Tag Archives: IRA

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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401k Distribution after Death

People who leave an employer frequently leave their 401(k) behind.  Usually, the wise thing to do is to roll that 401(k) into a rollover IRA.  But with so many other things to do when changing jobs, deciding what to do with the old 401(k) is often low on the list of priorities.

But there is another way of leaving an employer other than changing jobs.  Some people die while still employed.  And here is where the issue can get tricky.

When funds are left in a 401k after death, those must be distributed to the benefactor chosen by the participant. The way they are distributed depends on the choices of the company administering the 401k along with personal choices of the benefactor.

There are two rules that apply to an after-death distribution. One of the two must be used in all cases. The first allows for payments to be made within 5 years of the death of the participant. The second option allows a benefactor to received payments through his or her lifetime on a regular basis. The company administering the 401k may limit the option it will provide. Or, the benefactor may choose the preferred option. In any case, the election must be made by December 31 in the year of the death of the participant.

If the surviving spouse is not aware of this rule and decides to leave the 401(k) with the employer, it’s entirely possible that he or she will receive a check for the entire amount of the 401(k) five years after death, minus 20% federal tax withholding.  If the amount in the 401(k) is substantial the entire amount may be taxed.  It is possible to roll the proceeds into an IRA if it’s done in time, but to avoid paying an income tax on the federal tax that was withheld, the amount of the tax has to be added to the rollover.  This creates a very unpleasant surprise for the surviving spouse.

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How to Get Your 401(k) Ready for Retirement

In a recent Wall Street Journal article the writer gives those who are getting within 10 years of retirement six very useful ideas about getting their 401(k) plans prepared for the day they will actually leave work.

  1.  If you haven’t done it lately, review your 401(k) investment mix.: Typically after people enroll in employer-sponsored plans and make initial investment choices, they forget about how their money is allocated in the plan—sometimes for years.  Don’t let this happen to you.  It may mean that just as you should be getting more conservative you are actually increasing your risk.
  2. Beware of the rate sensitivity of fixed-income funds you own in your 401(k).:  Bonds traditionally were the safe-haven choice for near-retirees, but the bond market has changed and rising rates could result in losses just as retirement approaches.  Not all bond funds are created equal and caution is the watchword in today’s bond market.
  3. Look for greater variety within your 401(k).: When advisers construct portfolios for clients, they often include a mix of U.S. and international stocks, multiple types of bond exposure and, increasingly, “alternative” investments such as commodities and a variety of hedge-fund-like strategies.  So should you.
  4.  Use IRAs and other accounts to complement your 401(k).:  Too often people who change jobs leave their 401(k) behind at their previous employer.  When you leave, roll your 401(k) money into an IRA and don’t leave “orphan” accounts behind and unattended.
  5. Check whether your 401(k) plan includes a brokerage window, or self-directed account.: if your plan allows you to make your own investment decisions, you can often get greater variety and better asset allocation options than are offered in most 401(k) plans.
  6. Consider getting professional advice. : As you would expect we are 100% behind this recommendation.  In fact, if you want guidance with your 401(k), call us and see what we can do for you.
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When should I contribute to an IRA?

I realize that you have until April 15th (Tax Day) of the following year to make an IRA contribution, but why wait that long?  Paying yourself should be one of your first goals when planning your financial future.  That means the time to begin putting money aside is now … that is, if you don’t have a “Wayback Machine” and do it yesterday.  Waiting until the last minute means that you are wasting time, and time is the most critical factor in wealth accumulation for most people.  Why do you think that the average senior citizen has more money than the young person?   They have been accumulating it longer!

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IRAs Remain Largely Misunderstood

When I read the headline I was floored.  But if the TIAA-CREF survey is right,

80% of respondents said they were not contributing to an IRA, which marks a four-percent increase from last year. Additionally, close to half misunderstood the basics of investing in an IRA and how the money could be used, the study said.

That’s a staggering statistic given that IRAs have been around since 1974.

  “Many individuals are still missing out on the long-term savings benefits of IRAs, simply because they don’t understand what they are and how they work,” TIAA-CREF’s director of financial planning, Dan Keady, said. “By allowing savings to grow on a tax-deferred basis, an IRA can help give your current retirement savings a boost no matter what stage of life you’re in. Even if you’re on a tight budget or just starting to save, if you start small and invest wisely, that amount should grow over time.”

If you want to know more about IRAs ahd how they can improve your retirement, leave us a message.

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Don’t Miss the 2012 IRA Contribution Deadline

If you haven’t already made your IRA or Roth IRA contribution for 2012, don’t miss the deadline. Not contributing to an IRA every year could end up costing you in retirement!

You have until Monday, April 15, 2013 to make a contribution for your IRA or Roth IRA for 2012. Even if you don’t have an IRA yet, it’s not too late to open one and fund it for 2012. But hurry, once the deadline passes you will have not have any additional opportunities to make contributions for the year 2012!

How much can you contribute to an IRA? Well if you’re under 50 years old, you can contribute $5,000 for 2012, and $5,500 for 2013. If you’re over 50, you are allowed to make an extra $1,000 “catch-up” contribution each year (meaning those who are age 50 or over could contribute $6,000 for 2012 and $6,500 for 2013). The “catch-up” provision provides those who are closer to traditional retirement age to put away extra funds. In order to qualify, you must have reached age 50 by the end of the year in which the contribution is for. Here’s a chart to simplify:

2012 Limit 2013 Limit
Under 50 years old $5,000 $5,500
Over 50 years old $6,000 $6,500

To put money into a Roth IRA, you do have to be under a certain amount of income, but there are no income limitations on a traditional IRA other than that you (or your spouse) must have income from working. The difference between a Roth IRA and a Traditional IRA sounds like it should be the topic for another blog post, but if you have any questions in the meantime, please let us know!

-SJK

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