Donating Money From Your IRA

Every week Kelley Greene’s Focus on Retirement Segment in the Wall Street Journal is excellent, this week is no exception.  If anyone has any money left their IRA and would like to donate it to a charity…here are some details.

http://online.wsj.com/article/SB122489075823068591.html

Basically what it says is if you are 70 1/2 or older you can donate up to $100,000 from your IRA tax free to a qualified charity.  The same does not hold for a 401(k) or 403(b).

Ladies, Make Sure You Have Enough To Take Care Of Yourself!

Allstate was running an ad awhile back that reminds us of some important facts:

The average woman spends 11 years out of the workforce taking care of family, costing her an average of $659,139 in earnings.

Wow!  Considering that women live longer and make less money anyhow, this is quite scary!

How do they suggest remedying this problem?  The following three suggestions are made:

1)  Make every earning year count in the form of increased participation in 401(k) plans.

2)  Promote Spousal IRAs.

3) Educate: Offer financial seminars for employees and spouses.

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

Dollars & Sense Education – Raising Your Financial IQ!
http://www.daseducation.com
nicole@daseducation.com
215-499-3834

To Rollover or Not To Rollover…That Is The Question

There are a million and one things to think about when you leave a job for a new one.  New office dynamics, tasks and responsibilities, even new lunch options!  There is one item that comes with leaving an old job that often gets overlooked.  What to do with your previous company retirement account, your 401(k) or 403(b).  You have three options:  rollover your old account into an IRA account, keep your money in your previous employer’s plan or rollover the old account to your new employer’s plan.

What is one to do?  The answer to this question depends on a few things!  I present the pros and cons below. 

Benefits of an IRA Rollover:

Your Old Plan May Be a Bad Deal – It is truly amazing how many bad plans are out there.  Some plans impose atrocious expense rates, wrap charges and other needless costs.

Expand Your Investment Options – Most plans, even the good ones, restrict their participants to a few investment options. Roll your money over into an IRA and you have unlimited options.

Consolidate Your Accounts – By consolidating your old plans into a single IRA you can manage your portfolio in a single account and get complete picture of your investments all in one place. Even more importantly, by rolling out several accounts into one you can sometimes save on expenses.

Avoid the Money Market Trap – In some cases, if your former employer is unable to make contact with you and your previous investment choices in your plan are no longer available, your investments may be placed in some sort of stable principal fund. If you forget to follow up, it may be years before you realize that your hard earned retirement investment is earning 2% a year.

Tracking Your Money – Many plans do not use ticker symbols and are not easily trackable. In many cases this is true for companies whose plans are managed by an insurance company (ING, Hartford etc.) By rolling-over your plan into an IRA you will be able to invest your money in funds for which a public price is posted on a daily basis.

Index Investing – It is amazing that after all this time, most retirement plans offer only minimal index fund investment options.  

Benefits of Leaving Your Money in Your Old Plan:

Tax Benefits If You Hold Company Stock – This is beyond the scope of this article but if you have company stock in your company retirement plan, contact a financial advisor before initiating a rollover. 

Benefits of Rolling Over Into Your New Employer’s Plan:

Ability to Borrow Penalty Free – This is a highly unadvisable strategy but it is a benefit of an employer plan versus an IRA.

Penalty Free Withdrawals at Age 55 – You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA.  To do so, you must terminate your employment no earlier that the year in which you turn age 55.

 

The decision whether or not to rollover funds is not always cut and dry.  Do your research and choose wisely!  And remember, a rollover contribution doesn’t count toward annual IRA contribution limits — you can still make your regular contribution.  Also, don’t forget to keep investing in your current employer’s retirement plan — at least enough to collect the full amount of your current employer’s matching contributions. Your retired self will thank you.

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

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Dollars & Sense Education – Raising Your Financial IQ!
http://www.daseducation.com
nicole@daseducation.com
215-499-3834

What To Do When Your Company’s Retirement Plan Stinks

A problem that many Americans face is the choice of whether or not to invest in a less than stellar retirement plan (401K, 403B) at work.  I’m talking about plans filled with lousy mutual funds with high expense ratios and bad returns.  So what do you do when you want to sock your money away for retirement and there are no good investment alternatives in your employer’s plan?

1) Complain to your employee benefits department.  This isn’t always going to help and certainly not fast.  You also risk pissing off the people who hired you.

 2) Consider, “Do I get a company match?”  If the answer is yes, you should at least contribute up to the match.  That is and always will be free money.  Virtually any match on your money will beef up crappy returns significantly.

