Age 61 1/2 and Laid Off

Jan,

I am 61 ½ years old and just received notice that I will be laid off on December 30, 2009. I believe that the Social Security Administration averages the last few years of your employment in order to determine your monthly benefit. For the past 3 years I have made about $77,000 and I am worried that if I find a new position it will not pay that much and if I wait until I am 66 ½ to retire my monthly benefit will be reduced substantially. Should I retire now while my income is high and work part time to supplement my income or take a lower paying job? I currently have roughly $220,000 in all of my retirement accounts. Thanks for your opinion.

Coy from Mineral Springs, NC


Coy: You are facing a difficult decision. According to the Social Security rules, your social security benefits are actually based on your lifetime earnings. Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most money. They then apply a formula to those earnings to arrive at your basic benefit, and that is the amount you would receive at full retirement age. There is a worksheet on line at www.socialsecurity.gov to help you determine your benefit amount. This means if you continue working past age 62, the additional earnings could actually increase your benefit.

I encourage you to talk with a financial advisor about your retirement accounts to determine how best to invest those funds for your retirement needs. There are some excellent variable annuities with lifetime income guarantees you can consider. If you don't currently have a financial advisor, I suggest contacting a local bank or brokerage firm and ask to speak with a retirement specialist. The financial advisor can assist you in determining whether you currently have sufficient funds to go ahead and retire or whether you may want to continue to work a few additional years so you will have the money to do what you desire in retirement.

Good Luck!

Year End Tax Planning

Since we are in the last few weeks of 2009 and looking forward to a new year in 2010, now is an excellent time for a financial review to ensure you take advantage of every opportunity to increase your savings for retirement and lower your tax bill as much as possible.

• Make sure you take advantage of the “catch-up” provisions for IRAs and retirement plans. That means if you are age 50 or older, you may contribute an extra $1,000 to your traditional or Roth IRA for a total of $6,000 for 2009. For your 401(k), Roth 401(k), 403(b), and 457(b) plans, if you are age 50 or older, you may contribute an additional $5,500 for a total of $22,000. For your Simple IRA and Simple 401(k), if you are age 50 or older, your catch-up amount is $2,500 for a total of $14,000.



• Remember Required Minimum Distributions from your traditional IRA, 401(k) and other qualified retirement plans are waived for 2009 due to the passage of the Worker, Retiree and Employer Recovery Act of 2008. This waiver also applies to Beneficiary IRAs.



• If you inherited an IRA and there are multiple beneficiaries, you have until the end of the year following the year of the IRA owner’s death to split the IRA into separate accounts. If the IRA is not split by the end of the year, the oldest beneficiary’s age will be used to determine Required Minimum Distributions. This could penalize younger beneficiaries because they may want to stretch the IRA out for a longer period of time by using their own life expectancy. If the IRA is not split in a timely manner, they lose that option.



• Remember there is a potential for higher tax brackets in the future. If Congress does not act, after 2010, the current 25%, 28%, 33% and 35% tax brackets will increase to what they were prior to 2001, which were 28%, 31%, 36% and 39.6%, respectively. Proposals are being considered for tax bracket modification; however, we do not yet know what the outcome will be.



• Consider a Roth IRA conversion. Traditional IRAs grow tax-deferred, however, you will tax ordinary income taxes on any withdrawals when you begin taking money out. Roth IRA’s, however, have the potential for not only tax-free growth but also tax free withdrawals. The Tax Prevention and Reconciliation Act makes it possible for anyone to convert their traditional IRA to a Roth IRA beginning in 2010. Remember taxes will be due on the amount converted, but, you also have the opportunity to spread the taxes out over two years paying them in equal installments in 2011 and 2012. There are many factors to consider when thinking about a Roth conversion, and it is usually not advisable to convert to a Roth IRA unless you have money outside of the IRA to pay the taxes.

Out of the Country, Out of Luck?

