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A Roth IRA’s Many Benefits

Posted on Sunday, 3rd March 2013 by

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Why do so many people choose them over traditional IRAs?

The IRA that changed the whole retirement savings perspective. Since the Roth IRA was introduced in 1998, its popularity has soared. It has become a fixture in many retirement planning strategies, because it offers savers so many potential advantages.

The key argument for going Roth can be summed up in a sentence: Paying taxes on your retirement contributions today is better than paying taxes on your retirement savings tomorrow.

Think about it. All other variables aside, would you like to pay more taxes in retirement or less?

What if federal tax rates are higher in the future than they are today? Would you like to see a) your retirement savings taxed at those higher rates tomorrow, when you may have medical bills or other emergency expenses to contend with, or b) have the dollars you are saving for retirement today taxed at possibly lower rates?

Here is a closer look at the trade-off you make when you open and contribute to a Roth IRA – a trade-off many savers are happy to make.

You contribute after-tax dollars. You have already paid federal income tax on the dollars going into the account. But in exchange for paying taxes on your retirement savings contributions today, you could potentially realize great benefits tomorrow.1

You position the money for tax-deferred growth. Roth IRA earnings aren’t taxed as they grow and compound. If, say, your account grows 6% a year, that growth will be even greater when you factor in compounding. The earlier in life that you open a Roth IRA, the greater compounding potential you have.2

You can arrange tax-free retirement income. Roth IRA earnings can be withdrawn tax-free as long as you are age 59½ or older and have owned the IRA for at least 5 years. (That 5-year clock starts on January 1 of the tax year in which you make your initial Roth IRA contribution.)3

The IRS calls such tax-free withdrawals qualified distributions. They may be made to you, to your estate after you are deceased, and/or to a beneficiary. (If you die before the Roth IRA meets the 5-year rule, your IRA beneficiary will see the IRA earnings taxed until it is met.)4

If you withdraw money from a Roth IRA before you reach age 59½, it is called a nonqualified distribution. If you do this, you can still withdraw an amount equivalent to your total IRA contributions to that point tax-free and penalty-free. If you withdraw more than that amount, though, the rest of the withdrawal may be fully taxable and subject to a 10% IRS penalty as well. (If you are younger than 59½ and have owned a Roth IRA for at least 5 years, you are allowed to withdraw 100% of your contributions and up to $10,000 of IRA earnings tax- and penalty-free to buy a principal residence, assuming the buyer has not owned a home within the past 2 years.)1,3

You never have to make a withdrawal. When you own a traditional IRA, you must start pulling money out of it in your in your seventies. These withdrawals are called Required Minimum Distributions (RMDs), and the amount is calculated for you using an IRS formula. These forced withdrawals saddle some traditional IRA owners with tax problems. In contrast, Roth IRA owners never have to take RMDs. They are never required to take a penny out of their IRAs.1  

Withdrawals don’t affect taxation of Social Security benefits. If your total taxable income exceeds a certain threshold – $25,000 for single filers, $32,000 for joint filers – then your Social Security benefits may be taxed. (These limits are not adjusted for inflation, incidentally.) An RMD from a traditional IRA represents taxable income, and may push retirees over the threshold – but a qualified distribution from a Roth IRA isn’t taxable income, and doesn’t count toward it.5   

You can direct Roth IRA assets into many different kinds of investments. Invest them as aggressively or as conservatively as you wish – but remember to practice diversification. The range of investment choices is often broader than that offered in a typical workplace retirement plan.1

You can shift dividend-producing investments into a Roth IRA from a taxable account. As dividends are being taxed at higher rates in 2013, keeping dividend-producing stocks out of a taxable account has definite virtues.

