Should you always withdraw from IRAs last?

Conventional wisdom says yes, but there are exceptions.    

Shouldn’t you delay IRA distributions for as long as you can? According to conventional retirement planning wisdom, you should structure your retirement withdrawals so that money comes out of your taxable accounts first, then your tax-deferred accounts, and then finally your tax-free accounts. Roughly speaking, that means withdrawing income from investment funds, CDs, money market accounts and bank accounts before taking a dime from your IRAs.

The wisdom behind this is easy to discern. By postponing withdrawals from a traditional IRA and/or Roth IRA for as long as possible, you give the assets in those tax-advantaged accounts even more time to grow. You have to take required minimum distributions from a traditional IRA after age 70½, of course; if you have a Roth IRA, RMD rules are inapplicable while you are alive.¹

Or should you disregard that approach? Under certain circumstances, it may be a good idea to tap your IRA(s) in the early stages of retirement. While it may seem unconventional, making IRA withdrawals in your 60s might potentially help you enhance your wealth in the long term.

How, exactly? If you start drawing down the assets in your traditional IRA before age 70½, your RMDs could eventually be smaller than they would be otherwise. Smaller RMDs mean less taxable income. Not only that, a smaller RMD might keep you in a lower income tax bracket; welcome relief if you have a large traditional IRA.

Can exemptions & deductions shelter the income? A study from Rider University in New Jersey sees merit in this unconventional strategy. In the big picture, the researchers at Rider feel it may help seniors to level out annoying fluctuations in adjusted gross income and taxable income over the long run.²

The key: sheltering some or all of the early IRA withdrawals with IRS standard deductions and personal exemptions. As an example, take a married couple in which both spouses are at least age 65. The spouses have done their homework and determined that their IRS deductions and exemptions will add up to (at least) $21,800 for 2012. If their taxable income before any IRA withdrawal would fall below $21,800, they could use “withdrawals from tax-deferred IRAs to create tax-free income,” according to Alan Sumutka, one of the researchers behind the Rider study.²

The Rider study compared 15 model scenarios. Each one used a hypothetical married couple (both 65-year-olds) retiring in 2013 with $2 million in investable assets, $80,000 in current living expenses and $30,000 arriving from Social Security. Within the mock $2 million portfolio, 70% of the assets were held in traditional IRAs, 20% in taxable accounts and the rest in Roth IRAs. The portfolio returned a steady 6% annually (again, these were model scenarios).²

What was the most tax-efficient model scenario in the bunch? It played out as follows: from age 65 to age 70, the couple drew down their traditional IRAs right to the limit of their combined deductions and exemptions. Then, they reached into their taxable accounts for the balance of the money needed to meet that $80,000 in expenses, incurring taxes of up to 15% on long-term gains. They didn’t tap their Roth IRAs.²

After age 70½, they altered their approach: they took required distributions from their traditional IRAs, withdrew money from taxable accounts until those were exhausted, and then they turned to Roth accounts with the remaining balances on the traditional IRAs representing the last of their retirement savings.²

After all that, the hypothetical couple still had $1.61 million in their portfolio at age 95. The conventional withdrawal strategy (taxable accounts first, then tax-deferred accounts, then tax-free accounts) left them with just $1.17 million at that age, and it also led to them spending 23 years in the 25% tax bracket.²

The Rider study found that this approach was ill-suited to very large portfolios (ones with assets above $8 million) and portfolios with roughly 50% in taxable assets. It was also a bad fit for couples with sizable taxable pensions.²

It is worthwhile to review your retirement assumptions. As the American vision of retirement has changed in the last generation, so have retirement planning precepts. The recession and the financial pressures facing the baby boomers have upended some of the conventional thinking. A talk with a retirement planner may lead you toward some new financial options and some good ideas worth exploring.

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.  This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions#3 [8/2/12]

2 - money.msn.com/retirement-plan/when-should-you-tap-your-iras [11/16/12]

Important IRS adjustments for 2013

IRAs & workplace retirement plans have higher contribution limits.

The IRS has set annual contribution limits for IRAs, 401(k)s and other retirement plans higher for 2013, and made other important adjustments for inflation as well. Here is an overview of some notable changes just announced. 

