Jump-Start Your Retirement Plan, December 2014 - Live Chats, Q&As: Free Advice on Retirement, Investing, Personal Finance -- Kiplinger

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Jump-Start Your Retirement Plan, December 2014

Kiplinger is teaming up with the National Association of Personal Financial Advisors (NAPFA), whose planners will answer questions on retirement planning and other financial challenges. Submit your questions here and get free personalized financial advice on Thursday, December 11, from 9 a.m. to 5 p.m. ET.

  • I have 25k in a traditional IRA, and a similar amount in a roth IRA. I contributed to them before; but my income now over the IRS limits. Should I convert them into one account and combine with my current 457 and 403b accounts?
  • My financial adviser recommends that my wife and I put 15% of our $1,000,000 portfolio in a deferred fixed income annuity for five years with a current base rate of about 1.5% and then invest the rest in 60% stocks and 40% bonds. Your thoughts are appreciated. Thank you.
  • Hi John, Can I assume you trust your financial advisor and this advice was given in the context of an overall plan? Is your advisor paid on the sale of the annuity? Was the suggestion made because of something in your situation that called for a specific fixed income need? It's not clear from your question what purpose the annuity would serve for you and your wife. Happy to follow up -
  • Jess - Refinancing can be a great idea and it can also be an expensive way to save money, so consider the interest rate savings and see if you can refi for no or low costs. Also consider going to your existing lender and asking them to lower the rate AND remove the mortgage insurance after you pay down the principal. Make sure you plan to stay in your house for many years. It sure is easy to just pay off the high interest rate personal loan. Use the rest of the money and your the monthly loan payments to build an emergency fund or pay down your mortgage and then go back to the idea of asking the bank to lower the rate and remove the mortgage insurance.
  • My husband and I will be retiring in 11 years. Our 750K retirement savings is all tax-deferred which includes a 401K, cash balance plan and IRA's. SS will be 4K. Next year we plan on putting 7% in the 401K and 7,650 to an HSA of the 120K we earn. Company contributions bring our annual savings to 30K. We would like to generate 75K in retirement to live on but will also have some lump expenses like a new car occasionally. Are we saving enough money and is there a strategy to help keep us tax efficient and flexible besides doing a roth which currently hurts us at tax time? Your suggestions would be appreciated.
  • My wife work for a non-profit with pretty sad pay ($9.25 an hr and 35 hr week) are there any tax deductions or benefit we can use to make this job a little more valuable?
  • IRA, You cannot combine the ROTH with your current plan unless it has a ROTH IRA feature. In any event, I don't see any advantage in doing so. Now let's talk about the traditional IRA. There is a work around for high income earners who otherwise do not qualify for ROTH contributions. For those clients, we HAVE taken the money from their traditional IRA and rolled it up into their current employer plan. This would leave you with 25K in the Roth and -0- in the traditional IRA. Then you can make annual, non-deductible contributions to the Traditional IRA (there are no income limits on non-deductible contributions) and THEN immediately convert that amount from the traditional IRA to the ROTH (there are currently no income limits on Roth conversions). NOTE: If you do NOT rollover the current IRA to your current employer plan and you made the non-deductible contributions to the IRA, any conversion to a Roth would be taxable on a prorata basis. Kiplinger do you have an article on this? It can be complicated...courtesy of US tax law:-)
  • I'm 27 years old and purchased a home a few years ago with a 30-year, 4% fixed interest rate. I've heard a lot of advice to prepay my mortgage, but that's only the guaranteed equivalent of a 4% return and I bet that I can make more investing over the next 25 years. Is there any reason other than the "guaranteed" part to prepay the mortgage rather than long-term invest that money?
  • ira, here's more information for you...

