Altering your retirement investments mid-stream

Q. When you hit your 60s, does it pay to contribute to a retirement fund, such as a 401(k), or an IRA, or are you better off stopping because of the tax consequences stemming from mandatory distributions after age 70-1/2? Name withheld, Arlington, Va.

A. "If your tax consequences will not be onerous when you reach 70-1/2, you may want to continue to fund a 401(k) plan and a regular IRA," says Pat Schipper, a consultant with Prism Financial Group, Overland Park, Kan.

"That is especially the case if you get a matching contribution from your employer. The match, along with its subsequent compounding in your account, may outweigh the tax consequences," she says.

If taxes will really pinch your earnings upon withdrawal, you have two options, Ms. Schipper says: (1) Switch your retirement funds to a Roth IRA, assuming you fall within its income levels. You don't have to start withdrawing earnings from a Roth at age 70-1/2. (2) Consider funding an annuity with low expenses. Some don't require withdrawals until well after age 70-1/2.

Q. For several years now I have contributed to an ESOP plan at work, similar to a 401(k) plan. But when I first set up my account, I inadvertently elected to fund an after-tax account, not a tax-sheltered pre-tax account. I chose to invest in company stock, although stock-fund, bond-fund, and money-market accounts are also available. My earnings are free from taxes until I withdraw them, but I can't take the yearly deduction on the amount contributed. Can I now elect to establish a tax-sheltered account, to take the deduction on the contribution, instead of the after-tax account? D.M., Plainfield, N.J.

A Consider setting up a second, parallel, account within your ESOP plan, says David Bendix, who heads Bendix Financial Group, in Uniondale, N.Y.

Assuming the company allows it, for the second account, select the stock fund, using pretax dollars, he says.

Meantime, keep the post-tax-dollar account intact. You might even want to make a small contribution to it too, Bendix says.

Finally, he says, if your tax rate turns out to be higher in your retirement years than now, "you will come out ahead with the post-tax account, since you will have already paid taxes on any amounts of principal that you might withdraw."

Questions about finances? Write: Guy Halverson The Christian Science Monitor 500 Fifth Ave., Suite 1845 New York, NY 10110 E-mail: halversong@csps.com

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