The 2013 IRA contribution limit: $5,500. This is a $500 increase from 2012, and it applies to both Roth and traditional IRAs. The IRA catch-up contribution limit for those 50 and older remains $1,000.^1,3 

The 2013 contribution limit for 401(k), 403(b), TSP & most 457 plans: $17,500. For the second year in a row, we see a $500 increase. The catch-up contribution limit on these plans for participants 50 and older remains $5,500.^1,2   

The phase-out range on Roth IRA contributions has increased. It starts $5,000 higher in 2013 than in 2012 for married couples filing jointly ($178,000-$188,000) and $2,000 higher for single filers and heads of household ($112,000-$127,000).³ 

The phase-out range on deductible contributions to traditional IRAs has risen. In 2013 it increases by $1,000 for single filers ($59,000-$69,000) and $3,000 for married couples filing jointly ($95,000-$115,000), provided the spouse making the contribution is covered by a workplace retirement plan. If not, the deduction is phased out if the couple’s income is between $178,000-$188,000 – up $5,000 from 2012.^1,3 

The annual gift tax exclusion rises to $14,000 next year. The IRS has kept this at $13,000 for several years; no more. In 2013, a taxpayer can gift up to $14,000 each to as many different people as he or she wishes, tax-free.⁴      

You may be able to deduct a greater portion of LTCI premiums. For 2013, the deductible portion of eligible long term care insurance premiums that may be included as medical expenses on Schedule A rises. The new limits are $360 for taxpayers 40 or less, $680 for taxpayers aged 41-50, $1,360 for taxpayers aged 51-60, $3,640 for taxpayers aged 61-70, and $4,550 for taxpayers age 71 or older.^4,5  

The kiddie tax exemption increases to $1,000. It was set at $950 in 2012.⁴  

The foreign earned income exclusion rises to $97,600. That is a $2,600 increase over 2012.⁴  

In addition to these 2013 IRS adjustments, Social Security recipients will see a 1.7% rise in their benefits next year.²    

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.  This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - benefitslink.com/src/irs/IR-2012-77.pdf [10/18/12]

2 – money.cnn.com/2012/10/18/pf/taxes/401k-contribution-limit/4021136.html [10/18/12]

3 – www.bankrate.com/financing/taxes/saving-more-for-retirement-in-2013/ [10/18/12]

4 – blogs.wsj.com/totalreturn/2012/10/18/irs-announces-2013-inflation-adjustments/ [10/18/12]

5 – blog.oregonlive.com/taxes/2012/01/are_long-term_care_premiums_de.html [1/17/12]

Major risks to family wealth

Will your accumulated assets be threatened by them?

All too often, family wealth fails to last. One generation builds a business – or even a fortune – and it is lost in ensuing decades. Why does it happen, again and again? 

It is because families fall prey to serious money blunders – old and new. Classic mistakes are made, and changing times aren’t recognized. 

Procrastination. This isn’t simply a matter of failing to plan, but also of failing to respond to acknowledged financial weaknesses.   

For example, let’s say we have a multimillionaire named Alan. Alan gets a call one afternoon from his bank, which considers him a VIP. It turns out that his six-figure savings account lacks a designated beneficiary. He thanks the caller, and says he will come in soon to take care of that – but he never does. His schedule is busy, and the detour is always inconvenient. 

While Alan knows about this financial flaw, knowledge is one thing and action is another. Sadly, procrastination wins out in the end and those assets end up subject to probate. Then his heirs find out about other lingering financial matters that should have been taken care of regarding his IRA, his real estate holdings, and more. 

Minimal or absent estate planning. Forbes notes that 55% of Americans lack wills, and every year multimillionaires die without them – not just rock stars and actors, but also small business owners and entrepreneurs. Others opt for a living trust and a pour-over will, or just a basic will created online.¹ 

This may not be enough. Anyone reliant on a will risks handing the destiny of their wealth over to a probate judge. The multimillionaire who has a child with special needs, a family history of Alzheimer’s or Parkinson’s, or a former spouse or estranged children may need more rigorous estate planning. The same is true if he or she wants to endow charities or give grandkids a nice start in life. Is this person a business owner? That factor alone calls for coordinated estate and succession planning. 

A finely crafted estate plan has the potential to perpetuate and enhance family wealth for decades, perhaps generations. Without it, heirs may have to deal with probate and a painful opportunity cost: the lost potential for tax-advantaged growth and compounding of those assets.  

The lack of a “family office”. Years ago, wealthy families sometimes chose to assign financial management to professionals. The family mansion boasted an office where those professionals worked closely with the family. While the traditional “family office” has disappeared, the concept is as relevant as ever. Today, wealth management firms consult families, provide reports and assist in decision-making in an ongoing relationship with personal and responsive service. This is a wise choice when your financial picture becomes too complex to address on your own. 

Technological flaws. Hackers can hijack email accounts and send phony messages to banks, brokerages and financial advisors greenlighting asset transfers. Social media can help you build your business, but it can also lend personal information to identity thieves who want access to digital and tangible assets. 

Sometimes a business or family installs a security system that proves problematic – so much so that it is turned off half the time. Unscrupulous people have ways of learning about that. Maybe they are only one or two degrees separated from you. 

