Maximize Your Money With Kiplinger and NAPFA, December 2016
Kiplinger is teaming up with the National Association of Personal Financial Advisors (NAPFA), whose planners will answer questions about end of year tax prep and more. Submit your questions here and get free personalized financial advice on Thursday, December 15, from 9 a.m. to 5 p.m. ET.
3rd & 7 37yd
3rd & 7 37yd
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Joe, what was the original purpose for the I bonds? If it was to provide a relatively "safe" return, then they aren't a bad option to keep holding for any income you need in the next few years. But if you're hoping to pass along that money to heirs and don't need the money to live off of anytime soon (10+ years), then a globally diversified mix of investments tailored to your goals and risk tolerance might be a better fit for that money.
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S103462, There's a required beginning date that has to be met. Ed Slott is a recognized expert and from irahelp.com: In only the first year you are required to take distributions, you can defer the distribution until April 1 of the following year. This is your required beginning date (RBD).
If you die before your RBD, then there is no required distribution for your year of death - even if you already took part of the distribution before you die. Your spouse or other beneficiaries are not required to take any further funds out of the IRA to satisfy your distribution in the year of death. If the beneficiaries do not need the money, then let it stay in the IRA to continue growing and compounding tax deferred until they need to begin taking their own RMDs from the inherited account (12/31 of the following year).
But, if you die after the RBD and have not taken your entire RMD for the year, then your beneficiaries must take the balance of the RMD before the end of the year. The RMD for the year of death is calculated as you had lived for the entire year.
It is important that your beneficiaries know to take this distribution. The penalty for not taking a required distribution is 50%; that is not a typo; it is 50% of the amount not taken. But wait, there’s more! The amount of the missed distribution must be taken from the account and the beneficiary must pay income tax on that amount in addition to the penalty. -
S103462 straight from the IRS According to the IRS Final Regulations at Section 1.401(a)(9)-5, A-4(a),
[I]f an [IRA owner] dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the [IRA owner’s] death is determined as if the [IRA owner] had lived throughout the year. Thus, a minimum required distribution, determined as if the [IRA owner] had lived throughout that year, is required for the year of the [IRA owner’s] death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the [IRA owner]. -
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Hello there. Thanks for doing this. I am in my late 20s, saving enough in my 401K to get the full match from my company (6%), I started an IRA this year, and I have about 10K in an emergency fund. What would you recommend as potential next steps to saving and/or financial success?
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Hi AL2, congratulations on what you're doing so far - excellent! Have you named any financial goals for yourself? Doing this - "what do you want, when/how often do you want it, and how much will it cost" can lay the context for future financial decisions. You can do this on your own or work with a planner who can model outcomes for you. Either way, you're wise to be a saver, now perhaps it's time to think bigger about what you care most about funding for your life.
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Al2, I love that you are saving so much. There is never a better time than when you are young. When my clients reach retirement, they love to have money in different "buckets" (taxable, retirement, and tax free like a ROTH). So you might consider opening a taxable investment account with a low cost brokerage. Vanguard will let you buy a target date fund with as little as $1000. But if you want to maximize your current tax savings, you might just put more in your 401K at work IF, and this is important, they have good, low cost investment options.
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Hi AL2, thanks for joining us! Are you debt free? No credit cards, no student loans, no auto loans, etc? If so, CONGRATULATIONS!!! To keep it that way, make sure your emergency fund is large enough to cover 3-6+ months of living expenses. Also, make sure to pay attention to Bonnie's advice of setting goals because it's hard to know where to save and how much to save if you don't know what you're saving for. Whether it's early retirement, a house, starting a business, or something else entirely, this will influence where it makes the most sense to save and how to invest that money.
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Thanks, Bonnie, Bobbie and Tyler! Good advice to sit down and write out some goals. It's definitely something I need to do. And yes, I am debt-free (thankfully). Bobbie, a taxable account is something I hadn't thought about, so that might be something I explore when I sit down to write my goals. Thanks again, to all of you !
