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Posts from the ‘Retirement’ Category

12
Mar

What priority do you place on your retirement?

The New York Times Feb. 28, 2014 article, “Save for Retirement First, the Children’s Education Second”, applies to other financial goals also.  Two critical financial planning steps are to identify your financial goals and determine the priority of each.  The cost of each goal and when you want to achieve the goal are also needed.

One objective in financial planning is to determine how much is needed to achieve your goals.  Saving is almost always the way to have the funds needed.    The longer you wait to start to save for financial goals, the harder it is to achieve.  That is because more needs to be saved each year.   

The challenge to be able to save for retirement becomes more difficult as the number of goals increase.    You can borrow for some goals.   Borrowing for retirement is generally not an alternative.  Financing goals before retirement may decrease the ability to borrow in the future and increases future cash needs. 

Children’s education, helping a child with the purchase of a home, helping children with their loans could reduce the amounts needed to maintain a comfortable retirement. 

Possibly the expenses can be reduced.   Attending local and in-state colleges are generally less expensive than private colleges.  Having the children take out student loans also reduces the amount the parents will have to pay. 

Contributing less into qualified retirement plans, including IRAs, (Plans) and borrowing from Plans reduces the amount that can be saved for retirement.  Contributing to Plans allows the funds to grow free of annual income tax.  This allows the income and growth to grow faster in Plans.  Borrowing from a Plan reduces the potential return on the amount in the Plan.  If the interest rate charged by the Plan is less than the amount a financial institution would charge, the amount of income in the Plan will be reduced. 

A reserve account for the unexpected and emergencies should be given a very high priority.  Without reserves, these types of expenditures could require the liquidation of investment when their values are low. 

There are unintended consequences of not saving for retirement first.  Your children may need to support their parents in retirement.  A child may need to give up a job to care for a parent if the funds are not available for health care.

Set your priorities for yourself first.  Any excess can be left to your heirs.
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25
Feb

Tax Court Says One Tax-Free Rollover per Year Means Just That

   Background
The Internal Revenue Code says that if you receive a distribution from an IRA, you can’t make a tax-free (60-day) rollover into another IRA if you’ve already completed a tax-free rollover within the previous 12 months.

The long-standing position of the IRS, reflected in Publication 590 and proposed regulations, is that this rule applies separately to each IRA you own. Publication 590 provides the following example:

“You have two traditional IRAs*, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.”

Very clear. Clear, that is, until earlier this year, when the Tax Court considered the one-rollover-per-year-rule in the case of Bobrow v. Commissioner.

Bobrow v. Commissioner
In this case Mr. Bobrow (anecdotally, a tax lawyer) did the following:

       On April 14, 2008, he withdrew $65,064 from IRA #1. On June 10, 2008, he repaid the full amount into IRA #1.

       On June 6, 2008, he withdrew $65,064 from IRA #2. On August 4, 2008, he repaid the full amount into IRA #2.

Mr. Bobrow completed each rollover within 60 days. He made only one rollover from each IRA. So, according to Publication 590 and the proposed regulations, this should have been perfectly fine. However, the IRS served Mr. Bobrow with a tax deficiency notice, and the case went to the Tax Court. The IRS argued to the Court that Mr. Bobrow violated the one-rollover-per-year rule.

The Tax Court agreed with the IRS, relying on its previous rulings, the language of the statute, and the legislative history. The Court held that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover within each 12-month period.

“Taxpayers may rely on a proposed regulation, although they are not required to do so. Examiners, however, should follow proposed regulations, unless the proposed regulation is in conflict with an existing final or temporary regulation (Internal Revenue Manual 4.10.7 issue resolution).   

“IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are nonbinding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position” (Internal Revenue Manual 4.10.7 issue resolution).  This maybe why neither the IRS nor Mr. Bobrow appears to have cited the Service’s long-standing contrary position in Publication 590 and the proposed regulations.

So what’s the rule now?
It’s not clear, but taxpayers who rely on the proposed regulations or Publication 590 to make multiple tax-free rollovers within a 12-month period do so at their own risk. It’s hoped that the IRS will clarify its position in the near future.

And don’t forget–you can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule.

*The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as a rollover for this purpose.

 

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. 

