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  Gains on money withdrawn from a taxable account are taxed at capital gains rates where withdrawals from a traditional retirement account are taxed at regular income tax rates and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.

Retirement Tips for All Ages

Jane Young, CFP, EA

Jane Young, CFP, EA

It’s always a challenge to balance between current obligations and saving for retirement.  A good start toward meeting your retirement goals is to get your financial house in order.  Create a spending plan that helps you live below your means.  Maintain an emergency fund of at least four months of expenses and pay off high interest consumer debt.    Establish a habit of saving at least 10% of your income.  If you are getting a late start, you may need to save 15-20% of your income.

Develop a retirement plan to determine how much you need to save on a monthly basis and how large a nest egg you will need to comfortably retire.  There are many on-line calculators available to help you run retirement numbers.  However, they are only as accurate as the data that you input and the assumptions that the model uses.  You may want to hire a fee-only financial planner to run some figures for you.

Work toward maximizing contributions to your employer’s retirement plan; take advantage of any employer match that may be provided.  Once you have contributed up to the level of your employer’s match, consider contributing to a Roth IRA.  A painless way to steadily increase your contribution percentage is to increase your contribution whenever you get a raise.  If you are self-employed, or your employer doesn’t offer a retirement plan, contribute to a SEP, Simple or an IRA.  If you are maxed out, increase your contributions as the maximum contribution limits increase or you become eligible for a catch-up contribution at age 50.

Invest your retirement funds in a diversified portfolio made up of a combination of stock and bond funds that invest in companies of different sizes, in different industries and in different geographies.  Generally, your retirement savings is long term money, so avoid emotional reactions to make sudden changes based on short term market fluctuations.  Develop an investment plan that meets your timeframe and investment risk tolerance and stick to it. 

Don’t use your retirement funds as a savings account for other financial objectives.  Unless you are in a dire emergency, don’t take distributions or borrow against your retirement funds.  When you change jobs, don’t cash out your retirement plans.  Roll your funds over to an IRA or a new employer’s plan.    Avoid sacrificing your retirement savings to fund college education for your children.

As you near retirement age, there are several ways to stretch your retirement dollars.  Retirement doesn’t have to be all or nothing.  Consider a gradual step down where you work a few days a week or on a project basis.   Try to time the payoff of your mortgage with your date of retirement.  Consider downsizing to a smaller home or moving to a more economical area.  Establish a retirement spending plan that provides funds for things you value and helps you avoid frivolous spending on things that don’t really matter.

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.

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.

Mutual Funds May be Your Best Option

 

 

 

 

 

 

Jane M. Young

Generally the typical investor is better off investing in stock mutual funds than in individual stocks. A mutual fund is an investment vehicle where money from a large number of investors is pooled together and invested by a professional manager or management team.  Mutual fund managers invest this pool of money in accordance with a predefined set of goals and guidelines.

One of the primary benefits of investing in stock mutual funds is the ability to diversify across a large number of different stocks.  With mutual funds, you don’t need a fortune to invest in a broad spectrum of stocks issued by large and small companies from a variety of different industries and geographies.  Diversification with mutual funds reduces risk by providing a buffer against extreme swings in the prices of individual stocks.   You are less likely to lose a lot of money if an individual stock plummets. Unfortunately, you are also less likely to experience a huge gain if an individual stock skyrockets.

Another benefit of stock mutual funds over individual stocks is that less time and knowledge is required to create and monitor a portfolio.  Most individual investors do not have the time, expertise, or resources to select and monitor individual stocks.  Mutual funds hire hundreds of analysts to research and monitor companies, industries and market trends.   It is very difficult for an individual to achieve this level of knowledge and understanding across a broad spectrum of companies.  Mutual fund managers have the resources to easily move in and out of companies and industries as investment factors change.

Most individual investors appreciate the convenience of selecting and monitoring a diversified portfolio of mutual funds over the arduous task of selecting a large number of individual stocks.   Stock mutual funds are a good option for your serious money.  However, if you really want to play the market and invest in individual stocks, use money that you can afford to lose.

For diehard stock investors, there are some advantages to investing in individual stocks.  Many stock mutual funds charge an annual management fee of between .50% and 1% (.25% for index funds).  With individual stocks, there is a cost to buy and sell the stock but there is no annual management fee associated with holding stock.

