Q. My old college roommate is starting up his own bank and is looking for investors to come up with the $3 million in seed money. I don’t have a lot of available cash, but I was planning to shift $25,000 of my 401(k) money into stock in his bank, because my 401(k) has a self-direct option that allows us to invest in individual stocks. However, the lady I talked to at the 401(k) administrator told me that I am not
allowed to buy private stock with my 401(k) money. If it were a publicly traded stock, it would be no problem. I don’t think this is fair. I think the bank would be a great investment.
A. Uh-huh. In that case, can I interest you in some Florida swamp--er, wetlands?
If you don’t have a lot of available cash, you have no business gambling on a start-up, period, end of story. You’re not a highflying Silicon Valley venture capitalist with an eight-figure net worth and dollars to burn. You’re a working guy who needs that money for retirement.
It is getting easier and easier to gamble with 401(k) money--more companies are offering self-directed options that allow workers to invest in individual stocks and bonds instead of just mutual funds; many 401(k)s even allow daily trading. But most plans still have some safeguards in place to protect people from making a complete mess of their retirement funds.
Your plan’s rule against private stock is one such safeguard. Retirement plan providers are understandably nervous about letting employees invest in something that can’t readily be valued (since it doesn’t trade publicly) and that could disappear overnight.
Don’t try talking to me about borrowing money from your 401(k), either. Tapping retirement money for any other purpose is usually a bad idea. If you can’t come up with the cash outside your retirement kitty, you’re in no economic position to roll the dice on your buddy’s bank.
His Math but Their Rules
Q. I’m 49 and my wife is 42. We hope to retire in six or seven years. Our retirement funds are mostly in tax-advantaged accounts. If we retire in six years, we can live for a while on personal assets until I start drawing on my retirement accounts. However, it would be quite helpful if we could also draw on my wife’s generous retirement accounts at that time. If one spouse is older than 59 1/2 and the other spouse is younger, can a couple draw on the younger spouse’s retirement account without penalty--particularly considering that our state (California) is a community property state? Or, if my spouse changes jobs, could she transfer her existing retirement assets to a new account under our joint names, thus allowing us to draw on those assets when I turn 59 1/2? Or could she deposit her retirement assets into one of my existing individual retirement accounts, thus commingling our community property, and would we then be allowed to draw on her assets as well as mine when I turn 59 1/2?
A. Darn, you’ve been trying to work this out every which way, haven’t you?
Community property has nothing to do with it. If you divorced, you would be entitled to half of the retirement money earned during your marriage, but it would still have to be kept in separately titled accounts. There’s no such thing as a joint individual retirement account or 401(k), and you normally wouldn’t be able to tap your wife’s money without penalty until she reached the minimum withdrawal age of 59 1/2.
There are exceptions, though. She could begin taking what’s called “substantially equal periodic payments"--that is, withdrawals in equal annual amounts, based on her life expectancy--at any age from her IRA. (She can also make such withdrawals penalty-free from a 401(k) if she no longer works for that employer.) The IRS has strict rules about how to figure these payments, though; if your wife runs afoul of the rules, she’ll owe the early-withdrawal penalty.
For more details, talk to a tax professional and read up. One guide is the Nolo Press book “IRAs, 401(k)s and Other Retirement Plans: Taking Your Money Out.”
If your wife leaves her employer after age 55, her 401(k) distribution wouldn’t face the early-withdrawal penalty. Finally--and I almost hate to mention it, given your creative mind--if she dies and you inherit her retirement accounts, you could opt to treat them as your own, using your age to determine withdrawal amounts.
Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at email@example.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.