Friday, September 28, 2012

How to Increase Your Social Security Checks

by Emily Brandon

Social Security turns 76 last month, and the program continues to be most Americans' biggest source of retirement income. However, the size of your payments will depend on how much you earn while working and when you sign up for Social Security. You may also be able to secure additional payments for your spouse, dependent children, and survivors. Here's how to maximize the amount you will receive from Social Security in retirement:

Work for at least 35 years. Social Security benefits are calculated based on the 35 years of your career in which you earn the most. If you haven't worked for at least 35 years, zeros are averaged into the calculation, which will lower your payout. "You can improve your benefit if you continue working and replace low-earning years or zeros in your record with higher-earning years later on in your career," says Jim Blankenship, a certified financial planner for Blankenship Financial Planning in New Berlin, Ill., and author of A Social Security Owner's Manual.

Earn more. Increasing your income now by asking for a raise or taking a second job not only gives you more spending power now, but will also increase the amount you get from Social Security in retirement. "Any years that you have more income than a prior year, you are increasing your benefit," says Lesley Brey, a certified financial planner for LJ Brey Inc., in Hawaii.

Wait until your full retirement age. To get the full payout you are entitled to, claim Social Security at your full retirement age. That's age 66 for most baby boomers and 67 for people born in 1960 or later. If you sign up before your full retirement age, your monthly payments will be permanently reduced. You don't necessarily need to claim Social Security the same year you retire from your job. "You can use your savings to bridge the time between 62 and 66 while you delay claiming Social Security," says Kelly O'Donnell, vice president at Financial Engines.

Delay claiming until age 70. After your full retirement age, your monthly payments will increase by 8 percent for each year you delay claiming up until age 70. "You're not going to get that return anywhere else, and then it will pay out forever," says Brey. After age 70, there is no additional benefit to further delaying claiming.

Claim spousal payments. Married couples are eligible to claim benefits based on their own work record or up to 50 percent of the higher earner's benefit, whichever is higher. However, spousal benefits are reduced if you claim them before your full retirement age. "The main way to improve this benefit is to delay receiving it until at least full retirement age, since it will be reduced if you take it at age 62," says Blankenship.

Claim twice. Dual-earner couples who have reached their full retirement age may be able to claim spousal benefits and then later switch to payments based on their own work record, which will then be higher due to delayed claiming. "If you are going to be delaying until age 70 anyway, this is a way to receive some benefit between age 66 and 70," says Blankenship.

Include family. If you have dependent children when you claim Social Security, you may be able to secure additional payments for them. To receive benefits, the child must be unmarried, age 19 or younger, or disabled. Each qualifying biological child, adopted child, or stepchild may receive a monthly payment up to one-half of your full retirement benefit amount up to certain annual limits.

Claim on an ex-spouses's record. If you were married for at least 10 years, you can claim Social Security benefits based on an ex-spouse's work record.

Don't earn too much in retirement. If you work and claim Social Security benefits at the same time, some of your benefit may be temporarily withheld if you earn too much. People under their full retirement age who earn more than $14,640 in 2012 will have $1 withheld for each $2 they earn above the limit. For the year you reach your full retirement age, the earning limit jumps to $38,880, and the penalty decreases to $1 withheld for every $3 earned above the limit. Once you reach the month of your full retirement age, there are no restrictions on how much you can earn while receiving benefits and your payments will be recalculated to reflect the withheld payments.

Minimize Social Security taxes. Your Social Security payout may be taxable, depending on how much income you will have in retirement. If the sum of your adjusted gross income, nontaxable interest, and half of your Social Security benefits is between $25,000 and $34,000 ($32,000 and $44,000 for couples), income tax could be due on up to 50 percent of your benefits. If those three items total more than $34,000 ($44,000 for couples), up to 85 percent of your Social Security income may be taxable.

Maximize survivor's benefits. Widows and widowers are eligible for the higher earning spouse's full retirement benefit. The higher earner can maximize the benefit the surviving spouse will receive by waiting to sign up for Social Security. "If you want the maximum amount for the survivor, the higher earner should wait until age 70," says Brey.

Sign up for direct deposit. You'll get your Social Security payments faster and can avoid fees and a trip to the bank by having them directly deposited to a bank or credit union account. New Social Security recipients no longer have the option to receive their payments as paper checks through the mail, but must have their Social Security payments directly deposited into a bank account or loaded onto a Direct Express Debit MasterCard. Existing Social Security recipients have until March 1, 2013, to select one of these forms of electronic payments.

Make sure your work counts. The Social Security Administration began offering the option to view Social Security statements online on May 1, and one million people have already downloaded their statements. It's important to check your online Social Security statement annually to make sure your earnings history and Social Security taxes paid have been recorded correctly by the Social Security Administration. If you spot any errors, take steps to correct them while you have your current tax information handy. Make sure you are getting credit for the taxes you are paying into the system.


Thursday, September 27, 2012

It's Time to See Older Workers as an Asset

by Chris Farrell

The footprints of an aging America are everywhere. Every day it seems another blue chip report is issued worrying about the surging ranks of the elderly. All boomers will be 65 and older by 2030. (The Rolling Stones’ memorable line “What a drag it is getting old” hurts, doesn’t it?) Put somewhat differently, 19.3 percent of the population will be at least 65 in 2030, up from 13 percent in 2010, according to U.S. Census Bureau projections. The litany of fears that goes along with an aging population ranges from a rising tide of entitlement spending starving the public purse of money for productive investments, to Corporate America’s innovative energies being depleted along with graying hair and aching joints of an older workforce.

Demographics, however, aren’t destiny. Instead, an aging America is an underappreciated and unexploited economic resource in a highly competitive global economy. Take Europe vs. the U.S. In many parts of Europe there isn’t the kind of part-time, flexible work that’s available in the U.S., where federal laws have outlawed employment discrimination against age since the 1960s. Most European countries have only recently instituted such legislation. And Europe is still struggling to convince workers to stay on the job longer. The U.S. labor force participation rate of older male workers began climbing by the end of the 20th century. Older women are remaining employed longer, too. “Yes, America has an aging population,” says Nicole Maestas, economist at the Rand Corp., the Santa Monica (Calif.)-based think tank. “The upside of that is a whole generation of people who are interested in anything but retirement.”

The shift in sentiment is propitious, since the impact of working longer trumps demographic gloom. The economic dependency ratio—the number of nonworkers 16 and older compared with the number of workers 16 and older—was 50 to 100 in 1990. The Bureau of Labor Statistics predicts the ratio will leap to 62 adult nonworkers per 100 workers in 2030, with most of the increase coming after 2010. Government statisticians assume in their forecast that labor force participation rates will increase though 2020 and then level off. But if this rate doesn’t decelerate, the economic dependency ratio in 2030 would be 53, a negligible difference over 4 decades. In other words, the concern isn’t aging: It’s working.

Of course, it’s difficult to be optimistic about jobs with the unemployment rate at 8.3 percent 38 months after the National Bureau of Economic Research officially declared the Great Recession over. Nevertheless, the business cycle will eventually gather momentum. Plenty of jobs will be created from now until 2030, and the odds are good that many of the positions will be taken by older Americans. The trend toward staying in the labor force later in life took hold about two decades ago, and the transition toward retirement is increasingly complex as people forge different work paths in their older years, including downshifting to part-time work. Rand economist Maestas has found that 26 percent of retirees reversed their decision and returned to work, either full time or part time.

The “work longer” mindset reflects a number of fundamental factors that aren’t about to dissipate. Perhaps most important are the high education levels achieved by boomers, the shift toward more intellectually creative and less physically demanding work in many sectors of the economy, and the huge wave of women entering the workforce. The rewards to earning a paycheck longer rose starting in the early 1980s, when the gains of waiting to file for Social Security benefits increased from 3 percent annually to 8 percent (stopping at age 70), along with the decline of the defined benefit pension plan (in the private sector, at least). Money plays a role, too, with two bear markets and two recessions in less than a decade savaging savings. The median 401(k) and IRA balance for households approaching retirement is $120,000, roughly the same number as in 2007, according to the Federal Reserve’s recently released 2010 Survey of Consumer Finances.