You can potentially “stretch” the assets. If an original Roth IRA owner passes away after owning the IRA for at least five years, then its earnings can be withdrawn tax-free by its beneficiaries. (Relevant estate taxes may need to be paid, of course.) If a Roth IRA beneficiary is not a spouse, then other factors come into play: that beneficiary cannot contribute to the inherited Roth IRA, or combine it with an IRA he or she owns. The non-spouse beneficiary can decide to a) receive a distribution of 100% of the inherited Roth IRA assets by December 31st of the fifth year following the year of the IRA owner’s death, or b) receive periodic payments from the IRA over the course of his or her life, an option which may potentially be “stretched” (given proper planning) and extended to subsequent beneficiaries.6

You have 16 months to make a Roth IRA contribution for a given tax year. For example, IRA contributions for the 2012 tax year may be made up until April 15, 2013. While April 15 is the annual deadline, many IRA owners who make lump sum contributions for a given tax year make them as soon as that year begins, not in the following year. Making your Roth IRA contributions earlier gives the funds in the account more time to grow and compound with tax deferral.1

Who can open a Roth IRA? Anyone with earned income (and that includes a minor).1

How much can you contribute to a Roth IRA annually? The 2013 contribution limit is $5,500, with an additional $1,000 “catch-up” contribution allowed for those 50 and older. (The annual contribution limit is adjusted periodically for inflation.)7 

You can keep making annual Roth IRA contributions all your life. You can’t make annual contributions to a traditional IRA once you reach age 70½.7

Does a Roth IRA have any drawbacks? Actually, yes. One, you will generally be hit with a 10% penalty by the IRS if you withdraw Roth IRA funds before age 59½ or you haven’t owned the IRA for at least five years. (This is in addition to the regular income tax you will pay on the funds withdrawn, of course.) Two, you can’t deduct Roth IRA contributions on your 1040 form as you can do with contributions to a traditional IRA or the typical workplace retirement plan. Three, you might not be able to contribute to a Roth IRA as a consequence of your filing status and income; if you earn a great deal of money, you may be able to make only a partial contribution or none at all.3,7

Rollovers are permitted if you make too much to contribute. Even if your income prevents you from funding a Roth IRA, you can still roll traditional IRA assets into a Roth with the help of a financial professional. While this is a taxable event, you may realize significant long-term financial benefits as a result of it – tax-free retirement income withdrawals, and the potential for some of the Roth IRA assets to pass tax-free to your heirs with further growth and compounding. You also will gain the relief of never having to take an RMD each year.8

All this may have you thinking about opening up a Roth IRA or creating one from existing IRA assets. A chat with the financial professional you know and trust will help you evaluate whether a Roth IRA is right for you given your particular tax situation and retirement horizon.

Investment Advisor Representative with and Securities and Investment Advisory Services offered through Transamerica Financial Advisors, Inc. (TFA) member FINRA, SIPC and a Registered Investment Advisor. LD42774-2/12

Paul H. Risser may be reached at 1-866-274-7737, prisser@tfamail.com, or www.risserfinancial.com

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Investment Advisor Representative with and Securities and Investment Advisory Services offered through Transamerica Financial Advisors, Inc. (TFA) member FINRA, SIPC and a Registered Investment Advisor. LD42774-2/12.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Neither Transamerica Financial Advisors, Inc. (TFA) nor its representatives provide legal, tax nor accounting advice. Persons who provide such advice do so in a capacity other than as a registered representative of TFA.

Citations.

1 – www.kiplinger.com/article/retirement/T046-C006-S001-8-reasons-you-need-a-roth-ira-now.html [4/5/12]

2 – www.nj.com/business/index.ssf/2013/01/biz_brain_are_roth_iras_really.html [1/21/13]

3 – www.smartmoney.com/taxes/income/when-roth-ira-withdrawals-arent-taxfree-1293571638217/ [12/29/10]

4 – www.hrblock.com/free-tax-tips-calculators/tax-help-articles/Retirement-Plans/Early-Withdrawal-Penalties-Traditional-and-Roth-IRAs.html [1/2/13]

5 – www.investmentnews.com/article/20121216/REG/312169988 [12/16/12]

