GET YOUR SAVINGS IN GEAR
This live discussion with members of the National Association of Personal Financial Advisors (NAPFA) for Kiplinger's Jump-Start Your Retirement Plan Days has ended. You can view the transcript of the discussion below.
Another live discussion with NAPFA planners was held on Friday, January 30, 2009.
To view that discussion, click here.
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Rachel Sheedy:
Today's live discussion has come to a close. You'll get another chance to ask questions during the second 2009 Jump-Start Your Retirement Plan Day. Planners will be online and available by phone at 888-919-2345 from 9 a.m. to 6 p.m. eastern time on January 30.
Phil:
Is money that is in a 401k protected from a personal bankruptcy? Is money from a pension plan that I'm not drawing on yet also protected? I just got laid off and have no savings. I am age 55 but have 200k in a company held 401k that must be distributed in 90 days.
Eve Kaplan:
Hi Phil, retirement accounts such as 401k plans are protected. I believe a pension plan (a future asset) also is protected. Please consult with a professional (planner or CPA) about how to best handle your 401k assets that you say must be distributed. If there's any way to protect some of it (if you don't need all of it now) and retain the tax-deferred character, that would be great. Otherwise you'll be paying ordinary-income tax on all the gains in your 401k account.
Betty:
My daughter (20 yrs. old; 21 in April) still has a UTMA acct. with myself as the original custodian. What is the best way to convert this acct. to a 529 plan? She plans to attend graduate school. Also, we have a second daughter who will be attending college in the fall of 2009 and a son who will be attending college in 4 1/2 years. Additionally, last year the Utah 529 plan was listed in the top 10 529 plans for 2008; would you recommend the Utah 529 plan, too?Thank You.
Eve Kaplan:
Hi Betty, if you shift UTMA money into a 529 plan it still retains its UTMA characteristics. There really is no benefit; you need to stick with the UTMA structure. I like the Utah 529 plan and the Nebraska 529 plan (both direct sold). You can compare costs of 529 plans by going to www.savingforcollege.com.
Rick Anderson:
I have two children who will start college this coming fall. I had about $16,000 in each 529 plan, but investments reduced them to about $11,000 each. I can pay for the first year with other resources. Do you suggest leaving the money alone and see if the market will bounce back? Thanks!
Eve Kaplan:
Hi Rick, yes, I expect the market may be higher 1 year from now than current levels. Do pay with other resources -- hopefully we'll see a bounceback. How will you fund college once your 529 plans are depleted? If you have additional cash, you may want to add more to them now.
Karen:
Do you recommend long-term-care insurance?
Eve Kaplan:
Hi Karen, I suggest clients begin looking at long-term-care insurance in their 50s. If you have a net worth of under 250K or over $3 mln, you may not need it. If you're somewhere in-between, I always recommend long-term-care insurance -- especially for women. Women outlive men and often end up in nursing homes for extended periods (something to look forward to!!). I recommend these riders: 5% compound inflation, 100% home health care and "shared rider" with your husband if you're married.
OEB:
Hi, I am 45 years old. I set some money aside, on top of my 401K, which I invested in several mutual funds with the purpose of a long range growth investment. So far I have lost about 50% of the money. My investment portfolio was: DODFX, DODGX, FLVCX, JORNX, MXXIX, PCRDX.
My questions:
1. Should I leave my investment as is and just wait?
2. Should I liquidate all the money and accept the 50% loss?
3. Should I liquidate and reinvest the money in a different portfolio?
4. Should I liquidate and reinvest in time based fund?
Thanks
Eve Kaplan: Hi OEB, you have a mix of large cap international, large cap domestic, mid-caps, etc. I assume (I'm trying to understand your e-mail) that these are in a taxable account in addition to your 401k. Markets will come back, but we may be waiting a while. Your fund holdings are quality holdings but are you able to periodically rebalance and did you initially have a good idea of what percentage you wanted in each fund? If the answer to my previous question is "no," I recommend you consider an automatic asset allocation (time based), which adjusts automatically as you approach retirement. Vanguard LifeStrategy series has some very inexpensive (0.25% per year underlying expense ratio) funds you can choose from. You would be able to write off 3K per year of a long-term capital loss (after matching losses with any gains) if you sell some of your current holdings at a loss.
Mark E. Timer:
About 10 years ago, my wife had a choice between a defined-benefit pension plan with the state or an alternative retirement plan that we manage. Either way, she contributes 9% and the state contributes 14%. She chose the alternative retirement plan (and we have performed better than the pension). The Social Security Administration sends her statements estimating her social security benefit from a previous private sector employer. The private sector employer will also give her a pension at age 65 of about $7,500/ year. According to Social Security publications, her social security benefit can be reduced if she gets a defined pension benefit, but it does not address her alternative retirement plan. What is the effect on her social security benefit? Can we eliminate any negative impact?
Eve Kaplan:
Hi Mark, I don't have enough information about your alternative retirement plan to say what the tax consequences are. Since the state is involved with a matching element, I recommend you contact the state plan administrators and ask them. You may need to consult a CPA if they can't help you.
Venita Furtado:
My rollover 401k has lost a lot of money due to the stock market decline. Is this a good time to convert it to a Roth IRA?
Eve Kaplan:
Hi Venita, here's one Web site that may help you determine if you should convert an IRA to a Roth IRA:
https://personal.vanguard.com/us/RothConversion. If your 401k has shriveled due to the market, it could be a good time to convert to a Roth IRA (assuming it makes sense, given your tax bracket, etc.) because the market will rebound at some point and you never will be liable for capital gains with a Roth IRA. If the market rebounds and you sell some proceeds, all the gains will be taxed at ordinary-income rates when you tap this account after age 59 1/2.
don hodgeman:
To supplement our ss and pension in retirement would it be feasable to take the monthly or quarterly distributions from the bond portion of a 50/50 portfolio in lieu of reinvesting? Thank you for your time.
Eve Kaplan:
Hi Don, if you're tapping an investment, I recommend taking equal portions of your equity (50%) and bond (50%) positions so your exposure doesn't become overly exposed to bonds or equities. I assume you only would tap this investment if you need the money. Reinvesting is best if you don't need the money immediately.
Keith Green:
Which bond fund is best now for solo 401k? Corp or government fund or high yield CD? Thanks
Eve Kaplan:
Vanguard has some good short-term and intermediate term bond funds. I prefer to keep things in the short end right now, even low yields are very low. Studies show the risk of holding bonds with 5+ years duration doesn't pay off in terms of yield. Another possibility (which you didn't mention) is a municipal bond fund. It depends upon your tax bracket, but these can end up yielding more than an ordinary taxable bond fund.
Nathan:
My wife and I are in our early 20s. My wife just received a windfall of about 60k that we were not expecting. We plan to pay off some debt, put a large chunk in savings, and are willing to put in about 20k to some type of investment. Any advice on which direction to take? We are both contributing to our 401k's.
Eve Kaplan:
Hi Nathan, are you and your wife contributing the maximum in your 401k plans already? If not (because you couldn't afford it), I would contribute the maximum and tap some of the 60k to cover any cash flow shortfall. If that's not an issue, I would seek the advice of an hourly Fee-Only planner to determine your risk tolerance and the types of goals you need to attain. I'm not trying to dodge your question but I don't know enough about you to give you a more detailed answer. Perhaps you're missing life insurance and could be funding straight term life policies with some of these proceeds.
ABell:
Hi there. Between my wife and I, we have college loan payments to five companies, with minimum payments totaling over six hundred dollars a month. This makes it hard to save any money. What type of professional do I go to, to get help managing this and my other finances?
Eve Kaplan:
I recommend you reach out to an hourly Fee-Only financial planner (e.g. www.garrettplanningnetwork.com) so you can get objective advice. Perhaps you need a full financial plan or perhaps you only need a few questions about loan payments answered. Either way, an hourly planner is your best bet and well worth the investment on your side.
Natasha:
Should I raise my health-insurance deductible since I rarely see a doctor and end up just paying my premiums and that's it? I was also considering adding dental insurance with the same company since I use a dentist more often. Also, I have a 403B from a previous employer invested in conservative Vanguard funds. What do you advise I do with it?
Eve Kaplan:
Hi Natasha, you can raise the deductible if you need to save money. Can you change back to a lower deductible if you believe your health status may change?
Vanguard is a good company. You can either keep your 403b invested as is or -- if you prefer more options at Vanguard or elsewhere -- roll your 403b over to an IRA.
Linda:
Silly question that shows my total ignorance during a bull market . . . needing to catch up with the bears! I invest in my employer's 401K program; 20% of pretax, company matches $1.60 per $1 of the first 2.5%. I divide the investment up into 1/3 equal parts in the following funds (last 1/4 return in parentheses): Agressive (-15%), General (-11%), Conservative (+.3%). When I drop the money into the 401K ($200 in pre-tax and $100 in catch-up), am I "automatically" losing $0.15 on the dollar in the agressive? I can't move any funds around until the end of March; trying to understand if I'm actually putting "negative" dollars in? Thank you.
Eve Kaplan:
Hi Linda, I hope I understand your question correctly. The aggressive -15% probably indicates the return (this past quarter?) of that position. You're not losing 15% automatically by going into that type of holding. Of the 3, aggressive (which likely has the highest equities exposure) fell the most to date so you're actually doing better to "buy low and sell higher" with that category. Conservative eked out a slight 0.3% gain because it's probably primarily holding cash and short-term bonds. You won't be buying that "low" in this same way.
Leigh:
My husband and I will need to take out a loan in order to do in-vitro to start our family, as our insurance doesn't cover any of the costs. Currently, he has a whole life insurance policy that his mother believes we can borrow from. Would you recommend this to one of your clients? Or do you suggest we stay away from this option? What are the risks involved? Thank you!
Eve Kaplan:
Hi Leigh, I suppose you can tap the cash in your whole life policy if you really don't have any other ready sources of income. My clients typically don't own whole life insurance policies since the costs for insurance are very high and it takes a very long time to build up a cash position in them. The risk is that you deplete your whole life policy which was structured -- at great underlying cost to you -- to build up a cash position.
George Hewes:
My wife and I are 59. I am currently employed earning 6 figures. We have no credit card debt or car loans. If we have additional cash to do something with, should we (a) reduce the principal of our mortgage (the present balance is $133,000 at 5.75% with 10 more years to pay), (b) increase our emergency living fund, or (c) add more to our IRAs? Except for mortgage interest and R.P. taxes, we have no tax deductions.
Eve Kaplan:
Hi George, of the 3 alternatives, I recommend adding to your IRA to the limits. If your combined income is low enough, I strongly recommend funding a Roth IRA. I don't know how large your emergency living fund is, but it should be 3-6 months of living expenses (so bulk up on that first if it's too low). My least favorite option is reducing your principal in a shrinking asset (at least for the next 1-2 years).
