Converting Roth IRA into an Annuity

(The following is a series of correspondences between Brent and myself. I hope the information can be helpful to a number of people.)

Converting Roth IRA into an Annuity

Hello, I am 52 and planning to retire at age 55 ( I am a federal employee under the older Civil Service Retirement System). My question concerns annuities. A salesman is recommending I convert my Roth IRA to an annuity so there is a guaranteed 5% return (compounded). I could make much more if the investments I choose for the annuity do well – there is a 1% reduction on those excess returns in the form of a company fee. Wouldn’t I incur a penalty by transferring the Roth IRA into the annuity? I’ve never heard of doing this and an internet search didn’t turn up much information. These are funds I don’t plan on spending until much later in life.

Thanks

Brent from Seattle, WA

Answer

Brent, It sounds like you already have a Roth IRA, but since you used the term "convert," I just want to make sure you do not currently have a Traditional IRA, and the salesman is recommending you convert the Traditional IRA to a Roth IRA and then purchase the annuity he is recommending. For purposes of this answer, I will "assume" the former is true and that your IRA is already a Roth IRA. Purchasing a variable annuity with a rider guaranteeing lifetime income is a very good option for someone wanting to guarantee he/she will have a specified amount of income for the rest of their life, especially if you can wait 5 to 10 years to begin the income stream. However, I would like to clarify the terminology you are using as presented to you by the person making the recommendation. These "living benefit" riders come in many forms, such as GMIB(Guaranteed Minimum Income Benefit), GMWB(Guaranteed Minimum Withdrawal Benefit, GMAB(Guaranteed Minimum Accumulation Benefit), and they do add to the expense of the annuity. It is important to understand which Rider your advisor is recommending and the additional cost of the Rider. These Riders are too complicated for me to explain in this response, however, you should ask your Advisor to explain it in detail to you.

In addition, ask your Advisor, to clarify his terminology of guaranteeing you a "5% return," because that can be very misleading, and it sounds like he is proposing a "Guaranteed Minimum Accumulation Benefit." If so, the "5% guaranteed return" would only allow you to elect a lifetime income after a certain number of years utilizing that guarantee, and yes if your investments perform well, you could realize more than the 5% guarantee. The additional cost of these guarantees will, of course, lower your overall return.

As mentioned, these Riders can be complicated and often difficult to understand, therefore I recommend you have the Advisor give you a detailed explanation.

With regard to your question about a penalty, if you currently have a Roth IRA, there would be no IRS penalty for you to put the funds into an annuity if you "roll over" the IRA directly into the annuity.

One last thing I would like to mention, I would hesitate purchasing an annuity from anyone I refer to as a "salesman." An annuity with these types of features should only be purchased through a true "Financial Advisor," who you feel is taking your entire financial situation into consideration, and not looking to merely "sell" you a product.

If any of the above assumptions are incorrect, please let me know and we will look at your situation again.

Best regards,

Jan Jaffin

Converting Roth IRA into an Annuity - reply

Jan,

Thanks for taking the time to answer my question about rolling over the Roth IRA (I have all Roth IRA savings having converted a traditional IRA balance some years ago). Your advice is spot-on, he did rush the decision, I need more information. It is a Xxxxxxx product but he also represents a couple other companies. No mention of a waiting period to lock in the guaranteed return was made. Having bought and cancelled whole life policies in my youth, I am hesitant to make any snap decisions. And I agree a financial advisor with my best interest in mind is the place to go for such a decision.

Brent

Answer

Brent,

I'm glad I could be a bit of help. I don't feel comfortable recommending specific companies or products through this venue, but annuities are my specialty, so feel free to ask any additional questions.

Good luck to you.

Jan Jaffin

Converting Roth IRA into an Annuity - follow up

Jan,

If you have any recommendations on how to find a fee-only financial advisor, I would be most appreciative to receive it. My father was extremely complimentary of your response and we decided this is the way to go for such an important decision and complicated set of products. He started a similar annuity a few years ago and was surprised at how taxes are applied to distributions and really didn’t need the insurance that comes with a VA. So, I think professional independent advice is the way to go.

