Jump-Start Your Retirement Plan, September 2015
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, September 17, from 9 a.m. to 5 p.m. ET.
3rd & 7 37yd
3rd & 7 37yd
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Mary – the rules on this strategy are much more strict and limiting. Can you find a loan, credit, or borrow? You have transaction costs and an opportunity cost if stocks rise. This is the reason it’s so important to have a comfortable short-term cash reserve buffer between yourself and long-term assets.
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Hi Mary, this is a flat communication method so I hope this is read as intended. You need a planner I think because clients working with planners have far fewer financial emergencies that would cause them to dip into a retirement account on a temporary basis. Depending on your age, you may incur an early withdrawal penalty. A cash advance on a credit card would likely be cheaper - I highly recommend you see a planner before tapping your retirement accounts.
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@RobertSchmansky,CFP®,EA Thank you for the reply Robert. Some of my loans are federal and some are private. I would say 60% private and 40% federal (oh the errors of a young naive 20 year old) but I do plan to look into refinancing options when it comes time to move forward in life. Currently my credit is through the roof, so I'm sure this theoretically should help. My debt / income ratio should also be much closer to 1/1.
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Mary - You would first need to trade to cash in the IRA. Once in cash you are eligible to take a distribution of cash for 60 calendar days. Be careful the IRS tracks those days closely. You are limited to the number of times this can be completed in a 12 month time frame
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@BonnieASewell Thank you Bonnie. I appreciate the response. I have considered sitting with a life planner from time to time as the decision to move on to bigger things in life has come closer. I feel I have a pretty strong grip on things as they are now. I work in corporate financial planning and analysis for Bright Horizons so budgeting and forecasting is already my forte. My girlfriend is very akin to finance. She works for Ernst and Young in Boston and has a self made father who is a CPA with his own private tax firm. Hopefully soon the student loan debt is something I can look back on.
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Mary - you are contemplating an extremely risky move, which could lead to stiff penalties, not to mention the opportunity cost of the time out of the market. I would recommend against this strategy. I'd advise you to meet with an hourly, fee-only planner to see if there are any other alternatives.
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Corey, you should call you lenders and discuss the situation. If the private ones are high rate and / or variable, I would do all I could to lower all payments and have a strategy of paying down the private ones with the highest rates first. It sounds like you're on your way to paying them off, and you've got a great financial lesson that will stay with you that hopefully you can use to help others, and your future family. Best of luck!
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Joe – you may be able to convert, your plan must allow it and they do not have to. You should sit down with an advisor to see if that is the best option for your current and long-term tax plan. I often find if Roths are desired there are ways to gain Roth assets on my checklist prior to an in-plan conversion. Contributing to the Roth 401k, a Roth IRA and / or converting a pre-tax IRA are higher on my list. You can always undo those.
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Joe - first of all, you need to check your plan documents to see if the conversion is permitted. If not, at the very least, change your new contributions to the new Roth 401k option. If it is offered, you will owe income tax on the amount being converted. This will require a conversation with your CPA to see if it makes sense now and for the long-term. Try to pay the cost of the conversion with outside assets if possible, so you don't see your balance shrink.
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Joe - before you do such a conversion, if it's possible, be sure to carefully consider the tax bill you would face. Remember than you probably wouldn't be able to get cash out of the plan to cover the additional taxes. It sounds like a case for some software to examine the pros and cons, both short term and long term.
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HV_04 – this is more a ‘can you sleep at night’ if the market is down 40% and you’re paying 4% question than a financial question. I find too many people do not have the stomach to sit through a market like we have today, earning 0% and having negative investment returns, while paying interest. Many during the crash did the WORST possible thing and sold stocks at the bottom to pay-off the mortgage, while previously they were convinced of the long-term mortgage strategy. Yes, it’s in your financial interest in my opinion to carry a very long, low-rate mortgage, but you need to do some mental exercises to convince yourself you will stick with it. If you’re likely to sell with the market down, it’s OK to pay extra on the mortgage.
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HV_04 - Good question. If you have the funds to pay off your mortgage, you should examine how deploying that cash will impact other parts of your plan, like your rainy day fund, or ability to fund retirement, either now or in the future. My bias is that with such low mortgage rates available, if you are paying interest of 3-4%, it mike make sense to hold on to the mortgage if you can earn higher rates of return. If the money is sitting in savings earning essentially 0%, then it might make some sense to pay it off, especially is you're debt-averse.