Sharon:
Since you brought up borrowing money from family---Should we lend money to our child in order to pay off student loans? We could make more in interest from her than what we'd earn at the bank and she could pay less interest than what her loans are at now.
Eve Kaplan:
Intra-family loans can be tricky. I agree you can earn more from her and she can pay less interest but -- what happens if your child decides she doesn't want to pay you back (or can't afford to pay you back)? I recommend you look at www.virginmoneyusa.com. This firm structures intra-family loans. You can analyze various alternatives and see if this is a better fit for you than a standard loan.
NA:
What should I be doing to prepare for my son's college education? He is one. I'm currently in grad. school and expect to make $50,000 to $55,000 when I graduate.
EveKaplan:
You have a lot on your plate. Your priority, once you graduate, is to fund your current expenses and begin to save (hopefully with a 401k match) for retirement. Your third (lesser) priority right now is saving for college. That said, it's a great idea to open a 529 plan (you or your spouse are the owner, your son is the beneficiary) and tell friends/relatives that you PREFER they gift to this college fund instead of giving you toys/presents for birthdays and holidays. I'd look again at college funding in a few years, once you're more financially established.
Rachel Sheedy:
We're in the final hour of the Jump-Start Your Retirement Plan Day live discussion. Eve Kaplan of Kaplan Financial Advisors is online to take your questions. You can also reach planners by phone at 888-919-2345 until 6 p.m. eastern time today. Planners will answer as many questions as time permits.
Kim:
I am rolling over my 401k and I was wondering if you had a list of low-cost mutual funds that I could invest in?
Kevin Reardon:
Kim, consider speaking with a local advisor regarding the handling of your 401k rollover. Investing money is tricky and should be done with good counsel. The funds selected, and your overall asset allocation, is dependant on numerous factors too difficult to answer in this forum. Picking from someone's list should be avoided. Best of luck, Kevin Reardon
Blaine Le Fevre:
Currently I have some of my 401k invested in emerging markets and in gold, both have seen significant drops. Two questions, 1) should I keep the money in those funds? and 2) should I continue putting $$ in my 401k right now?
Kevin Reardon:
Blaine, question #2...Absolutely, keeping saving money into your 401k. Saving money always makes sense, and doing it in a 401k is logical.
I don't have enough information to answer question #1. Keep in mind that markets are volatile, and recall the reasons you made the investments in the first place. If your funds were down when other funds were up, you might have reason to sell the funds, but all funds have been down over the last 12 months. Consult a local advisor for specific recommendations to your asset allocation and fund holdings. Best of Luck, Kevin Reardon
Robin Henthorn:
I have $5200 in a Roth IRA with a company that I have lost faith in. I want to sever my ties with the company, but I'm not sure how to go about transferring my monies from the Roth. I'm thinking about opening up a Roth with Vanguard, but I'm not sure at this point. I'm 52 years old and plan on retiring at 67. What do you advise?
Kevin Reardon:
Robin, transferring a Roth IRA is a piece of cake, if that is your objective. Opening an account at Vanguard or other great institution is smart, and transfering those assets should be easy. Call Vanguard today and you'll get some good answers. Best of Luck.
Ivory:
Can I have too many retirement accounts and if so, which ones should/can I consolidate? I have a 401K, Roth 401K (Company matches on both of these and contributing 10%), a Roth IRA (Maxing that out now that I am no longer a student), and an IRA that I really need to roll over. Is there anything else I should be looking at? (I'm 26 years old.) Thank you
Kevin Reardon:
Ivory, you are a rock star. Great job on saving so well at such a young age. It is tough to know, given my limited knowledge of your situation, exactly which plans you should be maximizing and which to minimize. I like the fact that you are doing some of each, and doing so in a meaningful way. Guessing about the typical situation of a 26 year old and how and when you might need these monies in the future, I like the way you are doing it. You may want to consult a local financial advisor for a detailed analysis. Keep up the good work.
kathy modin:
If a person has a car loan with an interest rate of 7.5% for 6 years, would it be better to pay off that car loan or invest the money in mutual fund?
Kevin Reardon:
Kathy, can you make more than 7.5% by investing extra money elsewhere? Of course, that is unknown. I prefer paying down consumer debt, such as auto loans, instead of investing the proceeds. The other benefit of paying down this debt now is you can't be compelled to spend your investment/savings on other things in the near future. Quite often people start out with great intentions of investing extra money, only to spend it later. Rather then spend it, pay down debt. Best of Luck, Kevin Reardon
Jerry:
Our home mortgage loan-to-value ratio is currently at 97%. Several lenders require 90% LTV to refinance at today's great rates. Is it a wise idea to pay $5,000 out of our $6,000 savings to get the LTV below 90% in order to save over $100k in interest over the next 15 years, or is it too risky to get our savings that low? We have no other debt except our home, and we do not plan on moving.
Kevin Reardon:
Jerry, that is a toughy. How long would it take to rebuild your savings, given the cost savings of a lower mortgage? If you can do it within 12 months, and if you have great job security (not sure if that exists anymore), then it is a consideration. Could you borrow money from Mom & Dad, or Uncle Larry instead? Many people are willing to take a risk for someone being financially astute.
Good thinking, but this is quite a risk. Best of Luck, and be cautious. Kevin Reardon
Kris:
Would like to get some exposure to Biotech and Clean energy sector, mostly using ETFs. What percentage of the portfolio should I be having in these sectors? Part 2 of my question, is there a way to figure out the total biotech or clean energy sector's worth globally and peg my exposure to that number? Thanks for your time!
Kevin Reardon:
Kris, great question, but a tough one. The % you put in Biotech or clean energy depends on your objectives, tolerance, and time horizon. Any given sector can be volatile, for years, and so be cautious in loading up in any given area.
I would recommend you research Standard & Poor's, as they would be a great source to tell you how much of the market is currently in Biotech, Clean Energy, or any other sectors.
For more thorough analysis, consult a local financial advisor. Best of Luck, Kevin Reardon
Len:
Good afternoon. Both my wife and I are retired. My wife receives SS benefits and I will receive mine in May when I will be 70 years old. Our home is paid off. Like everyone else we lost a considerable amount of money last year: about $450K. We have opened 5 CDs with different maturity dates for a total of $1.1M. I dislike to have done that but we have crossed the line of resistance for the downs in the market. Once this situation improves, if ever, how can we go slide back into equities (moderately conservative)? What will be the signs for us to start switching (not all) but some of our savings?
Did we take the right steps in opening those CDs? Thanks
Kevin Reardon:
Len, you are not alone in your concerns regarding the market. The key point is that you are comfortable with your situation, and that your current CDs accomplish your objectives. Now that your money is not in the stock market, the question you need to answer is 'When do you come back, if ever?'. What if the Dow went down to 5,000? Would you come back? Not likely. What if the Dow went up to 10,000, would you come back into the market? If so, you just missed a 20% movement upwards. You need to find an asset mixture you are truly comfortable with.
What if 5 years worth of your min. living expenses were invested into CDs, guaranteeing your lifestyle for that period of time? Would you be able to take the remainder and put it into the markets? Most of my clients look at the equity markets differently if they know they have 5 years of min. living expenses secured in CDs. Just a thought.
James Jackson:
My mom is a year away from retirement and she owes money to her 401k from a previous withdrawal, is it still possible for her to convert that 401k into a traditional IRA, and if so, would that be the best thing to do?
Kevin Reardon:
James, I am assuming your mom took a loan from her 401k and not a withdrawal. Withdrawals from 401ks cannot be paid back or reversed. Converting the 401k to an IRA is something she would not be able to do until she retires, unless her plan allows for in-service withdrawals. Whether she should or should not convert the 401k to an IRA at a certain point is a great question, and one that requires detailed analysis and understanding to her objectives, time horizon, tax situation, and income needs. Please consult with a local financial advisor for a thorough analysis to her situation.
Ed Thompson:
Age 77-Retired. Have 2 deferred variable annunities. One inside IRA and one a taxable account.
How best to start taking distributions? Can take out up to 10% per year without penalty or can annuitize at a fixed amount for life. Which is best?
Kevin Reardon:
Ed, that question is much too difficult to answer in this forum, as we need to know about your other assets, your other income sources, your income needs, health status, estate plan, and type of annuities that you have. Please consult a local financial advisor for a detailed analysis.
alice Inouye:
I am 80 yrs old and would like to know if my IRA account allocations is right -- 74% in bonds and money mkt accts and bal in mutual funds. One of them is dodge & cox balance fund and is doing badly.
Kevin Reardon:
Alice, this is a tough one to answer without knowing more about your situation, such as your other assets, your income needs, risk tolerance and time horizon. I have some 80 year old clients who invest aggressively because they know the assets will eventually pass to their children or grandchildren. It sounds as though your asset mixture is reasonably conservative. Although a few of your funds are performing badly, your best option is to ride out the downturn and avoid selling at a low point. Consult with a local advisors for more detailed analysis.
Best of Luck, Kevin Reardon, CFP
Katie:
I am 28 and think I should change my traditional 401k withdrawals into a Roth (from this point on). It is also matched and offered by employer. However, most of the guidance is very vague about income expectations for someone my age. I think I should change to a Roth, but not sure until what income/AGI level. Or would it make sense to just split between the two options? If I make the change (not rolling over), at what point do I reevaluate?
Kevin Reardon:
Katie, the most important point is to continue saving, and saving in a meaningful way. I am at a little disadvantage in answering your question, b/c I don't know what tax bracket you are in now, or might be in in the future. Contributing into a 401k makes lots of sense to reduce your taxable wages and take advantage of the employer money, which should be considered 'Free Money' you don't want to pass up. Go for the 401k in this instance.
Ron:
I am M/51 and I have been investing the maximum amount each year in a Roth IRA since it started. These investments are well diversified and spread out into mutual funds set up by my Edward Jones advisor. I have always funded these accounts at the beginning of the year. Another advisor I spoke with highly reccommended investing the same amount each month (dollar cost averaging) instead of a lump sum. Obviously this year with the market down severely, I am puting the maximum amount in this month. Which one do you recommend?
Kevin Reardon:
Ron, market movements are unknown. I prefer getting money to work as soon as possible, especially after a horrifically bad market. Go for it all in January if you can swing it.
Rose:
I'm 28 years old and make approximatly $26,000 per year. Instead of decreasing my contributions due to the market conditions, I've increased from 23% to 25% of my income into a 401k (plus a 4% company match). I'm aware that I have many years to make up any losses due to market turbulence. I also contribute $1200 per year to a Roth IRA. Should I decrease my 401K contributions and increase my Roth IRA contributions?