6 – www.investorguide.com/article/11816/understanding-the-tax-ramifications-of-an-inherited-roth-ira/ [1/8/13]

7 – www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits [11/28/12]

8 – www.boston.com/business/personalfinance/articles/2012/05/20/roth_ira_conversion_not_for_everybody/ [5/20/12]

Posted in ESTATE PLANNING, FINANCE / TIP, RETIREMENT CONCERNS, SURVIVOR INFORMATION

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TSP Annual Statements and Highlights

Posted on Friday, 22nd February 2013 by

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I received my annual TSP statement several weeks ago and each year I find it informative. It’s a good tool for evaluating your fund’s performance and comparing it to other investments.  The highlights this year pointed out one of the true benefits of the TSP; the low expense ratio that we pay compared to other private sector funds. In 2012 the expense ratio was only .027%, that’s just 27 cents for every $1,000 in your account. The TSP points out that, “Such low fees are very rare in defined-contribution plans, where the average fee is $8.30/$1,000 account, and in 10% of plans, you’d pay more than $13.80.”

The illustration they use shows the dramatic impact a larger expense ratio has on your investments long term.  A $50,000 investment, over a 30 year period, earning an average 7% a year with an expense ratio of .027% would be worth $377,954. This same account would shrink to $257,842 with an expense ratio of 1.38%. That’s a loss of over $120,000 due to an expense ratio of only 1.38%!  Expense ratios matter. You don’t have other account services fees, fund loads or 12-b1 fees to contend with either. Overall you can’t purchase a lower cost indexed fund than what the TSP offers.

The statement also provides a lifetime TSP single life annuity estimate for age 62 or your current age. You can use this figure to shop around and compare private sector annuities to what the TSP can offer. There are significant differences between plans. If you are contemplating converting your TSP to a private sector annuity READ the fine print. Use the TSP’s online annuity calculator to compare plans before signing on the dotted line.

Many, especially the younger new hires, don’t spend the time they need to fully understand their investment options and how they should invest to maximize their gains. Everyone that has an investment account of any type needs to understand the dynamics to avoid panic moves that could prove costly.  Understanding your TSP investment and withdrawal options, and how to maximize your contributions, can help you realize your retirement savings goals.  If you would like to learn more about investing consider joining the (NAIC) Better Investing and sign up for their free 30 day trial and sample copy of their Better Investing magazine.  I was a member of this organization for many years and found it to be very helpful throughout my career. This organization helps you understand and profit from investing. They have many tools; online and traditional courses, local chapters, and investment clubs that teach you the fundamentals and how to invest wisely.

Use the TSP’s annual report as a reminder to reevaluate your current investment mix. Those close to or in retirement that will need to withdraw funds from their TSP account, should consider having the majority of your account in the L Income or G fund.  The L Income fund invests 74% in the G Fund, 12% in the C , 6 % F, 3% S and 5% I and the fund is rebalanced daily to maintain that mix.  Over the past three years the L Income Fund has earned a 4.2% return, not bad considering the low interest rates now available for CDs and Treasuries.

If you are uncomfortable with investing and fear the potential price fluctuations associated with equities (stocks), then the G-Fund is a safe haven to consider. The G Fund assets are managed internally by the Federal Retirement Thrift Investment Board. The G Fund buys a nonmarketable U.S. Treasury security that is guaranteed by the U.S. Government. This means that the G Fund will not lose money. With interest rates at historic lows the G-Fund still earned 1.47% in 2012, more than double what you can earn on a CD today.

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice. Our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

 

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1099R Statements, Replacement Copies, & Upcoming Changes

Posted on Friday, 8th February 2013 by

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My 1099R arrived from OPM this week and annuitants should have also received their Notice of Annuity Adjustments, Form R1 20-53 (REV. 12/12), that outlines your new 2013 status and payments. The annuity adjustment statement includes the 1.7% COLA increase and lists any changes to your insurance and elective payments.