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Lucie, there are a lot of great retirement savings vehicles available to self-employed folks such as a SEP-IRA, SIMPLE IRA, solo 401(k), and others. You might consider talking with a fee-only advisor to develop a retirement savings plan and to help determine the best place or places to save. I know of three good advisors on the chat right now ;-) or you can use the "Find an Advisor" tool at www.napfa.org to find a fee-only advisor near you! They'll also help you determine if it makes sense to keep those old 401(k)s with your previous employers or consolidate them by rolling them over to an IRA.
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Lucie, it depends on how much you want to save. There is something called a SIMPLE IRA that is very simple to set up. You can open the account at a discount brokerage and fund it up to 12,500 per year (15,500 if you are over 50). It does require any ongoing filing with the IRS or the costs to have someone administer it (as with a solo 401K). You can also make it so you, the employer, can match up to 3% per years. But if you have employees note that you have to do that for everyone. Now, if you want to save more, you need to look at a solo 401K or a SEP IRA. I suggest you check with a CPA before you make these decisions. He/she can also tell you what kind of business records you will need to keep AND how much of your earnings you need to save for estimated tax payments.
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Typical financial plans suggest 15% to international stocks. International has tanked for years now. I read a recent columnist in Kiplingers which supported giving up on Intl stocks and switching all stock to USA based stocks. Is the typical planner changing its views on Int'l stock allocation?
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I retired in 2015. For 2016 I have no earned income, but I converted $40K from my 503(b) account to my Roth IRA in November. No taxes were withheld. Do I need to make an estimated tax payment now to avoid penalty, or can I simply pay the appropriate tax when I file my 2016 tax return?
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Ed you must enroll in Medicare within 8 months after leaving employer coverage to fulfill the requirements of the Special Enrollment Period. COBRA does NOT count as employer coverage even if it is the same plan. There is a good article from pbs on this:
Don't make this Medicare mistake: COBRA is not like employer health insurance
PBS NewsHourCOBRA can be a literal lifesaver for people who lose their jobs and health coverage. What it does not do, however, is take the place of employer group coverage in the eyes of Medicare. -
GRH, the percentages that planners use are from my perspective an attempt to cover the entire market and you'll find planners (and clients) comfortable with a range on international anywhere from 5-25% in my experience. I can't speak to a typical planner, but the best ones I know have allocations that match their client's risk tolerance, risk capacity, and risk required at the minimum. Most planners can provide a copy of the Callan Chart of Investment Returns and that's a good look at how any particular asset class has performed in the last 10 years. It's a reasonable argument for diversification in the face of temporary disappointing returns.
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Mike I assume you mean 403b. Yes, you will owe taxes on this money. To avoid a penalty you need to pay in as much tax as you owed for 2015 (there are exceptions but only if you make more) or the amount owed for the current year, whichever is lower. Now, withholding is considered as being done throughout the year while estimated payments are considered received when paid. That means any tax payment you make now is likely already late and there will still be a little penalty. You can avoid additional penalty by paying them by 1-15-17 or as soon as possible. But the truth is the penalty is likely to be very smalll.
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GHR, Every investor is different due to their differing goals, risk tolerance, time horizon, etc. so whether or not 15% in international stocks is the right amount for you depends a great deal on your overall asset allocation and goals. With that said, just because a particular asset class (i.e. international stocks, domestic stocks, bonds, etc.) hasn't done particularly well in recent history doesn't mean that an investor should completely avoid that asset class. In fact, as the "Oracle of Omaha" himself (Warren Buffett) says, many times a successful investor is, "fearful when others are greedy and greedy when others are fearful."
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GHR, we all understand how you feel. Unloading an under performing asset "feels" like the right thing to do. For instance, many of my clients had exposure to commodities, energy, and south america and it was ugly through last year. But then, those are some of the best performers in their portfolios this year. Decide on an allocation and stick with it. Your heart will usually lead you astray when it comes to investing.