Kevin Reardon:
Rose, you are a rock star. Seriously, you are a super saver and should be commmended. Most likely, you will receive the most benefit from increasing your Roth IRA contributions and creating a more balanced savings plan between the two retirement plans.
The Roth does allow penalty-free withdrawals after a period of time for qualified reasons, such as a first home purchase. In addition, the tax-free status of the Roth IRA diversifies some of your assets to the potential for high future tax rates when you ultimately retire. This makes good sense to do.
Either way, your savings rate is outstanding. Congratulations.
Joe:
About 3 years ago I invested $20K in an EFT called ING Prime Rate Trust (PPR). It is now worth less than $14K including reinvested dividends. Is this a bad fund or a victim of the times? Does it have a peer group or index it can be compared to?
Kevin Reardon:
Joe, I would have to do research on PPR to make a determination on its viability as I am unfamiliar with it. Unfortunately, we don't have time for that in this forum. My suggestion is for you to contact a financial planner in your area and schedule a meeting to review this issue. Best of Luck, Kevin M. Reardon, CFP
Allison:
We're looking to buy a house in 2-3 years and have about $80,000 dollars saved. We have no other debt and max out our 403b contributions. Where do you suggest we save our money in the meantime? We're looking for something that is safe but will get a better rate of return than a savings account. Thanks!
Kevin Reardon:
Allison, from a comedic standpoint, there are a lot of funny responses I could give, but I'll refrain.
With a time frame of less than 3 years, and with the intention of purchasing a house, you will want to invest your funds in a safe investment. Unfortunately, the returns from bank type investments are very low. A money market account, bank CD, or other liquid investment is recommended.
The old adage, 'It's not the return on your money that counts, but rather the return OF your money that matters.'
Best of Luck, Kevin Reardon, CFP
John H:
I have a 401a & 457 plan through my employer which is a political subdivision of the state. I am currently investing to get the maximum match from my employee. I have more money to invest, but I will not get anymore from my employee. Should I continue to invest in my plan, open a Roth, IRA or what? If I add more to my plan, I am aware that I will benefit from the pretax of my salary. I have 14 years until I retire.
Kevin Reardon:
John,
That is a great question and one that is tough to answer. The best answer would depend on your current income tax rate, and the future tax rates that your employer plan money would be taxed at when you withdraw it. By investing some money into an employer plan and some money into a Roth IRA, you are diversifying your assets to future changes (increases) to the tax code.
Regardless of your end decision, you are making the right choice to save and to save in a meaningful way. The ultimate best choice is unknown, but I think using the Roth IRA to supplement what you are doing makes a little more sense. If you speak with 10 different advisors, I am sure you will get a few slightly different responses.
Sorry we can't be more definitive. Best of Luck.
Jeff:
I am retired at 61 and living off my savings. I am working part-time and earning about $100 per week and do not need this money to live on. Should I invest it in stocks or IRA for 2009?
Kevin Reardon:
Jeff, we would recommend that you first have a sufficient emergency reserve built up, and suggest that you have 6 months of living expenses saved in a bank account before additional investing occurs. Once you meet this criteria, investing the proceeds into a Roth IRA makes sense. You have an unlimited # of investment options, and the investment of that would be determined by your time horizon and risk tolerance. Best of luck.
Rachel Sheedy:
Kevin Reardon of Shakespeare Wealth Management is online to answer your questions for the next hour. Planners will answer as many questions as time permits. You can also reach planners by phone at 888-919-2345 until 6 p.m. eastern time today.
P.Halb:
For us professionals who can't make the time to study the market, research individual funds (and their associated fees), keep up with the latest news - you know - all that is involved in doing your 'due diligence' when investing (in general): Which would be the most responsible choice?
a) Low cost index fund
b) Target dated fund
c) ETF
d) Under the matress?
Francine Duke, CFP:
Definitely not under the mattress!! Index funds are a good vehicle as are ETFs due to their low fees. As for target date funds, just make sure that you can live with the asset allocation within them. Target date funds don't take risk tolerance into consideration (ie. every 45 year old has a different risk tolerance and all should not be invested the same way). Best of luck!!!
Paul:
Follow-up question to 401k vs 403b question. I do not want any IRAs until after 2010 when I plan to convert several after-tax IRAs to Roth IRAs. I think that my pension lump in an IRA would have a major impact on my conversions. Is this correct?
Francine Duke, CFP:
I'm not sure what you're referring to. So sorry. Why don't you contact a financial planner who can help you with the specifics? I think there's some confusion here. Roth IRAs ARE after tax -- traditional IRAs are before tax.
Michael:
I was recently laid off and have my 401K in my ex-employer's plan. What type of investing freedom would I have with it if I rolled it into an IRA? Mainly is there any way I could buy gold or silver with my new IRA?
Francine Duke, CFP:
You have many more investment options in an IRA as you're not limited to the few options that your employer offers. As for silver and gold, an IRA can hold certain coins in gold or silver. Best of luck!
Alex:
If you roll a traditional 401(k) directly into a Roth IRA, what do you pay taxes on: the amount you put into the 401(k) or its value at the time of the rollover? Do you have to sell the funds and then rebuy them when you do the rollover?
Francine Duke, CFP:
You pay taxes on the amount that you roll over into the Roth IRA. You will probably have to sell and rebuy - unless you're staying with the same fund company. You will have to check with them and also review your plan documents.
Tom Bailey:
I have a 401k before taxed matched account with Anheuser busch. I'm 55 years old and close to retirement at 57. Since the merger with In-Bev they want to charge exorbitant fees to handle my account. Some advice please...
Francine Duke, CFP:
I would hate to see you give up an employer match regardless of the fees. Why not contribute just enough to the 401k to get the match and then put the rest into a Roth IRA assuming that your income is under the limits to qualify for a Roth?
Richard Schlorff:
I would like to retire in 10 years and can handle risk. What should my allocation be to earn at least 8% per year. If bonds are included, what kinds of bonds?
Francine Duke, CFP:
Your expectation of 8% a year is unrealistic in today's market. And, don't forget, better returns require more risk. As for where you should put your money, I'd need more details about your situation. Best of luck!
ML Duncan:
I have a traditional IRA that is down 40% for 2008. I turned 60 this year but do not need the money now or even in the next 5 years. I am thinking that moving some of my IRA money into a Roth IRA would be a good investment. I have money mainly in a core, growth, and international fund, and a small amount in a bond fund. Do you have any suggestions on which I should start moving now?
Francine Duke, CFP:
Great time to do a Roth conversion since the fund is down and you'll be paying less in taxes. Just make sure your income is less than $100,000. If not, wait for 2010 when there are no income limitations and you'll get two years to pay the taxes. Best of luck and good thinking!
Sue:
I'm 56 yrs. old and I have a 401k plan with my current employer. If I am laid off or retire from the the company, I will have the option to let the company continue to manage my account or roll it out of the plan. What would you suggest I do?
Francine Duke, CFP:
I'd roll it into an IRA where the investment options are unlimited. But, be careful to do a trustee to trustee rollover and not take any of the money directly or it will be considered a taxable distribution. Best of luck to you!
Roberta:
I am 45 years and have at least 20 years until retirement. My 401K offers something called a target-retirement date fund. That way I don't have to manage my 401K as much. Is this a good idea?
Francine Duke, CFP:
Target date funds had disappointing results last year. The concept is good -- to base the asset allocation on your retirement age, however, what doesn't get considered is your risk tolerance. Not every 45 year old has the same risk tolerance and, therefore, not all 45 year olds should be invested the same way.
Also, if you look at asset allocations among various 2030 funds, for instance, you'll find that there is quite a variance between funds of different companies.
Just make sure that the target date fund you pick has an asset allocation that you are comfortable with. Best of luck!
Paul:
I have both a 401k & 403b account. Would like in near future to roll a lump sum pension distribution into one of them and eliminate the other one. Anything to favor 401k or 403b? Do I need at some time to then transfer all funds into an IRA?
Francine Duke, CFP:
How about putting the pension distribution into an IRA? If that's allowed, that would be my first choice as you will have unlimited investment options. There have been recent changes regarding 403b's so I guess that I favor 401k's but my very favorite choice for you is the IRA.
george:
I am 52, just retired on disability retirement for local govt. I have a 401K of $50,000. I can NO longer contribute, but I can move monies around. I also have the option of withdrawing these funds, and reinvesting them in a local credit union, IRA or 401K. Should I leave money where it is...or reinvest in my credit union's 401K or IRA?
Francine Duke, CFP:
You will have more investment options if you roll the money into an IRA but do NOT take a distribution as it will be taxable. Do a trustee to trustee rollover into a traditional or Roth IRA. I urge you not to touch this money but, instead, to let it grow for you. Best of luck!
Bob Wells:
If both my wife and I take Social Security at 62 and I repay my payments later, how does that affect her benefits?
Francine Duke, CFP:
Complicated question. You can do that but there is much involved. Why not wait to take your payments if you're planning to repay them anyway?
Martin Mehl:
What is your opinion on shorting the Treasury market given the current yields? How long will they stay this low?
Francine Duke, CFP:
Interesting question, Martin. I don't see Treasury returns going up anytime soon. They serve a purpose and people who had them last year were not sorry.
Laura:
My husband and I are both 60. Our portfolio was worth about $900,000, but now is worth about $600,000. I know if we sell stock funds now we would be taking a loss (not just on paper as it is now). Would it be advisable to sell a stock fund and buy another (let's say an ETF). Would we be losing money doing that? Thank you for your advice
Francine Duke, CFP:
My advice, especially at your age, is to see a financial planner to review your current asset allocation, risk tolerance, etc. And, I strongly urge you not to panic as that usually forces us to make bad decisions.
The market is cyclical and will come back. But, it may get worse before it gets better. I'm not sure what you'll accomplish by selling one stock fund and buying another. You need to get someone who will help you review your current funds to see if there are any that should be replaced. Best of luck!
mbe:
Hi. My question is how do my newlywed husband and I prioritize our financial goals? I am a new law school graduate with substantial student loan debt (165K). We have combined credit card/HELOC debt of around $20k. I have no retirement; he does. His job is secure; I could be laid off. We net about $6000/month and have almost no money left over after bills, student loan payments, and credit card payments are made. Should I put emergency savings and retirement on hold until I get my credit card debts paid down? Should I pay less toward my credit cards and start saving? We just don't know where to start. Thanks!
Francine Duke, CFP:
I would always contribute to a company retirement plan at least enough to partake of any company matching (free money). Then, I would focus on debt reduction and paying off your credit cards, living within a budget and building an emergency fund to cover 4-6 months worth of expenses. Cut any unnecessary expenses that you can - you won't be sorry! Best of luck to you!