    Getting Around Income Limits for a Roth IRA-Kiplinger

    www.kiplinger.comAdvice on how to navigate income limits for a Roth IRA plan.
    Hope it helps!
  • Hello EMEO91 - I'm not sure of any pecuniary benefits, but if you don't need the money to live on, she could contribute all her income to a 401k or 403b retirement plan sponsored by the organization and it would make all her income essentially tax free and you would be saving for retirement. If no retirement plan offered by employer, consider maxing out on a Roth IRA.
  • Lauren, Excellent question(s). Congratulations on a good savings rate too. Here's one way to back of the napkin think about a retirement 'paycheck' created from multiple sources. Write each source down, the timing of when it starts and the expected amount. It sounds like you will have enough based on what you've shared but I'd want to look to at least two other items - inflation projections and effect on your assumptions, and modeling expenses (like those recurring cars) and longevity. Also, have you ever received an optimized report regarding your specific social security numbers? That can be very helpful in planning. As for tax planning, much has gone by the wayside but you can look to tax managed funds for taxable accounts, muni funds too. Taxes are truly a bear right now and we all pay a lot of them and not just on income. I would try to build up your taxable accounts over the next 11 years to enjoy cap gains rates on withdrawal vs. income rates on the tax deferred accounts - good luck and keep at it!
  • First you done a few things correctly. Paying into your state pension, having your student loans almost paid off, having no credit card debt and a small mortgage at the age of 29 is great. But, yes, you are missing a major opportunity of potential future returns from stock, bond and other investment returns.
  • Advisers: Should I increase my contributions to my 457(b) non-qualified deferred compensation plan (from 6% to 20%- the max for my plan)? Currently: I contribute a max of $51k to retirement (401k pre/post tax + 457b + employer matches) and a backdoor Roth $5500. I only contribute 6% to my 457(b) NQ deferred compensation plan (because company match = 6%)
    My Financial Background: Age 35. Income $250k. With Wife tax bracket = 35% Savings: $190k, Total Retirement (Roth, 401k, 457b): $316k, Total Debt: $107k (0.7% interest, zero point seven percent). I work for a large company which is in the top half of the fortune 500 list.
  • Blackguru, that mortgage is actually costing you less than 4% as you get to deduct it on your taxes. If you are in the 30% combined state and federal tax bracket, the mortgage is only costing you .7 X 4% or 2.8%. Now, if you were about to retire, I might feel differently. But you are young and I am confident that over the period of the mortgage you could easily beat the 2.8% by investing. Good question.
  • Lauren, check out our Retirement Savings Calculator, too...

    Retirement Savings Calculator: How Much Money Do I Need to Retire?-Kiplinger

    www.kiplinger.comUse this calculator to estimate the future value of your retirement savings and determine how much more you need to save each month.
  • Ah Samy, Tim is going to answer you but I had to congratulate you for knowing about a back door Roth. Very savvy.
  • Good morning. I am 66 and will be retiring in one month I have a Vanguard traditional IRA of about 240K and a smaller taxable account there of about 80K. I will probably need to start using that money in about 2 or 3 years. My question is this--is there a science to choosing which account to use first and which investments to use in the accounts? If so, is this something I can figure out on my own or do I need expert help?
  • I would like to know what the 529 withdrawal rules are around education. We have had situations in the extended family where someone decided not to go to college and instead work for a startup (well paid) and now the 529 money is tied up meaning penalties for withdrawal.
  • Most everyone can invest annually in some type of an IRA up to an annual amount of $5,500.
  • Hi Larry, I think you can handle this - in general we like to withdraw from taxable accounts first due to the lower capital gains rates on those accounts vs. tax-deferred like your IRA but sometimes there can be reasons we might go 1/2 and 1/2 or start with the IRA and that would usually be because of a particular low tax year anyway that favors taking from the IRA first. Does this answer your question? And congratulations on your impending retirement!
  • DK, if the money is withdrawn for something rather than education, the earnings will be taxed and there will be a 10% penalty. Savingforcollege.com is a good site for 529 info. Remember, this could be used to fund someone else in the family to include the parents or future grandchildren. And it can be used for trade/technical schools.
  • Please advise:
    Household income of 50K
    Savings 5k
    Traditional IRA(self directed) 80k
    CC debt 30k
    Home worth 120k (40% equity)
    Wife and I are in late 50's. One teen starting college next yr.

