by John McCartin | IRAs, White Paper
Making sure your IRAs are allocated properly for required minimum distributions
(RMDs) once you reach the age at which you must take them is as simple as following a bit of
advice your parents probably used to tell you: live off your interest, don’t touch your principal.
That may sound simple enough, but there are many factors to consider in order to ensure the
interest and dividends you’re generating from your savings and investments is sufficient to cover
your RMDs and satisfy your other income needs throughout retirement.
Again, RMDs are distributions the IRS requires you to make on your retirement savings
each year after you’ve reached age 72. The amount changes each year in conjunction
with your estimated life expectancy and the balance of your IRAs and other qualified plans as of
December 31st the preceding year.
Ideally, an asset allocation right for taking RMDs should be able to generate at least 3.7%
dividend or interest. If your interest and dividend income isn’t sufficient to cover RMDs, then
the distributions will most likely have to come from principal. Why is that so bad? Well, with
average life expectancy rates today higher than they’ve ever been, most people need to plan for
30 years of retirement. That being the case, spending any principal at all, especially during the
early years of retirement, can be a slippery and dangerous slope….
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by John McCartin | Retirement Planning
How Living Expenses Change During Retirement
There are some upsides to being a retiree – senior discounts, lower taxes, subsidized healthcare, and regular Social Security checks among them. On the other hand, mature Americans must contend with worrisome issues such as rising costs for medical care, long-term care, prescription drugs, and even basic necessities such as food and energy.
To determine your monthly expenses during retirement, you start by dividing costs into two categories: those you believe will change and those you believe will remain largely the same.
Costs You Believe Might Change
- Housing expenses – particularly if you plan to live in your paid-off home or plan to downsize to a smaller dwelling
- Medical insurance – which may shift from a premium for HMO coverage to a Medigap policy
- Costs for dependents – if you have children you believe will be self-sufficient by the time you retire
- Entertainment and travel expenses – for some people, these might decline precipitously; for others, they might be far higher
- Taxes – most retirees find their combined tax burden is less than during their working years
- Automobile-related costs – retirees generally drive less than workers who commute to their jobs every day, thus spending less on maintenance, tolls, gasoline, etc.
- Monthly contributions toward retirement savings accounts – not only can you stop making this contribution, you might even consider spending it!
Costs You Think Will Remain the Same
- Food
- Clothing – unless you previously spent large amounts of money on uniforms or other job-specific wardrobe items
- Household expenses – such as telephone, utilities, cable, etc.
Determine Your Individual Needs
Once you analyze all this information, you can determine your estimated monthly income needs as well as how large of an emergency fund to establish. This fund should be held in a liquid form such as a money market account, which provides stability for your funds as well as ready access to them.
Consider reviewing your estimated needs at least annually, because circumstances can and do change in today’s fast-moving world.
by John McCartin | IRAs
The IRA is a handy place to consolidate all of your retirement funds. It can help you stay in control by not having to keep track of several company plans and IRAs and the beneficiary and withdrawal options with each plan. You won’t have to worry about required distributions from both your company plan and your IRAs once all the funds have been rolled to an IRA.
1) The best case for an IRA rollover is the ability to keep the money growing tax-deferred for your beneficiaries. Many company retirement plans do not allow this stretch option even though the IRA rules permit it. The custodian of your company plan does not want to get involved in the administrative nightmare of keeping track of your beneficiaries for 30,40, or 50 years as they take required distributions after you die. So instead, your former company plan could pay your beneficiaries the entire dollar amount of your account in one year or five years at best. It’s this simple!
Do you want your retirement account to last 50 years or 5 years for your children and grandchildren? If you want your kids to have the choice to withdraw the minimum amounts over their lifetime, you must rollover your company plan to an IRA. Otherwise, your beneficiaries will be receiving the entire dollar amount of your company plan in one to five years and owe taxes on the entire amount.
2) IRA’s provide the ability to have you name many different beneficiaries and the option for those beneficiaries to split the account up after you die. Funds in your company plan are subject to Federal Law requiring participants to name their spouse as the primary beneficiary.
3) Your old company plan typically does not offer a wide variety of investment options to choose from. You can instantly make changes to the investment options in your IRA without going through the red tape of your company plan, where you are now considered an ex-employee. Why speak with an inexperienced phone rep at the company plan, when you can receive better service and more personal attention from your financial advisor?
4) Once you have rolled over your company plan funds to a traditional IRA, you can convert those funds to a Roth IRA (as long as your adjusted gross income is under the $100k income eligibility limit). You cannot directly convert company plan dollars to a Roth IRA. First, you must convert to a traditional IRA.
5) Company plans may have restrictions on withdrawals. In an IRA, you may have immediate access to your funds, regardless of age. Even if you are under the age of 59 1/2, you can withdraw from your IRA. You’ll pay tax and the 10% penalty, but you still have the ability to withdraw quickly. The company plan may have restrictions on withdrawals before the age 59 1/2. If you are no longer working for the company and leave the money in the company plan, it still may take some time to access your cash. If you need it right away, that will put unnecessary pressure on you at a time when the last thing you need is more problems.
by John McCartin | IRAs, White Paper
The Roth IRA offers a number of advantages over its traditional counterpart. These include:
- Tax-free distributions at retirement
- Ability to continue making contributions beyond age 70-1/2
- No required minimum distributions beginning in the year you turn 70-1/2
- Leaving assets to survivors that are free from income taxes
Details on eligibility to convert a traditional IRA to a Roth IRA.
- For years before 2010, if your filing status is married filing separately, you don’t qualify unless you lived apart from your spouse for the entire year.
