Tag Archives: IRA

Putting RMDs to Work

When you’re over 70 ½ and have a retirement plan you have to start taking money out of the plan (with rare exceptions).  But even if you remember to take annual RMDs (Required Minimum Distributions) you could use help preparing for and managing the process. This includes reinvesting RMDs you don’t need immediately for living expenses.

It isn’t as simple as “Here’s your RMD, now go take it.”  Baby Boomers often retire with IRA and 401(k) balances instead of the defined benefit plans their predecessors often had.  And the rules are often complicated.  Take the retiree who has an IRA and a 401(k) that he left behind with a previous employer.

Many are surprised to learn that they have to take separate RMDs on their 401(k) and their traditional IRA.  RMDs must be calculated separately and distributed separately from each employer-sponsored account. But RMDs for IRAs can be aggregated, and the total can be withdrawn from one or multiple IRAs.  That’s one of the reasons that advisors suggest rolling your 401(k) into an IRA when leaving an employer for a new job or when retiring.

Steep penalties apply.  The failure to take a required minimum distribution results in a penalty of 50% of the RMD amount.

According to a 2016 study from Vanguard, IRAs subject to RMDs had a median withdrawal rate of 4% and a median spending rate of 1%. For employer plans subject to RMDs, the median withdrawal rate was 4% and the median spending rate was 0%.  A mandatory withdrawal doesn’t mean a mandatory spend.  Most retirees don’t need the income they are required to take from their plans.  As a result the money usually goes right back into an investment account.

If you have an investment account that is designed for your risk tolerance and goals, the money coming out of your retirement account should be invested so as to maintain your balanced portfolio.

For questions on this subject, please contact us.

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Questioner asks: “Should I roll my SEP IRA into a regular IRA or a Roth IRA?”

There are two issues to consider in answering this question.

  1. If you roll a SEP IRA into a regular or rollover IRA, assuming you do it right, there are no taxes to pay and your money will continue to grow tax deferred until you begin taking withdrawals.  At that point you will pay income tax on the withdrawals.
  2. If you decide to roll it into a Roth IRA you will owe income tax on the amount rolled over.  However, the money will then grow tax free since there will be no taxes to pay when you begin taking withdrawals.

If you roll your SEP into a Roth, be sure to know ahead of time how much you will have to pay in taxes and try to avoid using some of the rollover money to pay the tax because it could trigger an early withdrawal penalty – if you are under 59 1/2 .

It’s up to you to decide which option works best for you.  If you are unsure, you may want to consult a financial planner who can model the two strategies and show you which one works better for you.

As always, check with a financial professional who specializes in retirement planning before making a move and check with your accountant or tax advisor to make sure that you know the tax consequences of your decision.

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Will Retiring Force Cutbacks in Your Lifestyle?

For most people, retiring means the end of a paycheck.  When you retire, how will your lifestyle be affected?  If you don’t know the answer to that, shouldn’t you find out before it’s too late?  There are so many things to take into consideration.

Retirement age – Modern retirees face lots of choices that their parents did not have.  There is no longer a mandatory retirement age, so the question “when should I retire” gets more complicated.

Social Security – The age at which you apply for Social Security benefits has a big effect on your retirement income.  Apply early and you reduce your monthly benefits by 25% – 30%, depending on your age.  Wait until you’re 70 and you increase your monthly benefit by up to 32% (8% per year), depending on your age.  If you are married, the decisions get even more complicated.

Pension – If you are entitled to a pension, the amounts you receive usually depend on your length of service.  The formula used to calculate the pension benefit can get quite complicated.  Those who work for employers whose finances are questionable may want to consider whether they will get the benefits they are promised.  If you are married, you will need to decide how much of your pension will go to your spouse if you die first.

Second career – More and more people go back to work after retirement.  Quite a few people don’t want to stop working, but do something different.  Others use their skills to become consultants, or turn a hobby into a business.  A second career makes a big difference in your retirement lifestyle and how much income you will have in retirement.

Investment accounts – These are the funds you have saved for retirement: in IRAs, 401(k)s, 403(b)s, 457s, and individual accounts.  These funds are under your control.  Most retirees use them to supplement Social Security and pension income.  They are the key to determining how well people live in retirement.

To find out whether you will be forced to cut back after you retire, you need a plan that allows you to take all these factors into consideration.  A plan allows you to make mid-course corrections before it’s too late.

If you have questions, contact us.

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Retirement Plan Contribution Limits for 2016

One of the most common questions we get from clients throughout the year has to do with retirement plan contribution limits.  We put together this quick-reference chart, which shows the limits for most people:

2016 IRS Retirement Plan Contribution Limits

Not much has changed from 2015, except that the income limits for Roth IRA contributions have increased by $1,000.