Here's a question I'm sure you've never encountered. I am 50 years old. I worked in the USA from 1987 - 1995. During this time period I was employed and contributed to a 401k plan along with my employer. In 1995 I moved to Europe (Greece) with my family and have since been employed in the private sector (no affiliation with USA what-so-ever). My question is as far as the 401k plan I left behind (worth $40,000 now) what can I do about it other than wait out my retirement? Can I contribute to it from where I am?

Nick from Greece

Answer

Dear Nick: From your e-mail, it sounds like you are a non-US citizen. Generally, qualified retirement plans, such as a 401(k) are non-transportable (i.e. they cannot be rolled over to a qualified plan in another country). Your first course of action should be to obtain a copy of the Plan document and review the options available at termination of employment. If you have the option of taking a full withdrawal, you may be subject to U.S. as well as Greek taxes, and of course, you would have to pay the 10% early withdrawal fee if you take the funds before age 59 1/2.

As far as the ability to contribute to that 401(k) from where you currently are, you would not be able to make additions to it unless you are still employed by the same company and are being paid in U.S. dollars.

My advice would be to review your 401(k) plan document and then consult a tax adviser to determine the tax implications of taking a full withdrawal if that option is available to you. Otherwise, waiting until after age 59 1/2 may be your best course of action.

Good luck, and if your circumstances differ from what I surmised from your e-mail, please give me more details, and I will try to be of additional assistance to you.

Out of the Country, Out of Luck? (follow up)

Thank you Jan, By the way, I am a US citizen (dual citizenship). I dont think that changes anything from what you described though. Are you aware of any list of overseas tax advisors? There must be since there are US resident employees who work for US companies here.

Nick from Greece

Answer

Dear Nick:
You are correct, the dual citizenship alone does not change anything. The only way you would be able to roll your 401(k) to an IRA is if you have a US residence.
As far as a tax advisor, I would recommend you go into a local bank or brokerage firm and ask to speak with a Financial Advisor. Most banks have Financial Advisors who can assist with matters such as these.
Good luck!

Roll Over

With so much being written and talked about regarding Roth IRA conversions, you may be wondering whether you can “roll-over” your qualified retirement plan directly into a Roth IRA. The simple answer is “yes,” because of the passage of the Pension Protection Act of 2006. The new legislation allows eligible qualified retirement plan assets to be rolled over directly into a Roth IRA beginning January 1, 2008. There is no longer a requirement that the qualified plan be rolled over to a Traditional IRA and then converted to a Roth IRA. However, there are rules that must be followed when rolling over qualified assets to a Roth IRA:

0. The assets must meet the retirement plan’s definition of “eligible rollover distributions”. Be sure to check with your plan administrator for the plan’s definition and rules regarding rollover distributions.
0. At the time of the rollover, you must have a written “irrevocable” election of the rollover.
0. The rollover can be either “direct” or “indirect.” A direct rollover is when a check is made payable directly to the receiving institution. An “indirect” rollover is when the check is made payable to the participant, however, the rollover must occur within 60 days of the distribution.
0. Pretax and after tax assets may be rolled over to a Roth IRA. All pretax money is taxable in the year of the rollover.
0. If you rollover retirement plan assets prior to January 1, 2010, you must have a modified adjusted gross income of $100,000 or less, and if married you must be filing joint income tax returns.
0. For inherited qualified retirement plans, a spouse can rollover the plan assets to his/her own Roth IRA or an inherited Roth IRA. Non-spouses who inherit retirement plan assets, can only rollover to an inherited Roth IRA and it must be a “direct” rollover.

A rollover to a Roth IRA may be worth considering for you because qualified distributions from Roth IRA are tax-free and penalty-free. Be sure to check with your plan administrator to determine whether you qualify for a Roth IRA conversion.

Should I Convert?

