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Have you made your 2010 Roth IRA contribution?

If you have not yet made the maximum contribution, and are eligible to make contributions, you still have time!

Tax payers have until April 18^th of 2011 to make their Roth contributions for the 2010 tax year.  If you are within the income limitations to make contributions, a Roth IRA is an excellent investment account as investment growth is tax deferred and withdrawals in retirement can be tax free.

For 2010, single filers are able to fund their Roth IRAs with 100% of the contribution limits if their income is below $105,000.  Their amount of contribution availability drops if they are above the $105,000 and are phased out completely at $120,000.  For Married Filing Joint taxpayers, income restraints begin at $166,000 and end at $176,000.

Looking forward for 2011 contributions, contribution limits for this year have stayed the same as 2010.  This includes the limits for the Roth and Traditional IRAs and the majority of employer sponsored plans such as 401ks and 403bs. A very good practice is to contribute enough of your salary to receive at least the employer match.  Also, pay raises often present an easy opportunity to increase your deferral, while reducing your adjusted gross income.

The contribution limits for nearly all types of retirement plans are listed in the following chart:

Our wealth management service monitors your income and determines every year how much you should be contributing to each of these investment accounts.  It also reviews your income tax and estate picture, which may provide opportunities for tax savings.  If you are interested in this service, please contact us.

Photo credit: Scott Willis.

Many of our newer clients have come to us with old 401(k), 403(b), 457 and Simple IRA accounts from previous employers.  Some even have multiple IRA accounts, often from past rollover situations.  It’s important to have qualified professionals to help you decide on what to do with your inactive qualified plan and multiple IRA accounts.  Whether you are changing jobs, entering retirement or simply wanting to consolidate your accounts, we can help you with each step of the rollover process.

Should you always Rollover a 401k?

There are a few options for dealing with an inactive qualified plan including:

• Rollover the account into a self-directed IRA account, such as a traditional IRA.
• Rollover the account into a new employer-sponsored plan, if allowed under your current plan’s rules.
• Rollover the account into a self-directed IRA account, then convert all or a portion of the funds to a Roth IRA account (after careful tax analysis).
• Leave the account at the current custodian and bring your investment options in line with a comprehensive portfolio strategy.

Despite popular belief, it is not always best to rollover an old employer plan.  Certain custodians offer favorable investment options or have special tax provisions (the North Carolina employees’ Bailey provision, for example), meaning  it could benefit you to leave your account at the current institution rather than combining the funds into another account.

We have experience in dealing with many different custodians when it comes to the rollover process.  For our investment management clients, part of our service is to request and complete paperwork while monitoring the rollover process.  If you are interested in combining inactive qualified accounts, please feel free to contact us.  Your advisor will research the best approach for your individual situation and determine if a rollover is the best choice for you.  If it is, we’ll get the process started as soon as possible.

Not yet a client and unsure if a rollover is right for you? Contact us to schedule an appointment to review your financial picture and develop a plan that will help provide the answer.

Making use of the Gym

Why do we do this?  Until recently, researchers had no idea what made us act so strangely.  But now, a few studies are helping explain how we make decisions, and the results are funny.

David Laibson, an economics professor at Harvard, has conducted research which suggests that people do fairly complex mental accounting whenever they make decisions, and count future rewards (or efforts) as half as important as present rewards or efforts.

How does this work?  Suppose you get up in the morning and face the decision of whether or not to go to the gym.  In your mind, the effort of putting on your sweats and driving the health club on any particular day can be given a hassle factor of 6.  The benefits (being more healthy and in better shape) can be assigned a benefits value of 8.  But the future benefit is discounted by half, so it has an effective weight, in your decision-making, of four.  Since 6 (the hassle) is greater than the benefit factor of 4 (eight divided by two), your mind decides to skip today’s workout.

In mathematical terms, Laibson says the decision to exercise today can be defined by the equation (-6) + (8/2) = -2.  The negative result means that the future benefits are not worth the immediate investment.

