Stretch IRA?

Have you ever heard the term “stretch IRA”? According to the IRS, there is no such thing. What has become known as a stretch IRA is really a withdrawal strategy geared to spread the tax-deferred status of your IRA assets across multiple generations. Basically this is a provision you can add to any traditional IRA, ROTH, SEP-IRA, or SIMPLE IRA by using a beneficiary designation form.

Typically, a spouse is named as the primary beneficiary of an IRA, with children as the contingent beneficiaries. In this approach, after your death your surviving spouse rolls the balance of your IRA into his or her own IRA. This will allow your spouse to use the money from your IRA to cover his or her living expenses.

Alternatively, if your spouse will not need the assets in your IRA for living expenses in retirement, then you may consider naming your children and/or grandchildren as the primary beneficiaries. This will create the “stretch IRA.” After your death, your beneficiaries would each acquire what’s known as an inherited IRA from which he or she would have to withdraw a required minimum distribution each year thereafter. Here is an example to illustrate:

(more…)

Older Americans Have Increasing Amounts of Debt

An article in the Wall Street Journal (Debt Hobbles Older Americans, 9/7/11) paints a sobering picture of the impact that rising debt levels have on people’s retirement plans.

Thirty-nine percent of households headed by people aged 60 through 64 had primary mortgages in 2010, up from 22% in 1994. The median value of mortgage and home loan debt, adjusted for inflation, for homeowners aged 60 to 62 also increased, from about $40,000 in 1994 to $80,000 in 2008.

Housing price declines have made it more difficult to pay off these mortgages, forcing people to work longer before retiring.

(more…)

Can you benefit from a “Backdoor” Roth?

Since their introduction in 1998, Roth IRAs have become an important part of the financial planning landscape. They offer the unique ability for investors to grow their money tax-free, not simply tax-deferred like traditional IRAs. They also avoid required minimum distributions so they can grow undiminished for many years. In fact, Roth IRAs are wonderful assets to pass along to the next generation, where they can continue to grow tax-free even longer.

Until recently, this unique retirement vehicle was available only to individuals with incomes below certain thresholds. “High-income” individuals could not contribute to Roth IRAs or convert traditional IRAs into Roth IRAs. Some of this changed in 2010, when the Roth conversion income limitations were permanently repealed. Now, anyone (regardless of income) can make a Roth conversion.  However, the Roth contribution limitation was not repealed. This means that if your income exceeds the levels in the table below, you cannot contribute directly to a Roth IRA—but you can achieve the same result by first contributing to a non-deductible traditional IRA and then converting it to a Roth IRA.

This presents an interesting opportunity for high income individuals, who perhaps yearn to save beyond their 401(k) or 403(b) retirement plans or who simply desire the account diversification that comes with adding a Roth vehicle to their retirement mix. (more…)

The hidden costs of your 401(k)

Are you a participant in a 401(k) or similar retirement plan? If so, do you know what that plan is costing you? Ron Lieber of the New York Times thinks you don’t, and I think he is right. In a recent article, he says there’s really no way you could know what your plan is costing you – but the total might add up to thousands of dollars in hidden fees over the years while you work and (if you leave your money in the plan) after you retire.

To understand the issue, it helps to know that employee retirement plans typically have four players. The first is you, the employee. The second is your employer, who offers to withhold money from your pay and (sometimes) to match part or all of what you contribute. The third is a corporate administrator hired by your employer to operate the plan and choose investment options. The fourth player consists of the mutual funds, brokerages and insurance companies that provide those options. (more…)

It’s 10 PM. Do you know how much you’ll need in retirement?

Americans’ Financial Capability” by Professor Annamaria Lusardi is a new working paper published by the National Bureau of Economic Research. Professor Lusardi’s paper reports the results of a survey of nearly 1,500 Americans regarding their financial status and investment knowledge. As reported by Mary Pilon in an article from The Wall Street Journal, Most Americans Haven’t Planned for Retirement and Other Areas of Concern, there are many areas of concern. (more…)

When to start taking Social Security? It’s an important choice.

One of the many areas in which I help my clients is planning for retirement. Many people want to have a good understanding of how much they can spend, what type of investment return they need, and of how these decisions affect their portfolio.

A major source of income for most investors is Social Security. Every retiree has a choice of when to begin taking Social Security payments. While some people ignore this in their planning or take the decision lightly, this choice can make a big difference. (more…)