Do You Need Long Term Care Insurance? – Part 1

Jane Young, CFP, EA

Jane Young, CFP, EA

As retirement grows closer the decision on how you will cover potential long term care expenses becomes a serious concern.   Unfortunately, with the high cost of long term care (LTC) and the high cost of long term care insurance there is no easy solution.  LTC refers to services or support to help you with medical or non-medical personal care needs.   LTC can provide assistance with cognitive impairment and activities of daily living such as eating, bathing, dressing, using the toilet and assistance with incontinence.  About 80% of all LTC is provided in the home.

LTC expenses can be paid with a combination of personal or family savings, LTC Insurance and government assistance.  Generally Medicare does not cover long term care.  Medicare will provide 100 days of skilled nursing care following a 3 day stay in the hospital.  Medicaid will pay for LTC after most of your assets have been depleted but Medicaid is usually limited to skilled nursing home care.

The decision to purchase LTC insurance is straight forward for the affluent who can self-insure and for those with little or no assets who must rely on Medicaid for their LTC expenses.  The decision is more complicated for those who can’t afford to self-insure but want to protect their assets to provide a livelihood to a surviving spouse, an inheritance to children or want to avoid being a burden to family.

Individuals who are at the greatest risk for needing LTC are those with a history of a chronic condition such as high blood pressure or diabetes, or have family members with a history of a chronic condition.  You may also have a higher risk if you are in poor health or have poor diet and exercise habits.  Women are at greater risk than men because on average, they live 5 years longer.

According to a study using a microsimulation model performed by Kemper, Komisar and Alecxih, on average people currently turning 65 will need LTC for three years.   They found that 3 out of 10 people will rely on family for their care for more than 2 of these years.  They also found that 2 out of 10 people will need care for over 5 years.  Overall, their analysis indicated that 50% will have no out of pocket expenditures for LTC, 25% will spend less than $10,000 and 6% will spend over $100,000.

Additionally, based on information from leading insurance actuaries, the Association for Long Term Care Insurance reported that someone who buys a LTC insurance policy, with a 90 day elimination period, at age 60 has a 35% chance of using it before they die.  They also reported that the average stay in a nursing home is 2.3 years for men and 2.6 years for women. Most care is provided at home but statistics on this are limited.

My next column will address the cost of LTC and LTC insurance and the pros and cons of purchasing LTC insurance.

Gradual Retirement Can Ease Stress and Cash Flow

Jane Young, CFP, EA

Jane Young, CFP, EA

As the average life expectancy increases retirement is starting to look very different.   We may be less likely to completely stop working on a fixed, predetermined date.  As the traditional retirement age of 65 approaches many are considering a more gradual transition into retirement.

One advantage of easing into retirement includes the ability to supplement your cash flow and reduce the amount needed to be withdrawn from your retirement savings.  If you continue working after 65 you may be able to earn enough to delay taking Social Security until 70.  This will provide additional financial security because your Social Security benefit increases 8% per year from your normal retirement age to age 70.  The normal Social Security retirement age is between 66 and 67.

Abruptly going into retirement can be very traumatic because careers provide us with a sense of purpose, a feeling of accomplishment and self-esteem.   Your social structure can also be closely tied to work.  By working part time before completely retiring, you can gradually transition into the new phase of your life.   As you approach retirement age the grind of working 40 to 50 hours per week can become very trying.   Working part time allows you to stay engaged with your career while taking some time to relax and pursue other interests.

According to a 2012 study by the Bureau of Labor Statistics, more people are working beyond age 65.  In 2012 about 18.5% of Americans over 65 were still working vs. only 10.8% in 1985.  A study reported by the Journal of Occupational Health and Psychology stated there are health benefits from working part time during retirement.  This may be attributed to less stress and a more balanced life while experiencing the mental stimulation gained from continued engagement at work.