An aging population may be inevitable. A decline in worker productivity with an aging labor force isn’t. That’s a lesson from an intriguing experiment by BMW at its plant in Dingolfing, Germany. Management expected the average age of workers to increase from 39 years in 2007 to 47 years in 2017. To better understand the productivity implications, the luxury automaker modified an assembly line and staffed it with a mix of workers typical for 2017. The “pensioner’s assembly lines” productivity gained after BMW introduced 70 small—mostly ergonomic—changes, such as adding barbershop chairs so workers can perform tasks sitting down or standing up and orthopedic shoes for comfort. The total investment: $50,000. “But the 70 changes increased productivity by 7 percent in one year, bringing the line on a par with lines in which workers were, on average, younger,” according to a 2010 Harvard Business Review article, “How BMW Is Defusing the Demographic Time Bomb.” The article added: “Current performance stands at zero defects.”

Productivity matters more than demographics. For example, a half-century ago there were about five workers for every retiree, a figure that has shrunk to less than 3 to 1. Yet over the same time period, American living standards have risen smartly, thanks largely to productivity growth. If productivity continues to run at its current nearly 2.5 percent annual rate, the average worker will produce more than twice as much in an hour of work 30 years from now compared with today, points out Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

Taken altogether, an aging workforce is a competitive advantage. Instead of bemoaning America’s older population, policymakers and corporate chieftains should concentrate on keeping them productively on the job longer. In international comparisons, the U.S. has long garnered admiration for its productive workforce, innovative companies, superb universities, and dynamic labor market. It’s time to add older workers to that list.


Wednesday, September 26, 2012

The Case for On-Again, Off-Again Retirement

by Dave Bernard

A funny thing happened on the way to retirement. It turns out that not everyone feels the all-consuming need to escape from the working world. Some people actually enjoy the benefits that come from working with others in a company environment toward a common goal. Staying engaged and involved mentally and physically can help senior citizens realize a more fulfilling and exciting second act. And for some, the working world offers an increasingly attractive option.

One obvious motivation for working longer is to counter the financial hardship brought on by a challenging and unpredictable economy. Sometimes we need to work longer than we hoped in order to save enough money, as witnessed in a study by the National Council on Aging that found pre-retirees, on average, delaying retirement by five years due to the impact of the recent recession.

But the appeal of working beyond retirement age is more than just monetary. The council's United States of Aging Survey report found that of the 1 in 5 seniors still working either full- or part-time, 70 percent ranked enjoyment high on their list of reasons to stay in the workforce.

Here's where it gets interesting. Although only 4 percent of retirees say they want to work full-time in retirement, 36 percent would like to go back and forth between periods of work and leisure.

Having successfully negotiated a career and satisfied the requirements of raising a family, retirement age historically meant exchanging the stresses of working for a peaceful second act filled with relaxing hours and happy pursuits. But while workers of days gone by may have exhausted their body in physically demanding occupations, today's workers have many good years left to pursue new and exciting interests. That said, they do not want to miss out on the leisure time they have heard so much about.

One intriguing possibility is to work a bit, retire a bit, work a bit, and so on. For some, an on-again, off-again retirement can be just the ticket. Enjoy the engagement and stimulation provided within the job for a period of time, perhaps a few years. Interact with co-workers, complete projects, and learn new technologies. All the while you remain removed from the sometimes crippling stress of a working situation that you must stay with for better or worse due to financial and other requirements. You know it is for a limited amount of time. Then, when you are ready for the retirement side of the coin, you exit the job and chill a bit.

I find this combination attractive not just for the on-again, off-again aspect, but also for the opportunity to learn new things. Each new company has different processes, technologies, challenges, and opportunities. You meet new people and have new experiences that keep your mind engaged and stimulated.

There are risks when you decide to leave a job, especially as you get older. You may not immediately find something when you are ready to return to the workforce. But if you have prepared for retirement and are not financially in jeopardy, the lack of an immediate position only means an extension of the retirement part of your on-again, off-again strategy.

And with 10,000 baby boomers reaching age 65 each day, smart hiring companies will have to take notice of this valuable pool of labor. With skills, experience, and a willingness to work, along with the fact that seniors do not actually cost more, older workers can hope to find their employment prospects improving. According to the book Managing the Older Worker: How to Prepare for the New Organizational Order, doubling your percentage of 55-year-old workers raises your business's total compensation costs by a mere 1 percent.

An on-again, off-again retirement may not be for everyone, but it can provide a happy medium for some. It offers the opportunity to pursue one passion for a period of time and then head down the path toward another after a bit of time spent recharging in between. Each of us has to do what is right for our specific situation, but it is good to know there are some interesting options out there.


Tuesday, September 25, 2012

Social Security's Financial Problems Could Be Solved with Modest But Politically Tough Changes

by Stephen Ohlemacher

Despite Social Security's long-term problems, the massive retirement and disability program could be preserved for generations to come with modest but politically difficult changes to benefits or taxes, or a combination of both.

Some options could affect people quickly, such as increasing payroll taxes or reducing annual cost-of-living adjustments for those who already get benefits. Others options, such as gradually raising the retirement age, wouldn't be felt for years but would affect millions of younger workers.

All of the options carry political risks because they have the potential to affect nearly every U.S. family while raising the ire of powerful interest groups. But the sooner changes are made, the more subtle they can be because they can be phased in slowly. Each year lawmakers wait, Social Security's financial problems loom larger and the need for bigger changes becomes greater, according to an analysis by The Associated Press.

"Certainly, in the current environment, it would be very difficult to get changes made," Social Security's commissioner, Michael J. Astrue, said in an interview. "It doesn't mean that we shouldn't try. And sometimes when you try hard things, surprising things happen."

Social Security is ensnared in the same debate over taxes and spending that has gripped Washington for years. Liberal advocates and some Democrats say benefit cuts should be off the table. Conservative activists and some Republicans say tax increases are out of the question.

Others, including a deficit commission created by President Barack Obama in 2010, have called for a combination of tax increases and cuts to future benefits, including raising the retirement age again.

Janice Durflinger of Lincoln, Neb., is still working at age 76, running computer software programs for a bank. Still, she worries that a higher retirement age would be tough on people with more physically demanding jobs.

"No matter how much you exercise, age takes its toll," Durflinger said.

But at 20, Jared Macher of Manalapan, N.J., worries that Social Security won't be around for his generation without major changes.

"My generation sees Social Security as a tax, not an investment," Macher said.

Social Security's finances are being hit by a wave of demographics as millions of baby boomers reach retirement, leaving relatively fewer workers behind to pay into the system. About 56 million people get benefits today; that is projected to grow to 91 million in 2035.

For nearly three decades Social Security produced big surpluses, collecting more in taxes from workers than it paid in benefits to retirees, disabled workers, spouses and children.

But Social Security trustees project that the surplus, now valued at $2.7 trillion, will be gone in 2033. At that point, Social Security would only collect enough tax revenue each year to pay about 75 percent of benefits, unless Congress acts.

After the surplus is spent, the gap between scheduled benefits and projected tax revenue is big.

Social Security uses a 75-year window to forecast its finances, so the projections cover the life expectancy of every worker paying into the system. Once Social Security's surplus is gone, the program is scheduled to pay out $134 trillion more in benefits than it will collect in taxes over the next 75 years, according to data from the agency. Adjusted for inflation, that's $30.5 trillion in 2012 dollars.

The options for closing the gap fall into two broad categories: cutting benefits or raising taxes. There are, however, many options within each category.

The AP used data from the Social Security Administration to calculate how much of the shortfall would be eliminated by various options. To illustrate how Social Security's long-term finances have become worse in the past two years, the AP also calculated the share of the shortfall that would have been eliminated, if the options had been adopted in 2010.


Social Security is financed by a 12.4 percent tax on wages. Workers pay half and their employers pay the other half. The tax is applied to the first $110,100 of a worker's wages, a level that increases each year with inflation. For 2011 and 2012, the tax rate for employees was reduced to 4.2 percent, but is scheduled to return to 6.2 percent in January.


—Apply the Social Security tax to all wages, including those above $110,100. Workers making $200,000 in wages would get a tax increase of $5,574, an amount their employers would have to match. Their future benefits would increase, too. This option would eliminate 72 percent of the shortfall. Two years ago, it would have wiped out 99 percent.