For the official IRS announcement, click this link to the IRS website.

If you want more clarification on what all of the above means for you, contact us.

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This Simple Tip Could Make a Big Difference in Your Retirement Account

You can make a 2016 contribution to your IRA or Roth IRA as early as January 1, 2016 and as late as April 15, 2017.  It would seem obvious that the sooner you contribute to your retirement account and invest the money, the more money you’ll have by the time you retire.

However, according to research from Vanguard, people are more than twice as likely to fund their IRAs at the last minute as opposed to the first opportunity!  When Vanguard looked back at the IRA contributions of its clients from 2007 to 2012, only 10% of the contributions were made at the optimum point in January, and over 20% were made at the very last month possible.

IRA Contribution Month

To demonstrate the type of real, monetary impact this can have on someone’s retirement savings, take the following hypothetical example.  On January 1 each year, “Early Bird” contributes $5,500, while “Last Minute” makes their $5,500 contribution on April 1 of the following year.  Assume that each investor does this for 30 years and earns 4% annually, after inflation.  Early Bird ends up with $15,500 more than Last Minute.  Put another way, Last Minute has incurred a $15,500 “procrastination penalty” by waiting to make his contribution until the last possible month.

Procrastination Penalty

At the beginning of every year, make fully funding your IRA contributions a habit. (And if you’re the type of person who works better when things are automated, look into setting up an automatic savings & investment plan from your paycheck or bank account to your IRA to save on a monthly or per-paycheck basis.)

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The Real vs. the Ideal (Sometimes Life Happens)

The latest issue of Investment News reminded me of an article I saw recently about Marco Rubio, a Senator seeking the Republican Presidential nomination. It seems that he cashed in a 401k to buy a refrigerator, an air conditioner, pay some college costs for his children and cover some campaign expenses.

Financial planners always tell their clients that they need to put money aside for retirement and to never, ever take money out of retirement plans before age 59 ½ because the taxes and penalties can take nearly half of the money that you withdraw.

The article goes on to say that:

“Unfortunately, many middle-class Americans aren’t saving enough for retirement and some, like Mr. Rubio, even pull money out of their retirement plans prematurely.”

Our advice regarding the timing of withdrawals from retirement accounts is, of course, exactly right. And it will be followed if you are rich enough. Unfortunately, as John Lennon once said, “life is what happens when you’re making other plans.”

Most people have finite resources. Not everyone has the money to fully fund their IRA, 401k, 529 college savings plan, health savings account, life insurance and long-term care insurance policies. Life is about making choices between have-to-have and nice-to-have.

We realize that, and provide our clients with the trade-offs they often need to make. Some goals are achievable and others may not be. And sometimes it’s worthwhile cashing in a 401k if it means that later on you can become President.

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One in five Americans dies broke.

A University Michigan study on health and retirement indicates that 20% of Americans age 85 or older died without any assets other than a house.  One in eight (12%) didn’t even have a house and one in ten (10%) died owing money.

It’s the biggest financial worry for anyone saving for retirement: will I outlive my savings and die broke?  Based on surveys repeatedly pointing to dismally low levels of retirement savings, most American households have reason to be concerned.

While my opinion is not based on a survey, but on experience, I believe that this problem is not based on lack of earnings but on other factors.  I would like to highlight two of them.

One of those factors is that many people place saving for retirement low on their order of priority.  There are always other things that seem to be more interesting, or fulfilling, than putting money away for a far distant future.  Earlier generations had less of a social safety net and were more future oriented.  They knew that they had to take care of themselves as they got older or move in with their children.  The government programs that have been put in place over the last 85 years have made the specter of destitution at old age seem less dire.

A second factor is lack of knowledge.  Far too many middle-income income people are either unaware, or afraid, of the traditional ways people have accumulated money for retirement.  Many a family gathering will include a fair number of people who believe that an IRA is something you do with a bank.  Others will tell you that investing is gambling and are deathly afraid of anything having to do with stocks, bonds or mutual funds.

For many retirees, the end of life comes with major medical costs that can wipe out savings.  But others have little savings to begin with.  “Many more people who have very low financial assets at the end of life have been bumping along with low assets through most of their retirement,” he said.  “They just hadn’t saved very much.”

That brings us to Baby Boomers who are either retired or rapidly approaching retirement age.  Recent data shows that 40% have not saved anything and over 20% have less than $100,000 saved.

People in this situation need professional help.  They are not going to make it on their own.  They really need to seek out an advisor, preferably an RIA, who will take them under their wing, educate them, and be willing to work with them before it’s too late.

