social Security filing indicate that filing for Social Security benefits as late as possible is often the best way to go. However, this is not always the case, given that by filing earlier, you’re receiving the benefit (albeit at a reduced rate) for a longer period of time. Let’s work through some examples to show how this works. This article will only deal with single individuals – we’ve covered spouse benefits in several other articles, it’s time to provide some guidance for single folks.

Example 1, Filing at 62 vs 67

John is single, age 62, and his benefit at Full Retirement Age (FRA) has been estimated at $2,000, so his benefit at age 62 would be $1,400, or 70% of the amount at FRA. If he takes the benefit now, he’ll receive $16,800 per year for the next four years. (COLAs have been eliminated in this example to keep it less confusing.)

If he is in a position where he doesn’t necessarily need the money, he could invest the funds as he receives them. If he invested those funds at a 5% fixed rate, when he reaches age 67 he’ll have a total of approximately $114,272. He’ll also continue to receive the same $16,800 year-after-year.

Now, let’s assume at this age that John needs $2,000 a month for living expenses. If he uses the current $1,400 of Social Security benefits and supplements it with his “stash” he’s built up over the previous four years, letting the remainder grow at interest, it will take twenty-three years before he’s run out of the stash account.

The problem is, once John has done that now, he’ll be stuck with an income that is $600 less (in today’s dollars) than what he needs. If he has no other resources, such as a 401(k), pension, or IRA, he’s in a pickle.

If John was somehow able to generate 6% from his savings, he’ll buy himself another four to five years, by this point taking him to age 95.

Comparing this to delaying to age 67, again assuming he didn’t need the funds prior to age 67, John has exactly the amount of funds ($2,000 per month) to cover his living expenses.

Example 2, Filing at age 62 vs 70

Same facts as Example 1, but now we’ll compare the outcome if John is able to hold off to age 70, at which point his benefit would be increased to $2,640.

Running the numbers again, upon reaching age 70, John’s savings account at 5% will have grown to approximately $185,246. Now, if John’s income requirement is still only $2,000 per month, his side account generates enough interest (at 5%) to sustain over time without depleting it. (This assumes that he is financially in a position to delay, using other sources to cover his expenses up to age 70.)

However, if John had delayed receiving his benefit to age 70 and then began using $2,000 for expenses and banking the rest in the same type of savings account, he’d still have more money in the account if he started early benefits – for nineteen years, to his age 89.  From that point forward, it would be more beneficial to have waited to age 70.

Example 3, Filing at age 67 vs 70

Again, same facts, but John waits to file at Full Retirement Age (FRA), age 66, and puts the full amount of his benefit in the same savings account at 5% interest. Now, when he reaches age 70, the savings account has grown to more than $103,443.

He still only needs $2,000 to live on – and when compared to delaying up to age 70, since he is able to save a portion of the larger, full benefit, he is able to build up his savings account, but the “wait ‘til 70” account doesn’t become larger than the “file at 67” account until he reaches more than 91 years of age!

Conclusion

In these examples, which I’ll admit are far from comprehensive, we can see that longevity makes all the difference. If you live a very long life, it makes more sense to delay, assuming you can cover your expense needs in the meantime.

In many cases though, the individual cannot wait, needing the money earlier. In addition, most folks take a view that they’ll not likely live to the age needed in order to make the delay option pay off. So – all things considered, it might be better for you to file earlier, as always, depending upon your circumstances.

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When you have money in several accounts and you’d like to have that money consolidated in one place, the question comes up – Which type of account can be tax-free rolled over into which other type of accounts?

Thankfully, the IRS has provided a simple matrix to help with this question. At this link you’ll find the matrix, sourced from IRS Publication 590.

In terms of explanation, here are a few rules to remember:

You can generally rollover one account of any variety (IRA, Roth IRA, 401(k), and so on) into another account of the exact same type with minimal restrictions.

You can rollover a Traditional IRA into just about any other tax-deferral plan, including 401(k), 403(b), and 457(b). The same goes for each of the accounts in reverse as well as between all of these types of accounts. In general, employer plans such as 401(k), 403(b) and 457(b) plans are not eligible to rollover until the employee has left the job. The in-service rollover has become more common of late, but the plan has to specifically allow it – not all plans do.