3) After the match has been reached or without a match the decision becomes much harder.  Most people like the ease of investing in a company retirement plan because the money comes right out of your account.  Many people do not have the discipline to save outside of their retirement accounts for an IRA or after tax investing.  If this is you, use your company’s retirement plan.  A lousy plan is better than nothing. 

If you have the discipline to save outside of your work account than you are probably better off investing your next dollars in a low cost IRA or Roth IRA.  After these are maxed out you really need to run the numbers and see if after tax investing will make more sense than investing in underperforming mutual funds.

Rule 72(t) – Retire Early Penalty Free!!!

Many individuals feel the 401K is less desirable because they want to retire early and don’t want to postpone their investing gratification until they are 59 1/2.  That is the age that you can withdrawal funds from your 401K without a 10% penalty from the government.  If you have enough money in your 401K to retire at age 45, why can’t you?  Well, you can!!!

Rule 72(t) of the tax code the “equally substantial distribution” eliminates the early withdrawal penalty if done properly!

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How It Works

  1. Quit working.
  2. ROLL your 401k into an IRA.
  3. Apply for a 72(t) “equally substantial distribution”.
  4. The IRS will offer you (3) optional payout amounts. The (3) IRS optional payout methods will tell you how much the “equally substantial distribution” will be based on your age, the age of your beneficiary, the amount of money you have, the % rate used for the calculation and how long they expect you to live (based on IRS’s mortality table).
  5. The rule is, once a rollover is completed and a 72(t) is setup to pay out an income stream, it must
    continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever 
    comes last. For example, if you start a 72(t) at the age of 57, it must run until you are age 62, 
    then it stops. If you are age 50, then it runs until you reach age 59 ½, then it stops.
  6. After the 72(t) has stopped, then of course you can take out of your IRA any amount you might desire or require.

***I need to point out, just for clarification, that YES all the income you receive is fully “income taxable” at your applicable income tax rate but without any added penalty.

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

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Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

A Primer on Retirement Saving (Part 5 of 5)

In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement.  In Part 2, I talked about the different options that exist for retirement savings.  In Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings.  In Part 4, I discussed how and where you go to sign up for your 401K, 403B and IRA.  In this final installment, Part 5 of this series, I discuss good investment options for your IRAs, 401Ks and 403Bs.

1)    Determine the Appropriate Asset Allocation for Your Age and Risk Tolerance 
Diversification is a powerful investment concept.  It refers to saving your investments in different baskets.  Diversification requires you to place your money in different investments with returns that are not completely moving in the same direction at the same times.  When some of your investments are up, others will be down. To decrease your chances of getting clobbered at the same time, you must put your money in different investments such as stocks, bonds and cash.  You can further diversify your investments by investing in domestic as well as international markets.  The process of how you spread your money around and diversify is called “asset allocation”.  The wise approach is to have more risk (equities) in your younger years and as you move into retirement move the majority of your money into less risky assets (bonds and cash). There are many different ways to allocate your assets for retirement, but below I outline one possibility. 

Age:  Less than 40 years

Allocation:  100 % in stocks.  Of this, 40% invested in large cap-growth funds, 25% in small-cap growth funds, 25% in large-cap value funds, and 10% in international.

Age:  40 – 50 years

Allocation:  80 % in stocks and 20% in bonds.  Of the stocks portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% large-cap value funds, and 10% in international.

Age:  51 – 55 years

Allocation:  70% in stocks and 30% in bonds.  Of the stocks portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% in large cap value funds, and 10% in international.

Age:  55 – 60 years

Allocation:  50% in stocks and 50% in bonds.  Of the bonds portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large cap value funds, and 10% international.

Age:  60 – 65 years

Allocation:  Reduce stocks by 5% per year and increase bonds by 5% per year so that at retirement you have 25% in equities and 75% in fixed income.  Of the equity portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large-cap value funds and 10% international.

2)    Choose High Quality/Low Cost Funds
The second factor to take into account when you are choosing the mutual funds in your accounts is cost.   Typically the lowest cost funds that one can buy are index funds.  An index fund is a fund that merely tracks a specific financial market.  For example an S&P 500 index fund just copies the movement of large cap stocks.  A Russell 2000 index is used to track small cap companies.  Index funds do not have managers making decisions about what to invest in so they are less expensive.  They also tend to outperform actively managed, more expensive funds.  So if these are an option within your plan, take advantage of them to carry out your asset allocation strategy.   