—Increase the payroll tax by 0.1 percentage point a year, until it reaches 14.4 percent in 20 years. At that point, workers making $50,000 a year would get a tax increase of $500 and employers would have to match it. This option would eliminate 53 percent of the shortfall. Two years ago, it would have wiped out 73 percent.

Retirement age

Workers qualify for full retirement benefits at age 66, a threshold that gradually rises to 67 for people born in 1960 or later. Workers are eligible for early retirement at 62, though monthly benefits are reduced by about 25 percent. The reductions shrink the longer you wait to apply.


—Gradually raise the full retirement age to 68 in 2033. This option would eliminate 15 percent of the shortfall. Two years ago, it would have eliminated a little more than 20 percent.

—Gradually raise the full retirement age to 69 in 2039 and 70 in 2063. This option would eliminate 37 percent of the shortfall. Two years ago, it would have eliminated about half.

Cost-of-living adjustments

Each year, if consumer prices increase, Social Security benefits go up as well. By law, the increases are pegged to an inflation index. This year, benefits went up by 3.6 percent, the first increase since 2009.

Option: Adopt a new inflation index called the Chained CPI, which assumes that people change their buying habits when prices increase to reduce the impact on their pocketbooks. The new index would reduce the annual COLA by 0.3 percentage point, on average. This option would eliminate 19 percent of the shortfall. Two years ago, it would have eliminated 26 percent.


Initial Social Security benefits are determined by lifetime wages, meaning the more you make, the higher your benefit, to a point. Initial benefits are typically calculated using up to 35 years of wages. Earnings from earlier years, when workers were young, are adjusted to reflect the change in general wage levels that occurred during their years of employment.

Tinkering with the benefit formula can save big money, but cuts to initial benefits mean lower monthly payments for the rest of a retiree's life. The average monthly benefit for a new retiree is $1,264.

Option: Change the calculation for initial benefits, but only for people with lifetime wages above the national average, which is about $42,000 a year. Workers with higher incomes would still get a bigger monthly benefit than lower paid workers but not as big as under current law. It's a cut they would feel throughout their entire retirement. This option would eliminate 34 percent of the shortfall. Two years ago, it would have eliminated almost half.


Monday, September 24, 2012

Student Loans Are an Economic Cancer

by Patricia Chadwick

The housing market, while still under water and providing little contribution to economic growth, is at least seeing light at the end of the tunnel. That is because mortgage rates are now at a fifty year low, providing significant economic incentive for buyers to enter the marketplace. The excess supply of homes is slowly dwindling.

However, just as the housing market appears to be coming out of its depression, the country faces another threat. It is an insidious economic cancer that threatens to sap potential growth for decades to come.

This cancer is none other than STUDENT LOANS!

An entire generation of twenty-somethings who were not privileged enough to be provided higher education by their parents is entering the work force with a giant noose around its collective neck. And that noose is in the form of huge student loans they were required to take out in order to get an education that would give them a competitive entrée in the work place. It is the magnitude of the debt that is frightening. In many cases, their middle class parents are broke and now they are starting their careers broke as well. By some measures, the total student debt outstanding is over $1 trillion, according to an article in the Wall Street Journal on March 23, 2012.

The economic impact of this scenario is scary. Today’s young college graduates should be the trailblazers for the continuation of the American dream. Their energy, stamina, creativity and appetite for risk are the ingredients for entrepreneurship. It has been that way in this country for decades and even centuries. But now suddenly that ability to dream big and take risk is being choked off by the crushingly high level of debt they must repay. They cannot afford to take risk or to invest. They can barely afford to spend on discretionary items because they have so little money left each month after paying their student loans.

Student loans have long been a part of the American way of life. I had such a loan myself for seven or eight years. But there is a huge difference today. When I paid my student loan, it was in the late 1970s, a period of extraordinarily high inflation and consequently high interest rates. However, the interest on my student loan was a manageable 5.5% and the loan carried simple interest. 

Today, with interest rates under 2% on the 10 year Government note, student loans carry rates of 6% at a minimum and as high as 11%, most of them under a Federal Government program. And to add insult to injury, the interest on many of these loans is amortized. The newly minted graduate, assuming he/she gets that far, is racing just to service the debt without paying down the principal.

I recently spoke to a young woman who put herself through college and graduate school with no financial support from her family. Upon graduation, her eleven separate Federal loans totaled $135,000. She currently earns nearly $65,000 annually by working a full week and one day on the weekend. Since she started working, she has paid more than the monthly minimum required on her loans and after nearly two years of payments that have totaled $26,000 her balance today has grown to $141,560! She is deeper in debt than at graduation because some of the loans are paying down no principal at all.

She is caught in a vise that will make home ownership an impossible dream for decades. She called Sallie Mae, the company that services the vast majority of Federal student loans, to inquire about consolidating her many loans the possibility of getting a lower rate. The Sallie Mae employee said that the company was willing to consolidate but would give her no break on the interest rate. And when she inquired as to why no one at Sallie Mae reached out to her, she was told that policy prohibits such action. If that is true, that policy is criminally negligent.

Another young woman, the daughter of a friend of mine, has a $42,000 private student loan with Discover carrying an 11% interest rate. When her father contacted Discover in an attempt to negotiate a lower interest rate, the (evidently naïve) employee said there was nothing that could be done. In further conversation, she admitted that the student loan business was Discover’s most profitable and that employees were provided incentive compensation based on how successful they were in ‘selling’ loans to students. Again, if true, such a corporate ethic is moral turpitude. And Discover’s website advertises student loans for “as low as 6.79% APR”. 

These stories are far from unique. They are repeated hundreds of thousands of times in this country. The lenders decry the fact that student default rates are high. Well of course they are high when the interest rates are so onerous. The system is downright Dickensian.

The recently passed bill signed by President Obama unfortunately will not relieve the interest rate burden on the generation of young graduates who are drowning in debt, although it does alleviate conditions from getting even worse for some students. In response to the new law, Sallie Mae and other student debt servicing companies have bemoaned the fact that they will be forced to lay off employees. But I argue that those layoffs are nothing compared to the negative impact on the economy from a generation of workers who have diminished resources to buy basic goods and services, much less to take on economic risk.

So what is to be done? How can this cancer be cured?

A complete overhaul of the student loan industry is essential. For one, the business should be tightly regulated, in much the same way that utilities are. I am sure this concept is anathema to many, and I myself abhor overregulation, but the abuse that is being heaped on the vulnerable (i.e. young, desperate students) warrants such a response.

And something must be done about the cost of higher education, which has spiraled out of control. There are many studies that show that the cost of college tuition has increased at multiples of the rate of inflation. When an asset (college education) is priced to become a liability (it bankrupts the buyer) the price must fall. That is simply an economic fact of life.

Ruminate on these statistics for a moment or two.

Confiscatory Student Loans
Tuition Per Annum 1960 1960 (in 2008 $) 2008 Actual
Harvard $1,520 $10,147 $33,709
University of Texas $100 $695 $7,530
Michigan State $279 $1,939 $8,843

Is it no wonder that parents can no longer afford to provide a college education for their children? But without such higher education, the outlook for gainful and fulfilling employment is miserable.

The debt being incurred by the young in this country has reached the level of a national crisis. We had better address it now before this it takes on the proportion of our Federal Government’s debt.

Sunday, September 23, 2012

New Rules Allow Non-Spousal Inheritors of Retirement Accounts to Defer Taxes. Here's How to Do It.

by Bill Bischoff

Just a few years ago, many non-spousal inheritors had no tax-deferral option when they inherited all or part of a deceased individual's qualified retirement plan account. By qualified retirement plan, I mean 401(k) plans, profit-sharing plans and the like. For instance, say you inherit your Uncle Henry's 401(k) account. The plan's operating rules may call for completely cashing you out shortly after Uncle Henry's death by distributing his entire account balance to you. Back in the day, you had to pay the resulting income tax hit in the year you received the distribution. Today's rules allow you to defer taxes by rolling over the distribution into an IRA that you control. But you must follow the proper procedure to get this taxpayer-friendly outcome. Here's what non-spousal beneficiaries need to know.