Brent

Answer

Brent,

You are correct, you do need to seek professional unbiased advice. Trusting your retirement assetts to an individual to invest is an extremely important decision. There are many good Financial Advisors who will work with you to find the best way to invest your retirement funds, both fee-based and commissioned. My recommendation would be to contact some of the better known brokerage firms and banks in your area, and ask to meet with a Retirement Specialist. Then schedule an appointment and interview the Advisor to determine your comfort level with him/her. Ask them how they are compensated, and then make your decision. If they rush to make a recommendation and pressure you to make an immediate decision, that person may only be trying to "sell" you a product. This may take some time and effort on your part, however, it will be worth the effort if you find a person who will work to make sure you have the right retirement vehicle for your particular situation and a person in whom you have complete confidence.

As far as your father's annuity is concerned, it sounds like he has a non-qualified annuity. In a non-qualified annuity, the earnings come out first and of course are taxable at ordinary income tax rates. Your situation is different, if you do not take distributions from your Roth IRA until you have held it for 5 years and you are age 59 1/2, there will be no taxes due when you begin taking distributions. In addition, if you are only interested in income and not a death benefit, be sure to let the person you consult know that you only need a lifetime withdrawal benefit and not any additional death benefit. There are many options available with variable annuities, and your Advisor should only add the one(s) important to you, because each Rider will cost extra and take away from any potential earnings.

Best Regards,

Jan Jaffin

When to Retire

One of the most important decisions you will make in life is the one regarding when to retire. There are many considerations when you make this choice, among them:

*Your health and medical history
*The longevity of your family
*Your ability and/or desire to continue working

You may begin receiving benefits as early as age 62, however, if you begin your benefits early, you will have a permanent reduction in your benefit payments. In addition, to the reduction in benefits, another disadvantage of early retirement are deductions for exceeding the earnings limit. This earnings limitation, however, ends at full retirement age. The earnings limitation for 2010 is $14,160. Social Security uses a formula to determine the reduction in your benefits if you exceed that amount. If you were under full retirement age for the entire year, you would lose $1.00 in Social Security benefits for every $2.00 earned over $14,160. Earnings is considered any income from gross wages reported on your W-2 Form and net profit from Schedule SE. The following would not be considered earnings: Interest, Dividends, Capital Gains, Rental Income or any other Investment Income.

An example of the amount of the reduction if you retire early is:

If you were born between 1943 and 1954, your full retirement age will be age
66. If you retire at age 62, your reduction will be approximately 75%, at
age 63 your reduction will be 80%. If you retire at age 64, you will receive 87%
of your benefit, and at age 65, you will receive 93%. These are permanent
reductions in your benefits.

However, many people believe you should begin receiving benefits as soon as possible so that you can enjoy them longer. It will usually take at least 12 years of receiving a higher retirement benefit to make up for the Social Security checks you did not receive. In addition, the 12 year rule does not take into consideration the time value of money or the loss of enjoying your retirement years earlier. Receiving income early could allow you the freedom to do many of the things you have been delaying doing because of your work schedule, such as travel, hobbies, spending additional time with family and friends.

You can retire and begin receiving Social Security benefits as early as 62 or delay them until age 70. If you delay receiving benefits, you will receive a permanent increase in your payment amount depending on the number of months you do not receive benefits between full retirement age and age 70. Delaying retirement until after full retirement age will result in a permanent increase in your benefit amount. However, it takes approximately 12 ½ years of receiving the increased amount to make up for the checks that you could have received between ages 66 and 70, and, here again, the 12 ½ years does not include the time value of money. Delaying retirement past age 70 will not result in a higher monthly benefit.

As mentioned previously, there are many considerations when making this important decision. I recommend going to the Social Security web site to review all the calculations and requirements of early and delayed retirement as well as retiring at full retirement age,
www.socialsecurity.gov/.

