Tag Archives: traditional ira

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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Key retirement dates and terms.

From the Wall Street Journal’s Market Watch:

RBD: The required beginning date (RBD) is the deadline by which your first required minimum distribution must be withdrawn from your retirement account.

RMD: Your required minimum distribution, or RMD, is the minimum amount that you must withdraw from your retirement account

FRA: Full retirement age is the age at which a person may first become entitled to full or unreduced retirement benefits

Age 59½: the age when you can begin taking distributions from IRAs, 401(k) and 403(b) plans without penalty.

Age 62: The earliest date at which you can start taking Social Security retirement or spousal benefits.

Age 65: The regular Medicare eligibility age.

Age 70½: Age at which you must start taking required minimum distributions.

Getting older is not for the faint of heart or the forgetful.  Need a little help?  Contact us.


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A Creative Plan to Keep a Cheap NYC Apartment

From the Wall Street Journal we learn the way that wealthy people who live in New York’s rent controlled apartments keep them.

 He was a married professor in his late 60s who lived in a four-bedroom place in downtown Manhattan high-rise. His rent was set at just $2,000 a month; a comparable apartment at a market rental rate would run about $10,000 monthly.

The problem: The rules governing rent-stabilized apartments in New York disqualify tenants who make more than $200,000 a year in adjusted gross income for two years in a row. And required distributions from the client’s retirement accounts were going to push him above that threshold.

The professor’s AGI was $170,000. But thanks to diligent saving during a long corporate career before he started teaching, the professor had managed to accumulate $3 million in a handful of IRA and 401(k) accounts.

He had another $1 million in a 430(b), giving him a net worth of over $4 million.  The problem?  He didn’t want to pay market rates for his apartment and …

As soon as he hit age 70 1/2, he’d have to start taking required minimum distributions on those accounts…. at about $100,000 a year–immediately putting the [him] well over the rent-stabilization income limit.

The answer:

  1. … transfer $1.5 million from his old tax-deferred accounts into his current employer’s 403(b) plan, which would shield them from RMDs as long as the professor stayed with his employer

  2. use the rest of the funds in [his] IRAs and 401(k)s to fund a Roth IRA conversion.

Suddenly the professor is too poor and can keep his rent controlled apartment.

Homework assignment: discuss the ethics of rent control.

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You’re never too young to start thinking about retirement.

For most 20-somethings, the idea of retirement isn’t front and center. It isn’t even a glimmer.  But it ought to be.  This is especially true for young people today, many of whom believe that Social Security will not be there for them when they retire.  When you’re young the most valuable resource you have is time.

Time provides you with the power of compound interest.  Albert Einstein called it the “greatest invention of all time. ”  For example, a 25-year-old who starts saving just $600 a year could have $72,000 at age 65, nearly twice as much as someone who saves $1,200 a year beginning at 45, according to calculations by LearnVest, an online financial-planning service.

Retirement may be 40 years away, and your paycheck may small, you may have rent to pay and student loans to pay off, but saving even small amounts early on can make a big difference.  Many employers offer 401(k) plans that offer a company match, which is “free money” to the employee.   The money grows tax deferred, or if it’s a Roth plan it grows tax free.  These plans are often among the single biggest pools of funds that people have to draw on when they retire.   If you don’t work for a company that offers some kind of a retirement plan, start your own by contributing to an IRA or a Roth IRA.  The best time to begin was yesterday, the second best time it today.


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Some opinions from Around the Industry

 few opinions we thought that we would share with you.

Vanguard chief investment officer and indexing guru Gus Sauter thinks U.S. stocks are in a secular, long-term bull market and that investors can reasonably expect returns in line with historic rates between 8% and 10% over the next five to 10 years.

We hope he’s right, but we expect a bumpy ride.

In 2009, 25% of retirees said their financial situation was much worse after the recession. That percentage fell slightly to 23% in 2011. Among pre-retirees, the difference was more significant. Over a third of pre-retirees said in 2009 that they were much worse off after the recession, compared with 25% who said the same in 2011.

It’s an improvement, but the concerns that people had after the 2008 crash will take much longer to recede.

The amount you can sock away into your 401(k), 403(b), and most Section 457 plans increases from $17,000 to $17,500.  If you’re over 50, add another $5,500.

Individuals making qualifying contributions to an IRA can now contribute $5,500 in 2013. The 2012 limit was $5,000.