Rollover Mechanics

The rollover into a non-spousal beneficiary's receiving IRA (an IRA set up specifically to receive an inherited retirement plan distribution) must be accomplished via a direct (trustee-to-trustee) transfer that does not pass through the hands of the beneficiary (you). So if Uncle Henry's 401(k) plan issues a check payable to you personally, you can't do an IRA rollover. You'll have to include the entire taxable amount of the distribution on your Form 1040 for the year you receive the payout.

On the other hand, if you arrange to have the check made out to your receiving IRA's trustee (aka custodian), you can accomplish a tax-free rollover. The receiving IRA will still be in the deceased person's name, but it will be under your control. For example, the receiving IRA might be titled something like: "Grand Bank, Custodian, for IRA of Henry Smith, Amanda Smith, Beneficiary."

After the Rollover

The balance in your receiving IRA falls under required minimum withdrawal rules for inherited IRAs. That means you must start taking annual withdrawals from the account under the same rules that would apply if the IRA had been owned by Uncle Henry and then inherited by you as the account beneficiary. For details on how those rules work, see "Inheriting Uncle Henry's IRA". The amount of each annual required withdrawal that you must take from the receiving IRA (and pay taxes on) depends on: (1) the IRA's balance; and (2) the applicable single life expectancy divisor, based on your age at the end of each year. Basically, you are allowed to gradually draw down the balance in the receiving IRA over your life expectancy and potentially reap many years of tax-deferral benefits. Here's an example of how the IRA rollover option can work.

Example: Say you're the sole designated beneficiary of Uncle Henry's 401(k) account. He passes away in 2012 at age 63. You inherit the account, which is worth $100,000. Under the 401(k) plan's operating rules, the beneficiary (you) must be cashed out shortly after the death of the plan participant (Uncle Henry). However, you don't want to receive a taxable distribution. You prefer to defer taxes instead. Here's how.

Step 1: Set up a receiving IRA to take the $100,000 distribution from Uncle Henry's account. (The receiving IRA must be a brand-new account that only holds the money rolled over from Uncle Henry's retirement account.)

Step 2: Instruct the 401(k) plan trustee to directly transfer the $100,000 into the receiving IRA in a tax-free transaction. (If the retirement plan participant -- Uncle Henry -- was older when he died, you might have to take an initial required withdrawal from the plan before rolling over the balance into the receiving IRA.)

Step 3: Comply with the required minimum withdrawal rules each year. Otherwise, you'll owe a penalty equal to 50% of the difference between what you should have taken out each year and what you actually took out (if anything). Ouch! This is one of the most expensive penalties in our beloved Internal Revenue Code.

In our ongoing Uncle Henry example, you must begin taking annual required withdrawals by no later than Dec. 31 of the year after the year of Uncle Henry's death. Therefore, the initial required withdrawal must be taken by Dec. 31, 2013. You calculate the amount of that initial required withdrawal by dividing the receiving IRA's balance as of the end of the previous year (Dec. 31, 2012) by the single life expectancy divisor based on your age as of Dec. 31, 2013. (You can find the divisor in Table 1 of Appendix C in IRS Publication 590 at For each succeeding year, you reduce the divisor by 1.0 to account for your advancing age.

Required annual withdrawals can be a surprisingly small percentage of the receiving IRA's balance, which means the extra income taxes you'll have to pay each year can also be surprisingly small. For instance, say you'll be 41 as of Dec. 31, 2013 (the end of the first required withdrawal year in our example). The initial required withdrawal for 2013 is only 2.34% of the receiving IRA's Dec. 31, 2012 balance (based on a single life expectancy divisor of 42.7 from the IRS table). For 2014, the required withdrawal is only 2.40% of the Dec. 31, 2013 balance (based on a life expectancy divisor of 41.7 -- 42.7 minus 1.0). And so on for each succeeding year. As you can see, it's very possible that your receiving IRA's balance will continue to get bigger despite those darned required annual withdrawals.

The Bottom Line

The IRA rollover privilege is a good deal for non-spousal qualified retirement plan beneficiaries who want to defer taxes. Remember, however, that you must set up a receiving IRA to accept the check from the retirement plan in a direct transfer. Then you must comply with the required minimum withdrawal rules to avoid the dreaded 50% penalty. If you inherit a significant amount of retirement plan money, consider hiring a good tax pro to help keep everything straight.

Saturday, September 22, 2012

The Fifteen Worst Housing Markets for the Next Five Years

by Mamta Badkar

Home prices across the nation are down 33.3 percent since they peaked in the first quarter of 2006, according to latest data from Fiserv Case-Shiller. But home prices are projected to increase 3.9 percent between now and the first quarter of 2017.

Yesterday we put together a list of the 15 best housing markets for the next five years. We're following this up with a feature on the 15 housing markets that are projected to see the most declines or slowest growth in home prices.

Note: The median family income and home price data is for Q1 2012. Unemployment data is for May 2012, and population data is for 2011.

1. Atlantic City-Hammonton, New Jersey

Annualized expected growth from 2012 - 2017:
1.2 percent

The Atlantic City-Hammonton metro area has a median home price of $193,000, above the national median of $159,000. And its home prices are 35.3 percent lower than they were during their peak in the second quarter of 2006.

It has a population of 274,338, an unemployment rate of 12.6 percent, much higher than the national average of 8.2 percent, and a median family income of $64,200 above the national median of $62,900.

2. Columbia, Missouri

Annualized expected growth from 2012 - 2017:
1.2 percent

Columbia has a median home price of $145,000 and its home prices are down 0.5 percent since their Q1 2008 peak.

It has a population of 175,831, an unemployment rate of 5.1 percent, and a median family income of $63,900.

3. Shreveport-Bossier City, Louisiana

Annualized expected growth from 2012 - 2017:
1.1 percent

Shreveport-Bossier City has a median home price of $151,000 and the metro's home prices area down 0.9 percent since they peaked in Q3 2010.

It has a population of 403,595, an unemployment rate of 7.2 percent, and a median family income of $54,900.

4. Gadsden, Alabama

Annualized expected growth from 2012 - 2017:
1.1 percent

Gadsden's home prices have declined 1.9 percent since their Q1 2009 peak.

The metro has a population of 104,303, an unemployment rate of 7.4 percent and a median family income of $41,100.

5. St. George, Utah

Annualized expected growth from 2012 - 2017:
1.1 percent

St. George's metro prices have fallen 37.1 percent since their Q4 2006 peak. It has a population of 141,666, an unemployment rate of 7.7 percent and a median family income of $55,400.

6. San Angelo, Texas

Annualized expected growth from 2012 - 2017:
1.1 percent

San Angelo has a population of 113,443, a relatively low unemployment rate of 5.3 percent and a median family income of $55,000.

7. Elmira, New York

Annualized expected growth from 2012 - 2017:
1.0 percent

Elmira has a population of 88,840, an unemployment rate of 8.8 percent and a median family income of $58,000, below the national median of $62,900.

8. Austin-Round Rock-San Marcos, Texas

Annualized expected growth from 2012 - 2017:
1.0 percent

Home prices in the Austin-Round Rock-San Marcos area have fallen 1.5 percent since the first quarter of 2009. It also has a median home price of $193,000.

The metro has a population of 1.8 million, a relatively low unemployment rate of 5.9 percent, and a median family income of $72,800.

9. Amarillo, Texas

Annualized expected growth from 2012 - 2017:
0.9 percent

Amarillo has a median home price of $127,000 and a median family income of $62,200. It also has a population of 253,823, an unemployment rate of 4.9 percent.

10. Phoenix-Mesa-Glendale, Arizona

Annualized expected growth from 2012 - 2017:
0.9 percent

The Phoenix-Mesa-Glendale metro area has a median home price of $144,000 and home prices are 52.7 percent off their Q2 2006 peak.

It also has a population of 4.26 million, an unemployment rate of 7.2 percent a median family income of $59,400.

11. Ithaca, New York

Annualized expected growth from 2012 - 2017:
0.8 percent

Home prices in Ithaca are 0.5 percent lower than their Q4 2009 peak. It has a population of 101,723, an unemployment rate of 6.5 percent and a median family income of $80,900.

12. Crestview-Fort Walton Beach-Destin, Florida

Annualized expected growth from 2012 - 2017:
0.7 percent

Home prices in the Crestview-Fort Walton Beach-Destin metro area have declined 36.2 percent since their Q4 2005 peak, and it has a median home price of $180,000.