No long-term strategy in place. When a family wants to sustain wealth for decades to come, heirs have to understand the how and why. All family members have to be on the same page, or at least read that page. If family communication about wealth tends to be more opaque than transparent, the mechanics and purpose of the strategy may never be adequately conveyed to heirs. 

No decision-making process. In the typical high net worth family, financial decision-making is vertical and top-down. Parents or grandparents may make a decision in private, and it may be years before heirs learn about it or fully understand it. When the heirs do become decision makers, it is usually upon the death of the elders – only now the heirs are in their forties or fifties, with current and former spouses and perhaps children of their own to make family wealth decisions more trying. 

Horizontal decision-making can help multiple generations understand and participate in the guidance of family wealth. Estate and succession planning professionals can help a family make these decisions with an awareness of different communication styles. In-depth conversations are essential; good estate planners recognize that silence does not necessarily mean agreement. 

You may plan to reduce these risks (and others) in collaboration with financial and legal professionals who focus on estate planning and wealth transfer issues. It is never too early to begin. 

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.  This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.forbes.com/sites/financialfinesse/2012/01/19/a-common-sense-approach-to-estate-planning/ [1/19/12]

What is a "reasonable" savings rate?

The answer to that question varies per person.

How much salary should you defer into a retirement plan? Ultimately, the answer is “however much your budget allows you to contribute”. The big-picture question, however, is whether you need to contribute more to your retirement savings in order to maintain your lifestyle after your career is done. 

An Aon Hewitt analysis (The Real Deal: 2012 Retirement Income Adequacy at Large Companies) finds that the average corporate employee makes a pre-tax contribution equal to 7.2% of his or her pay to an employer-sponsored retirement plan. Aon Hewett has found this level of contribution to be pretty consistent across the past few years. The Employee Benefit Research Institute puts the number at 7.5%.^1,2 

Hopefully, these employees are basing their contributions on math. Retirement savings calculators are everywhere online, and while often criticized for their simplicity, they can bring you a useful ballpark figure. If you try them out, you may decide to boost your retirement savings rate as a result. 

As an example, using CNNMoney’s What You Need to Save calculator, a 34-year-old with $20,000 in retirement savings who makes $78,000 annually would need to save $11,544 a year to hope to retire at age 65 at 80% of pre-retirement income. That $11,544 represents 14.8% of his or her yearly salary.³ 

Our hypothetical 34-year-old is quite affluent and has gotten a decent start on retirement savings compared to many of his peers – yet according to this calculation, a 7.2% retirement savings rate won’t cut it. Of course, the calculator is ignorant of such factors as home equity, inherited wealth, profit from business enterprises and so forth – but even so, many people are not saving enough for their retirement target. 

More to the point, many people are saving for retirement without a savings target.  

One established approach. If you are approaching your retirement years, you may be asking “How much do I need to save?” In the eyes of financial services professionals, the answer is linked to the question, “How much do you plan to withdraw?” 

In 1994, a financial advisor (and MIT grad) named Bill Bengen published a long and highly influential article in the Journal of Financial Planning advocating that retirees withdraw a little more than 4% of their retirement savings each year. Bengen’s suggestion was labeled the “4% rule”, and many financial services professionals paid attention to it when consulting their clients.⁴ 

First, they helped their clients project how much would be needed to pay for planned annual retirement costs beyond what Social Security and pension benefits could absorb. Next, they asked clients to decide on a retirement savings withdrawal rate (4% or something else) in light of historical data. Then, they helped the client set a retirement savings target, roughly expressed as annual planned retirement expenses divided by the annual planned withdrawal rate, i.e., 45,000/.04 = 1,125,000, with $1.125 million being the target retirement savings goal. Lastly, a retirement savings rate was determined for the remainder of a client’s working years to him or her reach that goal (though the financial target could certainly be attained by other means).⁵ 

There are even simpler approaches. Other financial services professionals simply suggest that you should estimate your planned retirement expenses and adopt a savings rate (taking historical data into account) that you feel comfortable with in order to reach them. After all, different people derive retirement savings from different sources beyond 401(k)s and IRAs, and make different asset allocation choices with their investments. 

So what is that savings rate, and how then might it be reasonably figured? Some retirement planners suggest a simple rule of 12 – take your current salary, multiply it by 12, and what you get represents the minimum savings you need for retirement. 