Gradually transitioning into retirement may be more practical for someone who is self-employed.  However, the concept of phased retirement is a hot topic among human relations firms and departments.  Phased retirement programs usually involve working about 20 hours a week with some element of mentoring less experienced workers.  Formal phased retirement programs are still rare but they are gaining popularity.  A 2010 study by AARP and the Society for Human Resources Management found that about 20% of the organizations polled had a phased retirement program or were planning to start a one.  In fact, the federal government just launched a phased retirement program.

Before signing up for a phased retirement plan, take steps to fully understand the impact it may have on your benefits.  If you are under 65 there may be restrictions on your health insurance.   Additionally, some pension calculations are based on your final years of salary, working fewer hours at this time could negatively impact your benefit.  Also avoid situations where you are only paid for 20 hours a week but still work 30 or 40 hours to get your job done.

Tax Diversification Can Stretch Retirement Dollars

Jane Young, CFP, EA

Jane Young, CFP, EA

Most investors understand the importance of maintaining a well-diversified asset allocation consisting of a wide variety of stock mutual funds, fixed income investments and real estate.  But you may be less aware of the importance of building a portfolio that provides you with tax diversification.

Tax diversification is achieved by investing money in a variety of accounts that will be taxed differently in retirement.   With traditional retirement vehicles such as 401k plans and traditional IRAs, your contribution is currently deductible from your taxable income, your contribution will grow tax deferred and you will pay regular income taxes upon distribution in retirement.  Generally, you can’t access this money without a penalty before 59 ½ and you must take Required Minimum Distributions at 70 ½. This may be a good option during your peak earning years when your current tax bracket may be higher than it will be in retirement.

Another great vehicle for retirement savings is a Roth IRA or a Roth 401k which is not deductible from your current earnings.  Roth accounts grow tax free and can be withheld tax free in retirement, if held for at least five years. If possible everyone should contribute some money to a Roth and they are especially good for investors who are currently in their lower earning years.

A third common way to save for retirement is in a taxable account.  You invest in a taxable account with after tax money and pay taxes on interest and dividends as they are earned.  Capital gains are generally paid at a lower rate upon the sale of the investment.  In addition to liquidity, some benefits of a taxable account include the absence of limits on contributions, the absence of penalties for early withdrawals and absence of required minimum distributions.

Once you reach retirement it’s beneficial to have some flexibility in the type of account from which you pull retirement funds.  In some years you can minimize income taxes by pulling from a combination of 401k, Roth and taxable accounts to avoid going into a higher income tax bracket.  This may be especially helpful in years when you earn outside income, sell taxable property or take large withdrawals to cover big ticket items like a car.  Another way to save taxes is to spread large taxable distributions over two years.

Additionally, by strategically managing your taxable distributions you may be able to minimize tax on your Social Security benefit.   Your taxable income can also have an impact on deductions for medical expenses and miscellaneous itemized deductions, which must exceed a set percentage of your income to become deductible.  In years with large unreimbursed medical or dental expenses you may want to withdraw less from your taxable accounts.

Finally, there may be major changes to tax rates or the tax code in the future.  A Tax diversified portfolio can provide a hedge against major changes from future tax legislation.

Strategically Withdraw Money for Retirement

Jane Young, CFP, EA

Jane Young, CFP, EA

After years of contributing money to 401k plans and Roth IRAs you are finally ready for retirement and face the dilemma of how to best withdraw your retirement savings.  Many retirees have several sources of income such as pensions, social security and real estate investments to help cover their retirement needs. Review your annual expenses and determine how much you need to pull from your nest egg for expenses that aren’t covered by other income sources.

One way to manage your retirement income needs is to create three buckets of money.  The first bucket is for money that will be needed in the next twelve months.  This money should be fully liquid in a checking, savings or money market account.  The second bucket is money that will be needed over the next five years.  At a minimum, hold money needed in the next five years in fixed income investments such as CDs and short term bond funds.  By investing this money in fixed income investments it is shielded from the fluctuations in the stock market; avoiding the agonizing possibility of having to sell stock mutual funds when the market is down.

