Strategies for Smart Retirement Planning

You can't control the markets, but there are some factors you can influence to help keep your portfolio on track.

A study conducted by the Employee Benefit Research Institute estimated that the average American worker will face a retirement savings shortfall of more than $47,000.¹ How can you avoid a similar fate?

Some factors that influence your retirement savings results, such as the types of investments available to you through your plan and the performance of the financial markets, can't always be controlled. But there are some factors you can influence that can help keep your portfolio on track.

Step 1: Stay invested.

It's not easy to see your account value decrease after a decline in the stock market, particularly after a steep, sudden drop of 10% or more. But one of the dangers of cashing out is missing a potential market rebound. Trying to "time" the market is a strategy even the most-seasoned financial professionals have difficulty mastering. It can also lead investors into the trap of "chasing gains"; that is, moving your money from one investment that's lagging into another one that's currently achieving better performance.

Step 2: Regularly monitor your investment mix.

One of the benefits of a diversified portfolio is balance. If one type of investment is experiencing losses, another type may be earning gains. Over time, these gains and losses may cause your asset allocation to skew away from your target mix.² Or your tolerance for risk may evolve over time. Lifestyle changes can also necessitate a readjustment to your allocation. That's why it's important to monitor your mix and make adjustments when necessary.

Step 3: Increase your savings rate.

Perhaps the most important way to help fund your future is to sock away as much as possible. Finding the extra money to invest can be tough -- you've got plenty of expenses to worry about today without the added anxiety of worrying about tomorrow. But every dollar you can spare can make a difference. Whether retirement is just around the corner or 30 to 40 years away, regularly setting money aside -- particularly in a tax-deferred vehicle such as a 401(k) or tax-exempt account like a Roth IRA -- can often be the smartest move you can make.

2011 Retirement Plan Account Limits
Maximum contribution limit for 401(k), 403(b), and 457 plan participants	$16,500
Maximum additional "catch-up" contributions for 401(k), 403(b), and 457 plan participants age 50 and older	$5,500
Maximum traditional IRA contribution	$5,000
Maximum additional "catch-up" contributions for traditional IRA account holders age 50 and older	$1,000
Maximum contribution limit for SIMPLE retirement accounts	$11,500
Maximum contribution limit for Roth IRAs3	$5,000

Source/Disclaimer

¹Source: Employee Benefit Research Institute, EBRI Notes, October 2010.

²Diversification and asset allocation do not ensure a profit or protect against a loss in a declining market.

³Roth IRA contributions may be made only by single taxpayers with modified adjusted gross incomes (MAGIs) of less than $122,000 and married joint filers with MAGIs of under $179,000. Phase-out limits for partial contributions also apply. If your MAGI is close to or over these limits, talk to your financial or tax professional before contributing to a Roth IRA.

February 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by  James P. Ellman, ChFC and Barry Mendelson, CFP , a local members of FPA.

Roth Conversion of After-Tax Money

Natalie Choate answers reader questions about Roth conversion rules as they relate to inherited IRAs and profit-sharing plans.

Question: "Rose" has $20,000 in her traditional IRA, of which $16,000 is aftertax money (representing her nondeductible annual contributions over the

years). She also owns, as beneficiary, an inherited IRA (left to her by her grandmother), from which she is taking annual minimum required distributions

over her life expectancy. There is no aftertax money in the inherited IRA, which is now worth $100,000. Rose would like to convert her $20,000 traditional

IRA to a Roth, if only the $4,000 pretax portion of that account would be taxable. But someone told her "all IRAs are aggregated." If she has to consider her own IRA and the inherited IRA as if they were one aggregated single account, then only a small portion of any Roth conversion would be considered a taxfree conversion of aftertax money. Must the inherited IRA be aggregated with her own for this purpose?

Answer: No. "Your own" IRA(s) must all be aggregated (treated as one) for purposes of determining how much of any distribution (or Roth conversion)

from any one of them is taxable. In other words, the aftertax portion of your own IRAs is deemed to be spread ratably over all of your IRAs--it is not

"attached" to the particular IRA account that you actually made the nondeductible contributions to. However, inherited IRAs are NOT aggregated with your own IRA(s) for this purpose.

This rule applies for minimum distribution purposes as well as for purposes of determining what portion of any distribution is taxable. Rose must take

minimum required distributions attributable to the inherited IRA from the inherited IRA. Distributions from her own IRA would not count toward the

distribution requirement applicable to the inherited IRA. And IRAs inherited from one decedent are not aggregated with IRAs inherited from any other

decedent!