Another advantage of individual stocks is greater control over when capital gains are recognized within a non- retirement account.  When you own an individual stock, capital gains are not recognized until the stock is sold.   In a high income year, you can delay selling your stock, and recognizing the gain, to a year when it would be more tax efficient.   On the other hand, when you invest in a stock mutual fund you have no control over capital gains on stock sold within the fund.  Capital gains must be paid on sales within the mutual fund, before you actually sell the fund.  Mutual funds are not taxable entities, therefore all gains flow through to the end investor.

“What is Modern Retirement and Will You be Ready?” Join us on September 7th for our next Pinnacle Fireside Chat.

Please mark your calendars for our next Pinnacle Financial “Fireside Chat”, to be held on Wednesday, September 7th from 7:30am – 9:00am.

Jane will discuss the characteristics of modern retirement and how to plan for it. She will explore different approaches to retirement and some of the factors to be considered. She will also explain the various plans available to help you save for retirement.

The Fireside Chat sessions are informational only (no sales!) and interactive — a great opportunity to learn new things and ask questions in a relaxed environment. These sessions are open to your family and friends, so please feel free to pass this email along to anyone that you think might be interested in attending.

Please call Judy (719-260-9800) if you would like to attend this session on September 7th, as space is limited.

We hope to see you on September 7th! Coffee and donuts will be served!

10 Tips for Financial Success

8a8_9449-x2-x100

Jane M. Young CFP, EA

1. Set Goals –
Review your personal values, develop a personal strategic plan, establish specific goals for the next three years and identify action steps for the coming year.

2. Understand Your Current Situation –
Review your actual expenses over the last year and develop a budget or a cash flow plan for the next 12 months. Compare your expenses and your income to better understand your cash flow situation. Are you’re spending habits aligned with your goals? Can or should you be saving more?

3. Have sufficient Liquidity –
Maintain an emergency fund equal to at least four months of expenses in a fully liquid account. Additionally, I recommend having a secondary emergency fund equal to another three months of expenses in semi-liquid investments. Increase your liquidity if you have above average volatility in your life due to job instability, rental properties or other risk factors.

4. Always save at least 10% of your income –
Regardless of whether you are saving to fund your emergency fund or retirement you should always pay yourself first by saving at least 10% of your income. Most of us need to be saving closer to 15% to meet our retirement needs.

5. Pay-off Credit Cards and Consumer Debt –
Learn the difference between bad debt (credit cards) and good debt (fixed-rate home mortgage). Avoid the bad debt and take advantage of the leveraging power of good debt.

6. Take Advantage of the Leveraging Power of Owning Your Home –
Once you have established an emergency fund and have paid off your bad debt start saving for a down payment to purchase your own home.

7. Fully Fund Your Retirement Accounts be a tax smart investor –
Participate in tax advantaged retirement programs for which you qualify. Maximize your Roth IRA and 401k contribution take full advantage of any company match on your 401k. If you are self-employed consider a SEP or Simple plan. Always select investment vehicles that provide the most beneficial tax solution while meeting your investment objectives.

8. Be an Investor, Not a Trader. Don’t time the market and don’t let emotions drive your investment decisions –
Investing in the stock market is a long term endeavor, forecasting the short-term movement of the stock market is fruitless. Avoid emotional reactions to headlines and short-term events. Don’t overreact to sensationalistic journalists or chase the latest investment trends. You can establish a defensive position by maintaining a well diversified portfolio custom tailored to your unique situation. Slow and steady wins the race!
“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”  -Peter Lynch, author and former mutual fund manager with Fidelity Investments

9. Don’t Invest in anything you don’t understand and be aware of high fees and penalties –
If it sounds too good to be true and you just can’t get your head around it, don’t invest in it! If you want to invest in complicated products, read the fine print. Be aware of commissions, fees and surrender charges. Be especially wary of products with a contingent deferred sales charge. There is no free lunch, if you are being promised above market returns there is probably a catch. Keep in mind that contracts are written to protect the insurance or investment company not the investor.

10. Diversify, Diversify, Diversify – rebalance annually –
It is impossible to predict fluctuations in the market or to select the next great stock. However, you can hedge your bets by maintaining a well diversified portfolio. Establish an asset allocation that is aligned with your goals, investment timeframe and risk tolerance. You should have a good mix of fixed income and equity based investments. Your equity investments should be spread over a wide variety of large, small, domestic and international companies and industries. Re-balance your portfolio on an annual basis to stay diversified and weed out any underperforming investments.

