Hi Richard! Lea Anne answered your question below. Here's what she had to say:
HI Richard. Sounds like you don't necessarily need these unexpected taxable payouts to fund your living expenses between 55 and 65, so I would also consider putting the proceeds into Exchange Traded Funds (ETFs). They are more tax-efficient than equity mutual funds. Retiring at 55 means you have a long retirement ahead of you and you will want to stay ahead of inflation, so equities may be more appropriate than a muni bond fund. If you do need some income from this bucket of money, focus your research on dividend paying ETFs.
Tom: You can typically set up a Rorth IRA directly with the custodian. I would recommend using one with a wide range of mutual funds at low cost. Vanguard will be an excellent choice and is well known in the market place for their low cost and range of choices. I recommend index funds to capture market expsosure inexpensively.
Tom: With regard to the 457, if you are eligible to roll that over into your own IRA then great. This rollover does not count against your annual maximum contribution limits, so you can still make those contributions.
Thank you for your question, Clifton!
Here's a question we got from a reader:
I need to take my first RMD from my IRA this year. My husband started taking his several years ago. Can we add up our totals and then take a single RMD from one account?
Hi reader! Unfortunately, you cannot aggregate your IRA RMDs between you and your husband. If you, yourself, have 4 IRAs you can aggegrate the total RMDs amongst those four and take the withdrawal from one IRA.
Hi Tom. Since Roth IRAs grow tax free, I like to hold the more aggressive part of the portfolio in the Roth. Doing so should help the tax free part of your portfolio expand. To keep the account aggressive yet diversified, you could use an all-in-one fund from Fidelity (search for Fidelity Asset Manager), Vanguard (search for LifeStrategy), or build your own from Kiplinger's 25 favorites. To answer your second question, a rollover does not count toward your contribution, so you can still make your full contribution even if you roll your 457 funds. However, if you roll before tax dollars from a 457 to a Roth IRA you will owe income tax on the conversion. If you're planning on doing a rollover, you could roll to a traditional IRA instead to continue deferring the tax on the 457.
EKP: It sounds like your immediate retirement expenses are well in hand. Congratulations! If you intend to leave an inheritance to those you cherish, you may be able to consider investing those long-term dollars more aggressively. Equities come to mind first. Beyond that, you have considerable flexibility.
EKP: The extent of your flexibility may even include gifting. It's fun to see the dollars used, and it can be informative as to how remaining dollars may be used...
Thanks for the questions everyone, and keep them coming!
Mike and David, you are on deck!
Hi jhart. You can withdraw the converted ROTH next year. You'll owe tax and penalty on earnings between now and then. Each conversion has its own 5 year wait.
J Hart: RE: Roth IRA conversion. If there are taxes owed on the conversion, I recommend using outside funds to pay for the conversion. Also, you'll want to be careful about the conversion amount to stay within low tax brackets and if you are collecting social security you may be subjecting more of that benefit to taxation.
J Hart: The answer is No you cannot both collect on eachother.
SUSHILAND (great name, btw) you are on deck!
@David: There are a couple of factors that you may want to think about: your risk tolerance, i.e. how much are you willing to put into the market, do you wish to leave a legacy, and your life expectancy. Currently inflation is quite low at about 1.9 - 2.1 %, however in the longer term the avg. is closer to 3%. If you are striving only to keep pace with inflation you could consider a 75% fixed income/25% equity allocation. However, if your goals is more growth , more future potential and risk then ramp up the equity allocation. Many pensions don't have inflation adjustments, so your purchasing power on the pensions may actually be eroding over time and, in fact, you may need a higher return than inflation on the 401k accounts.
@David -- Apologies. I see that you have COLA in the pensions, but for the benefit of other readers I wanted to point out that many people don't have this. You've got a very good deal there!
Mike. Your question comes down to net worth now or net worth later. Social Security is not part of your net worth. So, taking Social Security now preserves net worth, but requires more net worth to be spent in later years because the Social Security check is smaller. When we've done the math in the past, delaying Social Security tends to result in a higher net worth if you live into your 80's but lower net worth in the earlier years of retirement. So, part of the calculation is life expectancy. Also, the surviving spouse keeps the larger of the two Social Security checks, so delaying your Social Security may actually benefit your spouse if she has a long life. It's helpful to have a financial planner run your actual figures to show the comparison.
Sushiland: I like to use aggressive funds in a Roth IRA given the tax deferral and tax-free withdrawal and assume you have a relatively long time horizon before you need the funds, i.e. you can ride out the ups and downs. I would recommend mutual funds given the diversification embedded therein and not individual stocks. Asset classes with high expected rates of return would include small cap value, emerging markets, international small caps; however, the volitility is high. Kiplinger's has a list of funds that would be a good starting point
Thank YOU for the question SUSHILAND!
Hi, cecil. To some extent the answer will depend on your tax situation. Generally speaking, I would pull from the 401k first.
Sushiland. Regarding your income needs, you have a few choices with pros / cons to each. A single premium immediate annuity (SPIA) provides guaranteed income for a period of time or life. However, the internal rate of return is currently low, so I'm inclined to only do this with a portion of your funds for a short payout period. There is no risk to a SPIA. Another option, which has risk and is potentially more lucrative, is to invest in income generating investments like funds that own dividend paying stocks, bonds (keep duration short), or real estate such as a REIT. For immediate expenses, nothing beats cash.
Cecil: I tend to view this as a tax question, what is the best way to keep the taxes low. I would attack the 401k first up to a certain tax bracket. This will help to reduce future RMD requirements. I agree with Tim.