Each year we receive many queries from federal and postal retirees that have not received their 1099R. If you need a replacement copy read the article titled 1099R Replacements that I wrote last year on this subject. It will walk you through the process. For federal employees reading this column the 1099R replaces the W2 that you receive for your wages when still employed by an agency. Retirees must report their retirement income to the IRS and the 1099R shows how much federal tax you paid and how much of your annuity is reportable for federal tax.

Government continues to go paperless. Social security payments must now be deposited into a bank account or the annuitant can elect to receive a debit card, you can’t buy paper savings bonds and soon OPM will be asking all annuitants and survivor beneficiaries to sign up for electronic 1099R and tax  withholding statements. All annuitants will be asked to visit their website at www.servicesonline.opm.gov and opt-in to receive electronic distribution of the 2013 1099R form. I can’t imagine that OPM will make this mandatory considering that many retirees don’t have computers to access this account.

In the meantime, if you haven’t accessed Services Online lately, you can prepare for the upcoming online elections and check on your annuity status plus much more. I use this site and it is helpful. You can change allotments, print out missing annuity statements, download replacement 1099R forms, change your mailing address, and elect state income tax withholdings and much more.

OPM advises users not to worry if you don’t remember your password. You can request a new one from the main page of Services Online. If you have set up your security questions and have an email address on file, you may choose to receive your password by email. However, if you don’t have an email address on file or haven’t set up your security questions your password will be sent by mail. Unfortunately, Services Online is currently unavailable for use by persons OPM has approved as “Representative Payees” for annuitants and survivors.

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice. Our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

 

Posted in ANNUITIES / ELIGIBILITY, BENEFITS / INSURANCE, RETIREMENT CONCERNS, SOCIAL SECURITY / MEDICARE, SURVIVOR INFORMATION

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IRA CONTRIBUTION LIMITS RISE FOR 2013

Posted on Friday, 1st February 2013 by

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Save a little more for retirement.

 Presented by Paul H. Risser

Time to boost your IRA balance. In 2013, you can contribute up to $5,500 to your Roth or traditional IRA. If you will be 50 or older by the end of 2013, your contribution limit is actually $6,500 this year thanks to the IRS’s “catch-up” provision. The new limits represent a $500 increase from 2012 levels.1

This is an ideal time to max out your annual IRA contribution. If you are in the habit of making a single annual contribution to your IRA rather than monthly or quarterly contributions, try to make the maximum contribution as early as you can in a year. More of your money should have an opportunity for tax-deferred growth, not less. While you can delay making your 2013 IRA contribution until April 15, 2014, there is no advantage in waiting – you will stunt the compounding potential of those assets, and time is your friend here.2

Do you own multiple IRAs? If you do, remember that your total IRA contributions for 2013 cannot exceed the relevant $5,500/$6,500 contribution limit.3

Your IRA contribution may be tax-deductible. Are you a single filer or a head of household? If you contribute to both a workplace retirement plan and a traditional IRA in 2013, you will be able to deduct the full amount of your IRA contribution if your modified adjusted gross income is $59,000 or less. A partial deduction is available to such filers with MAGI between $59,001-69,000.4

The 2013 phase-outs are higher for married couples filing jointly. If the spouse making the IRA contribution also participates in a workplace retirement plan, the traditional IRA contribution is fully deductible if the couple’s MAGI is $95,000 or less. A partial deduction is available if the couple’s MAGI is between $95,001-115,000.4

If the spouse making a 2013 IRA contribution doesn’t participate in a workplace retirement plan but the other spouse does, the IRA contribution may be wholly deducted if the couple’s MAGI is $178,000 or less. A partial deduction can be had if the couple’s MAGI is between $178,001-188,000. (The formula for calculating reduced IRA contribution amounts is found IRS Publication 590.)5

