Dec
31

Now May Be a Good Time to Convert Your IRA

By Ellen Clawans

Taking into account the likely tax increases for 2013, it makes sense to accelerate income into the 2012 tax year as a way to minimize your tax liability over 2012, 2013, and possibly beyond.  One aspect of income acceleration not being discussed as much as it should is the conversion of your IRA to a Roth IRA. 

To review, here are a few differences between the two types of IRAs:

  • Taxes on Roth IRA contributions are paid up front, so if you convert now before tax rates rise, you can pay taxes on the converted amount in 2012 while rates are lower. 
  • Assets from a Roth IRA are not taxed upon withdrawal.   And that applies to the earnings as well.
  • Distributions are not required at age 70 ½ with a Roth IRA, but they are with traditional IRAs.  Converting is a way to reduce future required distributions from your traditional IRA which are taxable.
  • The Roth IRA allows you to accumulate earnings tax-free with no time limit and you can bequeath the Roth IRA to your beneficiaries income-tax free.

If converting from a regular IRA to a Roth is something you’ve been contemplating for a while, making this move now may make sense.  However, don’t let the tax tail wag the dog.  In other words, initiate the conversion only if it works with your established estate plan and goals.  Basically, if you can’t afford to pay the tax now — which is required if you convert to a Roth — you shouldn’t do it.   Talk it over with your financial advisor.  A Roth makes particular sense for younger people because,  generally, they have more time for the Roth to grow, which helps make up for the cost of the conversion.

Your financial advisor can help you decide whether converting your IRA now fits into your overall financial plan, especially in light of the expected increase in tax rates.

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Categories : 401 (k), Roth IRA
Aug
27

Timing of Retirement Withdrawals Key to Your Retirement Portfolio’s Health

By Janet L. Critchley

Much has been written on “safe withdrawal rates” (see our blog earlier this year on the issue), but in addition to having enough money for retirement and figuring out how much is safe to withdraw per year, there is another concept, called the sequence of returns — which some call “the luck factor” — to figure into the equation.

Experiencing a market downturn when you first begin to withdraw your retirement funds can have a dramatic negative effect over time on the value of your portfolio.

It’s important to note that, in the absence of deposits or withdrawals, the sequence of returns over any period of time has no influence on the ending portfolio value at the end of that period.  It’s only when you introduce deposits and withdrawals — and, in retirement, most of us will be making net withdrawals — that the sequence matters. Read More→

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Categories : 401 (k), Financial Planning, Tax Strategies
Dec
05

Lump Sum or Annuity? Deciding on Your Pension Election Will Take Some Thought

By David M. Hill

Retirees are often faced with a big decision when filling out their retirement paperwork – Do I elect the lump sum or the annuity?  The answer may not be so simple.  There are clear benefits to both options.

For some people, the annuity makes sense because they need a steady stream of income.  They may be high spenders, and the annuity will force them to spend within their means.  Some retirees just want the peace of mind that their check will be in the mail each month no matter what is going on in the stock market.  Why is this important?  If you roll over your entire pension into an IRA, you are subjecting these funds to market volatility.  For wealthier retirees, this is probably fine.  They either do not mind some volatility, or have enough money to withstand the market gyrations.

The lump sum option has its advantages, too.  Read More→

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Categories : 401 (k), Financial Planning, Investment Management
Oct
04

Retirement Asset Distribution Options

By David M. Hill

Distributions of retirement assets must be planned carefully to ensure that you will have sufficient funds to cover expenses and to get the most favorable tax treatment. You should become familiar with the distribution options from all of your plans. The payout option you select is a very important decision and it is generally irrevocable. Here we assume that the distributions are being made after attaining age 59 ½ , as although there are exceptions, distributions prior to age 59 ½ are generally subject to IRS penalties.

At retirement, your company’s plan(s) will usually offer several ways to start collecting your benefits.  

With defined benefit plans and defined contribution plans (including plans such as 401(k) or 403(b) — in which case this is always your money), your distribution options may include: Read More→

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Categories : 401 (k), Financial Planning
Jul
13

Pay off Student Loans or Invest in Your Employer’s Retirement Plan?

By David M. Hill

Many students today are graduating with excessive amounts of student loan debt. When they are employed they often have the option of investing in a retirement plan. Given a limited amount of funds, is it better to contribute to a retirement plan or pay down the student loans? Read More→

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Categories : 401 (k), College Planning, Financial Planning, Investment Management
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