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Archive for February, 2016

22
Feb

Highlights from various articles of note

Target Date Funds:
An article by John Sullivan in the inaugural issue of “401k Specialist” discussed Target Date Funds (TDF).  The article is based on a panel discussion at the 2015 Morningstar Investment Conference.   Initially these funds were disappointing.  One area of concern related to asset-class diversification. The question was not just about the ratio of stocks to bonds.  The portion in domestic, foreign and alternative investments was also a concern.  Another area requiring improvement was how the mix of assets changed over time and during retirement.

TDFs have improved since their introduction. Three companies account for 70% of the assets in these funds.  At one point they accounted for 80%.  Only one firm had funds (3) in the highest 10 performing funds.  The other top performing TDF’s were from 2 other firms.

The greatest benefits of TDFs from my viewpoint is the improvement in investor behavior.   “Investors are using them well.  They don’t exhibit the typical behaviors of fear and greed with target date funds, and as a result stay the course and remain invested longer.”

Not all TDFs are the same.  You want one that is consistent with your situation and your plan.

Retirement Planning Calculators:
This is the subject of a Wall Street Journal article, “New Study Questions Retirement Planning Calculators’ Accuracy.” This article was update online Feb. 22, 2016.

The article discusses an academic study of 36 retirement planning calculators.  “… ‘in most cases, the available offerings are extremely misleading ‘ and generally not helpful to consumers trying to figure out if they will have enough money to cover their expenses for the rest of their lives.”

The study was based on “… a hypothetical couple in their late 50s earning $50,000 each and aiming to retire at ages 65 and 63.”  The calculators were described as “…free and low-cost…” The cause of the misleading results was the limited amount of information used by the calculators.

“…the researchers identified a list of more than 20 factors they believe should be included…”

Do not use the simplest calculator available.  Pick one that has many questions.  Also review the assumptions they are using.  All calculators are use assumptions.  Some assumptions to all calculators are: life expectancy, health, inflation rates, investment returns.  Other questions would include the amount of your current investments and amounts you are currently savings.

9
Feb

There’s Still Time to Contribute to an IRA for 2015

There’s still time to make a regular IRA contribution for 2015! You have until your tax return due date (not including extensions) to contribute up to $5,500 for 2015 ($6,500 if you were age 50 by December 31, 2015). For most taxpayers, the contribution deadline for 2015 is April 18, 2016 (April 19, 2016, if you live in Maine or Massachusetts).

You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit (or, if less, 100% of your earned income). You may also be able to contribute to an IRA for your spouse for 2015, even if your spouse didn’t have any 2015 income.

Traditional IRA   

You can contribute to a traditional IRA for 2015 if you had taxable compensation and you were not age 70½ by December 31, 2015.

However, if you or your spouse was covered by an employer-sponsored retirement plan in 2015, then your ability to deduct your contributions may be limited or eliminated depending on your filing status and your modified adjusted gross income (MAGI) (see table below). Even if you can’t deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you’re eligible, you’ll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.

2015 income phaseout ranges for determining deductibility of traditional IRA contributions:
1. Covered by an employer-sponsored plan and filing as: Your IRA deduction is reduced if your MAGI is: Your IRA deduction is eliminated if your MAGI is:
Single/Head of household $61,000 to $71,000 $71,000 or more
Married filing jointly $98,000 to $118,000 $118,000 or more
Married filing separately $0 to $10,000 $10,000 or more
2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan $183,000 to $193,000 $193,000 or more


Roth IRA

You can contribute to a Roth IRA if your MAGI is within certain dollar limits (even if you’re 70½ or older). For 2015, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $116,000 or less. Your maximum contribution is phased out if your income is between $116,000 and $131,000, and you can’t contribute at all if your income is $131,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $183,000 or less. Your contribution is phased out if your income is between $183,000 and $193,000, and you can’t contribute at all if your income is $193,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.

Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. If you haven’t yet reached age 70½, you can simply make a nondeductible contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own–other than IRAs you’ve inherited–when you calculate the taxable portion of your conversion. (This is sometimes called a “back-door” Roth IRA.)

Finally, keep in mind that if you make a contribution to a Roth IRA for 2015–no matter how small–by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2015.

 

The foregoing is provided for information purposes only.  It is not intended or designed to provide legal, accounting, tax, investment or other professional advice.  Such advice requires consideration of individual circumstances.  Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained.  JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.