Consider buying a rolling CD ladder where a CD covering one year of expenses will mature every year for the next four to five years.  After you spend your cash during the current year a new CD will mature to provide liquidity for the coming year.

The third bucket of money is your long term investment portfolio.  This should be a diversified portfolio made up of a combination stock mutual funds and fixed income investments.  Every year you will need to re-position investments from this bucket to your CD ladder or short term bond funds to cover five years of expenses.  Rebalance your long term portfolio on an annual basis to keep it well diversified.

In conjunction with positioning your asset allocation for short term needs, you need to decide from which account you should withdraw money.  Conventional wisdom tells us to draw down taxable accounts first to allow our retirement accounts to grow and compound tax deferred, for as long as possible.  Gains on money withdrawn from a taxable account are taxed at capital gains rates where withdrawals from a traditional retirement account are taxed at regular income tax rates and withdrawals from Roth IRAs are generally tax free.

Withdrawing all your money from taxable accounts first isn’t always the best solution.  You need to analyze your income tax situation and strategically manage your withdrawals to avoid unnecessarily going into a higher tax bracket.  Additionally, the taxation of Social Security is graduated based on income.  After starting Social Security, you may be able to minimize taxation of your benefit by taking withdrawals from a combination of taxable, traditional retirement and Roth accounts.  Do some tax and financial planning to strategically minimize taxes and maximize your retirement portfolio.

Should You Contribute to a Traditional 401(k) or a Roth 401(k)?

 

Jane Young, CFP, EA

Jane Young, CFP, EA

Many large employers have started offering employees the choice between a traditional 401(k) and a Roth 401(k).  However, only a small percentage of employees have elected to contribute to a Roth 401(k).  The primary difference between the two plans is when you pay income taxes.  When you contribute to a traditional 401(k) your contribution is currently tax deductible, but you must pay regular income taxes on distributions taken in retirement.  Contributions to a Roth 401(k) are not currently deductible, but you pay no income taxes on distributions in retirement.  As with your traditional 401(k), your employer can match your Roth 401(k) contributions, but the match must go into a pre-tax account.  

There are several differences between a Roth 401(k) and a Roth IRA.  In 2014, annual contributions to a Roth IRA are limited to $5,500 plus a $1,000 catch-up contribution if you are 50 or over.  Contribution limits on Roth 401(k) plans are much higher at $17,500 plus a $5,500 catch-up contribution, if you are 50 or over.  Additionally, there are income limitations on your ability to contribute to a Roth IRA, and there no income restrictions on contributions to a Roth 401(k).   Additionally, upon reaching 70 ½ you must take a required minimum distribution from a Roth 401(k).   You are not required to take a distribution from a Roth IRA at 70 ½.  However, you do have the option to transfer your Roth 401(k) to a Roth IRA prior to 70 ½ to avoid this requirement. 

The decision on whether to invest in a Roth or traditional 401(k) depends primarily on when you want to pay taxes.  If you are currently in a low tax bracket and believe you will be in a higher tax bracket in retirement, a Roth account may be your best option.  On the other hand, if you are currently in a high tax bracket and you think you may be in a lower tax bracket in retirement, a traditional 401(k) could be your best option.  A Roth 401(k) is generally most appropriate for younger investors who are just getting started in their careers or someone who is experiencing a low income year.  People who are in their prime earning years may be better off taking the current tax deduction available with a traditional 401(k). 

Unfortunately, it’s difficult for most of us to know if our tax bracket will increase or decrease in retirement.  It is also hard to know if tax rates will increase before we reach retirement.  From a historical perspective, tax rates are currently low and some believe future rates will be increased to help cover the rising federal debt.  Amid this future uncertainty, your best option may be to split your contribution between a Roth and traditional 401(k).  This will give you some tax relief today and some tax diversification in retirement.