Question: "Wally" is retiring soon. His company's profit-sharing plan maintains two accounts for him, the "pre-1987 money" account and the "post-1986

money" account. The pre-1987 account contains aftertax money as well as pretax money. The post-1986 account is all pre-tax money. Can he convert the

pre-tax money, by itself, to a Roth IRA?

Answer: Generally, a retirement plan cannot distribute the aftertax money in an employee's account separately from the pretax money. That's because

retirement plan distributions are generally governed by § 72 of the Code. Since 1986, § 72 has applied a general rule that all plan distributions are deemed

to contain proportionate amounts of the pre- and aftertax money in the account being distributed. Sometimes called the "cream in the coffee rule," this

means that, if the total account contains 25% aftertax money, only 25% of each distribution will be deemed to be a tax-free distribution of aftertax money.

Distributions will generally be 75% taxable and 25% tax-free.

However, § 72 does have some exceptions to this "cream" rule. One exception is in the nature of a grandfather rule: "In the case of a plan which on May 5,

1986, permitted withdrawal of any employee contributions before separation from service, subparagraph (A) shall apply only to the extent that amounts

received before the annuity starting date (when increased by amounts previously received under the contract after December 31, 1986) exceed the

investment in the contract as of December 31, 1986." Translated into English, this exception allows a "grandfathered" employee to withdraw his pre-1987

aftertax contributions tax-free, separately from all post-1986 balances and separately from the earnings on the pre-1987 contributions. If Wally's plan has

properly kept track of these balances and is willing to distribute the pre-1987 aftertax contributions to him ahead of time, he should indeed be able to

convert this aftertax money separately, tax-free, to a Roth IRA.

Needless to say there are not many people who can take advantage of this, because few of today's retirees have aftertax contribution accounts from 25

years ago still in their plans. Also, there is little or no IRS guidance on this "grandfather rule," so plans may or may not be willing to implement it.

The views expressed are the author's.

Rollover IRAs Offer a Wide Range of Benefits

IRA assets can generally be divided among multiple beneficiaries in an estate plan.

As compared with employer-sponsored retirement accounts, a rollover IRA can provide you with the broadest range of investment choices and the greatest flexibility for distribution planning. Also, a rollover IRA can typically be operated with fewer restrictions. This brief overview highlights some of the key benefits of a rollover IRA compared with an employer-sponsored plan.

• More control: As the IRA account owner, you make the key decisions that affect management and administrative costs, overall level of service, investment direction, and asset allocation. You can develop the precise mixture of investments that best reflects your own personal risk tolerance, investment philosophy, and financial goals. You can create IRAs that access the investment expertise of any available fund complex, and can hire and fire your investment managers by buying or selling their funds. You also control account administration through your choice of IRA custodians.
• More flexibility: IRAs can be more useful in estate planning than employer-sponsored plans. IRA assets can generally be divided among multiple beneficiaries in an estate plan. Each of those beneficiaries can make use of planning structures such as the Stretch IRA concept to maintain tax-advantaged investment management during their lifetimes. Beneficiary distributions from employer-sponsored plans, in contrast, are generally taken in lump sums as cash payments. Also, except in states with explicit community property laws, IRA account holders have sole control over their beneficiary designations.

Efficient Rollovers Require Careful Planning
One common goal of planning for a lump-sum distribution is averting unnecessary tax withholding. Under federal tax rules, any lump-sum distribution that is not transferred directly from one retirement account to another is subject to a special withholding of 20%. This withholding will apply as long as the employer's check is made out to you -- even if you plan to place equivalent cash in an IRA immediately. To avert the withholding, you must first create your rollover IRA, and then request that your employer transfer your assets directly to the custodian of that IRA.

Keep in mind that the 20% withholding is not your ultimate tax liability. If you spend the lump-sum distribution rather than reinvest it in another tax-qualified retirement account, you'll have to declare the full value of the lump sum as income and pay the full tax at filing time. In addition, the IRS generally imposes a 10% penalty tax on withdrawals taken before age 59 1/2.

Also, if you plan to roll over the entire sum, but have the check made out to you rather than your new IRA custodian, your employer will be required to withhold the 20%. In that event, you can get the 20% refunded if you complete the rollover within 60 days. You must deposit the full amount of your distribution in your new IRA, making up the withheld 20% out of other resources. When you file your tax return for the year, you can then include a request for refund of the lump-sum withholding.