Know the pros and cons of a reverse mortgage before going for one

By Marlon Powell, guest blogger

Reverse mortgages were initially launched in the year 1988. These loans are gaining more and more popularity, particularly among senior homeowners. As stated by a survey conducted by the AARP (American Association of Retired Persons), consumer consciousness is increasing and the average age for reverse mortgage borrowers has dropped from 76 to 73. Once the baby boomer generation attains 62 which is the age to qualify, the market for reverse mortgages is anticipated to grow significantly. In addition, the variety of products is also anticipated to increase to fulfill this demand.

According to the views of various finance professionals, a reverse mortgage loan mustn’t be the focus of a retirement plan. However, it is reasonable for some senior individuals. There are obviously pros and cons of reverse mortgages and it’s essential that you evaluate them watchfully before going for such a loan.

Whether you’re thinking about a reverse mortgage loan, giving suggestions to a family member or are keen to know more, the details given below can help you:

Pros of reverse mortgages

• The principal advantage of this kind of a loan is that you can take out a loan by utilizing the home equity and you don’t need to pay off the loan till the time you vacate your home. Rather than sending payments to a lender, you receive payments from a lender.
  
• If you have attained age 62, then you can qualify for a reverse mortgage. The amount you’re eligible to receive is dependent on your age, the amount of your home equity and obviously, the interest rate. The borrowing caps fixed by sellers and the location of your home are also important elements. If everything else remains the same, the higher your age when you obtain the loan, the higher will be the amount you can get.
  
• When you shift (whether you sell your home or retain it and lease it out) or if you expire, the loan has to be paid off. Nevertheless, the outstanding amount with interest wouldn’t surpass the value of your home. If any money remains when the value of your home grows quicker than the cost of the loan, you or your heirs can retain the difference.
  
• It is a flexible kind of a loan. You can receive the money as monthly payments, a one time payment, a line of credit or a blend of the three. Since the money you get is a loan and not income, it’s not taxable.
  
  Cons of reverse mortgages
  
• One of the most significant downsides of this loan is that it’s expensive. Origination fees and closing costs can amount to 8-10% of the loan limit. This is worth taking into consideration. It is equal to paying 8-10 points on a traditional mortgage. It’s so costly that it is only reasonable if you want to stay in your home for an extensive period.
  
• It is essential that you understand that in spite of the fact you don’t need to pay off the loan till the time you shift from your home, you’re still acquiring debt. If the value of your home grows adequately, (which happens on rare occasions) that growth can compensate a part or all of your loan costs. Regardless of how you take it, the debt along with interest is going up each month. In addition, you have the accountability of the recurring costs of insurance, upkeep and real estate taxes.
  
• One more probable disadvantage of this loan is family discord. If you have inheritors who hope to acquire the property, they might get disappointed to find that the lender possesses a considerable part or the entire home. You should make sure to discuss with your family members if you intend to obtain this loan. It is assumed that they would look for what is sensible for you in the end however it is always prudent to stay away from sudden unexpected events.
  
  When it is a sensible option
  
  A reverse mortgage can offer additional income for seniors with small amount of retirement savings who want to stay in their homes for a considerable period. It is also a feasible option for senior citizens who have very little cash and who might be compelled to quit their homes. A number of households have utilized these loans to offer home care for an aged parent.
  
  If the advantages of this loan surpass the disadvantages in specific circumstances, there are some loan options. The fees and loan limits differ from one lender to another and must be explored comprehensively. Options that should be taken into consideration are Fannie Mae Homekeeper Mortgage and Federally Insured Home Equity Conversion Mortgage or HECM.

Retirement on the Run

Note: This is the actual untouched question I received.

Dear sr

my friend have a criminal case pending in the USA ,he does not return to the US to face it , now he wants to receive his retirement money but we will like to know if it is true that he can not receive anything until he will return to the USA and face his legal situation .He is USA citizeen

Please answer me back ASAP

Yolanda from South America

Answer

Yolanda,

Although I am glad to give retirement advice, this is a situation that requires legal advice from a lawyer. I would also suggest that you check out the following web site: www.socialsecurity.gov/onlieservises/ Click on the "Do you Qualify for Benefits?" link, and I think you will find some valuable information.