You cannot contribute to a traditional IRA in the year in which you turn 70½ or in subsequent years. You can contribute to a Roth IRA at any age, assuming your income permits it.1

What are the income caps on Roth IRA contributions this year? Single filers and heads of household can make a full Roth IRA contribution for 2013 if their MAGI is less than $112,000; the phase-out range is from $112,000-127,000. For joint filers, the MAGI phase-out occurs at $178,000-188,000 in 2013; couples with MAGI of less than $178,000 can make a full contribution. (To figure reduced contribution amounts, see Publication 590.) Those who can’t contribute to a Roth IRA due to income limits do have the option of converting a traditional IRA to a Roth.7

As a reminder, Roth IRA contributions aren’t tax-deductible – that is the price you pay today for the possibility of tax-free IRA withdrawals tomorrow.8

Can you put money in an IRA even if you don’t work? There is a provision for that. Generally speaking, you need to have taxable earned income to make a Roth or traditional IRA contribution. The IRS defines taxable earned income as…

*Wages, salaries and tips.

*Union strike benefits.

*Long-term disability benefits received before minimum retirement age.

*Net earnings resulting from self-employment.

Also, you can’t put more in your IRA(s) than you earn in a given year. (For example, if you are 25 and your taxable earned income for 2013 amounts to $2,592, your IRA contributions for this year can’t exceed $2,592.)9

However, a spousal IRA can be created to let a working spouse contribute to a nonworking spouse’s retirement savings. That working spouse can make up to the maximum IRA contribution on behalf of the stay-at-home spouse (which does not affect the working spouse’s ability to contribute to his or her own IRA).

Married couples who file jointly can do this. The IRS rule is that you can contribute the maximum into this IRA for each spouse as long as the working spouse has income equal to both contributions. So if both spouses will be older than 50 at the end of 2013, the working spouse would have to earn taxable income of $13,000 or more to make two maximum IRA contributions ($12,000 if only one spouse is age 50 or older at the end of 2013, $11,000 if both spouses will be younger than 50 at the end of the year).6,9

So, to sum up … make your 2013 IRA contribution as soon as you can, the larger the better.

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Citations.

1 – www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits [11/28/12]
2 – finance.zacks.com/can-ira-contribution-carried-forward-5388.html [1/9/12]
3 – helpdesk.blogs.money.cnn.com/2012/06/06/can-i-contribute-more-than-5000-to-multiple-iras/ [6/6/12]
4 – www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work [11/26/12]
5 – www.irs.gov/Retirement-Plans/2013-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-NOT-Covered-by-a-Retirement-Plan-at-Work [11/26/12]
6 – www.irs.gov/publications/p590/ch01.html#en_US_2011_publink10002304123 [2011]
7 – www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2013 [11/27/12]
8 – www.irs.gov/taxtopics/tc309.html [12/17/12]
9 – www.creators.com/lifestylefeatures/business-and-finance/money-and-you/can-you-contribute-to-an-ira-if-you-don-t-have-a-job.html [2011]

Investment Advisor Representative with and Securities and Investment Advisory Services offered through Transamerica Financial Advisors, Inc. (TFA) member FINRA, SIPC and a Registered Investment Advisor. Non-Security products and services are not offered through TFA. Risser Financial Services and TFA are not affiliated.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Neither Transamerica Financial Advisors, Inc. (TFA) nor its representatives provide legal, tax nor accounting advice. Persons who provide such advice do so in a capacity other than as a registered representative of TFA.

Posted in ANNUITIES / ELIGIBILITY, ESTATE PLANNING, FINANCE / TIP, RETIREMENT CONCERNS, SURVIVOR INFORMATION

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TSP Roth Conversion Update

Posted on Monday, 21st January 2013 by

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I discussed the advantages and limitations of TSP ROTH conversions in my last column. THRIFT Plan participants are currently prohibited from converting their traditional TSP accounts to a ROTH. Changes may be on the way that will allow you to convert part of your TSP to a ROTH.