It has a population of 183,482, an unemployment rate of 6.1 percent, and a family income $62,400.

13. Naples-Marco Island, Florida

Annualized expected growth from 2012 - 2017:
0.6 percent

Naples-Marco Island home prices are down 51.8 percent since their Q1 2006 peak.

The metro has a population of 328,134, an unemployment rate of 8.3 percent, median home price of $257,000 and a median family income of $64,000.

14. Fort Lauderdale-Pompano Beach-Deerfield Beach, Florida

Annualized expected growth from 2012 - 2017:
0.4 percent

Home prices in the Fort Lauderdale-Pompano Beach-Deerfield Beach metro area have fallen 47.4 percent since their Q2 2006 peak.

It has a median home price of $196,000, a population of about 1.8 million, and an unemployment rate of 7.3 percent.

15. Miami-Miami Beach-Kendall, Florida

Annualized expected growth from 2012 - 2017:
-1.0 percent

Miami-Miami Beach-Kendall home prices are 51.4 percent off their Q1 2007 peak, and the metro has a median home price of $187,000.

But it has a population of 2.5 million people, an unemployment rate of 9.6 percent and a median family income of $47,700 below the national median.


Friday, September 21, 2012

Did You Miss Out On Lowest Mortgage Rates?

by Amy Hoak

Mortgage rates have edged up for the past few weeks, but rate watchers aren't so sure the trend is here to stay.

“The U.S. economy is not out of the woods, the European debt crisis has not been solved, we’ve got this looming fiscal cliff … there is no shortage of headwinds to the economy and there’s the possibility of more Fed stimulus,” said Greg McBride, senior financial analyst for, an aggregator of financial rate information. “All it would take is one hiccup and we could see rates moving back down.”

Rates on the 30-year fixed-rate mortgage averaged 3.62% for the week ending Aug. 16, according to Freddie Mac’s weekly survey of conforming mortgage rates. Rates fell as low as an average 3.49% for the week ending July 26, Freddie Mac reported.

But it’s important to keep the numbers in perspective: Rates are now back at levels seen around the Fourth of July, and people were more than happy to lock in similar rates then, McBride said.

Better-looking economic data is behind the latest rise in interest rates, with the improved numbers removing some of the urgency for the Federal Reserve to unveil more stimulus at its next meeting, McBride said. The expectation of more stimulus is partly what pushed rates down last month. Uncertainty about the Fed’s next move is now pushing rates higher.

A stimulus could come in a variety of forms, including the federal purchase of more mortgage-backed securities, to keep rates low, he said.

“We don’t know if the summer data is a blip or the start of a trend,” said Dan Green, a Cincinnati-based loan officer for Waterstone Mortgage Corp. Upcoming data releases in the next couple of weeks will help clarify the strength of the economy, he added.

Mortgage markets are also still being affected by issues in the euro zone, Green said. And any “hint that the [European Central Bank] doesn’t have its act together will put pressure on mortgage rates to fall,” he added.

When investors have renewed concerns about Europe, they tend to look for safe havens to park money. That usually means investing in the U.S. bond market, which tends to drive mortgage rates downward.

“Long term, I don’t know if rates will rise or fall,” Green said. However, “there are a lot of events that can prevent rates from getting past 4%.”

Even if mortgage rates have already hit their lows in the short run, people considering a refinance should remember that rates are still incredibly low by historical standards, said Bob Walters, chief economist for Quicken Loans, an online home lender. And given that home prices have risen in some places over the past year, some borrowers may discover that they again have enough equity in their home to make a refinance worthwhile.

His advice: Don’t wait for rates to drop more. If it makes sense for you to refinance now, do it.

“The closer you get to 0%, the harder it is for rates to push lower. It doesn’t mean they can’t. But it’s like blackjack: The closer you get to 21, the harder it is for you to get a card that will help you,” Walters said.

“It’s also likely that when [rates] spring forward, they can do so with gusto.”

It’s possible that rates could jump substantially, over just a few days, Green said. The climate could change so fast that people watching and waiting for rates to move lower could lose their chance altogether.

For those currently shopping for a home, the most recent rise in rates won’t likely have much of an effect on how much house you’d be able to get for your money, McBride said.

In fact, you’d be able to afford a much more expensive home today than you would have several years ago, according to Walters’s math. Or, for example, assuming a 35% home-price decline on a house that was once $400,000 and a drop in rates from 6% to 4%, a borrower might be able to buy the same house today for roughly half the monthly payment that they’d have signed up for several years ago, Walters said.

Of course, the prevailing trend is that people are more conservative, and would likely take the lower payment than the bigger house, McBride said.

“Even people who are taking the plunge [and buying a house], by and large, they’re not going hog wild in taking on debt. You can find instances where more affluent households are taking advantage to buy a bigger place. But I think that’s more of a limited instance,” he said.


Thursday, September 20, 2012

Three Ways to Figure Out What Stuff You Should Keep

by Carl Richards

We really like being able to store stuff. So much so that there’s now 2.3 billion square feet of self-storage space in the United States. To give you a better idea of how big that is, think of it, as the Self Storage Association does, as “an area well more than three times the size of Manhattan.” And about 10 percent of us are using that space to store our stuff.

Now maybe you’ve managed to keep all your stuff in closets, basements or garages. But many of the more than 300 comments on my post from last week indicated that we have mixed feelings about getting rid of our possessions. Those feelings become even harder to sort through when we’re dealing with stuff that we have an emotional attachment to.

This takes me back to the main point I had hoped to make: Does what you own add to your life or take away from it?

To be clear, I’m not saying we shouldn’t buy and own things. For instance, my family owns some outdoor equipment that we probably use only three or four times each year. But we take good care of it, and it adds something positive to our family activities. For us, it’s worth storing because we know why we own it.

On the other hand, we still own a lot of stuff that seems to take way more time and effort to deal with, and we’re constantly trying to cut back. Like a garden, our house seems to take constant work to avoid being overrun.

A few additional thoughts came out of the conversations around last week’s post:

1) Move out I have some friends who just moved for the first time in over a decade. They were shocked at how much stuff they had just taking up space. They commented that it was scary to think about how long all that stuff would have continued to take up space and mental energy if they hadn’t been forced to deal with it in the move. Since they had to move, they had to deal with it. I’ve heard people say they like to move every five years or so because it forces them to become cold-blooded stuff killers.

So while you might not be moving, go ahead and pretend that you are.

“Move” everything out of the house or apartment and be ruthless about what you allow to stay. You can do this room by room if you need to. Move everything from your bedroom into another room. Live with it bare for a day or two, then slowly start inviting the stuff you love/want/need back. Repeat with every room of the house.

2) Go on a trip Put together a pile of everything you’ll need over two weeks. I’ve discovered that most
people are surprised by what they actually use compared to everything they have around them.

3) Figure stuff per square foot If you have so much stuff that you’re renting extra space to accommodate it, how much does that cost you? The cost per square foot will vary depending on where you live, but it can be incredibly helpful to do the math and understand how much your stuff costs you after you’ve bought it.

Again, I’m not advocating that the only way to live a happy life is owning a small pile of stuff. But I do support the many comments that caution against letting your stuff own you and the value in gaining some perspective about what you own.

I don’t think there’s a magic number of items to own that guarantees a happy life. I also don’t think it’s automatically a bad thing to rent storage space. But I do think there’s something incredibly valuable about taking the time to understand why you own what you own and making thoughtful decisions about buying new stuff.


Wednesday, September 19, 2012

Why You Should Leave 401(k) With Your Former Employer

by Robert Powell

If you lose your job or leave your employer, many wise person will tell you to roll your 401k into an IRA.  But experts say that might not always by prudent, and that there are plenty for reasons to leave your 401k with former employer.

To be sure, you have to examine your own personal circumstances and decide what’s best for you, but here’s our laundry list of reasons—other than inertia—to leave your retirement account behind.

1. No 10% penalty on distributions

For starters, workers who lose their job between ages 55 and 59½ and who leave their 401(k) with their former employer can withdraw money from that account without having to pay a 10% penalty to Uncle Sam.