If actively managed funds are your only option, invest in them but be wary of expenses associated with the fund. Actively managed funds have expense ratios and loads that eat into your returns.  Minimize these costs as much as possible!

3)    Rebalance Your Portfolio Annually
The great thing about investing for retirement is that once you are set up you really don’t have to do much.  Just once a year look at your portfolio and make sure your investments still match up with the asset allocation you want.  Because your investments grow at different rates, this can throw off your asset allocation.  Make sure you rebalance it every year!

I hope you have enjoyed this 5 part series on Investing for Retirement.  Please contact me with any questions or clarifications!

Please contact Dollars & Sense Education to bring our “Financial Health 101” seminar to your company or organization! 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834 

A Primer on Retirement Saving (Part 4 of 5)

In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement.  In Part 2, I talked about the different options that exist for retirement savings.  In Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings.  In this installment of the series, I will discuss how and where you go to sign up for your 401K, 403B and IRA.  Signing up for a 401K or 403B is quite easy.  Picking the right company for your IRA is more complicated.  In this post I will attempt to make picking a company for your IRA as easy as possible.

Where to Open a 401K and 403B 

If your company offers a 401K or 403B, opening one is quite easy.  Just contact the HR office of your company and ask them for the paperwork!   

Where to Open a Traditional or Roth IRA

1)    Full Service Brokerages – Merril Lynch, TD Ameritrade, Wachovia, etc.  These are my least favorite options unless you really feel like you cannot do this on your own.  They provide investment advice but are very expensive.  If you want to use this option you can go online to find your nearest branch office. 

2)    Online Discount Brokerages – ShareBuilder, Scottrade, Firsttrade, Zecco, ETrade etc. 
Discount brokers appeal to many people because they have low or no minimums to open an account. Short term, online discount brokerages can be a good alternative if you only have a small amount to invest (less than $1,000) and you are not willing to make automatic contributions of at least $50/month. If you are a mutual fund investor, opening an online brokerage account should only be a short term bridge to opening an account at one of the big three mutual fund companies.  Discount brokers are a good option if you’re primarily interested in purchasing individual stocks instead of mutual funds, but for most casual investors this is not advised.  
 

3)    Banks – Bank of America, Commerce Bank, Citizens Bank, Washington Mutual, etc. Another option if you’re short on cash to open an IRA at a mutual fund company is to open an CD-based IRA at a bank until you’ve saved enough for the minimum initial deposit at one of the three big mutual fund companies.  This is only a short term option. As soon as you have at least $1,000 you should be rolling you IRA over to a mutual fund company. 

4)    Mutual Fund Companies – In my opinion, mutual fund companies are the best place to open your IRA.  However, they have fairly high minimums for investing.  Fidelity Investments, The Vanguard Group and T. Rowe Price are the three largest mutual fund companies and signing up for all three can be done easily online.  I will provide key details for each company so that you can properly evaluate which company best suits your needs. 

Fidelity Investments

Fees: No fee.

Minimum Investment: $2,500 minimum initial deposit, but this is waived if you commit to at least $200/month automatic contributions.

Additional Contributions: Minimum of $250 unless you commit to at least $200/month automatic contributions.

The Vanguard Group

Fees: No fee

Minimum Investment:  $1000 minimum initial deposit to purchase the company’s STAR fund.  (The STAR fund is a mutual fund of mutual funds, a safe choice for beginners.)  Most other funds at Vanguard have a $3000 minimum.

Additional Contributions: Minimum of $100 unless you use their Automatic Investment Plan, in which case the minimum is $50.

T. Rowe Price

Fees: $10/year per mutual fund owned for Roth IRA accounts until you have a balance above $5,000 for each mutual fund or an aggregate of $50,000 invested, after which there is no fee.

Minimum Investment: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.

Additional Contributions: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.

How to Open an IRA

Some firms require that you download the forms and then to mail or fax them to the company. Most companies, however, provide online applications. Before you begin the application, you will need the following:

  • Social security number
  • Bank account information
  • Employment information
  • Money

Once you’ve completed the application process, you will be asked to transfer money to your account. This money will probably earn interest in a money market fund until you choose an investment. In the final installment – Part 5 of this series, we’ll discuss good investment options for IRAs and 401Ks. Stay tuned!

Please contact Dollars & Sense Education to bring our “Financial Health 101 seminar to your company or organization! 

Dollars & Sense Education – Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 – 499 – 3834