Good morning. Robert Dowling from Modera Wealth Management in Westwood NJ
HI. Lea Ann Knight from Garrison/Knight Financial Planning in Bedford, MA
Hello all! And welcome to today’s Jump-Start Your Retirement Plan live chats! Thanks for joining us, Lea Ann and Robert.
We received several questions in advance, and for the most part, questions will be answered in the order they were received. Each question will be held for moderation until an advisor is available to give you a detailed, personalized response. So, please do not be concerned if you do not see your question appear right away.
If you have a follow-up question, please submit it, and we will bring it to the advisors’ attention right away.
Lea Ann, you can take this first one from Bubba
Hi Bubba - Vanguard certainly is the low-cost leader in the mutual funds market. And Fidelity has a wide variety of fund choices. There are many good mutual fund companies. My favorites are T Rowe Price, which has several strong no-load funds, and American Funds, which you have to purchase through an advisor. If you are looking for a strong, low cost fund in a particular asset class, I would suggest visiting morningstar.com and search on your required criteria. There will probably be some excellent fund choices that come up in the search.
And Robert, here's one for you from R Minch.
R Minch, I am not a CPA, so please consult with your account. However, the conversion amount will be considered income. You will need to consider the tax rate as it applies to your income sources on your 1040 tax return. I am unclear about the second part of your question but long term cap gains is 0% if the someone falls into the 10-15% marginal bracket.
Lea Ann, here's another one for you from Benjamin
HI Benjamin. Saving 15-20% of your income is a great goal, especially if you start such disciplined savings in your 20's! Given any fixed costs you may have right now, even saving 10% of your pre-tax income in an employer retirement account will give you a great start for retirement. By saving it pre-tax it comes out of your paycheck first (so you don't miss it) and it reduces your taxable income as well. If your not currently eligible for your employer plan, consider setting up an automatic monthly deposit to a Traditional or Roth IRA. Whether it's gross or net, set the percentage at something that is doable, so you won't be starting and stopping it. Make sure you have an adequate emergency fund first as well (3-6 months of expenses) so you can continue to save even if you are between jobs.
Robert, here's our next question from Herestous
Robert, here's our next question from Linda
Linda, without knowing the totality of your estate, I would consider speaking with an attorney that understands the balance between government assistance and your financial responsibility. The attorney will undoubtably speak with you about a Supplemental Needs Trust. Such trusts are good for inherited assets such that they avoid disqualification from receiving government benefits. The specifics of the trusts can be discussed with an attorney. Most attorneys will offer a free consultation. Good luck to you.
Lea Ann, you can tackle this one from Tony
HI Tony. Many, many mutual funds pay a dividend, but in general most Large Cap mutual funds and many International funds will pay a dividend. Technically all bond funds pay a dividend, which is really more like interest. So, should you be in them? For most investors, having a portion of your investments allocated to Large Cap, to International and to Bonds is appropriate. If you are retired and need to live on the dividend income, then you may need a larger allocation to dividend-paying mutual funds. If you visit a mutual fund website, such as Fidelity, you can use their online mutual fund screening tools to filter through the thousands of mutual funds and find excellent choices that fit your asset class needs and pay a dividend.
Robert, here's our next question from Mike
Hi Mike, In a vacuum, I think your equity/bond split is reasonable. A quick rule of thumb is subtracting 110 -your age to arrive at your equity allocation. Some people say subtract 100, others say 110. However, there are many factors to consider when deciding on your equity/bond allocation. Do you have equity investments in small, mid, international, and emerging markets. for example? Do you have bond exposure to domestic, international, high yield, and TIPS. for example? Another factor to consider is longevity and use of funds when you pass. Do you have a healthy family line, are you healthy?- the longer you feel you might live, a slightly higher equity allocation might be suitable. Do you want to see your money pass on to your heirs, then you have a longer time horizon than just your own life. In summary, it appears that you have an acceptable equity/bond allocation, all else being equal. Considerations in your allocation percentages.... use of funds, time horizon, and broad asset allocation.
Lea Ann. Here's our next question from SLG
HI slg. I am a big believer in having flexibility in retirement and part of that means having the flexibility each year to take distributions from either a Roth or an IRA depending on your tax bracket and income in any given year. So, the fact that you've been building up both accounts is going to give you maximum flexibility when you start having to draw down these accounts in retirement. From a tax perspective, if you are in a low bracket now, then the tax deductibility of the Traditional IRA doesn't give you a big advantage, but then if you are going to be in a low bracket in retirement, then you won't have a big tax impact when you take that money out either. If you don't mind paying taxes now, then shifting to an all Roth contribution for your remaining working years will allow you to just take what you need each year in retirement and definitely minimize your taxes then. Since we don't really know what that low bracket tax rate will look like in the future, that might be the smarter move from here to retirement.
Thanks, Lea Ann. Here's our next question from Janbg
HI Juanbg. Yes you can! If you are under 50, you can contribute up to $5,000 and if you are over 50 you can contribute up to $6,000. Just be sure to designate it as 2012 contributions. The good news is that 2013 contribution limits went up to $5,500 and $6,500.
Robert, here's our next one from Mike
Hi Mike. Unfortunately, you will not be able to contribute to your Traditional IRA because you have maximized your contributions to your IRA via the SEP. However, your wife can contribute to a spousal IRA up to $6,500, including the $1,000 catch-up. However, there is an IRA deduction phaseout of $178k-$188k in 2013.
Lea Ann. Here's our next question from B Neslon
HI B Nelson. I am assuming that when you say you are maxing out your IRA contributions you mean employer plan contributions (which would be significantly more than a Traditional IRA contribution). If not I have some suggestions there...But if you are maxing out deductible contributions, then consider a variable annuity. You don't need something with lots of bells and whistles (and expenses) but a simple variable annuity will allow you to put away more money tax-deferred (without limits). It grows tax-deferred and can be withdrawn just like you would with an IRA starting at 59 1/2. You don't need to annuitize it in retirement, just withdraw from the investments as needed. You will be taxes on a portion of the withdrawal, but it's still a great way to supplement your retirement savings. Fidelity and Vanguard both have low cost retirement annuities.
Robert. Here's a question from Joseph
Hi Joseph, The increase in earnings has been ~5.5%, which is nice considering we have experienced relatively low inflation. The big question for you is, can you afford to contribute more to an employer plan, for example? If you cannot afford to increase your contributions to a retirement account because it will negatively influence your current lifestyle or debt ratio, then you are doing the best. If you can afford to do so, I would consider increasing your contributions to a retirement account. If you do not have the ability to contribute to a retirement account, you can research opening an individual account at Vanguard, for example . Answer to your second question will follow .