The simplest approach of all might work better than any other – just save as much as you can. The Center for Retirement Research at Boston College notes that the median U.S. income in the 2010 U.S. Census was $43,084. A 35-year-old with that income and $0 retirement savings would need to defer about 18% of his or her pay annually to have enough to retire at 80% of salary at age 68, with his or her portfolio returning a hypothetical 4% every year for 33 years.² 

CRR director Alicia Munnell claimed to U.S. News & World Report that staying on the job (and waiting longer to claim Social Security) can have a bigger impact on retirement saving than portfolio performance. “If people could work until they’re 70, they would have a much higher chance of having a secure retirement. Social Security is higher if you wait until age 70, and it gives your 401(k) assets a longer chance to grow, and it reduces the number of years you have to support yourself.”²  

Save now; save avidly; save consistently. As you do, remember that if you don’t yet have a huge IRA or 401(k), it isn’t the end of the world – retirement savings and retirement income can be generated from other sources, some less exposed to the volatility of the financial markets. 

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.  This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – ir.aon.com/phoenix.zhtml?c=105697&p=irol-newsArticle_print&ID=1704476&highlight= [6/8/12]

2 - money.usnews.com/money/personal-finance/articles/2012/02/01/how-to-calculate-your-retirement-number [2/1/12]

3 - money.cnn.com/2012/03/06/pf/expert/retirement_savings.moneymag/index.htm [3/6/12]

4 - www.forbes.com/sites/williampbarrett/2011/05/06/all-about-the-4-rule-for-retirement-spending/ [5/6/11]

5 - www.fpanet.org/journal/CurrentIssue/TableofContents/SafeSavingsRates/ [5/11]

When will interest rates rise?

What factors might influence the Fed in the near future?

Here’s a trivia question for you: when was the last time the Federal Reserve raised the benchmark U.S. interest rate?

The answer: June 29, 2006. On that day, the federal funds rate hit 5.25%. It has declined ever since, and it has stayed at 0%-0.25% since December 16, 2008. The Fed expects to hold interest rates at 0%-0.25% through late 2014, and some analysts think they will remain there into 2015.^1,2

All that noted ... when should the Fed make a move with rates, and what might happen when rates approach something like historical norms?

Right now, the Fed has little incentive to make any moves. Our economy generated only 75,000 new jobs per month in the second quarter of 2012 compared to 226,000 a month in the first quarter. Unemployment is currently at 8.2% and we have housing and business sectors that are far from healed. Hiking the federal funds rate in such an environment would seem nonsensical. In fact, the Fed’s rationale for its current policy is that interest rates need to stay at or near these levels until we reach full employment (a 5-6% jobless rate). Low interest rates help to encourage business investment and big-ticket purchases, though they are no boon to retirees.³

Does the economy warrant further easing? Maybe not. The federal government’s second estimate of Q2 GDP (+1.5%) exceeded the +1.2% consensus forecast of economists polled by Briefing.com. That might signal the Fed to hold off on QE3.⁴

When might rates rise? It might be a while. Right now, we have very mild inflation: as of June, the Consumer Price Index was up just 1.7% across the past 12 months, within the Fed’s target. Demand for capital isn’t what it was before the recession, encouraging lenders to stay competitive. The Fed, the Bank of Japan and the European Central Bank have all printed more money, which encourages low interest rates in the short term.⁵

Of course, bloating the money supply might stimulate inflation in the long run. Some see greater inflation on the horizon: a June Pimco analysis forecast inflation rates rising during the next 3-5 years, citing shifts in exchange rates and rising commodity prices as potential drivers. Earlier this year, Slate founder and Bloomberg View columnist Michael Kinsley warned of “a fierce storm of inflation sometime in the next few years” that will “wipe out a big chunk of the national debt, along with the debts of individual citizens, and the savings of others.”^6,7    

Few economists feel that America is risking hyperinflation. Most see tame consumer inflation for years ahead, and the Congressional Budget Office’s 2012 edition of its Budget and Economic Outlook forecasts the government’s PCE price index advancing no more than 2.0% annually through 2022. Yet policymakers have been stung by macroeconomic forces before ... and it may happen again.⁸

What will bond investors do if they climb? If interest rates kick up, what investor will want to be stuck with a 1-2% TIPS return? He or she may end up selling that Treasury at market value. Think back to the 1970s, when long-term bond investors lent the government their money at 5-6%, then saw inflation go from 2-3% to almost 13%. This is a historically extreme example, but worth noting. If the federal funds rate rises 3%, a longer-term Treasury might lose as much as a third of its market value as a consequence. On June 12, 2007, the yield on the 10-year note was at 5.26%.⁹ 

On the other hand, another argument is that Treasury yields could be low for years. More than a few economists see a well-worn path from eras of easy credit and poor lending practices to excessive debt, then asset bubbles, then sustained economic slumps with minimal yields on long-term bonds.

You don’t have to go back too far to find paybacks for years of high total public debt. Besides the credit crunch and downturn of 2007-09, you have the current examples of Greece, Italy, Spain, Ireland and France, the Latin American debt crisis of the early 1980s (with Mexico’s default), Japan’s 1989-90 crisis and our own Great Depression.