Jean:
I have a 401(k) at my old job that I left there because I liked the options. With the market down so much this year, I don't want to sell. What are my rollover IRA options? Can I roll my traditional 401(k) into a Roth IRA? What would the tax consequences be? I make $35/yr.
Francine Duke, CFP:
Yes, and you should roll the money out of the plan either into a Roth or traditional IRA. Be careful how you do it (should be trustee to trustee rollover) so that the money is not considered a distribution.
If you roll it into a Roth, you will need to pay tax at that time but future earnings will be tax-free as long as you meet the rules of a Roth. If you roll the money into a traditional IRA, you will not pay any taxes.
Roths have many wonderful advantages if you have the money to pay the taxes now.
Best of luck to you!
Dan:
My partner and I are planning for retirement. We both have IRA accounts, and he has a 401k through work. Are there any considerations we should be aware of to protect our assests if one of us were to die or we were to separate?
Francine Duke, CFP:
Assuming that you are a same-sex couple, there are many special things that you need to consider. Make sure to see a good estate planning attorney for help drawing up the proper documents. Unfortunately, in this world, if you are not in a legal marriage, you lose many of the rights of a normal spouse. In addition, if you were to split up, things could also work against you.
Please be careful and make sure that all documents, including those relating to your home, health and estate planning, have been properly executed. You need to protect your rights!
Best of luck!
Mike:
I would like to retire at age 62. If I were to put off drawing on SS until I was age 66, would I draw more by doing this even if I were not paying into SS for the last 4 years?
Francine Duke, CFP:
You should definitely try to wait until you are at full retirement age to start taking social security unless you feel that you'll have an unusually short lifespan. And, yes, it will increase the amount you will get in monthly payments even if you are no longer paying into social security. Best of luck!
Geoff Gordon:
I am 30 years old and am trying to come up with the best strategy to begin saving for retirement. I have credit card debt of roughly $10,000 at an interest rate of 6%. I have very little emergency cash. Should I focus on paying down debt only, or should I invest in an ETF such as VT while also paying off debt and building up cash savings? Thank you for your help!
Francine Duke, CFP:
First, you are lucky in that you are young and have time on your side. I would certainly begin saving for retirement. If you have a company match to any of your retirement accounts at work, I would invest enough to take full advantage of that. I'd also work at paying off credit card debt and learn to live within your means. And, lastly, I'd try to build at least a 6 month emergency fund. Best of luck!
Bryon:
I retired 2 years ago at 62 and now find that at least a third of my retirement savings are gone. As of Sept I had 60% bonds and 40% stocks hoping to get 5% return on the bonds and withdrawing that annually. With what's happened in the last year (a lot of sleepless nights), I'm seriously considering converting the bond portion to an immediate annuity, thereby sacrificing so-called growth for guaranteed income. I'm also thinking about transferring my taxable money-market mutual fund into my bank's interest bearing FDIC insured checking account. What do you recommend?
Francine Duke, CFP:
First, I caution you not to panic. That often brings the worst results. Also, remember that you have a long-term investment horizon as people are easily living to be 90 these days.
However, if you are not sleeping at night, that won't be very good for your health. Annuities are commonly used in the hopes of not outliving your income. An immediate annuity offers a fixed rate of return for that privilege.
I strongly urge you to consult a financial planner who will help you (a) determine if an annuity makes sense based upon your current financial situation and (b) review your current asset allocation and investments and see if they are in line with your risk tolerance and financial goals.
Lastly, it sounds like you will have no money left in the stock market if you do what you are proposing. I'm not sure that you will have enough money to live on for your lifetime without taking some market risk.
The market is cyclical and will eventually bounce back. Best of luck to you.
Sharon:
We have old 403(b) and IRAs that have, of course, lost a lot of value. Is it better to just let them sit and, hopefully, gain back their value, or should we rollover the funds into something else? We are in our mid-fifties.
Francine Duke, CFP:
If you are comfortable with your asset allocation, it's best to let them sit and wait out the market. Selling low (which you would be doing now) is not the best solution. But, I'd suggest meeting with a financial planner who can help you with your overall asset allocation and review the performance of the individual investments within your 403b and IRA.
Jackie:
I have a nondeductible traditional IRA that I would like to convert to a Roth. Do I essentially have to roll it over into a new IRA, or can I just recharacterize the existing one?
Francine Duke, CFP:
You can recharacterize it to a Roth. The investments should stay the same.
Chuck W.:
My in-laws are 'hell bent' on annuities. They are sold that they earn 5% forever and can never lose a penny -- besides fees and the huge risk inherent in insurance companies nowadays; what could I possibly recommend to them that won't eat up all their earnings in fees, and (for my piece of mind) what should I look for in the company that could reassure me that the company won't default on the annuity contract?
Francine Duke:
As for the company defaulting on the annuity contract, I would look up the carrier on Am Bests to see their rating. Anything less than A would be of concern.
As for investments without fees, no load mutual funds are an option. But, frankly, a CD from a bank is federally insured, has no hidden fees or surrender charges and a fixed rate of return.
Best of luck to you, Francine Duke, CFP, Aqua Financial Planning, LLC
Rachel Sheedy:
Francine Duke of Aqua Financial Planning is online to take your questions. Planners will answer as many questions as time permits. You can also reach planners by phone at 888-919-2345 until 6 p.m. eastern time today.
Ashley:
I max out my 401K each year, and I want to save more for retirement. But because I earn $150K/year, it seems like I can't do traditional or Roth IRA. Are there any other retirement-savings options for me that have tax benefits?
Mark Berg, CFP:
Ashley, if you are a W2 employee, and your employer doesn't have a non-qualified deferred comp plan or allow you to make after-tax contributions (grow tax deferred), your options are limited. You could do a variable annuity (after-tax contributions, pre-tax growth), but this is a questionable option. Vanguard and Fidelity have decent options with no surrender charges. It may simply be time to build a tax-efficient, after-tax portfolio to subsidize your pre-tax dollars. The other option is to see if your company allows Roth 401(k)s, which doesn't give you a tax deduction but effectively puts more money in your retirement account. Best to you. - Mark
philip:
I am retired and living on a small pension. I have a fully paid up life-insuranace policy for 45K that was intended to help my wife should I die. She died two years ago. My kids don't need it as they are fincially set and will get my house. The policy has a cash value of approx 15K as I've had it since birth. Should i cash it to get the cash reserves i need? Thanks
Mark Berg, CFP:
Philip, I likely would based on the facts you laid out. I would simply recommend you contact the insurance company to find out what the income tax ramifications would be. I don't imagine it will be significant. Best to you. - Mark
Michael:
I always invest in my IRAs early in the year. Due to the drop in of all investments in 2008, can I add to my IRA to bring it back up to the total amount for the year?
Mark Berg, CFP:
Michael, unfortunately, the IRS doesn't work that way. You have to abide by the contribution limits, which for 2008 and 2009 is $5,000 (plus $1,000 if you are 50 or older). Best to you. - Mark
Zander:
I'm a college bound high-school senior, and based off of current savings and parent contributions, the first 3 years should be payed for. The tuition for my senior year in college will be roughly $22,000. What's the best way to get that money over the next 4 years, through saving or student loans?
Mark Berg, CFP:
Zander, I am never a fan of debt. You just have so much more flexibility. It is unlikely you will qualify for subsidized financial aid, so I would recommend working summers and P.T. jobs during school to cover the last year. Be one of the few that exits college debt free! Also, thank your parents for saving for you, and good job on your contribution as well. Best to you. - Mark
Angelina:
I am interested in purchasing my first home later this year. My credit score is around 650. Is this the right time to jump into the housing market, or should I wait until my credit score is higher?
Mark Berg, CFP:
Good time to buy. I would meet with a mortgage broker or realtor to find out how to improve your credit score. Banks are very stingy with money right now. The magic # is 740. I would focus on this. Best to you. - Mark
Darby:
Greetings, My wife and I have $9,000 in credit-card debt and $7,500 in auto debt. As luck would have it, we will soon be receiving $20k in cash. We plan to pay off the credit cards immediately. Should we also pay off the auto loans, or save that $7,500 for a down payment on a first house? Excellent credit. Help appreciated.
Mark Berg, CFP:
Good question. Part of the answer depends on how you got into the credit-card debt in the first place. If it is simply overspending, that needs to be a focus. With the auto debt, if the interest rates are reasonable (6% or less) and you are in the last 2 years of payment, I recommend you save the cash for emergency fund and/or to start saving for your first home. However, I would also recommend that once the car payment(s) end to auto deduct the same amount in a dedicated savings account so that you can use no or little debt for your next car purchase. Best to you. - Mark
Noak:
Till Dec 2009, I would have lived in my main home for 2 years and rented out the last 3 years. I do not want to sell it and want to continue renting it. However, I do not want to forgo the tax benefits on capital gain from the home appreciation if I would sell the home. The capital gain will be about $120K and my tax bracket is 15%. What are my options? Thanks
Mark Berg, CFP:
Noak, it appears you know the rules about living in your home 2 of the last 5 to qualify for the exemption. Your options:
1. Keep renting, and you will add $120k x 15% cap gains = $18K (then add state tax). You could 1031 exchange to another rental in the future, but eventually you will owe the tax.
2. Sell. Save yourself $18K. Rent another home.
That's about it! Best to you. - Mark
Ryan:
I have a 1 year old son and expecting our second child in July 2009. In 2010, I would like to start saving to a 529 plan. Do I need a separate 529 account for each child? What happens to the 529 if one or both the kids does not go to college or ever use it?
Mark Berg, CFP:
Ryan, good questions.
1. Technically, you can change beneficiaries on a 529 Plan, so you could have 1. However, since they will overlap in schooling, it makes more sense to have 2. It will also allow you to fund more if you have the means.
2. If there is a remaining balance, and you don't have someone (including yourself) that can use it out to first cousin, if you take out the $$ the GROWTH would be subject to income taxation and a 10% penalty tax. Best to you. - Mark
Brandon Prell:
I'm going to be making several moves from within my traditional IRA and Roth IRA accounts between mutual funds. It would be easier for me to withdraw the necessary amounts to my checking accounts and then to send in the exact dollar amounts to my new funds than it would be to submit transfer applications for the different dollar amounts and funds. Is there any problem in doing this this way? I know that it is a reportable event to the IRS but as long as you do this within 60 days, it is not a taxable event?