I’ve been hearing and seeing a lot about “Roth IRA conversions” recently. I think taxes will be increasing in a year or so, and am thinking about converting my traditional IRA to a Roth IRA now, so I can take tax-free distributions when I retire in about 7 years. My taxable income this year will be approximately $110,000 and I am currently age 61. My questions are: 1) am I too old to think about an IRA conversion and 2) should I think about “converting” my IRA this year or wait until next year?

Fred from Milwaukee, WI

Answer

Fred: Your thinking about taxes increasing in a couple of year unfortunately is probably pretty accurate and given your time horizon for needing to access your IRA, a conversion to a Roth IRA is probably a good idea for you. However, you will not be able to convert to a Roth IRA this year (2009), because you cannot qualify for the conversion since your income is over $100,000. However, beginning next year, 2010, anyone will be able to convert to a Roth IRA regardless of income or filing status. As you are making the decision whether or not to convert to a Roth IRA, keep the following factors in mind:

1. The tax bracket you anticipate being in after you retire – the higher you think your tax bracket will be, the more you will benefit from the conversion.
   
2. Whether or not you have funds set aside to pay the income taxes when you convert. Remember the amount you convert will be added to your income in the year you convert, and you should always pay the taxes due from non-IRA funds. The advantage of converting in 2010 is that you will be able to spread the taxes due on the converted amount over 2 years, the 2011 and 2012 tax years.
   
3. The time horizon before you will need to access the IRA funds. Since you do not plan to use your IRA during the next 7 years and you are over age 59 1/2, you are in a good position for a conversion.

Maximizing Your Retirement Savings

You have contributed to Social Security your entire life, and now you wonder if it will be there for you when you are ready to retire. None of us have that answer, but there are ways to help ensure you maximize your opportunities to save for retirement.

First of all, if you are employed and have access to a qualified plan, you should contribute the maximum amount possible. If you are not able to contribute the maximum amount allowed, you should at least contribute the percentage matched by your employer. For example in 2009, you are allowed to contribute up to $16,500 to a 401(k) or 403(b) (if you are age 50 or older that amount increases to $22,000). If you cannot financially afford to contribute the $16,500, but your employer matches the first 5% of your contributions, then you should make every effort to contribute the full 5%. Otherwise, you are “leaving money on the table” that could be invested for your retirement.

Secondly, if you have contributed the maximum amount you can to your qualified plan or if you do not have access to a qualified plan, you can open or add to your traditional IRA. Your contributions to a traditional IRA may be tax deductible depending on your modified adjusted gross income and whether or not you and/or your spouse has access to a qualified plan at work.

Now is an excellent time to invest tax-deferred, whether it be in a qualified plan at work or an IRA because the market is currently down and we know we should try to “buy low and sell high.” It’s often difficult to continue investing when you see your account decrease in value, but remember if you continue your contributions while the market is down, you increase your chance of having more dollars in retirement.

Avoiding Penalties for Early Retirement

Distributions from an IRA prior to age 59 ½ may be subject to a 10% IRS penalty in addition to ordinary income taxes. Under Internal Revenue Code 72(t), there are certain exceptions that will allow the 10% penalty to be waived by the IRS, such as death, disability, medical expenses greater than 7.5% AGI, Substantially Equal Periodic Payments, etc.

The Substantially Equal Periodic Payments portion of the IRS Code 72(t) is of particular importance to early retirees, because it allows a person to access their IRA funds prior to reaching age 59 ½ without paying an additional 10% penalty. There are certain conditions that must be met, however, to take advantage of this exception. The conditions include:

• Payments have to be based on the IRA owner’s life expectancy or joint life expectancy of the IRA owner and his/her beneficiary
  
• Payments must be substantially equal periodic payments
  
• Payments must be calculated using an interest rate no more than 120% of the applicable federal mid-term rate for either of the two months immediately preceding the month the distribution begins


• The IRA owner must continue the payments for the later of five years or until age 59 ½, whichever is longer

The three methods of calculating the 72(t) SEPP payments are:

Amortization method – think of this method the way you would your mortgage. The account balance is “amortized” over the IRA owner’s life expectancy or the IRA owner and designated beneficiary’s joint life expectancy. The interest rate used cannot exceed 120% of the applicable federal mid-term rate.