 

 

 

 

 
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6
Nov

IRA and Retirement Plan Limits for 2014

 

  The release of the 2014 limits is a reminder to make sure you maximize your 2013 contributions before December 31, 2013 in addition to starting your 2014 planning.  
     
   IRA contribution limits
The maximum amount you can contribute to a traditional IRA or Roth IRA in 2014 remains unchanged at $5,500 (or 100% of your earned income, if less). The maximum catch-up contribution for those age 50 or older in 2014 is $1,000, also unchanged from 2013. (You can contribute to both a traditional and Roth IRA in 2014, but your total contributions can’t exceed this annual limit.)Traditional IRA deduction limits for 2014

The income limits for determining the deductibility of traditional IRA contributions have increased for 2014 (for those covered by employer retirement plans). For example, you can fully deduct your IRA contribution if your filing status is single/head of household, and your income (“modified adjusted gross income,” or MAGI) is $60,000 or less (up from $59,000 in 2013). If you’re married and filing a joint return, you can fully deduct your IRA contribution if your MAGI is $96,000 or less (up from $95,000 in 2013). If you’re not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct your IRA contribution if your MAGI is $181,000 or less (up from $178,000 in 2013).

If your 2014 federal income tax filing status is:

Your IRA deduction is reduced if your MAGI is between:

Your deduction is eliminated if your MAGI is:

Single or head of household

$60,000 and $70,000 $70,000 or more

Married filing jointly or qualifying widow(er)*

$96,000 and $116,000 (combined) $116,000 or more (combined)

Married filing separately

$0 and $10,000 $10,000 or more

*If you’re not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $181,000 to $191,000, and eliminated if your MAGI exceeds $191,000.

Roth IRA contribution limits for 2014

The income limits for Roth IRA contributions have also increased. If your filing status is single/head of household, you can contribute the full $5,500 to a Roth IRA in 2014 if your MAGI is $114,000 or less (up from $112,000 in 2013). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $181,000 or less (up from $178,000 in 2013). (Again, contributions can’t exceed 100% of your earned income.)

If your 2014 federal income tax filing status is:

Your Roth IRA contribution is reduced if your MAGI is between:

You cannot contribute to a Roth IRA if your MAGI is:

Single or head of household

$114,000 and $129,000 $129,000 or more

Married filing jointly or qualifying widow(er)

$181,000 and $191,000 (combined) $191,000 or more (combined)

Married filing separately

$0 and $10,000 $10,000 or more

Employer retirement plans

The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan in 2014 remains unchanged at $17,500. The limit also applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift Savings Plan. If you’re age 50 or older, you can also make catch-up contributions of up to $5,500 to these plans in 2014 (unchanged from 2013). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)

If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($17,500 in 2014 plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans, and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan–a total of $35,000 in 2014 (plus any catch-up contributions).

The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan in 2014 is $12,000, unchanged from 2013. The catch-up limit for those age 50 or older also remains unchanged at $2,500.

Plan type:

Annual dollar limit:

Catch-up limit:

401(k), 403(b), governmental 457(b), SAR-SEP, Federal Thrift Savings Plan

$17,500 $5,500

SIMPLE plans

$12,000 $2,500

Note: Contributions can’t exceed 100% of your income.

The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2014 is $52,000 (up from $51,000 in 2013), plus age-50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)

Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2014 has increased to $260,000, up from $255,000 in 2013; and the dollar threshold for determining highly compensated employees remains unchanged at $115,000.

 

 

 

 
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6
Jun

What about Happines?

Most of us do not reflect about what is most important to us.  I was surprised to see this discussed in an article by Jason Hsu, Chief Investment Officer of Research Affiliates.  The last paragraph of the article raises issues we all should consider.  The following is from the last paragraph of the article:

“… We spend our lives working and hoping for a few good, healthy years in retirement. The experts seem to want to tell us that demographics and other economic forces are likely to surprise even those of us who save religiously with a rather austere retirement if not one that is characterized outright by lacks and insufficiencies. I can’t help but think that all this talk about optimizing output and consumption disregards the most important question: What about happiness? There is wisdom in the ancient prescription that happiness is not having what you want but wanting what you have. So love your parents, and love your friends’ parents, too. Love them for their wisdom; love them for their driving-you-mad-by-treating-you-like-a-five-year-old; love them for the free babysitting and house sitting; love them for their frailty, which teaches all of us some humility and humanity. They will live a good long time and lean heavily on us for support and, most of all, for love. And, in turn, we and our children will also be surrounded by love. In that world, there is no rationing but only abundance.”