Year End Financial Planning Tips

8a8_9449-x2-x100

Jane M. Young, CFP, EA

Roth Conversion –
The income limitations on converting a traditional IRA to a Roth IRA have been eliminated and taxes due on a Roth conversion, processed in 2010, can be paid in 2011 and 2012.

Required Minimum Distribution –
A required minimum distribution on your IRA and 401k/403b is required every year once you attain 70 ½.

Maximize your retirement contributions –
Be sure to maximize your retirement plan contributions for 2010. Below are the maximum contributions for your 401k and IRA contributions for 2010. You have until April 15th to contribute to your IRA.

401k – $16,500 plus a $5,500 catch-up provision if you are over 50
IRA – $5,000 plus a $1,000 catch-up provision if you are over 50 (income limits apply)
Simple – $11,500 plus a $2,500 catch-up provision if you are over 50

Adjust retirement contributions for 2011 –
There is no change to 401k and IRA contribution limits between 2010 and 2011. However, if you have turned 50 you can make a catch-up contribution. A change in your income may also impact your ability to contribute to an IRA.

Harvest Tax Losses –
If you have been thinking about selling some poor performing stocks or mutual funds, do so before the end of the year to take advantage of tax losses in 2010. However, if capital gains rates increase in 2011 it may be more advantageous to offset gains in 2011.

Charity Contributions –
Go through your closets and garage before the end of the year and donate any unwanted items to get a nice deduction on your tax return. When you drop off your items be sure to get a receipt. When making a charitable contribution, consider donating appreciated stock rather than cash.

Take advantage of the annual gift allowance –
In 2010 you can gift up to $13,000 per person without paying gift tax or impacting your estate tax exemption.

Make 529 Contributions –
Contributions made to the Colorado 529 plan are deductible on your state tax return. Money can be contributed into the Colorado 529 plan for tuition that is payable in 2011.

Review your expenses and draft a new budget –
Everyone should review their expenses and revise their budget at least once a year. December is a good time of year to review historical spending habits and make adjustments to your budget for the coming year. It is difficult to establish saving goals without a good understanding of what is available after your non-discretionary expenses.

Set financial goals for 2011 –
I recommend setting new personal and financial goals at the beginning of every year. Think of it as personal strategic planning. Set some long term goals for 3-5 years then identify some action plans for the next twelve months.

Adjust tax withholdings for 2011 –
Adjust your tax withholdings or estimated taxes for anticipated changes in income and deductions in 2011.

Organize 2010 tax documents –
Year end is a good time to create a folder for all of the 2010 tax documents you will be receiving and to start organizing your expenses and receipts. You will have everything thing in one place when it comes time to complete your tax return.

Make adjustments for changes in family circumstances – birth, death, marriage, dependents, and retirement –
Major changes in your life circumstances may result in numerous changes in your financial situation. For example a birth, marriage, or death will probably necessitate a change in your will and beneficiary designations. It also may impact your income tax withholdings. The birth of a child may result in significant tax benefits. With the birth of a child you also may want to consider starting a college fund and a change in life or disability insurance.

Spend FSA accounts –
With many companies, flexible savings accounts cannot be carried over into the next year so be sure to spend the money in your FSA account this year, before you lose it.

Consider the impact of possible changes in the tax law –
If the Bush tax cuts are not extended, there is a possibility that the capital gains rate will increase from 15% to 20%, that tax rates will increase, and that some tax deductions will disappear. These possibilities need to be considered in making your year end financial decisions.

A Money Moment with Jane – A Few Financial Planning Suggestions for the Fall

8a8_9449-x2-x1001

 

By Jane M. Young, CFP, EA

 

  • Required Minimum Distributions were not required for 2009.  However, if you are at least 70½ you will be required to take a distribution in 2010.

 

  • If you are planning to convert some of your regular IRA to a Roth IRA, do so in 2010 to spread the taxes over 2011 and 2112.

 

  • Have you maximized your Roth IRA and 401k contribution?  The 2010 contribution limit for the Roth is $5,000 plus a $1,000 catch-up provision if you are 50 or older.  The 2010 contribution limit for 401k plans is $16,500 plus a $5,500 catch-up provision if you are 50 or older.

 

  • This is a good time to do some tax planning to make sure your withholdings or estimates are adequate to cover the taxes you will owe in April. 