Annuity factor method – The account balance is divided by an “annuity” factor. The annuity factor can be derived by using up to 120% of the applicable federal mid-term rate, the attained age of the IRA owner and the
annuity table in Revenue Ruling 2002-62.

Required Minimum Distribution
method – The account balance is divided by the IRA owner’s life expectancy (use the IRS life expectancy table, either the single or uniform table). Just remember whichever table used must continue to be used for all subsequent years.

The annuity factor method often results in the highest income payment and the RMD method usually results in the lowest income payment.

Traditional vs a Roth IRA

There are two different types of IRAs available today, the traditional IRA (deductible and non-deductible) and a Roth IRA. Traditional IRAs are usually funded with pre-tax dollars, which means you will have to pay taxes on the entire amount when you withdraw your funds. Roth IRAs are funded with after-tax dollars, and can be taken tax-free when certain conditions are met. You may be hearing a lot lately about converting your traditional IRA to a Roth IRA in order to take advantage of tax-free withdrawals in retirement. In 2010, more people will become eligible for Roth Conversions because of the Tax Increase Prevention and Reconciliation Act of 2006. Currently, an individual with modified adjusted gross income of more than $100,000 (either married filing jointly or single) cannot qualify for a conversion. Beginning in January, 2010, however, anyone regardless of their income will be able to convert. In addition, the income taxes due for the conversion can be paid over two years (remember the amount converted will be added to your income for the year) rather than having to pay all the taxes in one year. With this new legislation you will be able to include half the amount converted when you file your 2011 taxes and the other half when you file your 2012 taxes.

There are many reasons you may want to consider converting your traditional IRA to a Roth, such as being able to take tax-free distributions of earnings after 5 years and age 59 ½ and the ability to pay taxes at possibly a lower tax bracket now than you would in the future. Whether or not to convert your traditional IRA to a Roth IRA will depend on many factors including your ability to pay the income taxes due from a non-IRA account, your time horizon before taking distributions (the longer you can wait to take distributions the better), and the difference between your current and future income tax bracket. As with any important financial decision, you should always talk with your personal financial advisor about your specific situation to determine whether it is the right choice for you.

Choosing an IRA

Choosing which IRA is right for your individual circumstances is very important. There are distinct differences in a Traditional IRA and a Roth IRA, however they are both good choices when saving for retirement.

An IRA can best be described as a "Basket" holding different investment options, i.e. stocks, bonds, annuities, CDs, mutual funds. Your investment choices will depend on several criteria, including your time horizon and risk tolerance. Traditional IRAs allow your savings to grow faster through tax-deferral and Roth IRAs allow you to have tax-free earnings as long as certain conditions are met.

In order to determine which IRA is right for you, you need to know the differences and details of each. There are pros and cons for each type, however, IRAs are an excellent way way to help accumulate savings for retirement.

Investing in an Annuity

People are retiring younger, living longer and have a desire for a better life in their later years. In many cases their savings are low or non-existent and pensions are scarce. The markets are constantly changing. many investors find they need fixed assets in their portfolios as they near retirement because of their desire for stability. Some people turn to CDs for this dependability, but many have invested in fixed annuities.

Fixed annuities provide a competitive and predictable yield with no sales charge and no annual expenses. The money invested is guaranteed by the insurance company issuing the annuity and in most cases there is a money back guarantee of principal should the need arise for a full withdrawal of the funds. in addition, the interest from a tax-deferred annuity is not taxed until it is withdrawn.

At retirement time, the annuity can be annuitized for a lifetime income for predictable periodic payments to pay bills, medical expenses or take vacations.

Before investing in an annuity, you should consider:

• How much total income you need


• Other sources of income you have to meet retirement needs


• Do you need income for anyone other than yourself

Always consult with your personal financial advisor before investing in an annuity.