The annual gift exclusion rises from $13,000 in 2012 to $14,000 in 2013,

Worker’s tax rate goes back to 6.2%b from 4.2%.

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Why Young People Are Saving More

The Wall Street Journal illustrates why young people are beginning to save more despite, or perhaps because of, poor economic conditions.

For years, Sean McGroarty ignored his mother’s urging to save money.

Then his mother, Karen Zader, 54 years old, lost her job as an administrative assistant. The family home, where Mr. McGroarty grew up, went into foreclosure, and Ms. Zader had to raid her retirement savings to pay bills. [snip]

As older Americans lose jobs, lose homes and delay retirement, their children are watching and reacting. Growing numbers of young Americans are boosting savings, cutting spending and planning for retirement. …

But young adults are now saving more and starting earlier than people their age used to, according to several broad measures.

Participation in 401(k) plans is up.  Credit card debt is down.

The younger generation may well be doing a better job getting ready for retirement, often nearly 40 years down the road, than their parents.  And it’s a good thing.  While their parents may have had a company pensions when they retired, most young people do not.  Many younger workers don’t believe that Social Security will be there for them when they retire.  Other government “entitlement” programs are projected to be  insolvent in the long term

Many young savers cited the fear that government retirement programs will be gone or curtailed by the time they qualify.

“Friends of mine in our 20s, we joke that there isn’t going to be any Social Security when we get old enough to collect,” said Mr. McGroarty, the DJ. “But it isn’t really a joke. What are we going to do after we retire?”

As they see their parents struggle financially, the younger generation is taking the lesson to heart that financial independence can be achieved, but it requires putting money aside in 401(k)s, IRAs and Roth IRAs and investing it wisely.  That’s where getting professional advice from an RIA is valuable.

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3 New Reasons to Beef Up Your Retirement Accounts

The last decade has seen most retirement accounts either decline or generate low level returns.  There are few working people who do not wish to have more money set aside for retirement.  Social Security is not insolvent yet but is now paying out more than it is taking in.   Pensions are a thing of the past for most companies.  YOU are the most reliable source for income during your retirement.

The Motley Fool gives three reasons to make more contributions now.

Without government action, a whole bunch of bad things are about to happen to your taxes. Let’s take a look at the three basic categories of higher taxes that you may face:

1. Higher taxes on ordinary income are coming….

  • The more you put in a deductible IRA or 401(k), the less taxable income you’ll have. With tax rates rising, the savings you’ll get from contributing to a retirement account will also increase.

2. Higher taxes on investment income are coming.

  • [With high dividend paying stocks] you could end up paying more than two-and-a-half times as much in taxes as you do now in a regular account. In an IRA, by contrast, you’ll save more of your hard-earned money and let it work harder for you during your career.

3. Excess taxes for high-income taxpayers are coming.

  • In addition to old tax law coming back to bite taxpayers, new increases are also on their way. Medicare withholding will rise by 0.9% once wages rise above certain limits — $200,000 for most singles and $250,000 for joint-filing taxpayers. Also, a 3.8% surtax on investment income will apply to high-income taxpayers, making it that much more important to get high-yielding dividend stocks under cover of a tax-favored retirement account.

Need help?  A good RIA can provide you with advice.

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Timing Your IRA Withdrawal at 70 1/2

If you will turn 70½ this year, you have until April 1 of next year to start taking required minimum distributions (RMD) from your individual retirement account and any “orphan” retirement accounts you may have left with previous employers.

But waiting could have tax consequences for some people.  For example, taxes could go up next year.

The second problem is that if you move the first RMD to the following year, you also have to take a second distribution for that year since there is no further grace period.   You will be paying taxes on two distributions which could put you into a higher tax bracket.

If you do decide to defer the first RMD until the following year, consult your tax adviser and your financial planner.  And keep in mind that your quarterly tax payment should reflect the added income.

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Inherited IRAs

If you are the beneficiary of an IRA there are a few things that you should know.

A spouse who inherits has an option not available to other inheritors. She can roll the assets into her own IRA and postpone distributions from a traditional IRA until she turns 70 1/2.

A non-spouse, a child for example,  can draw distributions out over their own expected life spans, enjoying decades of income-tax-deferred growth in a traditional IRA.  However, to make sure that you will be able to take advantage of this “Stretch IRA”  you have to follow the proper procedures.

IRA Forbes.com has an article, “Five Rules for Inherited IRAs” that you should read.

For more details, call us.

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