You can also rollover any of these accounts into a Roth IRA – but you’ll have to pay tax on the rollover amount. This is known as a Roth Conversion.

A SIMPLE IRA generally cannot accept a rollover of any other type of account (other than another SIMPLE IRA) into the account until two years have passed since the account was established. By the same token, a SIMPLE IRA can be rolled over into any of the other tax-deferred plans – IRA, 401(k), 403(b), or 457(b) – but only after the SIMPLE IRA has been established for at least two years.

A Designated Roth Account (DRAC), which is part of a 401(k), 403(b), or 457(b) plan, can only be rolled over into another DRAC, Roth IRA or Roth SIMPLE IRA. Likewise, a Roth IRA is only eligible to be rolled over into another Roth IRA or Roth SIMPLE IRA.

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In determining your retirement benefits from Social Security, as well as those of any dependents who may claim benefits based upon your record, the Primary Insurance Amount, or PIA, is an important factor. The PIA is the amount of benefit that you would receive if you began receiving benefits at exactly your Full Retirement Age, or FRA. (see this article for information about determining your FRA).

The PIA is only one of the factors used in determining the actual amount of your retirement benefit – the other factor being the date (or rather your age) when you elect to begin receiving retirement benefits.

So, how is PIA calculated?

There are several factors that go into the calculation of the PIA. You start off with your Average Indexed Monthly Earnings (AIME – which we defined in this article about the AIME). Then, we take into account the bend points for the current year.  For 2025 the bend points are $1,226 and $7,391. Here’s the calculation:

• the first $1,226 of your AIME is multiplied by 90%
• the amount between $1,226 and $7,391 is multiplied by 32%
• any amount in excess of $7,391 is multiplied by 15%

Note: these are the figures for 2025. Each year the bend points are increased slightly (or most years they are), and so the PIA calculation will change accordingly.

So let’s work through a couple of examples:

Our first retiree is age 62 in 2025, and is hoping to begin taking Social Security benefits immediately upon eligibility – to get what’s coming to her. Her AIME has been calculated as $7,500. Applying the formula, we get the following:

• first bend point: $1,103.40 ($1,226 * 90%)
• second bend point: $1,972.80 ($7,391 – $1,226 = $6,165 * 32%)
• excess: $16.35 ($7,500 – $7,391 = $109 * 15%)
• For a total PIA of: $3,092.50 ($1,103.40 + $1,972.80 + $16.35 = $3,092.55 rounded down)

The second example retiree also is age 62 in 2016.  His AIME has been calculated as $4,000.  Applying the formula:

• first bend point: $1,103.40 (as before)
• second bend point: $887.68 ($4,000 – $1,226 = $2,744 * 32%)
• excess: $0 (since the AIME is less than the second bend point)
• For a total PIA of: $1,991.00 ($1,103.40 + $887.68 = $1,991.08 rounded down)

You should note that the PIA is always rounded down to the next multiple of $0.10.

And that’s it.  As mentioned, your PIA is the basis for many of your benefit calculations.

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You’ve likely heard the conventional wisdom – “when you leave your job, you should roll over your retirement account”. You may know that it makes sense (or at least you assume it makes sense), but do you know why it’s important? And do you have the first clue as to how to accomplish a rollover? (There may also be times when it doesn’t make sense to rollover, as well.)

Why rollover? Among the reasons that it is important to rollover your retirement account when you leave employment is that you want to have control over your money. If you leave the account with the former employer, you are effectively handing over a portion of the control of your money to the administrator of the employer plan.

This administrator’s primary job is to ensure that the plan remains as effective and efficient as possible, for your former employer. Your interests are not taken into account, and in fact, many activities that the administrator undertakes (and subsequently charges the cost of to the plan accounts) are of no benefit to you whatsoever, as a former employee. By rolling your funds over to an IRA within your control, you can make sure that the costs associated with your account’s maintenance are directly benefiting your own account.

In addition, by rolling over your retirement funds into an IRA, you now have more flexibility in the investment choices that you can utilize. Remember how your employer’s qualified plan only had five or ten mutual funds to choose from? Now, depending upon the custodian you choose, you could be able to invest in just about any fund, stock, bond, or ETF available in the marketplace, plus some that you can dream up on your own.