So why do people buy memberships in the gym in the first place?  Laibson offered an analysis of the PLAN (or resolution) to exercise, and the numbers come out very different.  The intention to go to the gym three times a week costs nothing.  The future effort of going to the gym (-6) will be discounted by half, and so will the benefits (+8).  Therefore the mental equation you use when you buy the gym membership be defined as 0 [the "cost" of planning to go to the gym three times a week] + (-6/2) + (8/2) = 1.

“Planning to go to the gym is a win,” Laibson explains, “chiefly because the planning itself costs nothing.

In a confirming bit of research, two of Laibson’s students surveyed health and fitness facilities in the Boston area and found that the average cost of a gym membership is $75 a month.  Because people swipe their membership cards into the machines as they enter, there are fairly detailed records of how often members actually go.  The researchers found that the average person goes to the health club four times a month, which means the average cost per visit is $19.

But…  Laibson’s students found that these health clubs typically offered a $10 “pay per visit” rate.  Clearly, the people who bought their memberships intended to go at least twice as often as they actually did.  The mental equation around planning produced a very different outcome from the mental equation around execution.

Is there a way to change this mental accounting?  Laibson suggested that you hire a coach who will hold you accountable–adding a hassle factor if you don’t go to the gym.  Or arrange to meet a friend there three days a week, adding the hassle factor of disappointing your friend if you don’t show up.  Or, if you want to do it more positively, promise yourself that you’ll reward yourself with a fruit smoothie after you exercise, adding something positive to the mental equation.

This article was written by Bob Veres.  He writes for several national publications and publishes a monthly newsletter titled “Inside Information.”  You can find more info about him here http://www.bobveres.com/.

Photo Credit:  mjzitek

Photo Credit: alancleaver_2000

Know Your IRS Numbers

Unfortunately, there’s no rhyme or reason that will help you to remember the different IRS form codes.  But, remembering the following two will assist you greatly if you encounter a situation like we described above.  After you initiate a rollover of a former 401k or 403b, you should expect to receive a Form 1099R.  This form is used to report distributions from IRAs whether they are taxable or not.  The second form, Form 5498, you will need is not as well-known but equally as important.  This form’s purpose is to report the rollover contribution made to your new IRA.  These two forms work from opposite ends in the event of a rollover, conversion or recharacterization.  Be especially vigilant when reviewing this information when a transaction starts at one trustee and ends up at another.

For example, if you completed a direct trustee-to-trustee rollover out of a Fidelity 401k into a Vanguard IRA you should receive a 1099R from Fidelity and a form 5498 from Vanguard.  The Fidelity 1099R should show the total amount in box 1 and a code G in box 7 for the direct rollover.  The Vanguard 5498 should show the same amount in box 2 Rollover contributions.

If you completed the rollover within 60 days, where you received a check from one trustee and then made the rollover contribution within that time frame you’ll want to make sure that the form 5498 is accurately reporting the rollover in box 2.  More than likely the trustee issuing the 1099R for the distribution will report a taxable transaction.  You should indicate “rollover” on your tax return and the IRS will get the form 5498 to back that up.

May 31st Tax Deadline?

The trustee that maintains your individual retirement accounts (IRAs) is required by the IRS to report contributions, required minimum distributions and the fair market value of the account by May 31.  This date may seem like an odd time to receive a tax form since you’ve probably already filed your return.  However, form 5498 reports contributions made to an IRA during the tax year as well as those made after December 31, but before April 15^th for the previous tax year.  Make sure that those contributions match up to what you have reported on your tax return. If not, contact the trustee that sent the form 5498 and request a correction.

RMD’s not WMD’s

Another place to be sure that the information provided by the trustee matches your records is Required Minimum Distributions.  There are some fairly complicated rules regarding RMDs, especially if the account was inherited, so it makes sense to double check the accuracy on form 5498.