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HV - there is a financial answer and the 'other' answer. Most of my wealthy clients like to have paid off properties. The math may indicate it would be 'smarter' to keep a mortgage but they don't want one. We know that mathematically owners 'pay rent' to themselves and enjoy all the carrying costs (HOA, mtnce, improvements). Generally the folks who have paid off mortgages also have a very high level of flexibility in the rest of their finances - in other words they haven't paid off the property and then find themselves house rich, cash poor.
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HV_04 - Ah, the age old question of paying off the mortgage. I tell my clients that it's not always what the numbers tell you. Sure there's the cost of the loan (mortgage interest paid), the benefit of the mortgage interest deduction on your taxes, and the opportunity cost of using those dollars to pay down the mortgage instead of staying invested in the market. However, what allows you to have peace of mind? Some of my clients just prefer to have their homes paid off no matter what the numbers say. If you are in a position to pay it off and it makes you sleep better at night, go for it! If you do decide to pay it off, I'd recommend keeping a HELOC (home equity line of credit) open and available should you need to access the equity in your home.
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Hi Jane. Yes, you can. I would recommend a thorough analysis, however. We have found very few instances where it makes financial sense to convert. Often, one of the aspects that tips the scales in favor of converting is whether you can pay the taxes due from other money, and not from the IRA. The "breakeven" point is longer if you net taxes from the conversion.
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If you're going to convert your traditional IRA to a Roth, here are some things to know:
Rules for Converting Money From a Traditional IRA to a Roth
www.kiplinger.comYou can convert anytime, regardless of your age or income. -
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Lizzie, You are doing a great job of saving. It looks like that 30K may be your emergency account. If so, don't fret too much over lousy interest rates. Consider that fund an insurance policy. What is really important is that your money be available when you need it with no chance of market fluctuation. On line banks and credit unions usually have the best rates.
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Lizzie, Are you asking how to invest the proceeds in your Roth IRA. Because the Roth IRA proceeds have the ability to come out income tax free you want very good growth potential for those dollars. Depending upon the amount of fluctuation in values you can handle you should consider a higher mixture in US and International stocks. Then you can bring in bonds as you want to lower the volatility.
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Since we've mentioned RMDs, here's a primer:What Retirees Need to Know About RMDs
www.kiplinger.comStart planning your RMD strategy for required minimum distributions now. -
Hi Lizzie. Good for you for saving a high percentage of your paycheck! Have you done the analysis on whether it makes sense to direct some of that money to a traditional 401k? To get the most from your savings (after setting aside an emergency fund), I believe it makes sense to invest in a low-cost globally diversified portfolio. You can also take advantage of asset location, where you invest in tax efficient funds (US Large Growth) in your non-IRA and tax inefficient funds (e.g., REITs, Emerging markets) in your IRA.
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Michael, "Required distributions. You cannot convert amounts that must be distributed from your traditional IRA for a par- ticular year (including the calendar year in which you reach age 7012) under the required distribution rules (dis- cussed in Publication 590-B)." IRS Pub 590-A page 29
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thanks you all for your recommendation.i requested a financial planner from a rrelaible mutual fund house.20%stocks 80%bond.Mr.berstein said in an interview that when an indivisual reach 80 years hoes need a lot om money so he should allocet 60% to stocks and 40% to bond.i hav difficult time to find a reasable napfa planner
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Hassan, have you tried looking here for a NAPFA advisor near you:
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My wife and I are in our early fifties and solidly saving for retirement, but worried because we don't have any LTC insurance. I just found out about something called LifeCare through John Hancock, which says that if you put in $100,000 cash they will pay out $250,000 toward your LTC if you need it during your lifetime but that if you don't use it they will pay the $250,000 to your heirs when you die. On the theory that "if it's too good to be true it probably is" what am I missing? Other than the $100k nut up front, are there any drawbacks??
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Lee, You are giving up full access to the money for other purposes. Verify with the agent if this is actually a life insurance policy with rights to withdraw for qualified long term needs. Ask what qualifies for distributions and whether they will all be income tax free. Qualified long term care policies will have distributions that are all income tax free. Then determine if you can handle removing access to $100,000. Another note $100,000 invested with a 5% average annual return would require 19 years to grow to $250,000.
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Hi Lee. I am not too familiar with that particular product from John Hancock, but I would urge you to do thorough research and ask as many questions as possible. Also, I would compare that product to a more traditional LTC policy. Lastly, Something to keep in mind is a LTC policy does not necessarily need to fully cover your expected LTC costs. You can opt for a policy with lower benefits (and, consequently lower premiums) that will enable you to supplement any long-term care costs.