 

 
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11
Mar

A financial plan is essential for you to know how to invest your money.

To over simplify, financial planning is how you manage your finances and establish a path to reaching your goals.  Investment management is one part of managing your finances.  It is the part that determines how your savings will be invested.

Financial planning starts with your goals.  The amount and timing are critical.  Prioritizing your financial goals is necessary.   You can assign a priority of 1 to 10 or categorize your goals by what is needed, what is wanted and what is wished for.  This will be essential as you monitor your progress.  Life and unanticipated events are not controllable and may require adjustments.  Adjustments may result in changes to your goals, the timing of your goals, or your spending.

A reserve fund is needed to absorb unexpected events.   Reserves should be held so that they are quickly assessable, that is, liquid.   Six months of reserve are generally recommended.   As you approach each goal, the reserve fund should be increased.  This will avoid the impact of fluctuating investment values when the funds are needed.   The amount of liquid assets should be increased as you near retirement.  This minimizes the need to sell investments when the market is depressed.  Two years of liquid funds are generally recommended for retirees.  A portion of the funds for living expenses in retirement might be held in short-term bond funds or bonds.

Investments are purchased with the amount of your savings that exceed your reserves.  The amount that is used for investments must be sufficient to reach your goals.  Education expenses and health care are two categories of expenses that have exceeded what people anticipated.  Many people underestimate the amount they will need in retirement.  Because life expectancy has increased and people have retired early, many people will not be able meet their retirement goals.

The planning process needs to consider the above events and your ability to withstand losses.

The above has touched on cash planning, investment planning, education planning, risk assessment and retirement planning.  All the planning areas need to fit together.  How you manage your investments is dependent on the other areas of your financial plan.
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25
Feb

Do you know how much to save?

This is a question I am asked frequently.  I respond with “it depends” followed by a series of questions.  There are many rules of thumb used to answer this question.  A “rule of thumb” is a rough and easy estimation.  It is not based on a specific situation.

Following are some of the questions that should be asked.  What is the purpose of the expenditure? How important is the expenditure?  Is the expenditure something that is needed, wanted or just a wish?  What are the alternatives?  Is the cost known?  When will the expenditure be made?  An estimate can be calculated once the variables are identified.

The savings and the variables need to be monitored.  Life is a journey with many twists and turns.  There will be many unanticipated expenditures, opportunities and windfalls.  You need to identify what you did not plan for so that you can identify when you need to change what you are doing

Financial cycles may impact your ability to meet your expectations.  The available rates of returns will vary.  If you anticipated too high of a rate of return, you will save less than you planned.  If your earnings do not grow as much as you anticipated you will have less than you expected.  If your living expenses increase more than your income you will not meet you goals.   If the reverse happens you will save more than you planned.  That is easier to deal with than not saving enough.

You should monitor your savings and review your goals at least annually.  The sooner you adjust to adverse events, the easier it will be modify what you are doing and improve your ability to achieve your goals.
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8
Aug

Most under 45 underestimate their life expectancy.

This was the finding of a survey by the Society of Actuaries, as reported the Financial Advisor Magazine August 1, 2012.

Many people forget that the average represents the middle.  That is half will live longer and half will not live that long.  The life expectancy for newborn American males increased from 66.6 years to 75.7 years between 1960 and 2010.  During the same period the life expectancy for newborn American females increased from 73.1 to 80.8.

A majority say they would be very or somewhat likely to make significant reductions in their living expenses if they thought they would live 5 years longer than they expected.  “More than half of per-retirees would also use money they otherwise would have left to heirs or downsize their housing.”

The survey also found many underestimate their planning time-line when making major financial decisions.  Retires generally look 5 years into the future and per-retirees look 10 years into the future.

The report concludes this can result in underfunding for retirement.   Understanding the increased life expectancy, the current state of the economy and the volatility of the stock market require people to do a better job of managing their finances and planning for retirement.

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