Understanding how this form is used by the IRS can help keep your tax headaches to a minimum.

photo credit - cliff1066™

If you invest in your employer sponsored retirement plan you have probably heard of Target-Date funds.  These funds are characterized as investments that change the allocation of stocks, bonds, and cash according to your specified retirement date.  In theory, these funds should progressively reduce risk exposure as the target date approaches.  However, there are no universal allocation standards, so the returns have varied widely from plan to plan.  This was highlighted by the market downturn in 2008 when funds with a target date of 2010 lost an average of 25%, with some posting losses of over 40%.

While the concept of these funds is great; taking the guesswork out of retirement planning for the average investor; further research, transparency, and likely regulation is required.  To that aim the Senate Special Committee on Aging will be introducing legislation that would require fiduciary responsibility for target-date fund managers. This is a step in the right direction, but there are still many other concerns that warrant attention.  In October 2009 Morningstar’s vice president of research Jon Rekenthaler testified before the Senate Special Committee on Aging.  You can read his testimony here:

“Five Concerns About Target Date Funds”

http://advisor.morningstar.com/articles/article.asp?docId=17632

If you have not yet made the maximum contribution, you still have time!  Tax payers have until April 15^th of 2010 to make their Roth contributions for the 2009 tax year.  If you are within the income limitations to make contributions, a Roth IRA is an excellent investment account as investment growth is tax deferred and withdrawals in retirement can be tax free.  For 2009, single filers are able to fund their Roth IRAs with 100% of the contribution limits if their income is below $105,000.  Their amount of contribution availability drops if they are above the $105,000 and are phased out completely at $120,000.  For Married Filing Joint taxpayers, income restraints begin at $166,000 and end at $176,000.

Looking forward for 2010 contributions, contribution limits for this year have stayed the same.  This includes the limits for the Roth and Traditional IRAs and the majority of employer sponsored plans such as 401ks and 403bs. A very good practice is to contribute enough of your salary to receive at least the employer match.  Also, pay raises often present an easy opportunity to increase your deferral, while reducing your adjusted gross income.

The contribution limits for nearly all types of retirement plans are listed in the following chart:

Our wealth management service monitors your income and determines every year how much you should be contributing to each of these investment accounts.  It also reviews your income tax and estate picture, which may provide opportunities for tax savings.  If you are interested in this service, please contact us.

Finding the motivation to save can be just as difficult as motivating yourself to diet and exercise. In both cases you know the outcome will be worthwhile — financial security and better health. However, taking the steps to get there is easier said than done.

If you have ever watched the show “The Biggest Loser,” you have probably heard the trainers say that being fit is not about dieting, but about making lifestyle changes that you can stick with over time. As the contestants participate in the challenge, their health gradually improves and their motivation to continue a healthy lifestyle typically increases. The hardest part is usually getting started.

The same is true with saving. While difficult at first, adopting a scheduled savings strategy and making budgeting part of your routine will increase your odds of achieving your financial goals. Identifying those goals is the first step to finding that motivation, so spend some time thinking about what you want your money to do for you. Maybe you are saving for a family vacation, your children’s education, retirement, or all of the above. Make a list prioritizing each goal and put time frames on them.

Next, work on identifying those triggers that keep you from saving money. Just as having chips and cookies in the house can derail your healthy lifestyle, so can mail order catalogs on your coffee table or even a clear view of your neighbor’s new BMW. Toss those catalogues in the recycle bin, put a limit on your Amazon or eBay habit, and start planning a savings strategy.

One of the best ways to stick to your financially fit goals is to make savings automatic. Hopefully you are already deferring money from every paycheck to your 401k. Think about increasing your deferral to put more toward your retirement goal. Then find other savings you can make automatic. Maybe you can set up a monthly transfer into your savings account, Roth IRA, or your child’s 529 plan. This strategy takes some of the work out of saving and automatically curbs spending, as your checking account appears less flush each month.