If you have after-tax contributions in your employer plan, you may opt to withdraw them without penalty when you roll over your assets. However, if you wish to leave those funds in your retirement account in order to continue tax deferral, you can include them in your rollover. When you begin regular distributions from your IRA, a prorated portion will be deemed nontaxable to reimburse you for the after-tax contributions.

Potential Downsides of IRA Rollovers

While there are many advantages to consolidated IRA rollovers, there are some potential drawbacks to keep in mind. Assets greater than $1 million in an IRA may be taken to satisfy your debts in certain personal bankruptcy scenarios. Assets in an employer-sponsored plan cannot be readily taken in many circumstances. Also, you must begin taking distributions from an IRA by April 1 of the year after you reach 70 1/2 whether or not you continue working, but employer-sponsored plans do not require distributions if you continue working past that age.

Remember, the laws governing retirement assets and taxation are complex. In addition, there are many exceptions and limitations that may apply to your situation. Therefore, you should obtain qualified professional advice before taking any action.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

 This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by James P Ellman, ChFC and Barry Mendelson, CFP, local members of FPA.

Three Step Retirement Planning Strategy for Couples

It's important for you and your partner to evaluate all of your portfolios at the same time to see whether the overall investment mix is well diversified.

Communication is one of the foundations of a successful relationship. It also can help you and your partner structure a solid retirement planning strategy.

Planning for two can be more complex than planning for one. It's not unusual for two individuals to have very different plans and financial resources -- for example, one may have more money set aside or may be eligible to collect retirement benefits significantly earlier than the other.

If you're part of a dual-income couple, be sure to review the following considerations.

Step One: Talk About the Future

If you and your partner expect to retire at different times or need to negotiate priorities regarding how you'll spend time and money during retirement, it's important to start talking about the future now.

First, make sure your planned retirement dates are realistic. Next, estimate your combined retirement income needs as well as the amount of money you're each likely to have accumulated by retirement. If it looks like you may be facing a shortfall, try to contribute as much as possible to your employer-sponsored retirement plan while you still can.

Step Two: Make Sure You Are Properly Diversified

Within a single portfolio, diversification involves spreading your money among different types of investment options so that any losses in one area may be offset by potential gains elsewhere.1 With two or more retirement accounts, the same theory applies. It's important for you and your partner to evaluate all of your portfolios at the same time to see whether the overall investment mix is well diversified. For example, if you and your spouse have similar investment portfolios, your overall level of risk could be higher than you realize, since a decline in one portfolio would likely be accompanied by a similar decline in the other. If that's the case, you might want to rebalance your asset allocation by shifting money that's already in your accounts to different asset classes (stock funds, bond funds, or cash investments) or by directing future contributions to the under-represented asset classes.¹

Step Three: Get on the Same Page

When laying the groundwork for a financial future that includes your significant other, ask yourselves the following questions:

•                      Do you understand each other's "financial personality"? It's never too late to have an honest discussion about financial habits and objectives. Try to look past your differences and focus on shared goals.

•                      Have you calculated how much money you are likely to need to fund a financially secure retirement? Do both of you think this amount is realistic? It's tough to work together toward a shared goal if the two of you have different ideas about what exactly that goal is.

•                      Have you consulted a financial professional? Making a date to discuss your entire range of goals may put you in a stronger position financially to survive unforeseen circumstances.

Regardless of your particular situation, a little advance planning can make the transition to retirement much more pleasant for both you and your better half.

¹Diversification and asset allocation do not ensure a profit or protect against a loss in a declining market.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

May 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by James P Ellman, ChFC and Barry Mendelson, CFP,  local members of the FPA.

Four Tips for Tax Smart Investing

At times, you may use losses in your investment portfolio to help offset realized gains.

Savvy investors have long realized that what their investments earn after taxes is what really counts. After factoring in federal income and capital gains taxes, the alternative minimum tax (AMT), and potential state and local taxes, your investment returns in any given year may be reduced by 40% or more. Luckily, there are tools and tactics to help you manage taxes and your investments. Here are four tips to help you become a more tax-savvy investor.

Tip #1: Invest in Tax-Deferred and Tax-Free Accounts

Tax-deferred investments include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans and traditional individual retirement accounts (IRAs). In some cases, contributions to these accounts may be made on a pre-tax basis or may be tax deductible. More important, investment earnings compound tax-deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket.