Don’t Miss Out on Retirement Plans When Self-Employed

 

Jane Young, CFP, EA

Jane Young, CFP, EA

Just because you are self-employed doesn’t mean you don’t have access to tax advantaged retirement plans.   There are several options that may work for you depending on your situation.  One option is to contribute to a traditional IRA or Roth IRA.   In 2013, you can contribute up to $5,500 of earned income into an IRA ($6500, if you are over 49).  However, you may be restricted due to income limitations.  In addition to an IRA, consider establishing a SEP (Simplified Employee Pension), a SIMPLE IRA (Savings Incentive Match Plan for Employees) or a Solo 401k.

A SEP is a plan that enables you, as the employer, to set aside money for yourself and your employees.  The entire contribution is made by the employer, and equal contributions must be made to all eligible employees – including you as the owner.  The annual contribution is flexible, which allows you to adjust the contribution based on profitability for the year.  In 2013, contributions cannot exceed the lesser of 25% of W2 earnings or $51,000.  The limits are the same but some special rules apply, if you are self-employed. A SEP has low start-up and administrative costs with no filing requirements.  SEP plans can be of most benefit to companies with few or no employees, since the entire contribution is made by the employer. 

If you have several employees, a SIMPLE IRA plan may be the best option.  Employers are required to make a matching contribution of up to 3% or a 2% non-elective contribution for each eligible employee.  In 2013, employees may elect to contribute up to $12,000 plus a $2,500 catch-up if they are over 49.  A Simple IRA is available to any employer with up to 100 employees.  It is easy to establish and inexpensive to operate.  Discrimination testing is not required and there are no filing requirements.   A Simple IRA plan can be more practical than a SEP for companies with a lot of employees because most of the contribution is usually made by the employee.

Another option is a solo 401k. A one-participant 401k plan is a traditional 401k that covers a business owner with no employees, or a business owner and his or her spouse.  A solo 401k generally has the same rules as a traditional 401k plan.  As a business owner, you play the role of the employer and employee.  As an employee, in 2013 you can contribute up to $17,500 ($23,000 if you are over 49) – up to 100% of your compensation.  As an employer, you can contribute up to 25% of compensation.  Total contributions, not including catch-up provisions, cannot exceed $51,000.  If you hire employees who meet eligibility requirements, they must be included in the plan and their elective deferrals may be subject to non-discrimination testing.   Additionally, if your solo 401k plan has more than $250,000 in assets, you must file an annual report.

Sure Fire Ways to Ruin Your Retirement Plan

 

 

Jane Young, CFP, EA

Jane Young, CFP, EA

Managing your finances is a balancing act between spending for today and saving for the future.   It’s important to plan and save for retirement but the demands of everyday life frequently get in the way.  Here are some common pitfalls to avoid when planning for your retirement.

 

Living Beyond Your Means – Spending more than you earn, failing to save and going into debt can be huge threats to your financial security and retirement plans.  Develop a spending plan that allows for an emergency fund and annual savings of 10-15% of your gross income.  Make a conscious decision to spend less money, buy a less expensive house and buy less expensive cars to keep your expenses below your income.  This can help you save for the future with a buffer for financial emergencies.

 

Failure to Participate – Participate in tax advantaged retirement plans for which you may be eligible.  Contribute to your employers 401k or 403b to take advantage of any employer match and deduct the contributions from your current income.  Additionally, if you are eligible, consider contributing to a Roth IRA.  Generally, an after tax Roth IRA contribution can grow tax free, with no tax due upon distribution.

 

Failure to Diversify – Maximize the potential for growing your retirement nest egg by maintaining a well-diversified portfolio designed to meet your unique risk tolerance and investment timeframe.  A common pitfall is the failure to monitor and rebalance your portfolio on an annual basis.   A portfolio that is too conservative can be as detrimental to your retirement plan as an overly aggressive portfolio.  Upon retirement, investors frequently make the mistake of changing their portfolio allocation to be extremely conservative, when they may live for another 30 to 40 years.

