Ask The Money Coach

Posts Tagged ‘Roth IRA’

Congratulations on getting started investing. You’re not too late to the investing game: you’re right on time. A lot of 36, 46 and 56-year olds wish they’d started when they were 26, as you are. So don’t beat yourself up at all about your age. Glad to hear you’re starting a Roth IRA. It’s a great way to save for retirement. Regarding the 401(k), your investment options will be dictated primarily by the offerings that your employer has available. I can tell you in general that Edward Jones has a good reputation and is known for quality financial advice. However, the mutual funds you choose are equally important. So the main question you need to find out tackle is: based on my investment objectives, how much of my 401(k) should be in stocks, bonds, and cash? Then you can think about what funds or stocks to buy to match those objectives.

If you don’t have an adviser helping you, I’d strongly suggest that you get a professional to create a financial plan for you and offer you some specific recommendations based on your goals, risk tolerance and personal circumstances. You can get good help from the National Association of Personal Financial Advisors (www.napfa.org) or from the Financial Planning Association (www.fpanet.org).

Well, only you know whether or not it’s time for a major career shift. But based on what you said, you seem to be a bit overwhelmed in dealing with such an emotionally demanding job. You said you’ve worked there since 1997 and have been in the special education field since 1990, so the good news is that it’s not too much of a stretch to take the skills and experiences you’ve amassed over 20 years and apply them in the general education arena. From a financial standpoint, however, since you have no savings and described yourself as struggling to make ends meet, I would advise you to be cautious about taking money out of your 401(k) plan. You said you planned to roll it over. But into what? Your message didn’t indicate specifics. Into an IRA or something else? Read this post about Roth IRAs and this one as well about the benefits of having a 401(k), as well this item on the drawbacks of taking money from your 401(k) before you are age 59 1/2.

You are correct in your assumptions. Yes, you can open two IRAs (one for 2009 and one for 2010), and safely convert them into a Roth this year because of the removal of the income limits on Roth conversions. I double-checked with an expert on this, David Mendels, who is a Certified Financial Planner and the President-Elect of the New York Chapter of the Financial Planning Association. David is also an adjust faculty member at New York University, as well as the head of the fee-based financial planning firm, Creative Financial Concepts, LLC. So he is very well-credentialed and I’m confident in his knowledge ane expertise. He told me to offer you two caveats, just to make sure your efforts go smoothly.

First, if you have any existing IRAs that are traditional IRAs or IRAs other than the new ones you plan to open, be aware that your basis will be calculated over the combined IRAs that you have, not just the ones you are opening now. Second, to make sure you don’t experience any future issues if any questions ever arise, keep very clean records about this for the future. Here’s how: wait a brief period after you open the non-deductible IRA before you do the conversion. David suggested that you wait a week or so – or as long as it takes until the IRA custodian has a record that your original contribution was a non-deductible IRA. After that’s done and you have written confirmation, then go ahead and do the conversion.

A final tip: you can open two IRAs if you want, but you certainly don’t have to. If you prefer to keep things simpler (again, from a paperwork and record-keeping standpoint), you can just open a single non-deductible IRA. Put in your contribution for 2009 — you have to do it by April 15, 2010 — and make sure that the contribution is specifically designated for 2009. Then you can make another, separate contribution that is specifically earmarked as a 2010 contribution. Either way (one or two IRAs) accomplishes your goal and allows you to ultimately convert two years’ worth of IRA contributions into a Roth. Good luck!

Although the earnings in both types of retirement accounts grow tax-deferred, for longer-term financial planning, I like the benefits of the ROTH IRA over the Traditional IRA. Additionally, recent changes governing IRAs make it more financially advantageous to do a rollover in 2010. Lastly, since you are 50 years old and mentioned having other types of investments (bonds, CDs, retirement accounts, etc), I would seriously explore converting your Traditional IRA into a ROTH IRA. Read on for more details about why a ROTH is likely your better option.