Lastly, remember that you are not alone. You probably have friends and neighbors who are also trying to stick to a financially fit lifestyle. Work together on finding low cost activities to do, and exchange tips and tricks along the way. You may also want to consider using a professional. A financial planner can help you develop a strategy specific to your needs in the same way a personal trainer can recommend the best exercises for your health and fitness goals. You can seek out a fee-only financial planner at napfa.org.

Natalie breaks down the specific estate distribution of a 401k and a pension plan for a hypothetical same-sex couple.  Her findings are a reminder of how important it is to keep retirement plan beneficiary designations current!

Question: “John,” age 54, and “Jim,” age 58, were married to each other under Massachusetts law. Their marriage is not recognized under federal law. Jim died, leaving a 401(k) plan and a money purchase pension plan, both maintained by his employer, Acme Widget Co. Jim had named John as designated beneficiary of the pension plan, but Jim never filed any beneficiary designation form for the 401(k) plan. The 401(k) plan provides that, if no beneficiary is named, the benefits shall be paid to the employee’s “surviving spouse, if any, otherwise to the employee’s estate.” Elsewhere, the plan provides that the interpretation and administration of the plan shall be governed by Massachusetts law “to the extent not pre-empted by ERISA.” I assume this means the 401(k) benefits must be paid to Jim’s estate, since under federal laws such as ERISA same-sex marriage is not recognized. John is the sole beneficiary of the estate, under Jim’s will, which has been admitted to probate in Massachusetts. What are John’s rights with respect to the pension plan? The 401(k) plan?

See Natalie’s answer on MorningstarAdvisor.com.

In the current economic environment employers are evaluating all of their cost cutting options. In many cases this may lead to suspending or reducing their 401k match.

For employees of such companies this should prompt an evaluation of their current savings strategies. One of the golden rules you will hear in financial planning is that you should, at the very minimum, contribute enough to your 401k to receive the employer match because this is “free money.”  However, when the matching program is suspended, this no longer holds true.

Some questions you should ask yourself when deciding if you should continue contributing to your 401k plan are:

• How would I use the additional money in every paycheck?

• What other savings strategies should I utilize?

• What would be the tax implications of discontinuing contributions?

This first question is key because part of the attraction of 401k deferrals is that they make retirement saving automatic, eliminating the opportunity to spend those funds rather than save them. This has become increasingly important in modern society with the reduced availability of traditional pension plans to cover our retirement needs.  Without the automatic deferrals from your pay check, it will be important to establish other savings strategies to continue funding your retirement goals.

This leads us into questions 2 and 3, which are intricately related. The appropriate retirement savings strategies will rely heavily on your income level and tax bracket. You should evaluate what your adjusted gross income would be with and without your current 401k contribution. Before eliminating your deferral altogether you will want to make sure that this will not push you into a higher tax bracket, since traditional 401k contributions are made pre-tax. If you are in a low tax bracket then you may want to consider contributions to a Roth IRA instead of your 401k since withdrawals from that account will be tax free in retirement. As a result of lay offs and pay cuts over the past year, some individuals may now be within the income limitations to make Roth contributions when they were not in the past. This option should be analyzed as well.

For most employees a combination of some level of 401k and IRA (Traditional or Roth) contributions make sense. Seek the guidance of your financial advisor to help you evaluate your options when faced with a 401k match suspension.

Here is an except from the article written by Lisa Shidler:

In recent months, a greater number of younger investors have come in seeking help, especially as their assets have fallen, said Allison Berger, a certified financial planner with Financial Symmetry Inc. in Raleigh, N.C., whose firm manages $78 million in assets. “It’s been one of my goals to work with young professionals and help them get started on the right foot,” she said.

Sometimes, people in this age group are grappling with a wide range of issues, Ms. Berger said.

“We’re trying to help them pay off student loans, save for an emergency fund, buy the first home and save for retirement,” she said.

Click here to view the original article: Investment News