The President approved the American Taxpayer Relief Act of 2012, on January 2, 2013. This law allows the TSP and other qualified plans to give participants the option to convert their traditional account balances to a Roth balance.  The amount converted would be taxable to the participant. The Thrift Board is currently waiting for tax reporting guidance from the IRS and they will be studying the actions required to offer a conversion option.  After their review they will make a decision on whether to proceed.

Many readers have expressed interest in converting some of their TSP to a ROTH and currently only new contributions from plan participants can be invested in a ROTH. However, there are currently several options to transfer funds from your account, if eligible, that could be used to fund a private sector ROTH. Federal employees that are age 59 ½ can make a onetime lump sum in-service withdrawal from their TSP account while they are still actively employed in Federal civilian service or the uniformed services. There are two types of in-service withdrawals: financial hardship withdrawals and age-based withdrawals. Retirees can take a onetime lump sum withdrawal or transfer the entire account to fund a ROTH if desired.

Hopefully the TSP will afford us the opportunity to convert at least a portion of our current TSP account to a ROTH in the near future.  For more information on investing for retirement use our comprehensive Financial Planning Guide.

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice. Our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

 

Posted in BENEFITS / INSURANCE, ESTATE PLANNING, FINANCE / TIP, RETIREMENT CONCERNS

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Making Retirement Savings Last

Posted on Monday, 14th January 2013 by

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Different ways to respond to the challenge.
Presented by Paul H. Risser

As you retire, there are variables you can’t control; investment performance and fate are certainly toward the top of the list. Your approach to withdrawing and preserving your retirement savings, however, may give you more control over your financial life.

Drawing retirement income without draining your savings is a challenge, and the response to it varies per individual. Today’s retirees will likely need to be more flexible and look at different withdrawal methods and tax and lifestyle factors.

Should you go by the 4% rule? For decades, retirees were cautioned to withdraw no more than 4% of their retirement balances annually (adjusted north for inflation as the years went by). This “rule” still has merit (although sometimes the percentage must be increased out of necessity). T. Rowe Price has estimated that someone retiring with a typical 60%/40% stock/bond ratio in their portfolio has just a 13% chance of depleting retirement assets across 30 years if he or she abides by the 4% rule. A 7% initial withdrawal rate invites an 81% chance of outliving your retirement assets in 30 years.1

That sounds like a pretty good argument for the 4% rule in itself. However, while the 4% rule regulates your withdrawals, it doesn’t regulate portfolio performance. If the markets don’t do well, your portfolio may earn less than 4%, and if your investments repeatedly can’t make back the equivalent of what you withdraw, you will risk depleting your nest egg over time. 

Or perhaps the portfolio percentage method? Some retirees elect to withdraw X% of their portfolio in a year, adjusting the percentage based on how well or poorly their investments perform. As this can produce greatly varying annual income even with responsive adjustments, some retirees take a second step and set upper and lower limits on the dollar amount they withdraw annually. This approach is more flexible than the 4% rule, and in theory you will never outlive your money.    

Or maybe the spending floor approach? That’s another approach that has its fans. You estimate the amount of money you will need to spend in a year and then arrange your portfolio to generate it. This implies a laddered income strategy, with the portfolio heavily weighted towards bonds and away from stocks. This is a more conservative approach than the two methods above: with a low equity allocation in your portfolio, only a minority of those assets are exposed to stock market volatility, and yet they can still capture some upside with a foot in the market.  