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Pete, I use a projected return of about 5.5% for a portfolio like that. With inflation of 2.5% which is also what I use, this means a real return of about 3%. Real return is the number that matters. If you had a return of 10% and inflation was 7% you would still have a real return of 3%. If you are young, you have never seen inflation numbers like that. But I promise you, it was even worse in the 80s and at some point, inflation will come roaring back.
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Hi Pete, the long-term average 1913-2013 is 3.22%. Recently it's been much less - I can kill a retirement plan pretty quickly by adjusting the inflation rate to a higher amount and I do worry that we've grown very complacent in the last several years. I'd model different amounts like we do in the office to understand a pain point. As for an allocation, you won't be surprised that folks can and do disagree that 50/50 might be conservative. I hope we all learned in the Great Recession that things can look very different on this side of 19852 on the Dow vs less than 12 months ago around 15000. Please see a planner to discuss these important differences as they pertain to you.
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Joe will they not give you the pension for the accumulation up until now? Hum. If they offer a lump sum, you might decide to roll it into an IRA and invest it yourself, perhaps with the help of a planner. The advantage of this is that you will always have access to the money. The disadvantage is that there are no guarantees on returns. At the VERY LEAST, shop around and see if you can purchase a better annuity product that the one you are being offered. Keep it simple and check with low cost shops like Vanguard and Fidelity. This is a complicated question and you should really check with an advisor who can see the actual paperwork you are being given. Many NAPFA members work hourly.
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Joe, I'd also recommend you double and triple-check that your employer and the insurance company have all of the correct information that goes into calculating your benefit. I've known some folks who had their benefit substantially reduced in these types of situations due to simple clerical errors. Hanging on to your statements until you start collecting benefits will also help resolve any issues that might pop up down the road when you start collecting benefits.
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Jenn, Kiplinger knows!
You Don’t Need Earnings to Contribute to a Health Savings Account
www.kiplinger.comEarned income isn\'t a requirement to save in an HSA, but you do need an eligible high-deductible health insurance policy and you can\'t be enrolled in Medicare. -
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Hi Mary, I'm sorry for your loss. The answer is a qualified yes. We always run a projection of Social Security to make sure we understand the best time to take benefits which may or may not be as a survivor at 60 - please consider running your situation by a fee-only planner to confirm this would be appropriate for you.
Survivors Planner: If You Are The Worker's Widow Or Widower
Social Security delivers a broad range of services online at socialsecurity.gov. We have a proud history of protecting the integrity of our programs and service to the public. -
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Mary, you can start taking a survivor benefit when you turn 60 but it will be much less than if you want until your normal retirement age. Will you have your own benefit? Will it be higher? If so, you may take the survivor benefit now and let your own grow. If yours is lower, you may choose to take it at 62 and then take your survivor benefit when you reach normal retirement age. This is complicated and you don't want to make a mistake. So I suggest you do work with an hourly planner.
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Jenn, as Bonnie mentioned, you can continue contributing to an HSA without earned income. Just keep in mind you do have to be enrolled in an eligible high deductible health plan in order to keep contributing. Otherwise, the HSA contributions have to stop.
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Mike if you can pay the fee from outside the IRA, that allows for more tax deferred growth. On the other hand, if you take the advisor fee out of the IRA, it will not count as a distribution and you will never have to pay tax on that money. Most people like it the way you have it set up now....no tax on the withdrawal to pay the advisor. As always it depends on your circumstances.
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I will turn 70 in November of 2017. I was planning on delaying social security until then to maximize the amount. I am currently receiving Medicare Part B but paying the premiums myself since I am not taking social security yet. I am growing concerned with the minimal COLA for this year and the impact it may have on my Medicare premium. Any advice you can offer for consideration? Should I sign up now for social security and pay the medicare premiums that way to avoid the upcoming premium increase for those not held harmless,
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Mike, typically it makes sense to pay as much of the management fee as possible from inside the traditional IRA so those fees effectively come out tax-free. If for some reason part of that management fee is attributable to financial planning, tax planning, etc. then make sure the advisor only takes out the amount that is attributable to investment management. If you don't, you could run into major issues if the IRS determines some of that fee wasn't for investment management.
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