- For years before 2010, if your modified adjusted gross income is greater than $100,000, you can’t convert a traditional IRA to a Roth IRA.
- For years before 2008, direct conversions from an employer plan to a Roth IRA were not permitted. You can do that now, but in some situations it may be preferable to roll to a traditional IRA and then convert to a Roth IRA.
- If you inherited a traditional IRA from a person other than your spouse, you can’t convert it to a Roth IRA.
- You can convert a traditional IRA to a Roth IRA even if you made a rollover within the previous 12 months.
- If you’re otherwise eligible, you can convert part of a traditional IRA to a Roth IRA. But you can’t convert only the nontaxable part.
Assets converted to a Roth IRA must remain in the account for at least five years before any distributions are taken. Otherwise, a significant tax penalty may apply.
You’ll maximize the potential for tax-free income later if you pay conversion taxes out of pocket, rather than withdrawal them from your IRA. If you can’t pay conversion taxes without using part of your IRA funds, you probably shouldn’t convert unless you are certain you will be in a high tax bracket during retirement.
by John McCartin | Social Security
The Social Security program was signed into law in 1935 after the nation had endured more than a half-decade of the Great Depression. It was intended to provide a safety net of income for individuals too old or disabled to continue working.
Participation in the Social Security program is mandatory, with most wage earners contributing a percentage of their annual incomes to support the program. In return, participants, their spouses, and certain dependents are eligible for retirement, disability, and survivorship benefits.
Today, approximately 90% of people aged 65 and older receive a Social Security benefit check each month. For many, this benefit is their primary source of retirement income.
How Contributions are Made and Accounted For
Each year you work, you and your employer contribute to the Social Security program in equal amounts.
|
FICA Yearly Limits
|
|
Year
|
Annual Social Security Wage Base Limit
|
Social Security Tax Rate
|
Maximum Annual Social Security Tax Withholding
|
Annual Medicare Wage Base
|
Medicare Tax Rate
|
|
2011
|
$106,800
|
4.2%
|
$4,485.60
|
No annual limit
|
1.45%
|
|
2010
|
$106,800
|
6.2%
|
$6,621.60
|
No annual limit
|
1.45%
|
|
2009
|
$106,800
|
6.2%
|
$6,621.60
|
No annual limit
|
1.45%
|
|
2008
|
$102,000
|
6.2%
|
$6,324.00
|
No annual limit
|
1.45%
|
|
2007
|
$97,500
|
6.2%
|
$6,045.00
|
No annual limit
|
1.45%
|
|
2006
|
$94,200
|
6.2%
|
$5,840.40
|
No annual limit
|
1.45%
|
|
2005
|
$90,000
|
6.2%
|
$5,580.00
|
No annual limit
|
1.45%
|
|
2004
|
$87,900
|
6.2%
|
$5,449.80
|
No annual limit
|
1.45%
|
|
2003
|
$87,000
|
6.2%
|
$5,394.00
|
No annual limit
|
1.45%
|
|
2002
|
$84,900
|
6.2%
|
$5,263.80
|
No annual limit
|
1.45%
|
|
2001
|
$80,400
|
6.2%
|
$4,984.80
|
No annual limit
|
1.45%
|
|
2000
|
$76,200
|
6.2%
|
$4,724.40
|
No annual limit
|
1.45%
|
|
1999
|
$72,600
|
6.2%
|
$4,501.20
|
No annual limit
|
1.45%
|
|
1998
|
$68,400
|
6.2%
|
$4,240.80
|
No annual limit
|
1.45%
|
|
1997
|
$65,400
|
6.2%
|
$4,054.80
|
No annual limit
|
1.45%
|
How Your Benefits Are Calculated
Your benefits are based on a calculation that includes how many years you worked and how much you earned. These figures are used to determine the number of quarterly credits you accumulated toward benefits. If you were born prior to 1938, you may collect full Social Security benefits when you turn 65, or you may collect 80% of your benefit if you retire at 62. For people born after 1938, Normal Retirement Age (NRA), or the age at which you can receive full benefits, gradually increases from age 65 to age 67. To determine your NRA, visit http://www.ssa.gov. When you die, your surviving spouse is entitled to your benefits, unless he or she would collect more based on their own earnings history.
Your Social Security account opens once you receive a Social Security card. However, it is not activated until you begin earning income. Once your earnings begin, the amount you contribute each year is recorded.
The accuracy of this record is important. You can obtain a copy of your earnings record from the Social Security Administration by filling out and mailing Form 7004. Forms are available at your local Social Security office or by calling 800-772-1213 or online at www.ssa.gov/online/ssa-7004.html. If you discover errors in your record, you can ask that it be corrected, though you must supply evidence of such errors. The Social Security Administration encourages people to check their earnings records every three years or so, because the earlier a problem is found, the easier it is to correct.
How Your Benefits Are Taxed
Once you begin receiving retirement benefits, you may have to include them as part of your taxable income reported to the IRS each year.
If your total income for the year, including half of your Social Security and your tax-exempt earnings, is greater than $32,000 ($25,000 for single taxpayers), you will owe federal income tax on a portion of your Social Security benefits. The IRS provides a worksheet to help you determine how much you must include in your taxable income each year.
Did you know that…
- The Social Security Administration paid approximately $539 billion in benefits to nearly 49 million people in 2006
- Social Security benefits were awarded to more than 4 million people
- Among elderly Social Security beneficiaries, 54% of married couples and 74% of unmarried persons receive half or more of their income from Social Security.
- Women accounted for 57% of adult Social Security beneficiaries
- The average age of disabled-worker beneficiaries was 51
- Disability and blindness were the reasons for paying 82% of Supplemental Security Income recipients