How to roll over? We’ve covered briefly the “why”, so now we’ll cover the “how”. It’s actually pretty simple, as long as you follow a couple of important rules. Both of these are related to maintaining the tax-deferred nature of your investment.

The first rule is that you should always have an account set up to receive the monies before requesting the withdrawal from your current plan. If you don’t have a place to put the money, the plan administrator will assume that you’re taking a “cash out” distribution, and they’ll withhold 20% tax on the withdrawal. This can problematic, of course. The way to resolve this is to ensure that your withdrawal paperwork (with your old account) indicates a “direct rollover” is occurring. At the same time, your deposit paperwork with your new account will indicate the same. The old plan administrator may still send a check to your home address, but it will be made out to the new account custodian.

The second rule is related to the first, but this is one that you can foul up even if you’ve gotten the paperwork filled out correctly: your rollover must occur within the span of 60 days, or you’ll be penalized as if you withdrew the money to cash out the plan – 10%, plus ordinary income tax on the withdrawal.

The entire process is simple enough, following the steps below:

1. establish your new account
2. request a “direct rollover” withdrawal from your old plan
3. receive the rollover check
4. submit the check with the appropriate “direct rollover” deposit slip at your new account.

As you can see, the process is straightforward, but if you don’t pay close attention to what’s going on, or if one of your plan administrators (either the new one or your old one) has a special “twist” to the process, it can become a mess.

Note: steps 3 and 4 are not required if the transfer is done in a trustee-to-trustee manner, meaning that the old account administrator sends the funds directly to the new account trustee, and you never see a check.  This is one of the most common ways to ensure that you don’t miss the 60-day window.

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We’re here in the midst of tax season, and some of you may be wondering about tax credits. Some tax credits are more valuable than others, something a lot of folks don’t realize. Most tax credits are not refundable, meaning that if the amount of the credit is more than your tax for the year, the credit is limited only to the amount of your tax.

For example, if you had tax payable of $1,500 and then had a Lifetime Learning Credit, Energy Efficient Home Improvement Credit, and/or Foreign Tax Credit amounting to more than $1,500. Your credits will be limited to $1,500 since that’s your tax payable and the credits are not refundable. Some credits are allowed to carry forward to future years, but that’s a topic for another post.

On the other hand, there are a few credits that are refundable, as listed below.

Five Tax Credits that Can Boost Your Refund

A tax credit is a dollar-for-dollar reduction of taxes owed. Some tax credits are refundable meaning if you are eligible and claim one, you can get the rest of it in the form of a tax refund even after your tax liability has been reduced to zero.

Here are five refundable tax credits you should consider to increase your refund on your federal income tax return:

1.  The Earned Income Tax Credit is for people earning less than certain limits (which are adjusted year-to-year) from wages, self-employment or farming. Millions of workers who saw their earnings drop in the recently-completed tax year may qualify for the first time. Income, age and the number of qualifying children determine the amount of the credit, which can be substantial. Workers without children may qualify as well. For more information, see IRS Publication 596, Earned Income Credit. The Earned Income Credit is a refundable credit, meaning you can completely wipe out your income tax and generate a refund from this credit, under the right circumstances.

2.  The Additional Child Tax Credit is for people who have a qualifying child. The maximum credit is $1,300 for each qualifying child. You can claim this in addition to the Child and Dependent Care Credit. The Child Tax Credit is non-refundable, so if your tax burden isn’t enough to take advantage of Child Tax Credit, if you qualify you can utilize the Additional Child Tax Credit to receive the remainder of the Child Tax Credit as a refund. See IRS Publication 972, Child Tax Credit for more details.

3.  The American Opportunity Tax Credit, an education expense credit, can be up to $2,500 per eligible college student. Within income limits, 100% of the first $2,000 of qualified education expenses and 25% of the next $2,000 of qualified education expenses is available through AOTC as a tax credit. However, only 40% of this credit (up to $1,000) is refundable. At least you get some credit for the expense, even if your tax burden isn’t enough to fully take advantage of it.

4.  The Premium Tax Credit, which is available to purchasers of health insurance on the Affordable Care Act exchange. If you haven’t taken advantage of the prepayment of this credit, when you file your return you may take a refund of this credit amount in full. This credit is based on your income level and the cost of your insurance policy from the exchange.