Mark Berg, CFP:
Brandon, you are correct about the 60 days. However, I would recommend you roll over your IRA and Roth IRA to a brokerage account where rebalancing is much easier. They have a money market where sales are deposited, then you can make purchases from there. Also, firms like Vanguard, Fidelity and TD Ameritrade have great customer service that could make this a whole lot easier. Best to you. - Mark
SSam:
My question is about options with a company pension plan. My company froze and terminated the DB pension plan in 2005, went into bankrupcy, then came out of bankrupcy. I can retire this year but won't get Social Security for 12 years. There is an option called SSOA that pays more now and less when SS kicks in. Is this ever a good idea? Is it safer to get more income now because the company future is uncertain? If I save/invest the difference an I better off? I am also getting the increased pension in today's dollars. How do I put this in a formula that would determine my break-even point?
Mark Berg, CFP:
Sam, I have heard that called a 'bridge' or level income pension option. I wouldn't call it a 'bad' option, but there are some downsides. The break-even calculation is almost always based on how long you are projected to live. For men, our life expectancy is our late 70s. If you live beyond that point, you would have been better off waiting for the higher payout. However, the other aspect of your particular situation is the health of your company. If something could cause your company to go back into bankrupcy in the near term, it won't really matter because the PBGC will determine what your benefit will be. It is not a clear answer, but it is a challenging and multifaceted question. Best to you. - Mark
Mike:
I am 36 years old, married with 2 young children. We are planning on doing some estate planning this year to include a will. I am wondering if I should also be looking at a trust/life estate? We own a home with $60K equity, have retirement funds of about $140K, 529 plans of $10K, and cash/ST holdings around $50K. I also have a term life policy at $600K. Thank you.
Mark Berg, CFP:
Mike, it appears that you have done a very good job for your stage in life for your family, and I would concur that getting estate planning done is a critical component. For now, you would probably be well served with a will vs. trust. I would recommend keeping all of your assets joint tenancy, thereby avoiding probate if something happens to one of you. Based on your #'s, you do not have a taxable estate. Best to you. - Mark
Mark:
What are the pros and cons of investing in a total market index fund versus investing in index funds in the various styles within the market? If you invest in styles of index funds and invest more proportionally in a given style isn't that really defeating the purpuse of indexing?
Mark Berg, CFP:
Mark, there are a few different facets to your question:
1. Passive vs. Active. Indexing is a passive way to invest. I don't believe that proportional allocation in different styles would make this 'active'.
2. Total Market Index vs. Separate Indexes. I personally like separate indexes. You can typically control costs better separately vs in a 'fund of funds'. Also, rebalancing is easier, especially if you have other accounts, like a company 401(k), that needs to be factored in. Best to you. - Mark
Maxine:
I'm a single, professional working woman, and I don't own a house or have children. I currently contribute 10% of my income pre-tax to my company's 401k plan. What else can I do to reduce my income taxes?
Mark Berg, CFP:
Maxine, outside of additional contributions to your company's 401(k) (the maximum is $16,500 in 2009), you might wish to see if your employer offers a Health Care Reimbursement Account or HSA tied to your medical insurance plan. These dollars are pre-tax federally, state and FICA. There aren't a lot of other options. Best to you. - Mark
JOHN HAYES:
I am retired, my wife's employer just stoped matching the 401k which she contributes the max to at 48 years old. We have almost 7 figures in our tax deferred accounts now, and twice that in taxable accounts. We are considering stopping contributions to avoid such a large tax deferred account we may never be able to use. We are in the 28% bracket and will probably be in 25% the time of retirement.
Mark Berg, CFP:
John, this is a good problem to have. There are many factors, most we cannot predict, which would drive the answer to your question. However, I can say that given the amount of time until your wife is forced to draw from her account (20+ years at age 70 1/2), I believe that it makes sense for her to continue to contribute to her employer's plan. Better yet, if they offer a Roth 401(k) option, this I believe would be the best option. Best to you. - Mark
James Morrissey:
Are 12b-1 fees reflected in the rate of return for a mutual fund?
Mark Berg, CFP:
James, good question. My understanding is that rates of return are after all expense ratio fees, including 12b-1. The returns DON'T reflect commissions or if you are charged by an outside asset manager. - Mark
Phil:
Is money that is in a 401k protected from a bankruptcy? I am age 55.
Mark Berg, CFP:
Phil, yes, it is mandatorily kept separate from a company's assets. - Mark
Tiana:
I am 28 and have been putting money into my company's 403(c) account but have been seeing major losses. What is the best strategy for minimizing losses and taking advantage of falling stock prices?
Mark Berg, CFP:
Tiana, unfortunately, you can't get the best of both worlds. If you are 28, you have 30+ years before you can access this money anyway. Therefore, I would recommend focusing on the latter (taking advantage of falling stock prices). Diversification is the best way to reduce risk. Your company may have some literature to help you assess an allocation that is right for you. Best to you. - Mark
shirey:
If I have 2 employers and they both offer a 401(k) plan, can I participate in both plans? The second job is for extra money, and I thought it would be great if I put all my earnings into the plan for a better retirement.
Mark Berg, CFP:
Shirley, you can participate in both, they just combined can't exceed the $16,500 (or an additional $5,500 if you are over age 50). I would recommend contributing up to the match with both (assuming they both offer it), then the rest in the one with the better investment options. Good planning! Best to you. - Mark
TOM:
Should I continue funding my two 529s for college with $1k/month or increase my 401k contribution and pay for my daughter's college education with loans? I am 51 and currently have enough money in the 529s to fund 2 to 3 years of college each. Let me know please which is the best alternative?
Mark Berg, CFP:
Tom, if you have 2-3 years of college saved, I might either a) reduce college to $300 and increase 401(k) to $700/mo or b) shift it all to 401(k). I don't know enough about your situation to be any more specific, but the bottom line is that you need to make sure you are working toward your retirement savings as your window is closing. Even if the 4th year is not covered, your daughters have 30-40 years to pay off a loan, and you only have 10-15 years until retirement. Good job on the 529s by the way! Best to you. - Mark
Julie:
What are the tax implications if I decide to rent out my main home instead of selling it? I am moving out of the area and will rent accomodation myself. I'm currently earning under $45k.
Mark Berg, CFP:
Julie, Being from Chicago, I envy your California e-mail address. One particular item you will want to be aware of. If you have lived in CA for a long time, even in this poor real estate environment you may have some appreciation to your home. In order to avoid paying capital gains on the appreciation, you have to have lived there as your primary residence for 2 out of the 5 year period just prior to sale. Therefore, you have just under 3 years to rent.
Also, you would get to depreciate the home and maybe offset some of your income with 'losses' from the home rental. However, your earnings are not high to the point that you would get a lot of tax benefit anyway. Also, I typically don't recommend being a landlord if you are not in the area. I would recommend selling if you can. Best to you. - Mark
Kent:
I am 67 years old. Is this a good time for me to buy an immediate annuity? Should I wait for the rates to go up?
Mark Berg, CFP:
Kent, tough question. As a 67 year old, you still have many years ahead of you. Keep in mind the need to keep up with inflation, as well as to have money for unexpected expenses. I wouldn't think this is a great time, nor would I recommend it make up the majority of your investable assets. Best to you. - Mark
Tom:
Given $4,000 to invest for a 5 year old's college education and the choice between a Roth IRA and a 529 plan with the exact same funds -- which would you recommend and why?
Mark Berg, CFP:
Tom, good question. Being a goals-oriented person, I like to segment my funds according to my goals. Therefore, I like the 529 plan as it will provide a clear sense of how I am doing in my savings. It also has some state tax deductibility opportunities, depending on your state and the quality of their 529 Plans.
The Roth is a little stickier. First, you have you qualify for the 5 year holding period. Shouldn't be an issue with your 5 year old unless he is REALLY above average. The other issue is your age. If you are going to be over 59 1/2, there won't be an issue drawing from this tax-free. If you are under 59 1/2 when your child hits college years, you will only be able to withdraw the principal, NOT the growth.
Therefore, I would likely recommend the 529. Best to you - Mark
Michael Balt:
I want to clarify how much money my wife and I can contribute to our existing Roth IRAs. We file taxes jointly and for 2008 our adjusted gross income is approx $125,000. Of this, my W-2 income is approx. $80,000 and my wife as a substitute teacher received $4,200 gross. The $40,800 balance that makes up our AGI is from stock sales and dividends/interest income from accounts we hold jointly. Is it true my wife can only contribute $4,200 (her salary amount) rather than the $5,000 maximum contribution, while I am eligible to contribute $5,000 to my Roth? Thank you.
Mark Berg, CFP:
Michael, $5,000 each for 2008 (by 4/15/09) and $5,000 each for 2009. Your AGI is low enough to qualify. She can 'borrow' from your earnings to make the full contribution. Best to you. - Mark
Wei:
In general, will it incur extra layer of fees to purchase mutual funds from an asset managment co. comparing from the mutual fund co. directly? I am looking for some Vanguard Index funds for my Roth IRA. The expense ratio from different companies seems to be the same for same funds. Also, what are the other factors to consider when choosing where to invest Roth IRA money? Thanks! Wei
Mark Berg, CFP:
Wei, for clarification, an Asset Management Company actively manages someone's money, so they typically charge a fee for their services. If you are referring to a Brokerage, like TD Ameritrade Brokerage, that is different. There are two fees to be aware of in the no load world of investing:
1. Transaction fees: These range from $20-80 per transaction, unless it is on the No-Transaction-Fee list (NTF)
2. Expense Ratio: From this, the mutual fund company is paid, AND the brokerage through which the fund is purchases. If you buy direct, the mutual fund company gets the full amount, but you pay the same.
If you are planning on buying Vanguard funds, then I would recommend going directly to Vanguard. They also have a platform to buy other funds as well, then you just have to be aware of the transaction fees. Best to you. - Mark
Darren Lawler:
In my 401(k) plan at work I am in D&C Stock, T. Rowe Price Blue Chip Growth, EuroPacific, Lazard Emerging Mrkts and Hartford MidCap HLS/IA funds. Each one has lost 25-50%. As of 1/1/09, they added the PIMCO Total Return fund. Should I invest in this fund by rebalancing my account, should I put new money into this fund or both? If I rebalance, is this going to hurt me because everyone is saying don't sell out of any of your funds even though they lost money. I am 41, long term investor, max out my 401k contributions and my Roth IRA. Do I need this fund in my portfolio?
Mark Berg, CFP:
Darren, I always start by asking if you have lost any sleep about your investments. If not, I recommend holding the line. You have a long time horizon (age 41), obviously a high risk tolerance judging by the funds you selected, and this is retirement money. PIMCO is a very solid fixed income fund, but you may have a few more years before this is added to the mix. However, if you need to take some of the edge out of your portfolio, there are few bond funds I would recommend more. Best to you. - Mark
K NYC:
I would like to put funds into a bank CD. GMAC has a good rate (12 month CD at 3.75%). Are there any risks involved with this?