Why make money a little less cheap? Raising interest rates in the near future could actually accomplish some objectives. It could help to improve retiree income and retirement savings potential. It could encourage banks to loosen reins on their excess reserves. It could prompt those uncertain about homebuying to take the plunge.

Are the stock and commodities markets ready for an interest rate hike? Maybe not, but some notable voices – among them St. Louis Fed President James Bullard, Richmond Fed President Jeffrey Lacker and Charles Schwab – have publicly made the case for a rate hike before the jobless rate returns to normal levels. Should the economy heal at a faster pace, the federal funds rate might move north sooner than we think.^10,11

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.  This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1- www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html/ [7/30/12]

2 - online.wsj.com/article/BT-CO-20120730-709627.html [7/30/12]

3 - www.nj.com/news/index.ssf/2012/07/us_unemployment_rate_stays_at.html [7/6/12]

4 - briefing.com/investor/calendars/economic/2012/7/27 [7/30/12]

5 - www.reuters.com/article/2012/07/17/us-usa-economy-prices-idUSBRE86G0IQ20120717 [7/17/12]

6 - www.marketwatch.com/story/pimco-sees-rising-inflation-for-3-5-years-2011-06-27 [6/27/12]

7 - www.bloomberg.com/news/2012-01-20/about-rising-inflation-please-remain-worried-michael-kinsley.html [1/20/12]

8 - www.cbo.gov/sites/default/files/cbofiles/attachments/01-31-2012_Outlook.pdf [1/31/12]

9 - www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll [6/6/12]

10 - www.reuters.com/article/2012/02/06/us-usa-fed-bullard-idUSTRE8121QG20120206 [2/6/12]

11 - blogs.wsj.com/economics/2012/05/01/feds-lacker-higher-interest-rates-could-be-needed-even-if-jobless-rate-doesnt-fall/ [5/1/12]

Managing the Ups and Downs of Irregular Income

What do you do when you’re self-employed or commission-reliant?   

When your income stream is uneven, you must deal with some distinct financial issues. Besides cash flow, what do you do about your tax strategy? How should you try to save? If you are self-employed, what about health coverage?   

Budgeting. One significant financial detail in your life probably won’t fluctuate – the amount of money that you need to live on per month. A detailed monthly budget is essential. Maybe you need (or want) to pay for 17 expenses in your life per month. In some months, you may be able to easily pay for all 17. In other months, you may be able to pay for only 12. The key is to list them in order of priority, from the crucial to the near-frivolous. List every expense you can think of and rank them in order. Arranging automated bill paying may be useful if you are looking at several fixed monthly debts you will have for the long run. 

Managing taxes. Sans withholding, you must be disciplined. If you are self-employed and your income is predictable, you can estimate taxes and arrange quarterly payments to the IRS (take a look at Form 1040-ES, Estimated Tax for Individuals.) For the record, the IRS says you don’t have to make quarterly tax payments until you actually have the corresponding income.¹ 

Estimating tax becomes much tougher, however, when your income stream is inconsistent or if you have multiple income streams. If you underestimate your quarterly payments, you must pay interest. Schedule AI of Form 2210 (found in IRS Publication 505) can be a great help here – as complex as it appears, it is a solid way to document and calculate estimated quarterly payments when your income fluctuates. (If you are a self-employed fisherman or farmer, special rules apply.)^1,2  

Legions of freelancers neglect to set money aside for taxes. It might be wise to set up a savings account dedicated to that purpose, so you don’t have hassles come April. 

Managing savings. Saving when your income rises and falls is challenging, but not impossible. After you meet your expenses in a particular month, there may be little or nothing left – but you have to take a little bit of the little and save it, and commit yourself to saving much more in good months. 

One radical approach might help you ramp up your savings: austerity. Let’s say you decide not to spend a dime on golf for six months, or eating out. Voila – more money can potentially go into your savings, or into investing. 

Another, less radical approach: take $1,000 (or even $500, if the institution permits) and put it into a short-term CD. Or take $50 a month (or your bonus) and put into equity investments. Or put extra funds toward your mortgage. If your arrangement is salary + commissions, you could elect to live off your salary and invest or save your commissions if your salary permits that. 

You won’t have an employer-sponsored 401(k) or 403(b) plan at your disposal, but you can invest through traditional and Roth IRAs – and if the annual contribution limits seem low, you could look at creating a SEP, Solo(k) or Keogh plan for yourself. 

