I should have introduced myself. Hi everyone. I am Garrett Prom, CRPC with Prominent Financial Planning (www.prominentfp.com).
Hello Anna Sergunina, CFP®, ChFEBCsm with MainStreet Financial Planning, Inc is here. www.adviceonly.net
Thanks, Garrett and Anna. Welcome
Anna, when you're ready, you can take this question from Scott.
Scott: Generally yes, Roth IRA should come out ahead of Traditional IRA. You should decide if you want to contribute to either not only based on your projected tax bracket, but also what your tax bracket is now. In the case of Roth, you are likely paying a higher rate taxes now and hoping that in the future you will not pay any taxes. It's hard to project the future, therefore make a decision based on the facts you have today. Also, tax rates and tax brackets should not be the only drivers of your decision to invest in Roth or Traditional. Time horizon, age and risk tolerance should also be taken into account.
Garrett, perhaps you can take rshin's follow-up question. He was chatting with Mark before he had to leave
Rshin's first question was:
"I have a question I am a civil service retirement eligble employee 50yo with savings of 190k in 401 account 390k in 457 account 10k in ira account 46k in job annuity with a expected yearly pension of 60k would it be good for me to retire at this time I am concerned of inflation and outliving savings plus waiting til 59 1/2 yo for tax penalties what do you suggest" -rshin
And Mark responded:
"Hi Rshin. Great question. There's lots that goes into the retirement decision. If $60,000 provides your needed income and you don't need to touch your other investments, retiring now may be okay. Be sure to check if your civil service retirement pension has a cost of living adjustment i.e. the $60,000 increases each year with inflation. If $60,000 is not enough, you'll need to make up the difference with wages or taking withdrawals from the investments. You can use 72T distributions to avoid the 10% early withdrawal penatly, but not the income taxes on your retirement investments. It may be good to work with a local advisor if you want to use the 72T rules. If your income needs are well over $60,000, it may be best to postpone retirement for a few years."
Now, here is rshin's question for you Garrett
Rishin, I see your followup question. I answered a question for Adam below regarding 72T's. Did you read that and did it make sense? Do you have a follow up to that?
Thanks, Garrett. Rishin, here was Garrett's answer for Adam:
"Adam, Congrats on your ability to save and invest. I hope you are able to accomplish your goal of retiring by 50. There is a way to tap your retirement savings at age 50 without paying the 10% penalty. It is called a 72T Distribution. I will not be able to go into details here but it is good for you to look it up and consider. Basically you can withdraw a set amount each year until you reach 59.5. This amount is determined by the IRS based on your life expectancy and the amount you have in your accounts. You would still have to pay the income tax on the withdrawn amount. You would need to continue to make these withdrawals at the specified amounts until age 59.5. At that point, you can withdraw as much or little as you need until age 70.5. Hope this helps."
Anna, you can take this next question from Don
Don, The best way to develop a saving strategy is to compare your monthly net income after taxes against your expenses - make a list of all the items you spend money on in a given month. From there, you should be able to determine what you can save on a monthly basis. Then, set up a monthly automatic deposit to ensure that you are saving what you are supposed to. I would need more information to determine your best retirement age.
Don: It's difficult to say at what age you will be able to retire. It all depends on the retirement lifestyle you would like to plan for. Setting up an a budget now, will help you project what kind of expenses you might expect in retirement. Also, it will help estimate how much income you need to have and what sources it will come from. Work it backwards. "Begin with the end in mind"-said Stephen Covey. Also, having a budget or a spending plan will allow you to see a clear picture of your spending now and estimate how much you can and should devote for retirement savings. Start Late, Finish Rich by David Bach might be a good read for you.
Alright planners, when you're ready, here is our next question from Hugh
Hugh, as you know the interest rates on bonds is quite low at the moment. Many people think that interest rates can only go up. As the interest rates go up, the value of the bonds goes down if you were to sell the bond at a given point in time. If you plan to buy a 15 year bond and hold it to maturity then you would earn your 2% coupon and have your prinicipal returned as long as the issuing institution is still around. You probably already know this, but I do not speculate on the future of any markets.
Here are our next few questions from Bruce
Hey Bruce, congrats on how prepared you are for retirement. The first thing that you need to consider is whether you or your wife will have any income during the years prior to your full retirement age. For instance when you turn 62, will your wife still work for anohter year. If she does, your social security benefits will be reduced depending on how much she earns. Bottom line, you should probably stop working at the same time and minimize your earned income in the year that you do choose to take social security so that you don't limit it. The next most important is your health and family longevity. If you plan to live for a long time delaying social security is may be a good idea. If you are both done working, then perhaps the tax free social security during your 60's makes sense because you will be taxed on 85% of your social security once you have to take withdrawals at 70.5. This could all be calculated based on actual values, but all of this may just be a restatement of what you already know. I hope it was someone helpful, but without actual numbers and doing an analysis, I can't give you a definitive answer
Hi Bill - assuming the 457 plan is a non-starter due to the poor investment choices, you could save the $20k in a typical brokerage account or you may consider funding a whole life insurance policy. You'd would need to carefully review the illustration (ie. cash value), but assuming the policy is structured properly, you could use the cash value in later years as a retirement supplement and all the while have a death benefit component as well. Best bet, would be to speak with a qualified insurance agent.
Bill: Contribute $5,000 for 2012 (you still have time till April 15th) and $5,500 for 2013 to a Non-Deductible IRA, and then convert it to a Roth IRA right away. The rest of the money can go into a brokerage account invested in low cost index or exchange traded funds.
Good call Anna! Bill, just make sure you do not have any traditional IRA's as this could impact your ability to convert the full amount.
Thanks, planners! Some great advice for Bruce and Bill
Here is our next round of questions from Alison
Alison, I wonder if the economy is *ever* in a "usual state" :)
Alison, there has been a good amount of research on when to invest a lump sum. The conclusion to this research is invest the lump some all at once. This may sound scary, but if this is a long term investment then your best bet is right now. I know it can be scary and if you want to invest it periodically, then you are better off doing it over a short time period.
Nice conclusive answer, Garrett. Thanks.
Hi JJPHD - there are a lot of factors that play into whether to do a Roth IRA conversion (current tax rate, future tax rate, cash flow needs, etc.). The fact that you can pay the immediate tax consequence with non-qualified funds is a major plus. Next, you should have a financial plan that encourages you not to use the Roth funds for several years (15+) - so that the impact of the immediate tax consequence can be offset by the tax-free growth inside the Roth IRA.
JJ, this isn't that straightforward because of your age. Given your health and family history. It may be worth converting some of it now if you plan to live for a long time (I know that sounds weird). If that is the case, then converting to a Roth may make sense. I like the thought process if you plan to use this money as "insurance" if you do live for a long time and your tradional retirement accounts get depleted because of required withdrawals. If you do make this conversion then it is strongly adviseable to use non-qualified money.
Here is a question from tiohenry
Tiohenry: Roth TSP is a good option to use if you are not eligible for Roth IRA. The max you can contribute to TSP and Roth TSP combined in 2013 is $23,000. If you want to contribute to Roth TSP you will have to contribute less to regular TSP. This will cause you to pay a little be more in taxes now. Do you project that you tax bracket will be higher in retirement?
Please clarify the 401k you are talking about at the end? Is this the same as your TSP or a different plan?
We also have a question from Akililu