Mark Berg, CFP:
Mr/Mrs. NYC, if it is the GMAC Bank that is FDIC insured, as long as you don't deposit more than $250,000, your deposit is ensured. The only risk is if they fail, there is a waiting period until another bank takes over. So as long as you don't need the money immediately, there is not a big risk. Best to you. - Mark
Joanne Fields:
What is your best advice for ensuring that someone who is 52 years old has sufficient retirement funds in ten years? These would include 401k funds and funds outside of 401k.
Mark Berg, CFP:
Joanne, my best advice would be to seek an objective, fee only financial advisor to look at the 52 year old's specific situation. Investments are simply a tool to accomplish a client's goals. You need to look at their lifestyle, tax situation, investment profile, etc.
It is tempting in this environment to look for a 'safe investment'. The challenge is that we are outliving our parents, and the cost of living is going up, so putting everything in CDs or a fixed annuity could put your financial future at risk. A well-balanced, diversified portfolio designed in a low-cost manner according to the client's investment profile and lifestyle is, in my opinion, the best way to ensure sufficient retirment funds for a lifetime. Best to you. - Mark
jay waters:
I have an AIG fixed deferred annuity purchased 20 years ago. Is it OK to leave it with them or should I exchange it. How do I know any other company would do any better?
Mark Berg, CFP:
Jay, I would imagine by now that you are only earning the minimum interest, something like 3%. I would check into that. You should be past any surrender charge, so you may want to compare your interest with a fixed annuity through Fidelity or Vanguard. Fixed annuities usually come with surrender charges for a period of time, so make sure you read the fine print. Best to you. - Mark
Glenn:
How important is it to have disbility insurance? I am not offered any through my employer. What things should I look for if I decide to purchase a plan?
Mark Berg, CFP:
Glenn, I'll be honest, I am not a big fan of insurance in general. I consider it 'a necessary evil', mainly because the sales of it are abused. Nevertheless, you are statistically more likely to become disabled than die during your working career, so it is wise to have something.
The lowest cost option is typically through an association (for example, I have disability coverage through my membership with NAPFA). They can offer a substantial discount against buying an individual policy because from the insurance company's perspective they can easily underwrite a homogeneous group. Therefore, I would look at any association you belong to or one that you could belong to. Compare this with a quote you would get through an insurance broker. Special Note: Since you are paying the premium yourself, the benefit is federally income tax free. Therefore, you really are looking at covering your net take home, not your whole salary. Best to you. - Mark
Jane Kaplan:
Hi, I'm 28 and work in the theater, and have only a small Roth IRA (a retirement plan from Vanguard that switches automatically from stocks to bonds as I get older), it's about $6000. Should I be putting money into it while stocks are down? It's tempting to wait until the future starts to look brighter.
Mark Berg, CFP:
Jane, great question. We all are tempted in a down market to want to wait until a market recovery to make additional contributions. Unfortunately, the stock market doesn't send up signals to let you know when it is going up, down or sideways. In fact, most studies say that it is virtually impossible to time the market.
So to answer your question, I would recommend following Warren Buffett's advice, "Be fearful when others are greedy (i.e. stock markets are going up quickly), be greedy when others are fearful (i.e stocks are beaten down)." It sounds like you are in a good, low cost, diversified fund, so I would recommend you continue to contribute in a systematic way (monthly, for example). You are effectively 'buying low'. Best to you. - Mark
Rachel Sheedy:
Mark Berg of Timothy Financial Counsel will be answering questions for the next two hours. Planners will answer as many questions as time permits. Remember, you can also reach planners by phone until 6 p.m. today by calling 888-919-2345.
Raymond:
I have 4 investment accounts with 3 companies and 5 checking accounts with 4 companies. Do I have too many accounts? Do I need to consolidate them?
Annette:
Yes. You could consolidate your investment accounts by moving them to a discount brokerage account (like TD Ameritrade) or you could put all of your investments in diversified index funds at one low-cost mutual fund company (like Vanguard). Unless you have very high balances I can't think of a good reason to have your five checking accounts at different companies. Eliminate accounts you don't use and consolidate at a single bank unless your balance exceeds FDIC limits.
Kate:
I'm interested in investing in a limited partnership. Is this type of stock something better held in a tax-deferred or taxable account?
Annette:
I do not believe most tax-deferred accounts (IRAs, 401(k)s etc) allow investments in limited partnerships.
kathy modin:
I was wondering if you could tell me about load and no-load funds.
Annette:
The term Load refers to a fee or commission paid to the broker who sell you funds. Many funds have loads as high as 5.75%, and loads can be charged upfront, annually or at the time you sell your funds.
There is no reason to purchase load funds. Many studies have shown that no load funds consistently yield better returns to their investors. You can learn a lot about mutual fund investing by looking at the Vanguard website. If you choose to work with a financial advisor, look for a fee-only advisor (you can find one at www.napfa.org) who will help you invest in no-load funds.
Sani:
Hi, I’m 34 yrs old and I have a 401k from a prior job worth about $21k. I want to roll it over to and IRA and continue to contribute funds. Should I place the money in a Roth or traditional IRA? What are the pros and cons of each? Thanks.
Annette:
If you have enough money outside the account to pay the income tax (probably about $5K), a Roth IRA would be a great choice at your age. You would never pay tax again on the money now in the account and if you are single and earn less than $105K (married less than $166K) this year you can add $5K/year. The income restriction is due to phase out in 2010. Your contributions will not be tax deductible, but you (and your beneficiaries) will never pay income tax on the money in the Roth -- an incredible deal!
The only advantage to the traditional IRA is that your contributions may be deductible, but not if you are eligible to participate in an employer retirement plan.
Gary:
I'm nearing retirement but plan on working for about (5) more years. My job is currently secure but I've decided to set up a "CD laddering" for emergency funding to cover one year of expenses. I would like to invest in monthly CDs starting with a one year maturity and continue for (12) additional months at ($2,500) per monthly CD. This along with other income would allow me (12) months to look for a new job if needed. I haven't found anyone who will take ($30k) and do this spread. I therefore have to take out a new CD each month. This will take me an entire year to put this plan in place. Any better way to accomplish this? Thanks!
Annette:
I am not surprised that you can't find an advisor who will implement this plan - it is a lot of work to go through to earn a few extra dollars on your $30k. If you have the money now you might consider putting it into a very short bond fund (Vanguard has very low cost funds). Return is not guaranteed as the CD return is, but it is a pretty safe bet and it's much simpler.
Austin:
I am a senior in college and in the lowest tax bracket. This fall I purchased stock in a Zecco taxable account for the first time. How do I go about recording these purchases and their dividends on my taxes?
Annette:
If you have not yet sold the stock you don't need to report it on your taxes. When you sell the stock you will need to record it on Schedule D. They will be looking for your cost basis (what you paid including commissions and fees), what you received when you sold it (less commissions and fees) and the dates of both events.
Ernest:
Hi ... I often hear saving 15% of income for retirement: is that gross income or pre-tax income? Does the 15% include 401k company match? They say to shoot for 80-85% of pre-retirement income: is that based on my current income or forecasted income just before retirement? How do I know how much to save when my income is a moving target? Thank you!
Annette:
Ernest, the big answer to your questions is it's almost impossible to save too much!
15% of gross income is an excellent savings target. Your 401(k) contributions and match could be part of this, although I encourage clients to try to save outside of their retirement plans in addition to maxing out their contributions (or at least contributing enough to get the full employer match).
In terms of targeting retirement income, I have never been a believer that we spend less in retirement. Some expenses, like medical care, travel and entertainment increase in retirement and offset those that decline. We use current expenses (unless you have a child in college or private school for example and know that expense will end) in projecting future expenses. We do take inflation into account and use software that allows us to run many scenarios looking at how successful the client will be under different possible market conditions.
If your income is a moving target, you should set a fixed savings target and pay yourself first to the extent possible. Cut back on discretionary expenses when your income is lower and perhaps set aside a splurge fund to cover those expenses when income is up.
Lissette:
I'm wanting to start buying stocks. Do I absolutely need to have a financial advisor to do that? Or can I just go about it on my own?
Annette:
This is a big question! You do not have to have a financial advisor in order to buy stocks -- there are online brokerages that enable you to do so without assistance.
However, I would advise you to find a fee-only advisor near you who works on an hourly basis and ask her or him to spend an hour or two looking at where you are in your financial life -- helping you take in the big picture and set appropriate goals and priorities. You may be interested in buying stocks, but with the help of a professional you may learn that you have more pressing financial priorities. Spending some money for this kind of guidance would be something I am sure you would never regret.
Ed & Adell Chrisman:
I have three properties: my home, my second home (cabin), and a vacant building lot. Can I do a reverse mortgage on any of these three or does only my home property qualify? None have a mortgage.
Annette:
Here are some general rules for reverse mortgages:
Reverse Mortgage Loan Qualification:
All homeowners on title must be age 62 or older and occupy the
property as their principal residence.
Any existing mortgage balances must be small enough to be paid off
by the reverse mortgage.
The property must be an owner-occupied single-family home, two, three or four unit dwelling.
Town-homes, detached homes, condominium/co-op units, planned unit developments (PUDs) and some manufactured homes are eligible.
The home must meet HUD minimum property standards and, in some cases, necessary home repairs can be made after the closing of a reverse mortgage.
There are no income or credit qualifications.
In addition, I would add that reverse mortgages tend not to offer the most attractive terms. I would choose this source of funds only as a last resort.
David S:
I've heard that now might be a good time to convert some regular IRA funds to a Roth IRA. I work at a university and have a 403b plan. Is it possible to convert funds in a 403b to a Roth IRA?
Annette:
It is a good time to convert pre-tax retirement dollars to Roth IRAs because account values are relatively low thanks to the terrible market in 2008.
Converting any retirement account to a Roth only makes sense when you have enough money outside the account to pay the tax liability you will incur when you complete the conversion. If you cannot pay the taxes with outside, after-tax dollars, the conversion is really more-or-less a wash.
403(b) plans can vary from provider to provider so you should check with your plan administrator to be sure they are allowing Roth conversions.
Patrick Stokes:
My wife and I bought our first home just over 2 years ago for $340k and did a 80/10/10. First mortgage is 272k @ 6.125% and second is 34k @ 7.75%. Both are 30 year fixed rate. Would it make sense to refi to another 30 year fixed? Would it make sense to get a 30-50k HELOC to lower the interest rate on the balance for the 2nd mortgage?
Annette:
This is hard to answer without knowing more about your situation. If anything has changed with regard to your income, you may not qualify for a new loan -- credit it still relatively tight. Also, if the value of your home has dropped significantly your total loans may equal or exceed the value of your home, again making it difficult to refinance. Finally, while refinacing can lower your payments, there are always costs involved -- and they always seem to be more than expected. You'll need to get an estimate of what your new payments would be and compare the monthly savings to the cost of refinancing. If you don't make the cost back in a couple years it's probably better to wait. Finally, if you can afford to do so, it might make more sense to just accelerate the payments on your second loan so that you can retire it as quickly as possible.