Contributions to Roth IRAs and Roth 401(k) savings plans are not deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you are over age 59 1/2, have held the account for at least five years, and meet the requirements for a qualified distribution.

Tip #2: Manage Investments for Tax Efficiency

Tax-managed investment accounts are managed in ways that can help reduce their taxable distributions. Your investment professional can employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends, and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.

Tip #3: Put Losses to Work

At times, you may be able to use losses in your investment portfolio to help offset realized gains. It's a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized losses in a given tax year must first be used to offset realized capital gains. If you have "leftover" losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years.

Tip #4: Keep Good Records

Keep records of purchases, sales, distributions, and dividend reinvestments so that you can properly calculate the basis of shares you own and choose the most preferential tax treatment for shares you sell.

Keeping an eye on how taxes can affect your investments is one of the easiest ways to help enhance your returns over time. For more information about the tax aspects of investing, consult your tax professional.

The information in this article is not intended to be tax advice and should not be treated as such. You should consult with your tax advisor to discuss your personal situation before making any decisions.

© 2011 McGraw-Hill Financial Communications. All rights reserved.

March 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by James P Ellman ChFC and Barry Mendelson CFP local members of the FPA.

Financial Planning Strategies for Individuals & Families

Please see this presentation - updated through the end of the 1st Quarter, that Barry Mendelson, CFP(R) gave in February to the East Bay chapter of the American Society of Women Accountants.

Financial Planning Strategies for Individuals & Families

View more presentations from Barry Mendelson.

Financial Issues for Long-Distance Caregivers

Financial Issues for Long-Distance Caregivers

As older friends and relatives increasingly need our help, it’s not always possible for us to move back to personally oversee their care. The same goes for younger loved ones who face sudden illness or injury that robs them of their ability to care for themselves.

How can we best be in charge when we can’t be onsite?

It takes a plan, one best made well ahead of the time when there’s a real need. In reality, caregiving issues should be part of any person’s long-term financial plan if there’s even the remotest chance that a spouse, partner, parent, child aunt or uncle, sibling or friend may end up needing our care.

However, statistics suggest that possibility may not be all that remote, particularly as Americans live longer. In a 2009 report, The National Alliance for Caregivers, in collaboration with AARP and the MetLife Foundation, reported that currently 29 percent of the U.S. adult population, or 65.7 million people, are caregivers, including 31 percent of all households. Those numbers are expected to grow due largely to the aging Baby Boomer demographic.

Where to start? A good first stop is a qualified financial planner who can look at your overall financial picture and the financial picture for your loved one. Then you can determine how much help you can offer from a money perspective, either in direct care, travel expenses or expenses for third parties offering direct assistance onsite.  It’s important to get one-to-one advice on these matters because a caregiving plan needs to fit you and the person you’re trying to help.  Here are some questions that can help you focus your thinking: 

Do you know your loved one’s care preferences? Before you even get to money issues, understand what your loved one wants. The best-case scenario is to have a conversation with that person long before they need care, but even in a transitional situation, addressing their care preferences and overall dignity is paramount. You need to make sure your loved one understands your situation too, particularly if your work, your family situation or other issues prevent you from caring for them personally. Before making a plan, understand each other. A family meeting might be a good idea so everyone understands these needs and wants.

Are their legal documents in place? Does this parent, relative or friend have a will and necessary health directives in place? Health directives name a single individual to manage all key health decisions if a patient cannot make them; a will depending on their assets and lifestyle situation – if they have kids to raise or a business to run, for example – check to see what detailed legal instructions they have in place to manage their finances or run their business if they are incapacitated. And if those plans have not been made, they need to be made immediately with the help of financial planning, tax and estate experts to fit those documents to your loved one’s needs. An individual who is ill or disabled needs to designate people whom they trust to handle health and personal finance decisions. But if they have not planned for the future of their business, that is a third and very detailed step that needs to be addressed in collaboration with other family members as well as key co-workers or executives.

Do you know their financial situation? It’s rarely easy to talk about money even in the closest relationships. But once care preferences are known, then it’s time to discuss the loved one’s own financial preparations because one of the biggest misperceptions about long-term care is that the government provides financial support for nursing or home-based care. (Outside of medical care for those who qualify under Medicare or Medicaid, it doesn’t.) A qualified financial planner can be an important mediator in this very detailed discussion, asking both sides critical questions to illuminate what financial resources are available and which ones might be needed. And keep in mind that the questions go well beyond what’s necessary to provide care – loved ones may need to address omnibus issues like real estate and estate planning but even minute lifestyle issues like making sure monthly bills get paid. Expect a very wide-ranging and detailed conversation that could take weeks, not hours.