 

  • Do you have any underperforming stocks or mutual funds that should be sold to take advantage of a tax loss in 2010?

 

  • Now is the time to go through your home for items to be donated to charity.  These can provide a nice deduction on your 2010 tax return.

 

  • Start planning for Christmas now and save money by working to a plan. 

 

Your Money Bus is Coming to Colorado Springs

Your Money Bus is coming to Colorado Springs.

                               Get free professional advice, no strings attached

It’s never too late to secure your financial future.

Re: Free Non-profit Financial Education Event – Please share with friends, family and business associates.

All of us have family; friends and colleagues who are struggling to save money, eliminate debt and find jobs. Please share with them the opportunity to meet for a free one-on-one with local independent financial advisors when the national Your Money Bus Tour rolls into Colorado Springs on July 8th and 9th. Pinnacle Financial Concepts, Inc. is coordinating the Colorado Springs stop of this non-profit tour, visiting more that 25 cities. We will be volunteering at this event along with several other fee-only financial planning firms in town. The Your Money Bus Tour is sponsored by The National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation, TD AMERITRADE, Kiplinger’s Personal Finance magazine and FiLife.com.

The Your Money Bus Tour will stop in Colorado Springs at the Penrose Library (downtown) on July 8th from 12:00 – 7:00 and at UCCS, Lot 1 on July 9th from 12:00 – 5:00. At each stop, consumers can sit down with locally-based volunteer financial advisors to ask pressing financial questions. All Money Bus visitors will receive a free financial education kit, including a Kiplinger magazine and a budgetary workbook.

Forty percent of American families spend more than they earn and the average American with a credit file has more than $16,000 in debt, not including mortgages. We encourage people to stop byYour Money Bus to learn how to better save, eliminate debt and develop personal financial sustainability habits that will get them through and beyond these tough times.

The NAPFA Consumer Education Foundation is a 501c (3) organization committed to educating Americans on personal finance. Consumers need easy to understand information without any bias, sales, or conflicts of interest. All volunteer financial advisors are fee-only fiduciaries; nothing is being sold or promoted. This is strictly educational and free information for the public. The public is welcome to just stop by or make an appointment ahead of time.

For more information, visit www.YourMoneyBus.com and for up-to-date schedule information contact Krist Allnutt,krista.allnutt@perceptiononline.com.

Warmest Regards,

Jane M. Young, CFP, EA

What You Should Be Doing Now!

Jane M. Young CFP, EA

1. Start by re-evaluating your monthly expenses to determine how much money you need for necessary expenses. Then determine how much you have remaining after you cover these expenses.

2. During difficult economic times, like the present, most people should maintain an emergency fund of at least 6 months of expenses. If you have an exceptionally secure job you may be able to drop it down to 3 months. Always be sure to sure to maintain an adequate emergency fund.

3. Once your emergency fund is established pay off any high interest credit cards.

4. Put aside money for special one time expenses such as a new roof, a new car or a down payment on a house. If you don’t own your own home give some serious consideration to saving up to buy one. Decide how much you want to save on a monthly basis and start a systematic savings plan.

5. Now you can start investing! Determine how much you can afford to invest on a monthly basis. Most people should start by investing in their company retirement plan up to the level that the company will match. If you can afford to invest beyond the level of your company match, invest up to the maximum allowed in a Roth IRA. This should be done on a monthly basis to take advantage of dollar cost averaging – investing the same amount every month. The 2009 contribution limit for a Roth IRA is $5,000 if you are under 50 and $6000 if you are over 50. There is an income limit on your eligibility to contribute to a Roth IRA based on your adjusted gross income. For 2009, your eligibility to contribute begins to phase-out at $166,000, if you are married filing jointly and $105,000 if you are single.

If you still have money to invest after maximizing your Roth IRA, resume contributing to your company retirement plan up to the maximum amount. The maximum contribution limit for a 401k in 2009 is $16,500 if you are under 50 and $22,000 if you are over 50.

Invest your money in a diversified set of mutual funds. Establish an asset allocation consistent with your timeframe and risk tolerance. For most individuals this will vary from 50% to 80% in stock mutual funds, with the balance in fixed income investments. The market is still priced very low and it is a great time to buy stock mutual funds. However, the market will be very volatile over the next 6 – 9 months. Dollar cost averaging into your retirement plans will help you take advantage of this volatility.