 

Market Timing and Trading on Emotion – Moving in and out of the stock market based on short term market fluctuations generally results in lower long term returns.   There is a natural inclination to buy when the economy is booming and sell when the economy is in the doldrums.   This usually results in buying high and selling low, which can be very detrimental to your portfolio.  To maximize your retirement portfolio avoid the emotional temptation to react to short term events and fluctuations in the market.

 

Funding College and Living Expenses for Grown Children at the Expense of Retirement – Avoid the pitfall of sacrificing your retirement to fund college education for your children or to make significant contributions toward an adult child’s living expenses.  Students have many options to finance or minimize college expenses but you can’t take out a loan to finance your retirement.

Cashing Out or Taking an Early Withdrawal – When you change jobs, transfer the money from your employer’s plan to another tax deferred plan such as a Rollover IRA.  This allows you to avoid paying significant income tax and a 10% early distribution penalty, if you are under 59 ½.

The Difference Between an Roth IRA and a Traditional IRA

Jane Young, CFP, EA

Jane Young, CFP, EA


One of the biggest decisions associated with saving for retirement is choosing between a Roth IRA and a Traditional IRA. The primary difference between the two IRAs is when you pay income tax. A traditional IRA is usually funded with pre-tax dollars providing you with a current tax deduction. Your money grows tax deferred, but you have to pay regular income tax upon distribution. A Roth IRA is funded with after tax dollars, and does not provide a current tax deduction. Generally, a Roth IRA grows tax free and you don’t have to pay taxes on distributions. In 2013 you can contribute up to a total of $5,500 per year plus a $1,000 catch-up contribution if you are over 50. You can make a contribution into a combination of a Roth and a Traditional IRA as long as you don’t exceed the limit. You also have until your filing date, usually April 15th, to make a contribution for the previous year. New contributions must come from earned income.
There are some income restrictions on IRA contributions. In 2013, your eligibility to contribute to a Roth IRA begins to phase-out at a modified adjusted gross income of $112,000 if you file single and $178,000 if you file married filing jointly. With a traditional IRA, there are no limits on contributions based on income. However, if you are eligible for a retirement plan through your employer, there are restrictions on the amount you can earn and still be eligible for a tax deductible IRA. In 2013 your eligibility for a deductible IRA begins to phase out at $59,000 if you are single and at $95,000 if you file married filing jointly.
Generally, you cannot take distributions from a traditional IRA before age 59 ½ without a 10% penalty. Contributions to a Roth IRA can be withdrawn anytime, tax free. Earnings may be withdrawn tax free after you reach age 59 ½ and your money has been invested for at least five years. There are some exceptions to the early withdrawal penalties. You must start taking required minimum distributions on Traditional IRAs upon reaching 70 ½. Roth IRAs are not subject to required minimum distributions.
The decision on the type of IRA is based largely on your current tax rate, your anticipated tax rate in retirement, your investment timeframe, and your investment goals. A Roth IRA may be your best choice if you are currently in a low income tax bracket and anticipate being in a higher bracket in retirement. A Roth IRA may also be a good option if you already have a lot of money in a traditional IRA or 401k, and you are looking for some tax diversification. A Roth IRA can be a good option if you are not eligible for a deductible IRA but your income is low enough to qualify for a Roth IRA.