Who should handle what? Bigger families and groups can share responsibilities, and that can make the caregiving job easier. But if you are soloing as the financial and health power of attorney, it’s important to devise ways to do remote tasks efficiently and bring in help when necessary so you can supervise effectively from afar:

•          Consider a geriatric care manager: The National Association of Professional Geriatric Care Managers [www.caremanager.org] is an organization of on-the-ground caregivers and caregiving coordinators with skills that include nursing, gerontology, social work and psychology. For caregivers with limited time to address their loved one’s day-to-day issues but who have the resources to pay for help, it might be wise to consult with experts after checking their references and qualifications.

•          Take full advantage of the Internet: Older relatives tend to trust traditional means of paying bills, but automatic bill pay and other online financial tools provide an extraordinary benefit for caregivers or relatives charged with managing someone else’s finances. By gathering all bills that need to be paid and programming in their payment dates, there’s little or no risk that any regular bills will be paid late. Automatic bill payment should be one of the first decisions made if an elderly relative establishes a joint checking account with a caregiver or whoever holds their financial power of attorney. Also, if a relative wants to continue a regular savings or investment plan while they are incapacitated, those payments can be made as well. Most important – once those automatic transactions are set up, all the security codes and passwords must be kept in a safe place for both to access.

•          Set up a home maintenance schedule: If the relative is hoping to return to the home or if it must be sold at a later date to pay bills or to settle the estate, it must be maintained to assure its value at the time it needs to be reoccupied or sold.

•          Develop a paperwork system: the sheer amount of paperwork associated with caring for a sick or disabled person can shake the most organized individual. A trained financial expert can help you set up a system for collecting and sorting all the medical and care-based paperwork that will accumulate during your loved one’s care. This is a particular priority for those who are managing this situation remotely. If the house is unoccupied, it’s also important that there is a way to keep mail secure to avoid identity theft – buy a shredder for all mailed materials that don’t need to be filed. Also ask your loved one for permission to pull their credit reports annually so you can confirm all accounts are current and they haven’t been targeted by identity thieves.

What if I need to move? Never say never – this is the reality of a caregiver’s life. Particularly as loved ones get to the end stage of their lives or suffer emergencies and other setbacks, supervising caregivers need to plan for anything. The need to relocate, even temporarily, should always stay in the back of your mind, and the best time to coordinate with family and employers is always before the need arises.

February 2011 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by  Jim Ellman, ChFC and Barry Mendelson, CFP,  local members of FPA.

Jim Ellman, ChFC & Barry Mendelson, CFP®

Jim@JustPlans-Etc.com            Barry@JustPlans-Etc.com

1399 Ygnacio Valley Road #24, Walnut Creek, CA  94598

925.988.0330  http://www.justplans-etc.com/

Only 28% Understand

Only 28% Understand                                                                                      Dec 2010

The U.S. Treasury and the Fed are both running out of rope. And now, the Fed is going to have to run its operations under far greater scrutiny from Congress. That’s because Ron Paul has been given control over the House subcommittee charged with overseeing the Fed.

This is all sliding to an inevitable conclusion. If interest rates start to ratchet up on our many debts, the government and the Fed have no bullets remaining with which to fight.

The Financial Industry Regulatory Authority “FINRA” recently asked the following question as part of a random survey of 28,000 folks around the country.

            If interest rates rise, what will happen to bond prices?

              2% preferred not to say

  5% said they would not change

10% said there was no relationship between bond prices and interest rates

18% said they will rise

            28% said they would fall          

37% said they did not know

 

Out of the entire sample, only 28% actually understand that rising interest rates are poison to bonds prices. Anyone holding them takes a direct hit to principal, effectively wiping out any yields they might have hoped to earn.

Replay of October 25 webcast: Current Market Conditions & Investor Behavior

Replay of October 25 webcast: Current Market Conditions & Investor Behavior

Barry Mendelson, CFP® provides a timely perspective on the issues, risks, and opportunities facing investors today.  Specific topics include: 

• Review of the current market conditions  
• Historical perspective & investor behavior  
• Lessons for the future