This is very general advice and everyone’s situation is unique. Treat this advice as a general guideline and adapt it to your own situation or consult a Certified Financial Planner for guidance.

Roth IRAs – Part II – The Major Differences Between a Roth IRA and a Traditional IRA

Jane M. Young, CFP, EA

The primary difference between a Traditional IRA and a Roth IRA is when you pay income tax. A traditional IRA and a traditional retirement plan are funded with pre-tax dollars and you pay taxes on your withdrawals. A Roth IRA is funded with after tax dollars and you don’t pay taxes on your withdrawals. The decision to buy a Roth or a Traditional IRA is largely based on your current and future tax rates, your investment timeframe and your investment goals. The Roth IRA is usually the more advantageous of the two options but it depends on your individual situation.

Traditional IRA: (tax me later)

• Funded with pre-tax dollars therefore it provides a current tax deduction
• Earnings are tax deferred
• Distributions taxed at regular income tax rates, penalty if withdrawn before 59 1/2
• Required minimum distributions must be taken beginning at age 70 1/2
• Income limit on contributions begins at, if participant is in a retirement plan, $89,000 MFJ and $55,000 if single.
• Annual contribution limit is $5000 if under 50 and $6000 if over 50
• Many IRAs are created as a result of a rollover from a company retirement plan such as a 401k – very similar in tax structure.

Roth IRA: (tax me now)

• Funded with after tax dollars, does not provide a current tax deduction
• Earnings tax exempt (after five years or 59 ½)
• Contributions can be withdrawn penalty and tax free
• Earnings can be withdrawn tax free after five years or 59 1/2
• No required minimum distribution
• Income limit on contribution begins at $166,000 MFJ and $105,000 if single
• Annual contribution limit is $5000 if under 50 and $6000 if over 50

Part III of this series will address the pros and cons of converting a Roth IRA to a Traditional IRA.

Start Planning Now! Income Limits on Roth IRA Conversions to be Lifted in 2010 – Part 1

Jane M. Young, CFP, EA

Beginning in January 2010 the income limit of $100,000 AGI (adjusted gross income) on converting a traditional IRA to a Roth IRA will be lifted. This is a huge opportunity for many who have been unable to contribute to a Roth or convert to a Roth due to income restrictions. Normally, when one converts a traditional IRA to a Roth IRA the amount converted is added to gross income in the year of conversion. However, for conversions made in 2010 the government is allowing you to spread out the payment of taxes over the 2011 and 2012 tax years.

Why should you care about this now, prior to 2010? There are several things you can do to prepare for this opportunity. This is a great time to fund your traditional IRA, non-deductible traditional IRA or your 401k plan, if you are planning to retire or change companies soon, in anticipation of converting it to a Roth in 2010. You will need cash to pay the taxes associated with converting to a Roth IRA, so you should be incorporating this additional need for liquidity into your financial planning today.

This is the first in a series of postings on Roth IRAs and Roth IRA conversions.

Ten Things You Can Do Now To Save Taxes in 2009

Jane M. Young, CFP, EA

Whew!! The 2008 tax season is finally over and we can relax. Well not exactly; this is a great time to prepare for 2009 taxes. A little effort now can help you save in 2009 and will make the process a whole lot smoother. Below are some ideas to help save taxes in 2009.

1. Create a folder for your 2009 tax documents and receipts. Create a file right now, and keep it somewhere convenient, to keep track of all those expenses and donations as they occur.

2. Start going through your old clothes and junk in the garage and donate it to a charity of your choice, if you itemize this can provide a sizable deduction. Remember, keep a log of everything you donate and get a receipt!

3. If you anticipate a substantial change in your 2009 income or if you owed a lot in 2008, now is the time to adjust your withholdings or your estimated payments. There is nothing worse than owing an unexpected $5000 at the end of the year.

4. Maximize your contribution to tax deferred retirement plans. Limits on the 401k, Simple and SEP have all increased this year. If you turned 50 this year you can now make catch-up contributions to your retirement plans including your IRA (assuming you are otherwise qualified).

5. Do you anticipate a decrease in income this year? You may be eligible to contribute to a Roth IRA or for a conversion from a Roth IRA to a traditional IRA. The recent drop in the stock market has made conversion to a Roth IRA very appealing. You can pay income taxes on your account now, while the balance is low. Then during retirement, when the market has recovered, you can take tax free withdrawals. In 2009 your AGI must be less than $100,000 to be eligible for a conversion.

