Welcome to December's Maximize Your Money Q&A!
During the event, expert financial advisors will answer questions across an array of personal finance topics. And, with the holidays and new year upon us, we'll be paying special attention to holiday money concerns and year-end tax planning.
The floor is open for questions if you'd like to submit one ahead of time by clicking "make a comment" above.
Talk to you soon!
Good morning and welcome to December's Maximize Your Money chat. Let's give everyone a few more minutes to get logged in.
Good morning, and welcome! For the next 8 hours, NAPFA planners will be on hand to answer your questions. You can find a Fee-Only financial planner in your area at www.NAPFA.org.
With is this morning are NAPFA advisers Bonnie Sewell, Mark Coffey, Rob Schmansky, Frank Boucher and Danielle Seurkamp. Thank you all for being here!
With the holiday season in full swing, and the end of the year nearing, now's the perfect time to talk about budgeting and end-of-year financial planning. We're looking forward to your questions!
Here's a first one from Thomas: Tax Strategy - Nearing retirement and have a traditional IRA with before and after tax funds. What guidelines should be followed when taking money out.
Good morning Thomas, you should always see your tax advisor for specific tax questions, however, in general we would distribute taxable accounts first, after tax funds in the IRA, then the before tax funds. There are many instances where this would not be the order which is why your specific tax situation should be examined before deciding.
The first thing you'll want to do is figure what proportion of the IRA the after-tax money represents. So if your IRA is worth $100k and your after-tax contributions are $40,000, they represent 40% of your account. If you take out a 10,000 withdrawal, 40% of it will not be taxed and the other 60% would.
Depending on your tax bracket and need for cash flow, you may want to consider converting some of these funds to a Roth IRA before retirement. Work with your tax advisor to project your marginal tax bracket today and try to "fill up" the 15% bracket with converted dollars.
Thomas, one strategy is to take withdrawals to maximize your current tax bracket so that you do not go into a higher one down the road. We think often about how to put money into accounts, but we should also have a plan for taking it out. If you don’t need it for 5 years, maybe convert it to a Roth iRA.
You will need to get confirmation from a tax adviser but your logic appears correct to me.
Steve, The main thing to watch for on your rollovers is to have your 401(k) funds rolled DIRECTLY to your IRA's. Some plans may insist that they send a check to you and that's ok as long as it is made out to your IRA's. As for the conversion, I'm not aware of any restriction on that but it is always a good idea to check with your tax advisor first.
Steve, looks like a solid plan. You want to do a direct trustee-to-trustee transfer for the 401(k)’s to the IRAs. Easy peasy.
1. Yes, if you complete the rollovers correctly both should be tax-free. If you can have your 401(k) provider send the money directly to the custodian of your IRA and Roth (Schwab, Fidelity, etc.) that is usually best. That is considered a "trustee to trustee transfer". If they send the money to you and then you deposit it in your accounts, the 401(k) provider with have to take federal tax withholding, which is usually something people want to avoid.
I think your plan to move the 401(k) money to the IRA and Roth and then do the Roth conversion makes sense, but if you wanted to you could also have pre-tax 401(k) money sent directly to your Roth which would accomplish the same thing in fewer transactions. If it were me, though, I think I'd do it the way you've suggested.
Question for Paul. How much do you rely on your $3M of CDs and online savings to meet your living needs? Do you get what you need from SSI and your annuities or do you have to take withdrawals from your investments to cover your expenses?
Paul, perhaps you have goals that exist for future generations, and perhaps you have significant risk of high inflation over the coming decade. A diverse portfolio with some growth assets helps with those goals, but should be viewed in context with your ability to sleep at night. Many studies I’m reading lately suggest there is significant value in maintaining a balance throughout retirement.
Hi Paul, It looks like you may have your needs covered - if that's true, have you thought about setting up any remaining funds to go to a charity you deem worthy after your lifetime(s)? That may indicate a change for part of your money that wouldn't affect your ability to pay for your needs going forward.
PaulB, sounds like you are in a pretty good place compared to others. Provding for your current and future cash flow while also contemplating catastrophic events such as prolonged long term care needs (Alzheimer for example) for you and your wife should be part of your plan. The one risk that you may not be covering is inflation. Once these items are covered, I'd suggest reviewing your legacy and whether you want to fund a charity now or upon your death.
Hi George, my preference is a list of expected gift expenditures that gets followed. How to pay preference would be credit card for rewards (if you collect and use them) and simply pay it off the next month because all the spending was planned.
Paul, You "won the game" but what about your estate planning? Who gets your residual funds and what do you want them to do with it? Better yet, could you do something with those excess funds now that might make you a happier retiree? Maybe pay for a person to go to nursing school? Help some children? Battered women? The possibilities are endless. Since you have no heirs and you can't take it with you, you might want to consider sharing your blessings with those less fortunate.
George, since I can’t tell you the last time I wrote a check, I think that one is last! Otherwise, I agree with Bonnie!
From my perspective, how you pay for holiday shopping depends on how much discipline you have in spending. Yes, credit card rewards are a great thing to earn with holiday shopping if you know you'll pay the balance off next month and not pay interest. If you're prone to get into trouble by overspending using a credit card, I go with one of the other options that forces you to only spend what you have.
George, The credit card is best because it offers some consumer protection and like my friend Bonnie says you get rewards. But, you better pay off that balance when you get the January statement or all five of us advisors on this board will hunt you down :)
Hassan, are you a healthy 82 year old? Does anyone else rely on the funds your portfolio will provide? A well-diversified portfolio may already be in place with the Vanguard balanced funds. This is tough timing for high yield with an interest rate rise looming. Please see a fee-only advisor for a no-cost review of your existing portfolio before you make changes. Good luck.
Hi Hassan, I’m not sure of your needs so can’t provide a recommendation, but I generally recommend balanced funds for a simple, diverse mix. I’m not exactly clear on the other bond funds mentioned, but my preference is to not take risks in bonds by staying short-term. One way to get more short-term exposure would be by using a balanced growth fund combined with short-term bond funds. I also like the Vanguard Short-term Inflation Protected fund.
I'm a fan of keeping it simple when you can. The Vanguard balanced fund is a good low-cost option, my only concern with it is that it doesn't have much international stock and it's low on small US companies as well.
Oh gosh, Lester, you've asked a legal question in regards to bankruptcy so I advise you see a bankruptcy attorney for specific guidance. I'm sorry your sister-in-law is suffering. My suggestion is that she use some IRA funds to pay off her credit cards and to pay the on-going co-pay. That's a financial answer and you need a legal answer to determine if this is a bankruptcy case.
Hi Lester. I think I would refer your sister to an elder care attorney or your local government resource for ageing and disabled residents. I don't know enough about Medicare to understand why she was shut off but it would seem to me that there are other remedies available to her.
Thanks for joining, Hassan.
Hi Bill. That's a little tricky to answer without knowing what fund you have but I will say there are often investments that are more suitable for retirement accounts and those that are better for after-tax brokerage accounts. For example, you might want to use tax-exempt municipal bonds in a brokerage account and taxable bonds in a 401(k).