5.  The Fuel Tax Credit If you purchase fuel used for off-highway business and farming purposes, you may be able to claim the Fuel Tax Credit (FTC). This is a refundable tax credit available for eligible types of use.

There are many other tax credits that may be available to you depending on your facts and circumstances.  Since many qualifications and limitations apply to various tax credits, you should carefully check your tax form instructions, the listed publications and additional information available at www.irs.gov. IRS forms and publications are available on the IRS website at www.irs.gov and by calling 800-TAX-FORM (800-829-3676).

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1. Each dollar you defer is worth more than a dollar. It’s true. As you defer money into your retirement account, each dollar that you defer could be worth as much as $1.65. How, you might ask?

Since you are not taxed on each dollar that has been deferred into the retirement account, your “take home” pay only reduces by the amount that is left over after taxation. For example, if you’re in the 25% income tax bracket, generally your income will only reduce by 75¢ for every dollar that you defer into your retirement plan. Therefore, the 75¢ that you’ve effectively “spent” is worth 33% more ($1.00) in your retirement account.

If you happened to be in the highest, 39.6%, income tax bracket, this works out to a 65% increase in the value of each dollar deferred. This doesn’t even take into account the potential for matching dollars from your employer!

2. Matching – FREE MONEY. Well, it’s not exactly free, you must defer some funds (but it’s all still your money) in order to take advantage of it, but other than that, your employer is actually chomping at the bit to give you this money. The reasons can be far-reaching, but the point is that it’s literally yours for the taking (and totally yours if you’re vested in the plan). It should be noted that some companies do not match your funds at any level in a plan.

So, what should you do about this? If you aren’t currently participating in your company’s 401(k) or other deferred compensation plan and they match your funds, you are throwing money away by not participating in the deferral arrangement. Depending upon the options in your plan, you could be turning your back on as much as a 100% return on your investment – guaranteed! Everyone should take advantage of AT LEAST the matched portion of your deferred compensation plan. After that, it may make good sense to put money aside in a Roth IRA (up to the maximum annual amount), before adding more to your deferral to max out your 401(k).

3. Don’t Overload On Company Stock. Even (especially?) if you’re in a company where the stock has experienced dramatic increases in recent history, you need to make sure that your overall exposure to any one company is limited. A rule of thumb that I use is: no more than 5% of your overall net worth should be invested in any one company. If you are inclined to have a larger stake in your company because you work there and enjoy the sense of ownership, I still wouldn’t recommend putting any more than 10% in that stock. The figure is doubled for the company that you work in because, at least presumably, you are more in tune with the value of the company and internal events taking place and could make adjustments if an event were coming up that could seriously impact your holdings.

Of course, the reason behind this is to limit your exposure to the ebb and flow of a single company’s stock price. For example, what if you held stock in one company that amounted to 30% of your overall net worth, and that stock took a major hit of a 25% price reduction? This one event would have the impact of yanking down your net worth balance by 7.5% – quite a serious impact, to say the least. The folks at Enron (and countless other companies) found out the hard way how much damage can be done by having too large of an exposure in a single company.

4. Diversify, diversify, diversify. Most of us understand the concept of diversification, but how do you actually accomplish it?

In order to properly diversify, you need to review the available investment choices in your plan, and then use those choices to spread your investments among capitalization categories (large-cap and small-cap), as well as between value-oriented and growth oriented, as well as domestic companies and international companies. You should also consider what amount of fixed-income investment (bonds) makes the most sense in your portfolio.

Keep in mind, diversification doesn’t simply mean you put an equal amount of money in each available choice of investment. Each person needs to consider this individually, in respect to their overall portfolio and risk tolerance. Your investment allocation should include assets held outside of the deferred compensation plan, such as other IRAs or taxable accounts. You need to make a decision as to what allocation makes the most sense for you and apply it across all of your accounts. If you’re fairly young and have a lot of years to grow your funds (as well as recover from any downturns), you can probably take on a greater amount of risk. If you’re nearing retirement, most likely your risk profile will be much less risky.

5. Don’t Take A Loan. No matter how tempting it is, taking a loan out from your qualified retirement plan in more cases than not, results with derailing your hard work in saving and building up your account. Not only are you strapped with having to pay back the funds to your account (with interest), but you have also given up whatever growth might occur within your account (since the funds are being used for another purpose).