There is More to Retirement Than the Money

Jane Young, CFP, EA

Jane Young, CFP, EA

Are you concerned that you don’t have the financial means to fully retire anytime soon? That may not be such a bad thing. There is much more to retirement than reaching some magic number where you will be able to cover your living expenses. Your personal identity may be closely aligned with your career. Personal identity plays a huge role in your self-esteem and happiness. Your sense of accomplishment and purpose can also be tied to your work. The structure, responsibility and expectations from your job give you a sense of purpose and help you feel appreciated. Retirement may have a dramatic impact on your personal identity and sense of relevance. Make a plan to transition into your retirement adventure with a new sense of direction and purpose.
Many of your relationships are connected to your career. Relationships with colleagues, clients, co-workers and suppliers account for a lot of your social interactions. These are people with whom you have a common understanding and intertwined social connections. Think about the impact retirement may have on these connections. How will you replace this sense of community and nurture these relationships after retirement?
Another consideration in retirement is keeping your mind stimulated. At work our minds are fully engaged as we juggle several different tasks at once. This may be exhausting, but it keeps our minds stimulated and energized. A study conducted by the Rand Center for the Study of Aging and the University of Michigan found that early retirement can have a significant negative impact on the cognitive ability of people in their early 60’s. The study concluded that people need to stay active to preserve their memories and reasoning abilities. As you transition into retirement, be sure stay mentally active and engaged.
You may be looking forward to retirement in anticipation of doing all the fun things you currently have no time for. Retirees frequently enter retirement with tremendous enthusiasm and fill their first few years with exciting trips and activities. However, after a while you tire of these activities, the activities lack the substance to make you feel truly fulfilled. You start missing the sense of affirmation, self- identity and purpose you found in your job. You have time to engage in fun activities every day, but it’s just not enough, you aren’t fully satisfied.
It doesn’t have to be this way. Before you jump into retirement, give some serious thought about what you will do in retirement. How will you stay socially and emotionally engaged in a way that is truly meaningful and rewarding? Engage in activities that will feed your self-esteem. Consider a new, part-time career, set some fitness goals, engage in volunteer activities, or take up a meaningful hobby. Decide how you will develop new social networks. Once you are retired, what will you say and how will you feel when someone asks – What do you do?

How to Pick an IRA That’s Right for You (via Credit.com)

One of the most common questions I hear from clients is whether they should invest in a traditional IRA or a Roth IRA. Let’s start with an understanding of the difference between the two. The biggest difference between a traditional IRA and a Roth IRA is when you pay taxes. I like to think of it…


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Stock Can Be a Good Option in Retirement

 

 

 

 

 

 

Jane M. Young

As we approach retirement, there is a common misconception that we need to abruptly transition our portfolios completely out of the stock market to be fully invested in fixed income investments.   One reason to avoid a sudden shift to fixed income is that retirement is fluid; it is not a permanent decision. Most people will and should gradually transition into retirement.  Traditional retirement is becoming less common because life expectancies are increasing and fewer people are receiving pensions. Most people will go in and out of retirement several times.  After many years we may leave a traditional career field for some well-deserved rest and relaxation.  However, after a few years of leisure we may miss the sense of purpose, accomplishment, and identity gained from working.  As a result, we may return to work in a new career field, do some consulting in an area where we had past experience or work part-time in a coffee shop.

Another problem with a drastic shift to fixed income is that we don’t need our entire retirement nest egg on the day we reach retirement.   The typical retirement age is around 65, based on current Social Security data, the average retiree will live for another twenty years. A small portion of our portfolio may be needed upon reaching retirement but a large percentage won’t be needed for many years.   It is important to keep long term money in a diversified portfolio, including stock mutual funds, to provide growth and inflation protection.   A reasonable rate of growth in our portfolio is usually needed to meet our goals. Inflation can take a huge bite out of the purchasing power of our portfolios over twenty years or more.   Historically, fixed income investments have just barely kept up with inflation while stock market investments have provided a nice hedge against inflation.

We need to think in terms of segregating our portfolios into imaginary buckets based on the timeframes in which money will be needed.  Money that is needed in the next few years should be safe and readily available.  Money that isn’t needed for many years can stay in a diversified portfolio based on personal risk tolerance.  Portfolios should be rebalanced on an annual basis to be sure there is easy access to money needed in the short term.