That’s not the case with an IRA. If you roll your 401(k) into an IRA and then withdraw money from that account prior to age 59½ you will—with some exceptions—pay a 10% penalty on the distribution. After age 59½, you can of course withdraw money from an IRA without having to pay the 10% penalty. (You will pay an ordinary income tax on the distribution from either the 401(k) or the IRA.)

For the record, Barry Picker, of Picker & Auerbach CPAs, said the ability to withdraw prior to age 59½ without penalty works only if you separate from service in the year you turn age 55, or later. But that is definitely a reason to leave it,” he said.

Picker, for what it’s worth, noted that a taxpayer who rolled a 401(k) into an IRA and then took a distribution tried to argue against the 10% penalty in a recent court case, but lost.

For his part, Ross Marino, the CEO of Rekon Intelligence, agrees that being able to withdraw money from a 401(k) plan without have to pay the 10% penalty is a plus. “With downsizing, job insecurity and early retirement for many, being able to access monies without a 10% early withdrawal penalty is important,” he said.

One strategy that you might want to consider is what Marino calls a “partial rollover.” Here’s how it would work: If a worker who separates from service needs $20,000 per year between ages 55 and 59 ½, he or she may execute a partial rollover. The displaced worker would leave $80,000 or so in their 401(k), and roll the balance to an IRA. “If the 401(k) offers a competitive fixed account, this may be a low risk way to provide four years’ worth of income,” said Marino.

There is at least one advantage to moving your 401(k) to an IRA worth noting according to Natalie Choate, who practices law with Nutter McClennen and is the author of “Life and Death Planning for Retirement Benefits.” “IRAs allow a $10,000 penalty-free distributions for a first-time home purchase, as well as penalty-free distributions for certain education expenses, neither of which applies to a 401(k),” Choate said.

And there’s another exception worth noting. You can roll your 401(k) into an IRA and take distributions prior to age 59½ without paying the 10% penalty by using what’s called the 72t rule, according to Katherine Roy, executive director of J.P. Morgan Asset Management Individual Retirement.

“If you were to rollover your funds to an IRA, the 72t rule allows you to also take distributions prior to 59½ without being subject to the 10% penalty, but you are signing up for a specific payment schedule—the payments must be ‘substantially equal’ and must continue for a minimum of five years or until you reach age 59½, whichever is longer,” said Roy.

2. Company stock better left behind

According to Jeffrey Levine, an IRA technical consultant with Ed Slott & Co., keeping money inside a 401(k) could leave the door open for certain tax-saving strategies, such as the tax benefit for Net Unrealized Appreciation (NUA) or 10-year averaging.

“These are both lump-sum distribution options, which means everything must leave the plan in one tax year,” said Levine. “There are also a myriad of other rules that apply, which is why before rolling over a 401(k), people should consult with a knowledgeable adviser who can let them know if they qualify for either of these—or other—special tax breaks and whether they would make sense.”

FYI: You would consider using the NUA option if you have highly appreciated company stock. If that’s the case, you would want to wait on rolling it over until age 59½ and the roll over the account taking advantage of the NUA while avoiding the 10% penalty, said Phillis Sax Pilvinis, the founder and president of PSP & Associates.

You might want to leave your 401(k) that contains company stock behind for other reasons, too. “Many times individuals have company stock in their 401(k) that they do not want to sell because they believe in the future of the company,” said Don Chamberlin, Jr., the CEO and president of The Chamberlin Group. “And who can hardly blame them, because of the experience with their employer they probably know more about the stock than their broker.”

3. Lower fees

Marino and others say leaving your 401(k) behind might be cheaper than rolling it over to an IRA. For one, 401(k) plans tend to offer low-cost investment options, typically institutional class mutual funds that are much less expensive than the retail mutual funds available to IRA investors. “Years ago, 401(k) plans offered limited investment options,” said Marino. “Now, many 401(k) plans offer similar options to professionally-managed accounts with competitive fees.”

Scott Dingwell, head of participant communications within BlackRock’s U.S. and Canada defined contribution group, agreed. “Many corporate 401(k) plans have negotiated fees that amount to buying ‘wholesale’,” he said.

One exception: Small 401(k) plans are generally less able to negotiate lower fees so there might be no cost advantages if you participate in a small plan.

What’s more, your old 401(k) may have funds or models customized to the plan that have performed well and cannot be replicated in an IRA, said Eric Levy, a senior vice president with Lincoln Financial Group’s retirement plan services group.

Levy also noted that some 401(k) plans have a self-directed brokerage account that offer lower transaction charges than retail brokerage accounts.

In addition, it may be cheaper to keep your balance in the 401(k) plan because many plans don’t charge fees for keeping your balance in the plan, said Kevin Crain, head of institutional retirement and benefit services for Bank of America Merrill Lynch. “IRAs often charge an account or maintenance fee, commissions, and the like,” Crain said.

4. Access to advice

Having access to a managed account services such as those provided by Financial Engines or Morningstar Retirement Manger or GuidedChoice is another reason to leave your 401(k) behind. “The fees for managed account services inside a 401(k) cost the participant on average 0.3% to 0.6% vs. 1% to 2% for similar services outside your old 401(k),” said Levy.

In addition, Levy said participants may have access to one-on-one in-person support through a retirement consultant for guidance and education which they will typically not have with an IRA. “This is especially important for people with assets under $100,000 as they are typically on their own or in a call center service model,” he said.

5. Better oversight

If you don’t have an adviser looking over your IRA, it might be better to leave your 401(k) behind. With a 401(k) plan, the employer has a fiduciary responsibility to provide ongoing oversight of the plan and its costs.

“No one is going to be a fiduciary over your IRA,” said Levy. “Whenever you leave a job, you should get objective information about the full range of investment options, including those offered by your current provider, and understand how your choice will affect your ability to preserve and grow your savings.”

6. Guaranteed products

In some cases, you might have to leave money in your 401(k) because of the products you own. According to Levy, some 401(k) plans have the option of in-plan income guarantees, which may not be transferable.

In other cases, you might want to leave the money behind because you have access to institutionally priced annuity payout options that are better inside a 401(k) than outside the plan. “Many 401(k) plans are taking a close look at a new breed of retirement income funds that will allow participants in these plans to convert part or all of their balance into a source of guaranteed income for the duration of retirement—no matter how long one might live,” Dingwell said. “Given the current risk many of us face that we might run out of money in old age, having access to these soon-to-arrive products may be a critical reason to stay put.”

And in still other cases, you might have access to guaranteed funds that you trust. “Some 401(k) plans provide a guarantee fund or other investment options that workers like because of the known result,” said Bill Bailey of Wealth Management Advisors. “They can set it and forget it. For many workers this is what they need.”

One such company providing this option in their 401k plan, for instance, was Eastman Kodak, said Bailey. That plan, prior to Eastman Kodak seeking bankruptcy protection, provided a Fixed Income Fund known as Fund D that nearly everyone participated in because of its guaranteed yield, he said. “It became the anchor of many personal retirement plans for workers, former workers, retirees and retirees widows or widowers. Once workers were in this fund they never wanted to change,” said Bailey.

7. Better creditor protection

According to Picker, leaving your money in a 401(k) gives you—possibly—better protection against creditors. “ERISA plans, a 401(k) for example, are protected under federal law but IRAs are protected under state law which can vary state to state,” Picker said.

Choate agreed. “Your 401(k) is generally much safer from creditors than your IRA,” she said. “The only exception is a solo practitioner small business owner where it doesn’t make much difference.”

Levine said it’s worth checking the creditor protection your IRA has in your state. “In some states, that protection is virtually as strong as the creditor protection afforded by ERISA, while in other states, it may be much weaker,” Levine said. “People should make sure to know the rules in the state where they live.”

Levine also offered this reason for keeping money in a former employer’s 401(k) plan. “Sometimes, when I meet with doctors, lawyers, contractors or other professionals who face a higher-than-average risk of being sued, they are particularly concerned about the creditor protection of their retirement savings,” he said. “If this is a big concern for them, then it may pay to keep their money inside a 401(k) instead of rolling it over to an IRA.”

8. Access to loans

If you have a family-owned business, and you’re contemplating transferring ownership to your heirs, it might make sense to leave your 401(k) behind too, according to Don Clark, CFP, of Personal Financial Group. Often, it’s advantageous for the primary owner or owners, who typically have the largest percent of assets in the 401(k), to leave the assets in the plan in order to help control and minimize total plan expenses, which is based on total plan assets, for the remaining participants.