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The retirement savings crisis

Banker’s Life commissioned a survey that’s troubling for baby boomers, people aged 50 to 68. The survey says that middle income boomers have saved too little. Only 13 percent have investable assets of $500,000 or more. More than half (54 percent) have less than $100,000, and one-third (34 percent) have assets of less than $25,000.

What does this mean for boomers? Many will have only Social Security income after retirement. Some will also have pensions. And over half expect to continue working after age 65.

This should be a wake-up call for people younger than baby boomers. When boomers entered the work force many of the big companies offered pension plans. That number is fast dwindling. So younger workers will be even more dependent that their elders on their own savings.

Social security is also a problem. The number of workers contributing to the system has been declining relative to those receiving benefits. At some point in the future, benefits will have to be cut or taxes will have to go up to levels that will be politically unsustainable.

The lesson for the children and grandchildren of the baby boomers is to save more and invest wisely. And begin now.

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NEW! IRS Retirement Plan Contributions Limits For 2015

The IRS just this week released the retirement plan contribution limits for 2015.  Here’s a chart we put together that shows what the limits are for most people:

2015 Contribution Limits

For those of you who prefer to read it, from Financial Advisor magazine:

Taxpayers can now put aside a little more toward their retirement in 2015, according to the Internal Revenue Service.
The agency has adjusted the maximum contribution allowed for pension plans and other retirement funds for tax year 2015, it announced today, a change reflecting cost-of-living increases.
Taxpayers 50 years old and over can contribute up to $24,000 in retirement funds for 2015, an increase of $1,000 from 2014.
Though some limits remain unchanged from last year, several ceilings have increased. Some of the changes include:
• The elective deferral (contribution) limit for employees who participate in 401(k)s, 403(b)s, most 457 plans and the federal government’s Thrift Savings Plan has been increased from $17,500 to $18,000.
• The catch-up contribution limit for employees aged 50 and over who participate in those same plans has been increased from $5,500 to $6,000.
• The limit on annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
• The deduction for taxpayers making contributions to a traditional IRA has been phased out for singles and heads of households who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000, up from $60,000 and $70,000 in 2014. For married couples filing jointly, the income phase-out range is $98,000 to $118,000, up from $96,000 to $116,000.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $183,000 and $193,000, up from $181,000 and $191,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

For even more written information, go to the IRS website.

For clarification, and to figure out what all of the above means for you, contact us.

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Don’t make these common mistakes when planning your retirement.

Planning to retire? Have all your ducks in a row? Know where your retirement income’s going to come from? Great! But don’t make some basic mistakes or you may find yourself working longer or living on a reduced income.

Retirement income is like a three legged stool. Take one of the legs away and you fall over.

The first leg of the stool is Social Security. Depending on your income goals, do it right and you can cover part of your retirement income from this source. Do it wrong and you can leave lots of money on the table.

The second leg is a pension. Many people have guaranteed pensions provided by their employer.  But these are gradually disappearing, replaced by 401(k) and similar plans known as “defined contribution” plans. If you don’t have a pension but want a second guaranteed lifetime income you can look into annuities that pay you a fixed income for life.

The third leg of the stool is your investment portfolio. This is where most people make mistakes and it can have a big impact in your retirement.

Mistake number one is leaving “orphan” 401(k) plans behind as you change jobs. These plans often represent a large part of a typical retiree’s investment assets. Our advice for people who move from one company to another is to roll their 401 (k) assets into an IRA. This gives you much more flexibility and many more investment choices, often at a lower cost than the ones you have in the typical 401(k).

Mistake number two is trying to time the market. Many people are tempted to jump in and out of the market based on nothing but TV talking heads, rumors, or their guess about what the market is going to do in the near future. Timing the market is almost always counter-productive. Instead, create a well balanced portfolio that can weather market volatility and stick with it.

Mistake number three is “set it and forget it.” The biggest factor influencing portfolio returns is asset allocation. And the one thing you can be sure of is that over time your asset allocation will change. You need to rebalance your portfolio to insure that your portfolio does not becoming more aggressive than you realize. If it does, you could find yourself facing a major loss just as you’re ready to retire. Rebalancing lets you “buy low and sell high,” something that everyone wants to do.

Mistake number four is to assume that the planning process ends with your retirement. The typical retiree will live another 25 year after reaching retirement age. To maintain you purchasing power your money continues to have to work hard for you. Otherwise inflation and medical expenses are going to deplete your portfolio and reduce your standard of living. Retirement plans should assume that you will live to at least 90, perhaps to 100.

Retirement planning is complicated and is best done with the help of an expert. Check out our website and feel free to give us a call. We wrote the book on retirement and estate planning.

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