A final myth with regard to investing in retirement is that money needed to cover your retirement expenses must come from interest earning investments.  Sure, money needed in the short term needs to be kept in safe, fixed income investments to avoid selling stock when the market is down.  However, this doesn’t mean that we have to cover all of our retirement income needs with interest earning investments.  There may be several good reasons to cover retirement expenses by selling stock.   When the stock market is up it may be wise to harvest some gains or do some rebalancing.  At other times there may be tax benefits to selling stock.

 

Watch Out for These Pitfalls with Social Security and IRA Rollovers

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Jane M. Young, CFP, EA

Here are a couple issues on Social Security and IRA Rollovers that frequently catch people by surprise.

Think twice about taking your Social Security at 62 or before your regular retirement age, if you plan to work during this timeframe. In 2011, if you earn more than $14,160, Social Security will withhold $1 for every $2 earned above this amount. However, all is not lost, when you reach full retirement age Social Security will increase your benefits to make up for the benefits withheld. Once you reach your full retirement age there is no reduction in benefits for earning more than $14,160. However, the amount of tax you pay on your Social Security benefits will increase as your taxable income increases. This may be a good reason to wait until your full retirement age or until you stop working to begin taking Social Security.

If you are thinking about moving your IRA from one custodian to another I strongly encourage you to do this as a direct transfer and not as a rollover. We frequently use these terms synonymously but I assure you the IRS does not! A transfer is when you move your IRA directly from one IRA trustee/custodian to another – nothing is paid to you. A rollover is when a check is issued to you and you write a second check to the new IRA Trustee/Custodian. This must be done within 60 days or the transaction is treated as a taxable distribution. You can do as many transfers as you desire in a given year. However, you can only do one rollover per year, on a given IRA. This is a very stringent rule and there are very few exceptions even when the error is out of your control. Whenever possible be sure to use a direct transfer not a rollover to move your IRA Account.

Attend a Financial Fireside Chat with Jane and Linda on December 2nd to discuss “Year End Financial Planning Tips and Money Saving Ideas for the Holidays”

 

You and a guest are invited to a Financial Fireside Chat with Jane and Linda at our office, from 7:30 – 9:00 am on Thursday, December 2nd to discuss “Year End Financial Planning Tips and Money Saving Ideas for the Holidays.”

A Financial Fireside chat is an informal discussion over coffee and donuts, where our clients and guests can learn about various financial topics in a casual non-threatening environment. This is free of charge and purely educational. There will be absolutely no sales of products or services during this session. We will provide plenty of time for informal discussion.

The Fireside Chat will be held at the Pinnacle Financial Concepts, Inc. offices at 7025 Tall Oak Drive, Suite 210. Please RSVP with Judy at 260-9800.

We are looking forward to seeing you on Thursday, December 2nd to learn about and discuss some great year end financial planning ideas.

Three Significant Changes to Your Retirement Plans in 2009 and 2010

Jane M. Young, CFP, EA

1. No required minimum distribution in 2009 for IRA, 401k, 403b, 457b, 401k and profit sharing plans. This does not apply to annuitized defined benefit plans.

2. If you are older than 70 ½, in 2009 you can make charitable gifts from your IRA without the payment being included in your adjusted gross income. The distribution must be a “qualified charitable distribution”, which means it must be made directly from the IRA owner to the charitable institution. This is especially beneficial if you claim a standard deduction and were unable to deduct charitable contributions by itemizing.

3. Beginning in 2010 individuals earning over $100,000 in modified adjusted gross income will be able to convert traditional IRAs to Roth IRAs. Modified adjusted gross income is the bottom line on the first page of the 1040 tax form. Income from a conversion in 2010 may be reported equally over 2011 and 2012.

While there are many benefits to converting from a traditional IRA to a Roth IRA the conversion will increase your adjusted gross income (AGI) which can have some unintended consequences. An increase in AGI may impact the taxability of your social security, phase-outs on itemized deductions, education and your tax bracket.

I will write more about Roth IRA conversions in a future blog.