6. Will you be paying college expenses sometime soon? If you live in Colorado you can invest the money you will be spending on college expenses in a 529 plan and deduct the contribution from your state income tax. If you have a couple kids in college this can be significant. Don’t worry; you can invest the money in something very safe within the 529 if you are worried about market volatility.

7. If you are a first time homeowner you may be eligible for a 10% credit up to $8000 if you buy a home by December 1, 2009. This is really more like an interest free loan because it must be paid back over 15 years. Additionally, it is subject to income limits. The credit begins to phase-out for joint filers with modified adjusted gross income of $150,000 or more.

8. Are you thinking about buying a new car? You may be able to deduct the sales and local tax if you buy the car this year. This is subject to an income phase out if your adjusted gross income exceeds $125,000. I know they take all the good stuff away from middle class wage earners.

9. If you own a business or work as a consultant, be sure to keep accurate and complete records. Don’t forget to track your mileage, the current deduction for business mileage is $.55 per mile. This is frequently overlooked or understated due to poor record keeping. Additionally, if you work in your home and have a dedicated work area you may want to claim a home office deduction.

10. Take advantage of the drop in the stock market to do some tax harvesting. Tax harvesting is taking advantage of a market decline to sell some of the dogs in your investment portfolio while taking a capital loss or reduced capital gain. Prior to the market drop, the sale of a particular security may have been prohibitive due to capital gains. Now you can take advantage of the drop in the market to clean up your portfolio or do some re-balancing of your asset allocation.

Finding Peace of Mind in Turbulent Times

 Jane M. Young, CFP, EA

 

                                         

1. Don’t lose sight of your investment timeframe.  You’ve heard it time and time again but stock is a long term investment.  So, don’t let the current drop in the stock market cause you to make drastic changes to money you won’t need for 10, 15 or 20 years.   If you don’t need your money for 5 to 10 years stop worrying about it, the market will recover.   If you are in or approaching retirement, you should have put aside the money you will need in the short term.   Use this for your immediate needs.   Down the road in 5 or 10 years when you need to tap into your stock mutual funds they should be back to reasonable levels.   Don’t lose sleep about the level of your investments 10 years from now.

 

2. Every financial crisis feels like the end of the world while we are in it.  If you were to look at the headlines during any one of the past financial downturns you couldn’t differentiate them from today.   Every time we go through a financial crisis whether it’s the savings and loan crisis in the 80’s or the dot.com crisis the message is the same.  This time it’s different, things will never be the same, the sky is falling and so forth.   Everything isn’t rosy, but we will recover from this.  We need to avoid making decisions based on emotion and fear.  The media is in the business to sell papers or increase viewers.  They are going to sensationalize our economic situation.  Good news does not provide high ratings.    Take a deep breath, hug your kids, walk your dog, live your life and stay the course with your portfolio – this too shall pass.

 

3. Don’t pass up a once in a lifetime opportunity to invest in stock at exceptionally low values.  Sure it has been exceptionally painful to watch the stock portion of our portfolios drop by 40% but what a great opportunity we have.   If you have a long time horizon now is a great time to invest in the stock market.  I encourage you to invest a set amount of money into a diversified set of stock mutual funds every month (dollar cost averaging).   Investing in your company 401k or a Roth IRA is a great way to make systematic investments.   Now is the time to invest, not to sit on the sidelines.  It is always darkest before the dawn.  Remember, the stock market is counterintuitive – you feel like selling when you should be buying and you feel like buying when you should be selling.  Therefore, right now we should be buying!!!   When you feel it is safe to buy again it will be too late.

 

4.  Choose your battles and focus on what you can control.  You can’t control the fluctuations in the stock market or where the market is headed.  However, you can better prepare yourself for a weak economy.  Maybe now is the time to cut your personal spending and build up your emergency fund.  Evaluate how to reduce your expenses and pay off debt. Make sure your skills are current and relevant.  Build and strengthen your network now before you really need it.  If you are approaching retirement, and the market has set you back, evaluate alternatives and contingency plans.   Take advantage of opportunities available to you – buy stock mutual funds at low values,  re-finance your home at a low interest rate, convert your traditional IRA to a Roth and sell those especially weak stocks to harvest tax losses.