Arranging health insurance. It isn’t 2014 yet, so like many self-employed Americans you may be faced with paying three or four times the premiums for health insurance than you would as a “captive”. According to Gallup, a record 17.1% of self-employed individuals lacked health insurance in 2011 – not surprising.^3,4    

Still, there ways to sustain and/or arrange health coverage. If you are leaving a salaried position to go solo, COBRA can extend coverage for 18 months. About one-quarter of U.S. firms still offer some level of retiree health benefits, and roughly one-sixth extend group health benefits to part-time workers.³ 

If you have a pre-existing condition, some states have high-risk pool programs and all states have PCIPs (pre-existing condition insurance plans) for which you might be eligible (see statehealthfacts.org for more).³ 

You might also be able to get coverage through a family coverage option in your spouse’s plan, or via a professional or trade group you have joined. Hiring an employee might allow you to qualify for a small business group plan (talk with an insurance professional to determine your options).³  

Do you work for yourself and pay for your health insurance? In 2012, the IRS will let you deduct 100% of the cost of those health insurance premiums from your taxable income (the deduction is not subject to the 7.5% AGI limitation). You do this on the first page of Form 1040. Notably, the IRS defines sole proprietors, partners, members of LLCs and anyone with more than a 2% share in a S-Corp whose underlying personal service activity represents a material income-producing factor as “self-employed”.^3,5 

Kim Bolker may be reached at kbolker@sigmarep.com or 616-942-8600.    

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.irs.gov/businesses/small/article/0,,id=110413,00.html/ [2/24/12]

2 - www.irs.gov/pub/irs-pdf/f2210.pdf [2011]

3 - www.forbes.com/sites/kerryhannon/2012/01/04/the-best-ways-to-find-health-insurance-if-you-are-self-employed-in-2012/ [1/4/12]

4 - www.hrmorning.com/workers-covered-by-company-health-plans-hits-new-low/ [4/6/12]

5 - www.berrydunn.com/resources-detail/heres-a-tip-on-how-to-deduct-your-health-insurance-premiums [1/11/12]

The retirement reality check - little things to keep in mind after work

Decades ago, there was a popular book entitled What They Don’t Teach You at Harvard Business School. Perhaps someday, another book will appear to discuss certain aspects of the retirement experience that go unrecognized - the “fine print”, if you will. Here are some little things that can be frequently overlooked.     How will you save in retirement? More and more baby boomers are retiring with the hope that they can become centenarians. That may prove true thanks to healthcare advances and generally healthier lifestyles.

We all save for retirement; with our increasing longevity, we will also need to save in retirement for the (presumed) decades ahead. That means more than budgeting; it means investing with growth and tax efficiency in mind year after year. 

Could your cash flow be more important than your savings? While the #1 retirement fear is someday running out of money, your income stream may actually prove more important than your retirement nest egg. How great will the income stream be from your accumulated wealth?    

There’s a longstanding belief that retirees should withdraw about 4% of their savings annually. This “4% rule” became popular back in the 1990s, thanks to an influential article written by a financial advisor named Bill Bengen in the Journal of Financial Planning. While the “4% rule” has its followers, the respected economist William Sharpe (one of the minds behind Modern Portfolio Theory) dismissed it as simplistic and an open door to retirement income shortfalls in a widely cited 2009 essay in the Journal of Investment Management.^1,2  

Volatility is pronounced in today’s financial markets, and the relative calm we knew prior to the last recession may take years to return. Because of this volatility, it is hard to imagine sticking to a hard-and-fast withdrawal rate in retirement – your annual withdrawal percentage may need to vary due to life and market factors.   

What will you begin doing in retirement? In the classic retirement dream, every day feels like a Saturday. Your reward for decades of work is 24/7 freedom. But might all that freedom leave you bored? 

Impossible, you say? It happens. Some people retire with only a vague idea of “what’s next”. After a few months or years, they find themselves in the doldrums. Shouldn’t they be doing something with all that time on their hands? 

A goal-oriented retirement has its virtues. Purpose leads to objectives, objectives lead to plans, and plans can impart some structure and order to your days and weeks – and that can help cure retirement listlessness. 

Will your spouse want to live the way that you live? Many couples retire with shared goals, but they find that their ambitions and day-to-day routines differ. Over time, this dissonance can be aggravating. A conversation or two may help you iron out potential conflicts. While your spouse’s “picture” of retirement will not simply be a mental photocopy of your own, the variance in retirement visions may surprise you.    

When should you (and your spouse) claim Social Security benefits? “As soon as possible” may not be the wisest answer. An analysis is needed. Talk with the financial professional you trust and run the numbers. If you can wait and apply for Social Security strategically, you might realize as much as hundreds of thousands of dollars more in benefits over your lifetimes.