    I'm more concerned on strategy to reduce debt, less on investment planning.
    Btw, no NAPFA within 200 miles of 79915. I've heard of "financial coach". Advice?
  • Hello Samy - You should consult with your accountant on some tax planning because you will have to take this money at some point and being as young as you are you might have to take this money when you are earning much more. You seem to already be in the highest tax bracket. Also consider what investment vehicles you have in the 457 plan. Remember that these plans are a general obligation of the company and not a separate investment account. Also consider what happens when you eventually leave the company via retirement or otherwise.
  • I'm recently married, and last year was an expensive year leading up to the wedding. However, with that in the rearview, my wife and I should have some nice excess income. We're both Federal employees with access to and contributions to TSP. We plan to upgrade to a larger home in the next year or so and expect our mortgage and related expenses to increase, but we make more money than we need to live on and I have no clue what to do with it. We're 31/30, and I know we have lots of time, but I want to ensure we're taking the right steps now to benefit in the long run.
  • I recently started buying stocks via a brokerage firm. I am mid-30s, living in CA and under the 25% tax bracket. No active contributions to 401k, have an old 401k account but no contributions to it. If I convert old 401k to IRA, is there any tax penalties or any considerations during tax filing that I should defer or do it now?
  • Hi PG, If you are rolling a 401k to a traditional IRA in a trustee to trustee rollover (never comes to you, just goes from existing institution to the place where you have an IRA), no tax consequences.
  • Hello JMac - Youth is fleeting! Save as much as you can in the TSP. Don't buy more house than you can comfortably afford, especially if you plan to have children and may desire to live on one income. You can save after-tax dollars to build an emergency fund to cover your costs for 3-6 months, then begin investing in mutual funds.
  • I'm self-employed and thinking about a SEP-IRA to reduce my tax bill. I do max out my IRA (5500). I've heard that SEP-IRA is complicated and leads to lots of paperwork/forms. I have been using tax preparation software - can I get a SEP-IRA without using a CPA? Any other considerations for whether SEP-IRA is a good idea?
  • Hi folks! My husband is 63 and I'm 59; we are both retired. My IRA is way larger (like 5x) than his. Should we start taking distributions from his IRA soon to even out the income stream so when I am forced to withdraw from mine we won't have such a large hump?
  • These annual amounts can compound over time to some material retirement savings balances. You, can invest $5,500 for 2014 and another $5,500 in 2015. Take a look at the Vanguard site and look at a fund called Total Stock Market Index. You'll likely want to talk to a Representative. You can save unlimited amounts in regular taxable funds. Stock Market Index Funds are relatively tax efficient for long term investments. In addition to investing outside of your employer, consider researching whether the state offers a 457 type contribution fund. This can be similar to a 401k where you contribute to a wide variety of mutual funds. Consider checking if your state has fully funded your pension. Some states have been struggling financially and have not been able meet this commitment. This is just another incentive to invest outside your employer in IRA's or regular taxable investments.
  • Hi sfmitch, a SEP-IRA isn't more complicated but it does have it's own rules so it has its own paperwork. You can start one by yourself, the reason to use a professional to assist is to confirm you are maxing it out as you'd like and investing the amounts as you'd like. I'm going to ask Kiplinger's to post a link to an article I'm certain they have the shows the options side by side (you could also google this) but SEP IRAs can work well.
  • Al, many of us work remotely with clients via webex or skype. So don't give up. I've been meeting with other clients who, like you, have a child starting college just as many who started their families earlier are empty nesters and able to save aggressively for retirement. You are not alone. I agree that working on your debt is number one on the list. Is it possible that you could use some student loans or have your child work part-time to fund college and or his expenses? The former is not the most pleasant idea but there is much more time to pay student loans than there is for you to prepare for retirement. As for the latter, I know many affluent clients who require this of their children. Children tend to do better if they have some skin in the game. Would these alternatives help you have the additional cash to retire you debt? If not, you need to go over your budget with a fine tooth comb, come up with a strategy that will let you pay off the debt within a fixed time period (3 years would be great) and still save for yourselves. It might mean giving up some things but the payoff will come later....when you really need it. Good luck!