Good luck to you, you are probably going to need it.

Jan Jaffin

Reply

Dear Mr. Jaffin

thanks for your advice on the social security matter. He is allready contacting an Attorney to clear up his legal situation.

You are doing a great job and I thank you one´s more time

Yolanda

IRA Contribution Limits

During 2009, I worked for 2 months for a company that offered a 401k. During that time, I contributed $1927. Then, I went to work for another company that does not offer a 401k. I am 54 years of age. How much can I contribute to my IRA? Also, my wife worked for a company that offered a 401k, again, for 2 months. She contributed $1267. She did not work for the rest of the year. She is 45 years of age. How much are we allowed to put into her IRA?

Thanks,

Lance from Kansas City, KS

Answer


The simple answer to your question is, you may both contribute to a Traditional IRA for 2009 (up to April 15, 2010). Taxpayers age 50 and over are allowed to contribute an additional $1,000 as a "catch-up" contribution. Therefore, since you are over age 50, you can contribute $6,000, and since your wife is under age 50, she can contribute $5,000.

The question is whether you can deduct the IRA contribution from your taxes. The answer to that depends on your modified adjusted gross income for 2009. I am assuming you are married, filing jointly. If so, since you both had a qualified retirement plan available to you during 2009, if your MAGI is $89,000 or less, you can have a full deduction. If your MAGI is more than $89,000, but less than $109,000, you can have a partial deduction If your MAGI is $109,000 or more, you may not deduct any of your contribution. If you are in the $89,000 to $109,000, there is a formula in IRS Publication 590, which will tell you how much you may deduct.

For a Roth IRA, generally you both may contribute to a Roth IRA as long as you had taxable compensation for 2009, and your modified adjusted gross income is $176,000(married filing jointly). The limits are the same as for a Traditional IRA, $5,000 each, plus an additional $1,000 for taxpayers age 50 and over. Please remember, you cannot contribute the maximum amount to a Traditional IRA and Roth IRA, you may only contribute a TOTAL of $5,000 each (plus the $1,000 catch-up for yourself).

The key here is that you are able to contribute to a Traditional IRA, regardless of your income or availability of a Qualified Retirement Plan.

Is a Roth Right for You?

Beginning in 2010, the Tax Increase Prevention and Reconciliation Act lifted the restrictions on who can have a Roth IRA by allowing anyone, regardless of their income or tax filing status to convert their Traditional IRA to a Roth. Some articles and advisers are saying everyone with a Traditional IRA should convert to a Roth. However, not everyone would benefit from a Roth Conversion. For instance, if you are near retirement age, and plan to use your Traditional IRA for income at retirement, you would not necessarily want to pay all the taxes due upfront. Just take your funds as you need them and pay the taxes in the year you withdraw the money from your Traditional IRA, especially if you will be in the same tax bracket when you take distributions. Wait as long as you can to pay the taxes, and pay them in small increments as you use your money.

To determine whether you could benefit from a conversion, consider these advantages of a Roth IRA over a Traditional IRA:

• No Required Minimum Distributions
  
• Tax-free income
  
• Ability to leave money tax-free to beneficiaries
  

Technically anyone is eligible for a Roth IRA beginning in 2010, however, you will benefit most if you fit into one of the following categories:

• You do not want or need to take money from your IRA, including RMDs, thereby allowing you to leave money tax-free to your heirs
  
• You have assets in another account to pay the taxes due upon conversion. If you have to pay the taxes due from your IRA, converting is not usually a good idea. Remember you can choose to pay all the taxes owed in one lump sum in 2010 or you can spread the taxes out over equal payments in 2011 and 2012.
  
• You are a high net worth person who was not eligible to convert previously

Just because something is new and everyone is talking about it, does not mean it is right for every individual. Consider all the pros and cons of conversion before you make your decision.

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.