In addition, a retiring business owner who leaves their 401(k) has access to an emergency fund of sorts. “I have had an occasion when a retiring business owner has left the assets in the plan so in a difficult financial situation for the business arose and credit was tight, they were able to access a 401(k) loan to cover a short-term credit crunch,” Clark said. “While I don’t recommend this situation often, this has helped in the recent years when it was difficult for some small businesses to access money.”

9. A way to buy life insurance

One of the better reasons to leave money in a company plan is to get life insurance, said Joe Felicetti of R. Seelaus & Co. “A person who cannot get an individual life insurance policy, because of medical reasons, may be able to participate in a group insurance policy through a company plan, Felicetti said. “You cannot buy life insurance in an IRA, but money in company plans can be invested in life insurance.”

What’s more, Felicetti said, this may be the only way a person can come up with the money to pay the premiums.

10. Divorce and 401(k)s

And if you are getting divorced, you might have to leave the money behind in your 401(k) for legal reasons. “It is often a few years before this asset can be touched so a former worker cannot move it until the final decree or QDRO, or Qualified Domestic Relations Order, is complete,” said Bailey. “This is a legal item and the courts can be prohibitive on moving retirement resources.”

If a divorced spouse under age 59½ receives a 401(k) account through a QDRO, he or she may be wise to leave the account inside the 401(k), according to Terry Prather, a wealth planner with Payne Wealth Partners.

“A 401(k) received through a QDRO provides an exception to the 10% early withdrawal penalty,” Prather said. “If the individual instead rolls the assets to an IRA, the 10% penalty will apply to any withdrawals prior to age 59½.”

But even if you are not involved a divorce, you might want or need to leave the 401(k) behind, according to Joseph Clark CFP, RFC, and managing partner with The Financial Enhancement Group. “Qualified plans require spouses to be the primary beneficiary where IRA plans do not,” he said.

11. Other reasons

There are many other reasons to leave your 401(k) with your former employer. For instance, if you leave your money with your old 401(k), you might have an easier time of transferring that money to your new employer’s 401(k).

What’s more, beneficiaries can move money from an inherited 401(k) to an inherited Roth IRA, which they cannot do with an inherited traditional IRA, Picker said.

Also, if you have been contributing to a non-deductible IRA each year and have no other IRAs, you can convert that IRA to a Roth. In essence, you’ve circumvented the income limitation on Roth contributions, Picker said. If, however, you move your 401(k) to an IRA, “the Roth conversion would have to prorate all IRAs and would make the conversion taxable,” said Picker.

Another adviser gave this example: If you are doing a Roth conversion in the same tax year as a rollover to an IRA and you have after-tax contributions to either your IRA or 401(k) you need to be aware of aggregation rules. Basically, you can’t only convert your after-tax contributions to lower your tax bill. All your IRA assets, including any 401(k) rollovers the same tax year, will be included in the aggregation. You will need to apply taxes on the percentage of before-tax and after-tax IRA assets.

And still yet another reason is this: If you work for an investment firm, say a private equity firm, you often get access to private deals in your 401(k) that you would lose if you moved out to an IRA, said Choate.


Tuesday, September 18, 2012

Six of the Richest Owed No Income Tax

by Jeanne Sahadi

It's a statistical blip, but a stunning one.

In 2009, six tax filers among the country's 400 richest tax filers owed absolutely nothing in federal income taxes.

Not a penny.

This, despite the fact that those six filers belong to a group whose average adjusted gross income clocked in at $202.4 million, according to new IRS data.

Now, it's not news that close to half of the more than 140 million U.S. tax filers end up with no federal income tax liability. Nor is it news that a sliver of those non-payers make seriously big bucks.

But it's eye-opening when anyone among the 400 highest income tax filers is among them.

As a group, of course, high-income households pay more into federal coffers than the vast majority of Americans combined, and their effective tax rates are often higher than what most Americans pay.

So how is it that a lucky few can wind up owing nothing at all?

Without being able to examine the returns, which are confidential, no one can say with certainty how those six filers in the top 400 did it in 2009.

"Each return is a different story," said Edward Kleinbard, former chief of staff at the nonpartisan congressional Joint Committee on Taxation.

But the likely reason is straightforward. "It's because the tax code allows them to do it," said tax lawyer Christopher Bergin, president and publisher of Tax Analysts.

In particular, the foreign tax credit and the deduction for charitable contributions may have played big roles, Kleinbard said.

The very wealthy often invest in foreign businesses and other non-U.S. investments. If they pay tax on those investments to foreign governments, they can take a credit on their U.S. return for those payments to avoid double taxation.

Similarly, the richest of the rich also are well positioned to give away large amounts of money. Charitable contributions let a wealthy donor contribute to the social good while substantially dialing down his tax liability.

And it's possible a number of other itemized deductions -- such as those for state and local taxes paid - helped as well.

For Bergin, the phenomenon of uber-rich non-payers is yet another good argument for Congress to reform the tax code.

Tax experts would prefer that policymakers greatly reduce the number of tax breaks available and, if affordable, reduce income tax rates as well.

Under that kind of regime - which is easier to propose than pass - taxpayers would have fewer opportunities to shelter money and therefore would have less reason to make financial or economic decisions based on the tax consequences.

But since one goal of reform is to simplify the tax system, lawmakers should avoid drafting special rules designed to ensure that there are no non-payers above a certain level.

"It may be a way to do tax politics, but it's a horrible way to do tax policy," Bergin said.

And, he added, we have proof. It's called the Alternative Minimum Tax (AMT).

The AMT was created in 1969 when it was discovered that 155 wealthy tax filers ended up owing nothing in federal income taxes because they took advantage of the legal tax breaks available at the time.

The goal was to ensure the wealthy paid at least a minimum amount of tax. But in subsequent years the AMT was "repurposed into a mass-market product," Kleinbard said.

The result? Instead of guaranteeing that the rich pay at least something, the AMT now threatens to engulf tens of millions of non-wealthy filers unless lawmakers pass a costly "patch" every year to protect them. 


Monday, September 17, 2012

Master At Federal Budget, Paul Ryan Is No Expert At Personal Finance

Paul and Janna Ryan
Paul Ryan and his wife have accumulated far more savings than the typical American couple, but they still face an all-too-common investing problem: holding an unwieldy collection of mutual funds.

Unlike finance whiz Mitt Romney, the Republican presidential candidate who just picked the Wisconsin congressman as his running mate, Ryan's financial life looks both jumbled and typical of many individual investors.

Ryan's net worth — estimated as high as $3.2 million in 2010 — was far above the median U.S. family's net worth of $77,300 for the same year.

But despite their riches, Ryan and his wife Janna appear to have made the same mistakes as many less wealthy investors: owning too many mutual funds that duplicate one another thereby increasing their costs and their risk.

It is easy for even wealthy families to wind up with "a patchwork of investments that is not a strategy," said Derek Holman, managing director EP Wealth Advisors in Los Angeles.

Several other financial advisers rolled their eyes at a June 6 disclosure in which Ryan listed investments held by himself and his wife.

These included more than 30 different funds, largely mutual funds, and a host of individual stocks, most held through investment partnerships.

Mutual fund holdings included stakes of up to $100,000 owned by Janna Ryan in both Fidelity Investments' famous Contrafund and T. Rowe Price's New Horizons Fund. The form also listed lesser amounts in funds like American Century Small Cap Value Fund, American Funds' EuroPacific Growth Fund and the Pimco Total Return Fund, the giant bond fund run by Bill Gross.

While some of the funds have done well and some poorly, many seem to duplicate each other or individually-owned stocks also listed in the filing, said Bill Mertes, chief investment officer of wealth adviser American Financial Advisors in Orlando, Florida.

Contrafund, for instance, has been a major buyer of individual stocks that Ryan also listed, such as Apple and Google. Almost all of the stocks are held through two investment partnerships.

In another instance, one of Ryan's partnerships is listed as investing in both Artisan International Fund and Harbor International Fund. The funds have many similar holdings such as: Japan Tobacco, Anheuser-Busch Inbev and Nestle, according to fund-tracker Morningstar.

