Welcome to today’s Jump-Start Your Retirement Plan Live Chats!
Good morning. This is Erin Campbell with Beacon Financial Strategies in Raleigh NC.
Good morning. This is Ken Weingarten of Weingarten Associates in Lawrenceville, NJ
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.
Erin, you can take this first one from Darrel J
Darrel, I believe you should consult with lawyer who set up the trust. There are income limitations . If these are exceeded, the trust may not qualify for government aid
Darrel, first I agree with James that this is a question for your attorney. In general, I like Roth IRAs, but unless you are working and have earned income, you cannot contribute directly to a Roth IRA.
Ken, here's one for you from DebtCrisis
Good morning Debt Crisis. I am not familiar with the income taxes in TX or NM (I am in NJ), but if memory serves me correct there is no income tax in TX. So for a specific answer you may need to consult a local CPA. That said, one thought to consider would be do some Roth conversions over the next few years while you live in TX. While this would create taxable income now, if you already have low taxable income, you may be able to do these conversions at a fairly low effective tax rate. Then, when you turn 70.5 the size of your IRA and subsequent RMDs will be lower; so if you do move to NM at that point, your taxable income would be that much lower. Again, you should probably consult with a local tax adviser.
James, here's another one for you from Georgianfan14
Target date funds have diverse portfolios in which asset allocation varies from agressive when you are young to conservative as you approach retirement. These may be a good way to start investing if your investment assets are not large.
And Erin, here's one from Sferguson1
Sferguson, first let me say that you are well on your way towards your retirement goals. Congratulations! In my opinion, the next step is to fully fund an emergency fund of at least 3 months of living expenses. The purpose of that money is liquidity and not rate of return. Then I would say it becomes a rate of return question. If your auto loan interest rate is more than your expected rate of return in the stock market, then the auto loan is the next place to send extra money. Also, you need to look at whether you are getting a tax deduction for the interest on the student loan debt. If so, the auto loan probably has a higher after-tax interest rate than the student loan. Good luck to you!
James, here's the next one for your from Kate.
Kate: In a ROTH 401k, contributions are taxed and distributions are tax free. In a traditional 401k contributions are not taxed but distributions are. So if you expect your tax rate in retirement to be lower than present tax rate, you would use traditional 401k. One advantage of ROTH is that there are no minimum distributions when you reach 70+1/2 so you may be able to keep funds growing longer tax free if you do not need funds. With so many unknowns, some people contribute an equal amount to both.
I think ROTH IRAs are great saving vehicles when you are young and perhaphs in a low tax bracket. If your earnings are high and tax bracket high, a traditional IRA may be a better approach. With future tax rates unknown, I like idea of spliitng contribution if this option is available
K, Roth IRAs are great vehicles for young people. But, if young people are in a high tax bracket now, it makes sense to fund a regular 401(k). I totally agree with James on splitting the contributions if you are unsure.
Erin, here's one from Scott.
Scott, I can give you the quick answer to that question but I would encourage you to visit with a local NAPFA advisor and have them run a retirement plan as you get close to your expected retirement date. In general, most advisors believe that a 3-4% withdrawal rate is sustainable. So if you divide $48,000/year into 4%, you get $1,200,000. However, keep in mind that some of your assets are in qualified plans that are taxed when you take distributions. So, the actual amount you need varies depending on the taxation of the accounts. Again, I would encourage you to have a full retirement analysis done to give you the most confidence in your decision to retire.
And Ken, how about you take this one from Darryl.
Hello Darryl. Since all of your withdrawals from your retirement accounts are taxable at ordinary income tax rates, the only thing you could to to improve your tax position would be to reduce these withdrawals and find another avenue for replacing that income. If, for example, you have a non-retirement account brokerage or mutual fund account, you could replace your TIAA distributions for example by taking funds from these other non-retirement accounts. Depending on how that money is invested (if there is such an account), the taxes due would involve capital gains taxes which are lower than ordinary income tax rates. Of course, this will have the effect of allowing your TIAA account to grow faster and larger which will then create larger required minimum distributions at age 70.5. Hope these thoughts help a bit.
Thanks, Ken. Here's our next question from WS
WS: you cannot take a distribution from a 401k without penalty unless it meets certain exceptions such as death or disability. You can take a loan from a 401k equal to 50% of the account balance up to a maximum loan of $50,000. That said, I would strongly encourage you to avoid this route. The 401k was designed to help you fund your retirement down the road. My advice would be to save up or find a generous relative to help!
Ken, here's the next question from rxfxworld
rxfxworld: as far as a reasonable rate of return on your portfolio it depends on how much equity risk you are willing to take. Just as an example, a well-diversified portfolio that is 50% stocks/50% bonds should conservatively provide an expected total return between 5-6%. Given how low interest rates are now, this is the best one should realistically expect. It is very important to remember that expected returns are not guaranteed returns so you should really consult with a NAPFA adviser to help you determine your need, ability, and willingness to take risk. As far as how long it will last, again that depends on how much you need from the IRA to live on. A NAPFA adviser can better help you as your questions are very good, but require a bit more analysis. All the best.
And Angela, here's one from GadgetQueen
Gadget Queen: The employer who sponsers IRA whether traditional or ROTH has selected funds that participants can select from. So you are limited to these. Usually, when you retire, you can choose a lump sum and rollover IRA or choose an annuity from a company participating in plan.
GadgetQueen, I did not catch Ed Slott's recommendation on PBS so I cannot speak to that directly. My guess is that he was recommending an annuity using Roth IRA funds. The positive is that the annuity payout would be tax-free. However, a Roth IRA distribution is tax-free anyway. So, if you believe that there is comfort in having a known annuity payout for a certain period of time and are willing to pay an insurance company for that certainty, it may be a reasonable recommendation. This all depends on your individual circumstances.
GadgetQueen: just to piggy back on Erin's response, I'm not so sure I'd want to annuitize funds in a Roth IRA. In general you want assets inside a Roth IRA with high expected growth rates since the Roth IRA is a tax-free account. If you are seeking the assurance of an annuity you might want to consider regular IRA funds or non-retirement funds.
Advisors, here's another question from Win Sein
WS, it is never too early to visit an advisor for a check up as to how you are doing financially. Likely, a fee-only advisor can give you some tips as to what you can do to improve your situation and an overall allocation that you can rebalance to annually. Good luck to you!