Attention has to be paid to tax efficiency. Many people have amassed sizable retirement savings, yet give little thought as to the order of their withdrawals. Generally speaking, there is wisdom in taking money out of taxable accounts first, then tax-deferred accounts and lastly tax-exempt accounts. This withdrawal order gives the assets in the tax-deferred and tax-exempt accounts some additional time to grow. A smartly conceived withdrawal sequence may help your retirement savings to last several years longer than they would in its absence.2 

Keeping healthy might help you save more in two ways. Increasingly, people want to work until age 70, or longer. Many assume they can, but their assumption may be flawed. The 2012 Retirement Confidence Survey from the Employee Benefit Research Institute found that 50% of current retirees had left the workforce earlier than they planned, with personal or spousal health concerns a major factor.3

When you eat right, exercise consistently and see a doctor regularly, you may be bolstering your earning potential as well as your constitution. Health problems can hurt your income stream and reduce your chances to get a job, and medical treatments can eat up time that you could use in other ways. Good health can mean fewer ER visits, fewer treatments and fewer hospital stays, all saving you money that might otherwise come out of your retirement fund.

Investment Advisor Representative with and Securities and Investment Advisory Services offered through Transamerica Financial Advisors, Inc. (TFA) member FINRA, SIPC and a Registered Investment Advisor. Non-Security products and services are not offered through TFA., Risser Financial Services, and TFA are not affiliated.

LD045429-12/12

Citations.

1 – individual.troweprice.com/staticFiles/Retail/Shared/PDFs/retPlanGuide.pdf [5/10]
2 – online.wsj.com/article/SB10001424052748703529004576160693310435366.html [3/7/11]
3 – www.dailyfinance.com/2012/09/03/postponing-retirement-70-not-the-new-65/ [9/3/12]

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Posted in ESTATE PLANNING, FINANCE / TIP, LIFESTYLE / TRAVEL, RETIREMENT CONCERNS

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TSP ROTH Conversions, Benefits, & Limitations

Posted on Saturday, 5th January 2013 by

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There is considerable confusion on what federal employees and retirees can do to convert all or a part of their TSP funds to a TSP ROTH.  There are limitations and unfortunately you can’t convert any of your current TSP funds to a ROTH within the TSP program. There are only 2 ways to get ROTH money into your TSP account:

  1. From your future pay — you’ll notify your agency or service that you want to make Roth contributions, or
  2. Transfer Roth money into your account directly from eligible plans (Roth 401(k)s, Roth 403(b)s, or Roth 457(b)s only).

You will not be able to transfer money into the TSP from Roth IRAs. Also, you will not be able to convert money that is already in your TSP account into Roth money. Along the same lines, agency automatic and matching contributions will always be traditional, tax-deferred contributions, even if your own contributions are only Roth. You will not be able to convert any agency traditional contributions into Roth contributions.

That being said, there are no limitations on transferring your TSP funds when eligible to a private sector ROTH account outside of your TSP.  Federal employees and retirees may discover that shifting some or all of their THRIFT savings or traditional IRAs into a ROTH will save them taxes on investment earnings and growth long term. Roth IRAs provide tax-free earnings on your contributions however you MUST pay taxes on your initial ROTH contributions. The amount that you transfer into a ROTH is fully taxed at current tax rates. Since you already paid taxes on your contributions you can withdraw them from a Roth IRA at any time tax-free.

Generally, if your account has been open for at least 5 years, your earnings are tax-free when you withdraw them. Usually, you must be 59½ or older in order to avoid paying a 10% early withdrawal penalty tax on your earnings. Other exceptions to the withdrawal penalty tax may also apply. IRS publication 590 provides detailed guidance.

Roth IRAs do not require minimum distributions for participants starting at age 70½ like traditional IRAs require and beneficiaries pay NO INCOME TAXES for inherited accounts open at least five years. ROTH IRAs are one of the few investment vehicles that we have, other than municipal bonds that may earn tax free income.

For more information on ROTH accounts visit our TSP ROTH page and review the extensive FAQ that we have on the site to determine if a ROTH is right for you.  Current federal employees should review this carefully, a ROTH can be highly advantageous and devoting at least a part of your contributions to a ROTH could prove worthwhile.  Roth contributions are taxable unlike your standard  TSP contributions.  I converted half of one of my retirement account to a ROTH in 2010 and was able to pay the taxes over the next two years.  The conversion added to my taxable income for both years however since converting to a ROTH my account has increased in value by 33% and all capital gains and dividends are tax free as long as I keep the account for 5 years before withdrawing any of the gains.  There is no penalty if you have to withdraw any part of your original contributions because you already paid taxes on them when you converted.