  • I'm already contributing 15% to my IRA through my employer. What can I do with rest of the cash that I have with me?
  • When returning to the workforce after a significant time off (more than 5 years), in what order should finances (emergency fund, 401k, IRA, etc.) be rebuilt?
  • Hi CK - Good to be thinking ahead! You should make some projections with your accountant to see what makes sense. Another key decision that goes hand-in-hand is when to begin taking social security. Both of these decisions have big impacts. You might find it does not pay to take IRA withdrawals before forced to at 70 1/2.
  • My husband and I have been married for a year and a half. Before we got married, he accrued 5k in credit card debt and pays about $150/month on it while still maxing it out. Someone told him carrying debt would help his credit and after buying a house, we don't anticipate needing credit for anything for awhile. He will not let go of the idea of carrying the debt. I have told him about how expensive it is, and how his 14% interest rate means he is throwing money into the wind. We have other money needs, such as building a reserve fund for home repairs, a new car, and emergencies. So far we only have 10k in that. He will not listen to me and insists his way is just "another way of thinking about it". Do you have any ideas how I can convince him to pay that sucker down? It's driving me crazy!
  • Hi Rita, great question. Here's my recommended order - emergency, 401k and then IRA - (just as you listed actually). Good luck on going back to work!
  • RIta, to be just a bit more specific, emergency of 3 months expenses (to avoid credit card runups), 401k to take advantage of free money (the match) and IRA to build more long term savings in another tax-deferred vehicle. Also consider a taxable account for the purpose of retirement.
  • Hello, I am 45 and my spouse is 42. He's a government employee who will retire with a pension, and he also has 200k save up in his TSP. He is also in the National Guard and will be eligible to receive VA health benefits when he retires. I am a private sector employee with 300k in my 401k. I contribute the maximum to the plan each month, and my employer does a 10% match. We just bought a home and have about 2k of equity in it so far. Our emergency savings fund is low and needs a boost! Only 12k there. My question is twofold: Should we buy long term care insurance and if so when? Do you have a recommendation for how much we should buy?
  • Hi MoneyQuestioner, great question - and the answer is maybe. Family and personal health history matter as does cash flow which from what you've described is good. I really like John Ryan (been using John for 20+ years) who is a fee-only insurance pro licensed in all states. His website has a ton of info and calculators plus no hassle quote requests (although an actual policy generally requires a fairly invasive health inquiry at any firm) ryan-insurance.net
  • MoneyQuestioner, aside from the question of need, there is unfortunately also the question of the strength of that particular part of the insurance industry and the products offered. Include this in any discussion with a provider.
  • Ah wondering wife, you are correct. Keeping that debt will NOT improve his credit. Indeed, much of the credit score is based on how much of your credit you are using (which is why you shouldn't close accounts with -0- balances). A usage of 100% will DEFINITELY hurt his credit not help it. So he does need to pay this off. It would be interesting to get the the root of his thinking.....why is he holding on to this idea? Does he just want to spend more? Without figuring that part out, getting him to change is unlikely. Do you use a budget? Does it include irregular expenses? I have clients put money monthly into savings for home repairs, car repairs, vacations, holidays, and other big purchases. That way, the money is there when it is needed. And it WILL be needed as roofs leak and air conditioners break and cars, well..... you get the idea. There are many helpful sites for budgeting to include mvelopes.com and mint.com. Get it down on paper and it will help you both make decisions about where your money goes. GOOD LUCK!
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