Cathy:
The stock portion of my retirement portfolio is split between five funds; three of which are managed funds. I was thinking of condensing down to three funds consisting of a total market index fund, an overseas index fund and company dividend paying stock. We are in our fifties and I am concerned about fees associated with the other funds. Would this be a good move?
Annette:
I am not certain what you mean by your third fund description --"company dividend paying stock." Index funds are certainly the best choice for individual investors self-managing their portfolio. You want to diversify as broadly as possible, so the total market fund sounds great. I'd then choose an international fund or ETF that mirrors the EAFE Index and might allocate a small amount to an emerging markets index fund. Other ways to diversify would include allocating small (less than 5%) portions of your portfolio to a real estate index and a commodities index. How much you want to keep in equities vs. fixed income (which should also be diversified) depends upon your personal risk tolerance, the time you have to stay invested before tapping into your portfolio and how large your portfolio is (if it's very large you may not need to take much risk at all to acheive your goals).
Phil:
If I have a loan out against my 401k for the purpose of buying a home and then get laid off, if I'm over 55, can I claim a hardship withdrawal since my company is forcing me to pay the loan back within 90 days?
Annette:
Here's some information from 401khelpcenter.com -- a good resource on this topic:
You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:
You become totally disabled.
You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
You are required by court order to give the money to your divorced spouse, a child, or a dependent.
You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)
Employers are not required to offer any type of hardship withdrawal, so you should check with your employer to see if it is available to you.
Buying a house does not seem to qualify.
Rachel Sheedy:
Annette Simon of Garnet Group is online for the next hour to take your questions. Our planners will answer as many questions as time permits. You can also reach planners by phone today until 6 p.m. eastern time by calling 888-919-2345.
Philip:
Can an ordinary 401k be rolled over into a self-directed 401k? Could the proceeds of the SD401k be used to buy individual property or propertys?
Roger:
Philip, thank you for your question. I'm not sure that I fully understand your question. A few basics. A 401(k) can be rolled to an IRA or in some cases to the 401(k) of new employer. In both cases you typically would have had to separate from service with your company. Some plans do offer self-directed brokerage options within the 401(k). As for individual real estate within a 401(k), I do not believe that this can be done, but I am not 100% sure. I have seen some firms that can administer individual real estate holdings in an IRA. I am not well-versed here, but I do know that the rules surrounding this are pretty complex. You might consider consulting with a NAPFA advisor in your area who is knowledgable on this subject. The website is www.napfa.org. Good luck.
Kaija Langley:
I recently read in a personal finance magazine that investors should consider corporate bonds during this down market. How does one purchase corporate bonds? Is there a way to include it in my tax-deferred retirement savings plan at work? (My 401(k) is with Fidelity.)
Roger:
Kaija, thank you for your question. You can buy individual bonds from places like Fidelity. This would likely work for your 401(k) unless you are able to utilize a brokerage window. Check the funds offered in your plan to see if there is a bond fund offered. The opportunity as I see it in corp. bonds is that the spread in yield between investment grade corporates and Treasuries is at or near an all time high. You will gain from the higher yield and possibly the price appreciation that could come from a narrowing of this spread. Good luck.
Tom:
Hi, should I transfer $80k from my existing traditional IRA into a Roth IRA and pay the 20% early withdrawal fee or leave it as is? I am currently 52 and anticipate working until 60 give or take a year or two. Thanks.
Roger:
Tom, thank you for your question. First I do not believe that there is an early withdrawal penalty for a Roth conversion, though you would still pay income tax on the amount converted. I believe thaqt the income ceiling in '09 remains at $100,000 to do this, it goes up in 2010. That all said, this can be a complex calculation based upon the following factors (this is not an exhaustive list): Your projection of future tax rates and your projection of your tax bracket in retirement, estate planning issues and can you pay the tax out of other assets besides the IRA. You might consider seeking the advice of a professional at the NAPFA Web site, www.napfa.org. Good luck.
matt cieslewicz:
I moved all the funds ($90,000) from my retirement account into cash in February of 2008. Should I start moving this back into mutual funds gradually, or should it be moved at once? What allocation would you recommend?
Roger:
Matt, thank you for your question. Knowing nothing about you I cannot recommend an asset allocation. Your timing was excellent in moving to cash. Whether to move back gradually or all at once, there is no right answer. I am one who believes that the downside risk in equities from here has certainly been reduced through price erosion. On the one hand, being on the sidelines could cause you to miss the next upturn in the market. On the other, none of us knows when this will occur, will it be sustained, etc. I appologize, but it is difficult to be more specific on a question like this knowing nothing about your situation. Good Luck.
James:
I'm 35 and only started saving for retirement this year. I intend to max out my contribution to my 401(k), but I'll still have some after tax money to save every month. What do you think is the best way to invest that money for retirement?
Roger:
James, thank you for your question. Congratulations on maxing out the 401(k). In '09 the max allowed is $16,500 plus another $5,500 if you will be 50 or over anytime in '09. Assuming you are doing this, the next task should be to build a liquid fund of 3-6 months of those expenses that would need to be covered (essentials vs. "fun") were you to lose your job. After that you might consider finding one or more funds that will allow you to dollar cost average into them much in the same way you do with your 401(k). Some funds have lower minimums for auto investing (T. Rowe Price is a family that comes to mind) other have a higher minimum such as Vanguard. Good luck.
Janette Julio:
My company no longer offers match our 401K contribution. Shall I continue to contribute to my 401K or find other alternatives?
Roger:
Janette, thank you for your question. In most cases I feel the forced savings aspect outweighs the loss of the match. Please see an article from the Chicago Tribune, Stick to a plan if you lose employer 401 (k) match from a couple of weeks ago. Good luck.
C Chong:
When it comes to organizing one's personal finances for now and for the future, what is the order of importance for the following: debt reduction, savings, investments, retirement and college for education for children.
Roger:
Thank you for your question. While everyone's situation is different, I would generally answer as follows: 1.) Debt reduction/spending reduction. The two go hand and hand. 2.) Savings 3.) Retirement savings. Take advantage of the time left 'til retirement to take advantage of compund growth (last year not withstanding) 4.) Investments 5.) College savings. From personal experience, if your child is a pretty decent student there may be scholarships or loans available. This doesn't mean don't save, but the other items to me are a bigger priority. Good luck.
Mark-Va Bch:
My IRAs and 401Ks investments have taken a 25-35% hit in value. All invested in various mutual funds (int'l growth, int'l energy). I've left the funds in-place and haven't pulled out. I'm hoping for a quick recovery, but it's not looking good from where I sit. Wife and I are both 54, so we have time. What's your advice on what we should do, if different than "just waiting it out"?
Roger:
Mark, thank you for your question. Overall, the S&P 500 lost about 37% in '08 so your losses are "in line" for a diversified portfolio. What I am doing with my clients is to rebalance to their target asset allocation for starters. I am also reviewing that allocation to ensure that it still fits with their risk tolerance, time horizon, etc. In reviewing your holdings, please ensure that you look at the portfolio as a whole. I see too many 401(k) plan participants who look at their plan holdings in a vaacum. Lastly, this is a good time to review the quality of the funds you hold. Not that you should chase performance, but if an actively managed fund lagged the market by a lot this should be a red flag and warrant further review. Good luck.
matt:
I was recently laid off from a job. What's the best thing to do with my 401k while I'm looking for new employment?
Roger:
Matt thank you for your question. I generally suggest that you do not cash out the 401(k) unless this is the last source of money you have available to tide you over until you find another job. That said, you can keep the money with your former company if you like the plan and its investment options. Once you get reemployed, if the new company allows for this, you can also transfer the old 401(k) to the new employer's plan. I suggest in this case you compare the plans to see which offers better investment choices, etc. You can also roll your 401(k) over to an IRA. Please be careful here to make sure this is a trustee to trustee transfer and that you do not take a distribution by mistake. A direct transfer allows you to retain the tax deferral, with a distribution you would get hit with a 20% tax hit which you would have to put in should you decide to do a rollover. You also have 60 days if you take a distribution then decide to do the rollover. If your balance is small (I don't recall the limit), your former employer may be able to force you to move your money, best to check with the HR department if this is the case. Good luck.
Rachel Sheedy:
Roger Wohlner of Asset Strategy Consultants is now joining us to take your retirement-planning questions.
Gary Childs:
What is the best hedge against future inflation?
Jeff Kostis:
There is no single, best investment hedge that does not have other risks attached. Historically, owning equities (stocks) provided the highest long term return over inflation. However, as we have seen, this higher return comes with more risk. As a pure hedge, you can buy TIPS (Treasury Inflation Protected Securities). These are tresury bonds that adjust their interest payment and principal value by increases in the Consumer Price Index. However, the return above the rate of inflation is very low (for a short time late in 2008, the return was actually negative). My recommendation is to understand your risk tolerance, identify your goals and diversify your investments. Investing in equities carries a lot of riks, but over the long term has shown itself to be the best way to beat inflation.
Cheryl Priest:
We are retired and need more annual income. We do not want an annuity. Is a 20 year AAA bond like an annuity -- monthly payments cannot change but you eventually get all the principal back? We could buy one with Vanguard.
Jeff Kostis:
If you buy an individual bond that you are going to hold until it matures, then it does become similar to an annuity. The interest payments are not going to vary and you will get your principal amount back in 20 years. However, there are a lot of risks with this. First, just because it is AAA rated, today, does not mean that in 10 years the company will not go out of business. Also, the $1,000 in principal you get back in 20 years will be worth a lot less because of inflation. There are other risks, but I will not go into them here. The advantage of an annuity is that the payments are guaranteed, even if the issuing company goes out of business (talk to your state's insurance regulator for specific information about your state's limits and details). Like other financial products, an annuity has its advantages and disadvantages. Depending on your circumstances, an annuity may be the best option. If you have not examined them recently, you may want to reexamine the current annuity products. The government has issued some informative buying guides and there is some good information on the Internet about them. Alternatively, you may want to speak with a fee-only advisor (who does not earn a commission on their sale) to educate you on the pros and cons of an annuity versus other options for you. You will need to pay them for this service.
KF:
I am 43 years old. I have put max pretax contributions into my 401k, and have put 5,000 into an IRA (do not qualify for a Roth) for 2008. Can I open up multiple IRAs and put 5,000 into each of them each year? Or is it only one IRA per person (unless a 401K is transferred into an IRA when you leave a company)?