The overlap is typical for many investors, Mertes said. "He has great assets and access to a lot of smart people," Mertes said. Bu t, "You can tell he doesn't really have a plan. That's very common."

Ryan's financial life has drawn much political scrutiny since he was named Romney's running mate over the weekend. But from a personal-finance perspective, the disclosures point to more mundane and universal questions about how well the couple has managed their assets.

Although Ryan chairs the House Budget Committee, it may be that even the wonkiest of politicians is no investment whiz.


A spokesman for Ryan, Brendan Buck, declined to comment on the holdings in detail, making it hard to evaluate Ryan's exact investment strategy or how the holdings balance his family's goals. He also would not say whether the Ryans use a financial adviser, though he did say Paul Ryan "has no role" in the partnerships' investment decisions.

Ryan's disclosure forms are posted on the website maintained by the Center for Responsive Politics in Washington, D.C.

For 2010 the organization estimated Ryan's net worth at between $927,100 and $3.2 million. Since then, Ryan disclosed that his wife received an interest in a family trust worth between $1 million and $5 million, according to the June 6 filing. Ryan omitted details of how the trust funds are invested, a decision supported by a House Ethics Committee attorney, the filing stated.

The amounts are rounding errors compared to the much wealthier Romney. But they also put Ryan in the same company with many other well-off investors who rely heavily on mutual funds to gain access to the markets — sometimes more than advisers suggest.

Households with incomes of more than $150,000 that owned mutual funds held a median of six funds, according to surveys by the Investment Company Institute, a fund industry trade group. Of such households, 23 percent owned seven to 10 mutual funds and 24 percent owned 11 or more mutual funds.

Keeping track of the funds can be tricky, warned Dawn Bennett, a financial adviser in Washington, D.C. whose clients include political and government professionals

The Ryans should rethink some underperformers, she said. For instance, Janna Ryan held an investment of between $15,001 and $50,000 in the Hartford Capital Appreciation Fund plus additional shares through an IRA.

But the fund trailed 97 percent of peer funds for the 12 months ended August 13, according to Morningstar, and 98 percent during the last three years.

"They haven't cleaned up their weaker mutual funds," Bennett said.


Bennett also said the Ryans seemed excessively weighted to U.S. stocks, which would have held back their portfolio in recent years as emerging markets grew faster. This year, the trend reversed and benefitted U.S. holdings, to be sure. Staying domestic can be easier for political figures by avoiding potentially controversial foreign investments, however, Bennett said.

Politicians also often use mutual funds to avoid potential conflicts of interest.

In his 2011 disclosure, President Barack Obama listed investments in the Vanguard 500 Index fund, plus portfolios run by Pimco and Calvert Investments, part of 529 college-savings plans for his children. The largest amount of Obama's assets were in U.S. Treasury notes, between $1 million and $5 million, according to the filing.

In Ryan's disclosure, one large transaction in 2011 moved money within the Wells Fargo Advantage Funds EdVest 529 College Savings Plan.

The money, between $100,001 and $250,000, was moved from an "aggressive" portfolio to a "moderate" portfolio - a typical transaction made by parents as children age and get closer to the time when the money would be needed for college tuition.

The Ryans' three children are 10, 9 and 7 years old, said spokesman Buck.

Sunday, September 16, 2012

Twelve Financial Habits for An Early Retirement in Paris

by Mary Duncan

When I was 7-years-old, my wise grandmother gave me some advice. "Mary," she said, "If you buy property when you are young, you can have anything you want when you are old." At that age, all I could think about was an unlimited amount of ice cream and beautiful illustrated books.

As I grew older, went to college, got married and started my career as a college professor at San Diego State University, I never forgot Grandma Hackett's advice. Throughout my life I've combined her wisdom with other financial guidelines.

I learned that paying rent is flushing money down a toilet. You receive no tax credits. You build no equity. Your first purchase won't be your dream home but it can be a first step towards it. Even in today's economy, I believe buying is preferable to renting.

My former husband and I lived on one salary and invested the other in small mountain cottages in Idyllwild, California. When we parted amicably 10 years later, we divided four pieces of property. I parlayed mine into more property.

Balancing instant gratification with deferred gratification

Grandma was a practical woman who was generous but never wasted money. Even though she was raised before we had credit cards, she would not buy anything on credit unless it gained in value (property), added to her ability to earn a living or could be paid in thirty days.

That is hard to do when you need a new car for work. But do you need a new BMW when a smaller less expensive car will do? Is that new dress or suit really necessary? Perhaps a scarf or tie will give you a new look.

Before I pay for something on a monthly basis such as cable TV, I multiply that by 12 months. How much is it costing for the year? Do you really want to pay $200 a month or $2,400 a year to watch television? Over five years that's $12,000. In 10 years, you get the picture. That money is a significant step towards financing a life in Paris. One thousand dollars will purchase a ticket to France.

Grandma Hackett, who was widowed with four young children, also said that if you are going to have children, you should be able to financially care for them. Divorce, death, unemployment, a financial crisis can place the responsibility on you.

Think strategically

The home you buy today may help finance your life in Paris. I rent my home in California and it pays for my living expenses. This is called a "twofer." Another "twofer" is asking how you can help your career and facilitate your dream. Will learning French enhance your job opportunities? That's a "twofer?

Avoid energy leaks

Do not blab to all of your friends that someday you are going to live in Paris. You may change your mind. Be a person of action not words. Don't be in a position of explaining to your friends why you changed your mind. It's self-defeating. Only tell people who will be supportive of you living in Paris.

Learn from the masters

Even though Grandma Hackett didn't have any advice about Paris, other people did. What advice do they have for you? Ask them to introduce you to their friends in Paris. Even their elderly aunt can aid your transition to the City of Light. A friend gave me a letter of introduction to the late George Whitman, the owner of Shakespeare and Company Bookstore. Twenty years later I am still meeting new people and attending their literary events.

Learn the difference between happiness and pleasure

Relationships are more important than material things. Clothes, jewelry and bling bring you pleasure. Pleasure is temporary. Friends, education and time spent in Paris are more permanent and contribute to your overall happiness. Invest in your happiness.

Short range and long range planning

Set a timeline for when you want to live in Paris. "Someday" never happens. It took me 20 years to move to Paris. Your time frame should be measurable such as by your fiftieth birthday. Develop a way to measure your progress.

Do not rely on your parent's money or an inheritance unless it is already legally yours

Wills and some trusts can be changed. When a parent dies, the surviving parent often remarries. The new spouse may be entitled to the property and money. Your parents may need it for their retirement and unexpected health care costs. Or your parents may move to Paris and spend it before you arrive.

Do something today. Go into action

Subscribe to a blog such as I Prefer Paris. Listen to a French language course on your computer. Going into action puts your body in sync with your mind. When they are working together, it is a powerful combination. Each week you should do or learn something that is related to living in Paris.

Research your family tree

Was your grandmother born in Italy, Germany, England, Ireland or any of the EEU countries? If so, you may be entitled to dual citizenship. This can enhance your opportunities to live, work and travel in France or Europe.


The people we love and respect can be a major deterrent to fulfilling our dreams. Mom doesn't want you moving so far away. Dad hates to travel. Your partner mopes every time you mention it. Love them but be careful they don't derail your dreams.

If you have debts, other than real estate, pay them off as quickly as possible.

Have an alternative plan

People fall in love, change jobs, even move to other countries. As we mature our interests change. Be flexible. I lived in Moscow before I moved to Paris.

Pay attention to your retirement plans

Learn about money. How to earn it, invest it and spend it. Be careful of middlemen who make a living off of your money. BEWARE before you give anyone power of attorney over your money or property. I have seen adult children lose all of their parent's money on bad investments, drugs or worse.

Only invest where there is rule of law. Only invest what you can afford to lose

I lost a small beach house in Baja, California due to corruption. Thankfully, it wasn't my primary home. Personally, I don't like the stock market. The news since 2008 explains why.

I didn't inherit any property from my grandmother but I did follow her road map to financial success. Look around for people who are financially successful and happy. Perhaps it's your parents. Perhaps it's a neighbor or your grandparents. Ask for their guidance. Follow their advice. Let them help you retire early and move to Paris.