Two major advantages of the ROTH are more control over your withdrawals and a potentially bigger nest egg at retirement. As you know, with a Traditional IRA, your contributions may be tax deductible up front (depending on your income and marital status), but you must later pay taxes on distributions.

With a ROTH IRA, you get no upfront deduction for contributions. However, your stand to get a bigger payoff on the backend – since distributions made from your ROTH IRA won’t be subjected to income taxes in retirement. This combination of tax-free growth and tax free distributions makes the ROTH IRA an especially powerful retirement account. Plus, with the ROTH IRA, you get to make contributions at any age and there’s no mandatory withdrawal age. By comparison, if you have earned income, you can only put money into a traditional IRA up until the year you turn 70 ½, and you must begin taking distributions from Traditional IRAs beginning at age 70 ½.

In 2010, IRA contribution limits for both traditional and ROTH IRAs are $5,000, plus an additional $1,000 for those 50 an older. Starting in 2010, to be eligible to contribute to a ROTH IRA, your modified adjusted gross income must be less than $177,000 for married taxpayers filing joint returns, and less than $120,000 for single taxpayers.

Also noteworthy is that as of 2010, several important changes have occurred impacting Individual Retirement Accounts. First, you no longer have to worry about whether you’re eligible to convert a Traditional IRA to a ROTH IRA due to your income level or your tax-filing status. That’s because previous rules that restricted conversions/rollovers based on income limits and filing status requirements were eliminated effective 2010.

More importantly, the financial sting of doing a rollover has been greatly reduced. In years past, a rollover was considered taxable income in the year you did the rollover. However, for any 2010 rollover from a Traditional IRA to a ROTH IRA, any amounts that would be included as income can be spaced out over two years: in equal parts in 2011 and 2012. This would effectively knock in half any tax bill generated by doing a rollover. The law also still gives you the option of including the entire amount in income in 2010. But most people doing rollovers will want the benefit of spreading that conversion income over two years and deferring taxes in the process.

Retiring in two to three short years from now means you’ve got to ensure that your financial affairs are in good shape, and that you will have enough money on hand to last you another two or three decades. Many financial planners create plans for their clients on the assumption that the client will live until 90 or 100 years old. So you have to consider whether, if you retired at age 65 or 66, you would have enough money to last for potentially another 30 years.

Max Out that Retirement Plan at Work

Start by looking at what you’ve saved in your retirement plan at work. If you haven’t been aggressively saving in a 401(k) or 403(b) plan, by all means start doing so. Perhaps your employer offers a match to boost your retirement plan. Under federal law, most employees can put up to $16,500 into a qualified retirement plan in 2010. However, since you are over 50 years of age, you can also put into another $5,500 in “catch up” payments if you’ve been a late starter, in terms of saving. You can also sock money away into an IRA, or Individual Retirement Account. The 2010 limit for regular IRAs and Roth IRAs is $5,000, plus another $1,000 in allowable contributions for those 50 and above. Assess also any pension income or retirement benefits that will be provided directly by your employer. Then find out how much money you will be entitled to from Social Security. You can find out your expected Social Security payments by visiting the Social Security Administration’s website (www.ssa.gov).

Two Steps To Assessing Your Retirement Readiness

In summary, to make sure you are on track to retire when you want, you should follow these two steps:

Step 1: Calculate Your Retirement Needs
Think about what how much money you’ll need in retirement, on a monthly and annual basis. Take into account your projected monthly expenses, any debts you’ll have, along with the possibility of healthcare or medical costs, travel, as well as inflation. A good tool to use is the “Ballpark Estimate” retirement calculator from the American Savings Education Council at: www.icief.org/retirement/illustrations/ill_ballpark.html

Step 2: Estimate Future Benefits
After consulting your Human Resources Department or taking a look at any employer-provided pension income you may be expecting, go get an estimate of your Social Security benefits at www.ssa.gov./estimator.

If you don’t like what you see in the results, all is not lost. You have the option of working a bit longer, perhaps investing slightly more aggressively if you are comfortable doing so, or even using products like annuities that can offer you a steady income stream or make up for any financial shortfalls you may face.