Jeff Kostis:
You are doing a great job of saving for your retirement!! Unfortunatly, the $5,000 IRS limit for the IRA is for the year, not for each account. However, there is benefit from diversifying the tax status of your investments, to have some tax-deferred accounts and some taxable accounts. Depending on your goals and overall situation, you may want to talk with a financial planner about other options beside saving in tax-deferred accounts.
Ray Olson:
How do I set up an IRA account to live beyond me? What are the pros/cons of this and are there various ways to structure the beneficiary(ies). Can I state for instance: 50% to Person A (if living)? Thanks.
Jeff Kostis:
Short answer, Yes - you can state 50% to person A, 20% to person B and 30% to person C. The major benefit of doing this is to give your heirs the ability to stretch out payments for decades to take advantage of tax-deferred compounding. However, there are very specific legal requirements and multiple strategies that you can use to maximize the benefit of doing this, depending on your goals and specific situation. I suggest talking with an estate-planning attorney AND a financial planner to make sure you follow the requirements correctly to meet your goals. If you want to tackle this on your own, I suggest going to Ed Slott's Web site as a starting point (www.edslott.com).
L Johnson:
For diversification the recommendation is to allocate a percentage of your savings to different equities, and a percentage to bonds. Bonds are supposed to be a safety net when stocks drop, but this past year bonds also dropped. Is it wiser to put that portion of your portfolio in cash, say CDs or money market funds? So, instead of a 50/50 stock bond allocation, have a 50% stock 50% cash allocation?
Jeff Kostis:
This is a very good observation. Most bond funds did drop in value in 2008. The only exception is Treasury bond funds, which acually saw an increase of about 12%. This highlights the investment risk of non-Treasury bond funds. They are not immune from losses, and those losses may be severe. The problem with putting your entire bond allocation in cash-equivalents is the low return. CDs and money market accounts offer lower returns than bond funds becuase they are so much safer. I generally recommend only investing in Treasury bond funds (along with CDs and money markets), but many other financial advisors advise their clients to use several funds, including Treasury funds, high grade corporate bond funds, high yield bond funds and TIPS. This will usually increase your return, but you are taking more risk overall (thus the higher return).
Ed Fisher:
I put money in a traditional IRA with after-tax contributions when optional IRAs were first established. How can I roll them into a Roth or get those contributed after-tax contributions out without paying taxes again?
Jeff Kostis:
This is a very complex issue. The IRS will not tax you twice on the same money, so the after-tax contribution will not be subject to taxation again. However, if you have multiple IRA accounts and only do a rollover of 1 account to a Roth, the IRS requires that you look at the balance of all your IRA accounts (not just the one you are rolling over) to calculate the part of the balance that has already been taxed. For example, suppose you have 2 accounts - Account A with an after-tax basis of $100 and total balance of $200, and Account B with a $0 after-tax basis and total balance of $200. Further, suppose you only convert Account A to a Roth IRA. The IRS says you must look at the balance of both Account A and B ($400 in this example), and the after-tax basis of both accounts ($100 in this example). The IRS then says your after-tax contribution in Account A is 25% of the balance or $50 ($100 / $400 * $200) and that you will owe tax on 75% or $150 of the account balance in Account A when you do the conversion. However, the remaining after-tax contribution of $50 is in effect credited to Account B, so it is not lost. Due to its complexity, I suggest you talk with a tax accountant or financial planner to help explain the calculation and the impact or your overall tax situation.
richie:
Hi...thanks for taking my Q. It's a 2-parter. When advisors in paper/radio /TV say 'your portfolio'- what are they including? Everything plus primary residence? Or are they speaking without primary residence? Thanks, Richie
Jeff Kostis:
While I can't speak for all advisors, I do not include the primary residence when talking about a portfolio. I believe that your primary residence is where you live and should not be looked at as an investment. However, if you own a vaction home, rental property, etc., this would be part of your portfolio.
Ray Olson:
What is the absolute last date by which I must start withdrawals from my IRA account? Six months before my 71st birthday? Thanks.
Jeff Kostis:
For 2009, there is no required distribution amount. My understanding of this law, however, is that if you needed to take your distribution in 2008 but were able to wait until April 1, 2009, you still need to take your distribution. The actual IRS verbiage from Publication 590 states: "If you are the owner of a traditional IRA, you must start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date. Distributions by the required beginning date. You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). If you do not (or did not) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year." The publication continues with an example "You reach age 70½ on August 20, 2007. For 2007, you must receive the required minimum distribution from your IRA by April 1, 2008. You must receive the required minimum distribution for 2008 by December 31, 2008." I suggest you check with your tax accountant to see if you are exempt or required to take the distribution.
Carey Hoffman:
I am 58 yrs old. I hae a 401k which has dropped drastically over the year. It is not a large one but I was depending on it for a bit of retirememt help. With only about 5 yrs till I wish to retire, and lossing in my 401, should I stop putting in, take it out somehow, or let it ride itself out. Thank you, Carey Hoffman
Jeff Kostis:
The market crash over the past year has devestated many 401(k) accouns and forced people to rethink their retirment plans. Generally, taking the money out of your plan is not a good idea, since you still need to make up for the losses you just suffered. If you become too conservative in your investment approach, you may not be able to meet your retirement goals. I recommend using this as an opportunity to reexamine your risk tolerance and rebalance your account to more closely match your goals, ability to take investment risk and desire to take that risk. You can look at my prior post for tools to help. Also generally speaking, many people chose to see a financial adviser as they close in on important life events, such as marriage, first child or retirement. If you are not sure what to do after looking at these other tools, you may want to see a financial planner and have them do a "Second Look" or "Portfolio Check-up" to give you an outsider's perspective on where you stand.
ak:
My husband and I are both 29, and have recently set a goal to retire at 50. Maxing out our 401ks won't be enough, and we aren't eligible to contribute to a Roth IRA - where is the best place (or places) to invest money so that we can reach our goal?
Jeff Kostis:
This is a very aggressive goal, and I hope you are able to meet it. As you point out, you will need to save much more than you can in your 401(k). The biggest investment concern I see is that you will need to save outside of traditional retirement plans and annuities since you will need money to live on from 50 (when you retire) and 59, the age you can take penalty-free withdrawals from retirement accounts. I recommend using a taxable account for the rest of your savings, and making sure to invest in very tax effecient funds or stocks. More holistically, I would also be concerned about how you pay for health care between 50 and 65 (when you are eligible for Medicare) and how much your Social Security benefits will be since you will not have 35 years of earnings. You may benefit from talking with a financial planner to help with these calculations and provide a more detailed risk analysis.
Glenn Turner:
I'm looking for the proper asset allocation for my retirement funds. I have approximately 25 years to go before retirement and have a fairly high tolerance for risk (I have continued to buy during this downturn).
Jeff Kostis:
There is no "right" or "wrong" asset allocation. There are a lot of factors that go into determining an appropriate allocation. For help determing your allocation, you can go to Kiplinger's web site, and do a search on "asset allocation". You can also go to other sites, including Morningstar, Vanguard, Fidelity, CNN, MSN Money and others to help determine your risk tolerance and get a recommended allocation. Another option is to look at several "life cycle" or "target date" funds from Vanguard, Fidelity, T Rowe Price, etc. and see how these funds allocate their portfolio. Lastly, you can go to the library and check out the book All About Asset Allocation by Richard Ferri. This book has very specific recommendations based on your age and risk tolerance.
Eric:
When I got my new job, I arbitrarily picked a contribution percentage for my 401k plan and changed that percentage throughout the first half of the year without much thinking. Then I realized I wanted to contribute enough to get my employer's match. How do I go about calculating how much more or less I should contribute to get just the match? I'm paid by the hour and my wages have changed twice within this time frame. Will that complicate matters?
Jeff Kostis:
I'll start with your second question - yes, having fluctuating wages will complicate matters, but there is a short-cut around this. Most 401(k) plans I have seen are based on a calender year. Since this is still early January, if your employer uses a calendar year for their plan, you should be able to adjust your contribution now to the level of the match and not miss out their contribution. If your employer is not on a calendar year plan, find out how much you have contributed to your 401k during the plan year and your gross wages during the same time. Next, estimate what you expect to earn from now until the end of the plan year and add this to your wages so far (call this total A). Next, multiply the combined number (A) by the percent of your wages that the company matches against (call this B). Subtract the amount you have already contributed against from B. This will give you the dollars you need to contribute from now until the end of the plan year (call this C). Lastly, divide C by the amount you expect to earn from now until the end of the plan year. This will be the percent you want to contribute to the plan moving forward. You will not be "spot on", but this will get you very close. Also, be sure to correct the percentage at the start of the next plan year.
carol:
what is the difference between a cfp and personal financial advisor? which one is the best choice for asking re retirement planning?
Jeff Kostis:
A CFP(R) is a license that a financial planner can earn by meeting very strict education, examination, experience and ethics requirements. A CFP(R) must take courses in 6 subject areas and pass a 2 day examination. They must also have 3 years of practice experience and pass 30 hours of continuing education every year. This is all monitored and maintained by the Certified Financial Planner Board of Standards. The term "personal financial advisor" is not a regulated term, either by the government or a private board. Vitrually anyone can call themselves a "personal financial advisor." Regardless of who you use to help with your financial planning needs, you should verify their basic information - are they registered with the state or SEC as required, are their credentials real (i.e. do they really hold the CFP(R) or other designation), etc. Not all financial planners choose to take the CFP route, and may have other designations, such as PFS/CPA, ChFC, etc. You should carefully interview any prospective provider. You can go to the NAPFA website (www.napfa.org) or the CFP Board web site (www.cfp.net) for samples of questions to ask a financial advisor.
Eliana:
Hello, I just recently graduated college. I am making around 34k a year but have over 70k in student loan debt, should I participate in my company's 401k plan (that matches dollar for dollar up to six percent) and save money or should I put all my efforts to clearing my student loan debt and credit card debt?
Jeff Kostis:
Congratulations on graduating from college and starting to think about retirement already! Typically, I recommend that my clients participate in their employer's 401(k) program as quickly as possible, and at least up to the matching amount (6% in your case). With your company's plan, you are getting a 100% return on the first 6% of your contribution, plus reducing your tax bill. I would then recommend paying off your credit card debt as quickly as possible, since credit cards usually carry a higher interest rate than student loans. You also may be able to deduct the interest you are paying on your student loans, so the "real" may be even lower than the stated rate.
Rachel Sheedy:
Welcome to today's Jump-Start Your Retirement Plan live discussion. I'm Rachel Sheedy, editor of Kiplinger.com's Retirement channel, and I'll be moderating the discussion. Jeff Kostis of JK Financial Planning will be answering questions for the first two hours. Let's get started.






