Cindy - Does your company offer a lump sum pension option?
Cindy - Buying back pension benefits has worked well for a number of my clients. One thing to consider is the company may have the option to discontinue the buy back. I would consider looking for other inflation hedges just in case they discontinue it.
No problem, Nate. It's easy for the questions to get buried. We'll post a more reader-friendly transcript after the chat. Thanks for the great question!
Alright, while some of the advisors tackle Cindy's question, here's another one from a Kiplinger reader. Bob understands that we all must wait until age 59 ½ before withdrawing penalty-free from an IRA or Roth IRA, and he is also aware of a five-year holding period on funds converted into a Roth IRA. Advisors, can you clarify whether folks older than 59 ½ can withdraw penalty-free any funds converted into the IRA in the last five years?
Kip - To my understanding, any contributions can be taken out at any time at any age. The earnings and conversions are bound by the 5 yr rule.
Bob, see a tax advisor. That said, if you are asking if funds coverted to a Roth from an IRA can be withdrawn penalty free, it's my understanding that contributions come out first and after age 591/2, the penalty disappears.
Sounds like a pretty complicated question, Bob.
Alright, let's move on to our next question from Larcy
K - in fact, that's the reason to see the tax advisor. Sometimes a tax question is asked in such a way that it is incomplete - for a solid opinion, Bob, you really should run your question by a tax expert on the subject of IRAs and your specifics.
Thanks, Bonnie. That makes sense.
@larcy: I have a blog post coming out next Friday which quotes this chilling fact: "Whether you think inflation is here now or is headed our way, planners should prepare for it. Even at an annual rate of 4.5% – the inflation level when President Richard Nixon imposed wage and price controls in August 1971 – prices would double in roughly 16 years."
Losing half your buying power isn’t the intended outcome when storing your money safely in the bank in dollars. I wrote back in 2007 that cash had been the riskiest investment for the prior five year period in which the U.S. Dollar Index had dropped 36%.
I think REALLY safe means investments with the promise of appreciating more than inflation, which means some equity allocation. Diversification is the best safety that keeps up with inflation.
Larcy, the reason investors take the risk of the markets is to try to overcome inflation (which even as we speak, eats away at our spending power). Really safe means you may lose out to inflation. Think of splitting it into part safe, part at risk. Any money in a market (bonds or equities is subject to risk - has always been true, will always be true) - really safe is for "I cannot afford to lose any of this money" and in order to preserve your purchasing power, you'll need to take some risk with the rest of the money - keep learning, seek out a competent advisor and learn about how to manage both risk and your concerns around it. They're valid but may not be in balance. I hope this helps.
larcy - I was going to say the same as Bonnie. She is apparently a better typist.
Alright, here's our next question from Todd.
Great minds think alike, Randy (but perhaps they don't alright type alike) ;)
Waiting for Randy . . . . :) Todd, please see a tax specialist. My E & O simply doesn't cover that kind of specificity in a public forum - I'm sorry I can't be more help.
No problem, Bonnie. Here's our next question from Mike.
@larcy: People are often reluctant to invest because there are so many opinions they don't know what to do. If I told you that you could invest in one of ten equity investments picked at random and be invested between the period of 1982-2012 (the last 30 years) would you care which one?
Over a 30 year time horizon, equities generally make money. And I would take the growth of the 80s and 90s and suffer the down and sideways market of the 00s.
I was talking to a young couple yesterday who asked, "But what do we invest in?" and I answered candidly, "It honestly doesn't matter. It is more important to invest than not to invest." [I did go on to recommend Vanguard STAR fund as a great choice.]
Todd, if your IRA had growth, you only get to avoid taxes on the portion that represents the basis. However, rolling pre-tax funds back into an employer sponsored plan is reasonable method to avoid paying a huge tax bill on conversions.
Thanks for the clarification, Matt.
That's a great quote, David. "It is more important to invest than not to invest."
@Mike: Since you are 37, my guess is that your tax bracket is probably lower than it will be in the future, so I would take the Roth 401k option. Also, in a Roth you will get tax free growth for your lifetime and no required minimum distributions in retirement. With tax rates probably going up in the future, that is another reason to utilize the Roth option. Only if you are at the height of your earnings would I not recommend a Roth.
Mike - I'm a believer in having taxable, tax free and tax deferred money invested. When I had a 401k with an employer, I contributed to both. Rather than place one bet on future tax laws, I spread my bet out among several.
Mike - there are a lot of tax questions - a million years ago, I owned a tax practice and you can see how much confusion there is around taxes when it comes to investing. Your tax situation will change over time. Most of my clients enjoy differnt types of accounts including taxable, Roth, Traditional IRA, and if we run through everything else, the occasional annuity. If you have an IRA already, adding a Roth is a good idea.
Here's a follow-up from Mike
And a follow up from Larcy.
Many employers do not include the Roth option in their 401(k), so you are fortunate. I have created some simple rules to help you make this decision.
You are a good candidate for a Roth if:
You’re young and earning less than you will be in the future.
You’re a “supersaver” or you benefit from generous employer retirement contributions and will have a large nest egg in retirement.*
You expect to inherit a family business or some other taxable investment interest that will increase your retirement earnings.
After reviewing the U.S. government’s debts and historically low tax rates, you expect tax rates to rise in the future and you are willing to pay now for tax-free income in the future.
*This applies if you have at least 12% (combining employer and employee contributions) of your salary automatically deposited into retirement plans annually.
You’re a good candidate for a traditional pre-tax savings if:
You are at or near your highest earning capacity.
You have limited retirement savings and expect your income to drop in retirement.
The general goal is to pay tax when you are at the lowest rates. Some people also try to analyze growth rates, but this has no bearing on the decision. Here is the only question you should attempt to answer: Are you paying a higher rate now or later?
I agree with Randy and Bonnie, a mix of types of account provides great flexibility. I'm assuming you have been contributing to a traditional 401k and that any match must still be put in a traditional 401k, so I'm trying to boost your Roth holdings. (And you should have taxable investments, too.)
Mike, that's an interesting question. Many of my retirees are bringing in much bigger incomes than they expected. And the taxes are right there with it. I would not assume if you retire early, healthy that you will have fewer expenses - plan on up to 15% higher while you have the time to spend, travel, etc.
Thanks for the extensive answer, Matt. Mike, all of the advisors offer some great advice. It sounds like a mix of accounts is a good way to go if you're able to contribute to all of them.
Mike - You are correct. That's the importance of having money (taxable) you can get to if your retire early.