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Learn more about your benefits, employment, and financial planning issues on our site and visit our Blog frequently at  https://fedretire.net to read all forum articles.

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice. Our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

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Posted in ANNUITIES / ELIGIBILITY, BENEFITS / INSURANCE, EMPLOYMENT OPTIONS, ESTATE PLANNING, FINANCE / TIP, RETIREMENT CONCERNS

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Strategies for Increasing Your Retirement Annuity and Income

Posted on Friday, 7th December 2012 by

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Updated 7/25/2021

Yes, there are ways to retire with more than you can imagine!  There are many parts to this puzzle that YOU have control over and those who take responsible actions now will be handsomely rewarded when they decide to retire.  Having more in retirement doesn’t necessarily mean having a larger annuity, although that too is desirable. You can improve your financial position through promotions, by fully funding your THRIFT plan, saving more, delaying Social Security, working in retirement, to paying off debt.  It’s not too late to start, even if you are only a few years away from your target retirement date.  Notice that I emphasize target date.

A retirement target date is simply a date that you think may be a good time to change course and leave federal service. Often times, including in my case, we revise our departure dates for many reasons; uncertainty, insufficient retirement income, health issues, and for a thousand other reasons. I revised my target date twice and still left when I was 55, not when I first turned 55 but at the end of the year to increase my retirement income and to be able to sell back the maximum amount of annual leave as possible.

A career development plan can help employees maximize their retirement income and provide considerable personal satisfaction along the way.  Your annuity is calculated on your average high three years base salary including locality pay.  By developing and completing a realistic Individual Development Plan (IDP) while still employed you can add thousands to your annual retirement income.  I used these methods successfully throughout my federal career and wrote Take Charge of Your Federal Career;  A Practical, Action-Oriented Career Management Workbook for Federal Employees that is now in its 2nd edition. This book’s companion web site at www.fedcareerinfo.com will help you start your plan and includes free downloadable career planning forms.

Career development isn’t only for those in their early to mid careers.  There are career development initiatives for those within 3 years of retirement that can benefit from this approach.  Actually, most of us have a plan at least in draft form in our heads. We think about it occasionally and then the desire dies off and we go on to other things. To make your plan work you have to write it down and work the plan, baby steps at first until you get the feel for it and understand where you are going.

To increase your high three you have to earn more and to do that you have to explore opportunities for promotion, including reassignment, to boost your salary for those last three years of work.  You can explore reassignment to regional or Washington headquarters or seek a promotion within your department.

You can also maximize your TSP contributions, $19,500 for 2021, and if you are over 50 add the additional $6,500 catch up contributions if possible to retire with more.  Paying off your mortgage also makes sense and the less debt you have in retirement the more you will have to spend on necessities, travel, and entertainment.  This does take some sacrifice and it isn’t always easy. However, if you learn to do with less while employed just imagine how much better off you will be in retirement.

If you still come up short and want to retire anyway or just don’t have anything else planned for retirement you can always consider going back to work. Many find more enjoyable or less stressful opportunities and a change of venue can be refreshing.  Explore your employment options on our federal retiree’s jobs board to find opportunities in your area.

Request a Retirement Benefits Summary & Analysis. This 27 page report includes projected annuity payments, income verses expenses, FEGLI, TSP projections, and more.

Learn more about your benefits, employment, and financial planning issues on our site and visit our Blog frequently at  https://fedretire.net to read all forum articles.

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice. Our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

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Posted in BENEFITS / INSURANCE, EMPLOYMENT OPTIONS, FINANCE / TIP, RETIREMENT CONCERNS

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