Kim Bolker can be reached at 616-942-8600 or kbolker@sigmarep.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.forbes.com/forbes/2011/0523/investing-retirement-bill-bengen-savings-spending-solution.html [5/23/11]

2 – articles.marketwatch.com/2010-05-19/finance/30729568_1_retirement-period-retiree-spending [5/19/10]

IRA dates & milestones to remember

IRAs come with complex rules and regulations. As these rules and regulations are occasionally forgotten or misinterpreted by IRA owners, here is a refresher.   Age 70½: Required Minimum Distributions (RMDs). Once you reach age 70½, you are required to make withdrawals from any traditional (“regular”) IRAs that you have established. (Original owners of Roth IRAs never have to take RMDs.)¹

**You must take your initial RMD from a traditional IRA by April 1 of the year following the year during which you turn 70½. You may not want to wait that long, however. 

**If you do wait that long and choose to take your first RMD in the year after you turn 70½ rather than the year during which you turn 70½, you have to take two RMDs in that year after you turn 70½ - one by April 1, and another by December 31. 

**In all succeeding years, you must take your annual RMD by December 31.¹    

Age 59½: option to make penalty-free IRA withdrawals. With few exceptions (see below), original owners of Roth and traditional IRAs must wait until age 59½ to take money out of their IRA without a 10% early withdrawal penalty. The IRS defines “age 59½” as the point at which you are midway through your 59th year.²

 Age 59½: option to donate IRA funds to charity. While the IRA charitable rollover is no more, IRA owners aged 59½ and older can still distribute IRA assets to a qualified charity. The deadline to do so for a particular tax year is December 31. One problem: your gift to charity will also boost your adjusted gross income (AGI). As with an RMD, this type of IRA distribution qualifies as taxable income. You can claim a charitable deduction as you report the distribution as income to the IRS.³

The timeline for 72(t) payments. These are the special periodic payments by which you can exempt yourself from the 10% early withdrawal penalty normally due on IRA withdrawals prior to age 59½. In the 72(t) option, equal payments (distributions) from your IRA are scheduled for five or more years or until you hit age 59½, whichever time frame is longer. The time frame reaches its limit when a) you are exactly 59 years and six months old or b) exactly five years have passed since the first of the periodic payments.²

The 12-month limit on IRA-to-IRA rollovers. There is no annual deadline for these rollovers, but there is a 12-month time limit affecting how many you can make. You can only make one IRA-to-IRA rollover per IRA account per year, whether the IRA is a traditional IRA or a Roth. So if you have three IRAs, you can make a total of three rollovers (one per IRA) in a 12-month period, be they IRA-to-IRA rollovers or Roth-to-Roth rollovers.⁴  

The 5-year rule on Roth IRA conversions. You may know about the five-year rule here – when you convert a traditional IRA to a Roth IRA, you have to wait until you either a) turn 59 1/2 or b) five years have passed before you can take a penalty-free distribution of a Roth IRA conversion. The asterisk comes in terms of measuring those five years. It isn’t five years from the day you complete the Roth conversion; the five-year measurement actually starts on January 1 of the year in which the funds are first deposited in the Roth IRA.²  

The 5-year rule for Roth IRA qualified distributions. Here we have a slightly different circumstance, and a slightly different five-year rule. You may know that once your first Roth IRA is five years old, you can start taking tax-free and penalty-free withdrawals from it under the following circumstances: a) you are age 59½ or older, b) you are disabled, or c) you are a first-time homebuyer using Roth IRA assets for that purpose.² 

With regard to qualified distributions, when is your Roth IRA judged to have turned five? It depends on which calendar year you earmarked your first Roth IRA contribution for – for example, you can make a 2012 Roth IRA contribution up until April 15, 2013. The five-year time frame starts on January 1 of the calendar year for which the contribution is designated. An interesting wrinkle: if you open additional Roth IRAs in the future, that initial five-year time frame also applies to them; there is no reset per new Roth IRA.²   

The deadline(s) for RMDs made by non-spouse beneficiaries. If you are a non-spouse beneficiary of someone else’s IRA, you usually have to start taking RMDs from that IRA by December 31 of the year after the death of that IRA owner. In other words, you have from 12-24 months to take that first RMD. One exception comes if an IRA accountholder dies after age 70½ without taking his or her initial RMD. If that is the case, then the non-spouse beneficiary of the IRA will end up having to take the initial RMD from that IRA by the end of the calendar year in which the deceased IRA owner has passed away.²    

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - www.irs.gov/retirement/article/0,,id=96989,00.html#2 [1/5/12]

2 – www.smartmoney.com/retirement/planning/iras-5-timing-rules-you-need-to-understand-1337271033972/ [3/5/12]

3 - counselprotect.com/making-charitable-ira-donations-in-2012/ [4/23/12]

4 - www.theslottreport.com/2012/05/one-ira-rollover-per-year-per-ira.html [5/4/12]