Experience tells us that you would be much better off to temporarily suspend or reduce your contributions to your retirement plan in order to save up money for that purchase, instead of taking a loan from your retirement plan. It may take a little while longer, but you’ll probably appreciate it a bit more as a result of your saving.

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Employers have been giving us lots of opportunities to make this decision of late: when leaving an employer, whether voluntarily or otherwise, we have the opportunity to rollover the qualified retirement plan (QRP) such as a 401(k) from the former employer to either an IRA or a new employer’s QRP.

This decision shouldn’t be taken lightly – although it may be the best option for you. Moving to an IRA gives you much more control over your destiny, so to speak, by allowing you to choose from the entire universe of allowable investment choices, rather than a limited menu of investments in a 401(k) plan. Using your new employer’s QRP can give you a better sense of control over the account as well, although the flexibility of an IRA is generally preferable to another QRP.

But sometimes it makes the most sense to leave your money in the old plan. Listed below are eight possible reasons that you might want to do just that.

1. If you are happy with your former employer’s plan, consider it well-managed, low cost, and possibly with some investment options that are not readily available (such as desirable mutual funds that are closed to new investors), you may want to leave your money in the plan. This would be especially beneficial if you don’t have another employer plan to roll over into, or you are inexperienced (and squeamish) about establishing your own IRA.
2. If you have commingled deductible and non-deducted IRA contributions in your outside IRA accounts, having an active 401(k) plan can help you to “separate” the deductible IRA assets from the non-deducted. See this article for more information. Essentially this benefit gives you a way to bypass the “little bit pregnant” rule wherein the IRS treats all IRA funds pro-rata taxable and non-taxable when making distributions… a common issue when doing a Roth IRA conversion. If you don’t have an active 401(k) plan available, this option is lost.
3. If you have an investment in your former employer’s stock in your 401(k), you need to consider the ramifications of utilizing the Net Unrealized Appreciation (NUA) option – before doing a rollover. The point is, if you’ve taken even a partial rollover of your 401(k) in a prior year, the NUA treatment is no longer available to you.
4. If you think you may be returning to this employer, it might make sense to leave your funds where they are. This is especially true for government employers with section 457 plans – due to the nature of these plans’ ability to provide you with retirement income without penalty much earlier than an IRA or a 401(k) plan could. With the vagaries of governmental policy changes, if you’ve withdrawn and closed your account and come back to work for the same agency, the old plan may no longer be available to you since you’re now a “new” participant.
5. If you’re in the year when you’ll reach age 55 or older, maintaining the 401(k) plan gives you an option to begin taking distributions prior to age 59½ without penalty. If you move these funds over to an IRA this option is lost. It’s also lost (at least temporarily, while you’re employed by the new employer) if you rollover the old 401(k) plan to a new employer’s 401(k) plan.
6. On the off-chance that you might need a loan from your retirement funds, you should know that IRAs do not have this provision. Retain at least some balance in the plan if you might need this option – but also you should check with your plan administrator to see if this option is available for non-employee plan participants, because it might not be (and actually, it likely is not). But keeping in mind #4, if you’ve maintained a healthy balance in the plan and you return to work with this same employer, you’d have a much larger account to work with if you needed to borrow.
7. Funds in a 401(k) account are protected by ERISA – and as such are generally not available to creditors. Depending upon the state you live in, IRA assets may be available to your creditors in the event of a bankruptcy. At any rate, ERISA protection is pretty much an absolute, so this is yet another reason you might consider leaving funds in a former employer’s 401(k) plan. Funds moved from an ERISA-protected account can carry the protection on, but new contributions to the account do not.
8. Take your after-tax contributions out first, if your plan happens to include these. If you’ve made after-tax contributions, as some plans allow, it makes sense to separate these contributions from the pre-taxed amounts. You can convert these contributions directly over to a Roth IRA in most cases, tax free. This is because the 401(k) isn’t subject to the “little bit pregnant” rule (pro rata distributions) alluded to earlier. Once you’ve removed the after-tax contributions and put them into a Roth IRA, you can then rollover the rest of your 401(k) if it makes sense.

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