GETTING OFF ON THE RIGHT FOOT IN 2012

Every year brings some financial change, so here are some relevant changes relating to investment, tax and estate planning for 2012.  Retirement plans. 401(k), 403(b) and 457 plan annual contribution limits rise slightly to $17,000, and you can contribute an additional $5,500 to these accounts if you are 50 or older this year. IRA contribution levels are unchanged from 2011: the ceiling is $5,000, $6,000 if you will be 50 or older in 2012.¹ 

As you strive to contribute as much as you comfortably can to these accounts this year, you will probably notice some changes with the retirement plan at your workplace. In 2012, retirement plan sponsors (i.e., employers) will have to note all of the fees and expenses linked to the funds in the plan to plan participants. So if you have a 401(k) or 403(b), you may notice some differences in the disclosures on your statements and you will probably notice more information coming your way about fees. There is also a push in Washington, D.C. to have financial companies provide lifetime income illustrations on retirement plan account statements, projections of your expected monthly benefit at retirement age.²

 Income taxes. Wealthy Americans are set to face greater income tax burdens in 2013, so 2012 may be the last year to take advantage of certain factors. For example, the top tax bracket in 2013 is slated to be at 39.6% instead of the current 35%. This year, capital gains and dividends will be taxed at 15% or less for everyone, 0% for those in the 10% and 15% tax brackets. In 2013, the qualified capital gains tax rate is scheduled to rise to 20% and qualified dividends will be taxed as ordinary income. So taking a little more income in 2012 could be smart.³

 In 2013, the wealthiest Americans are supposed to be hit with new Medicare taxes: a new 3.8% levy on unearned income (such as capital gains, income from real estate, dividends and interest) and a new 0.9% tax or earned income. So next year, the truly wealthy could effectively face in the neighborhood of 45% federal taxes.³

 Additionally, the IRS is planning to limit itemized deductions for upper-income taxpayers in 2013. A phase-out will also apply for the personal exemption deduction.³ 

Estate & gift taxes. At the end of 2012, some very nice estate tax breaks could sunset. Barring action by Congress, 2013 could see a 20% leap in the federal estate tax rate from 35% to 55%. The individual estate tax exclusion (currently $5.12 million) is scheduled to be reduced to $1 million.³ 

As we have unified gift and estate tax rates, those numbers and percentages also apply to gift taxes. That is, from 2012 to 2013 top federal gift tax rate is set to go from 35% to 55% and the lifetime gift tax exemption amount is scheduled to fall $4,120,000 per individual to $1 million. The annual gift tax exemption is $13,000 per recipient in 2012; there is an exemption limit for qualifying educational and medical payments. If you want to gift relatives or friends, you may want to avoid procrastinating for another very good reason: when you make such a gift early in a year, the recipient will gain both the principal and any appreciation tied to the gifted asset in that year.^3,4

 Speaking of gifts, we said goodbye to charitable IRA gifts in 2011. The IRA charitable rollover, a boon to non-profits and a handy tax deduction option for taxpayers older than age 70½, was not extended into 2012, not even temporarily as a sweetener to the payroll tax extension bill. There is hope it will be back. Two bills have been introduced in Congress with that goal, one sponsored by Sen. Olympia Snowe (R-ME) and Sen. Charles Schumer (D-NY) and another by Rep. Wally Herger (R-CA) and Rep. Earl Blumenauer (D-OR). The proposed legislation would let IRA owners start making charitable IRA gifts at age 59½ and remove the $100,000 limit on the rollovers.⁵ 

The limits on the generation-skipping transfer tax could change, too: assuming the Bush-era tax cuts do sunset, the GSTT rate would jump from 35% this year to 55% in 2013, with the GSTT exemption falling from $5,120,000 per person this year to roughly $1.3 million per person next year.³

 So given all these changes, it might be wise to meet with the financial professional you know and trust early in 2012 as you strive to start the year off on the right foot. You have until April 17 to file your federal return, but you can plan now. 

Kim Bolker may be reached at 616-942-8600 or kbolker@sigmarep.com This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - www.irs.gov/retirement/article/0,,id=96461,00.html [10/20/11]

2 - www.marketwatch.com/story/retirement-plan-changes-coming-in-2012-2011-12-29 [12/29/11]       

3 - www.sbnonline.com/2012/01/how-to-approach-tax-and-estate-planning-opportunities-for-2012/?full=1 [1/3/12]

4 - advisorone.com/2012/01/06/10-tax-tips-for-advisors-in-2012 [1/6/12]

5 - www.northjersey.com/news/business/business_opinion/136217658_Payroll_tax_cut_benefits_charities.html [12/25/11]

CFP® - Let's make a plan

CFP® - Let's make a plan Click on the link to see a short video about what I do