Take Your 401(k) BEFORE Retirement?

A new possibility. Sometimes employees want to pull money out of a 401(k) before they retire. It isn’t always because of an emergency. Some workers want to make an in-service non-hardship withdrawal just to roll their 401(k) assets into an IRA. Why? They see lower account fees and greater investment choices ahead.

As a result of the Tax Increase Prevention Reconciliation Act (TIPRA), tax laws now permit in-service non-hardship withdrawals from 401(k), 403(b) and 457 plans to traditional IRAs and Roth IRAs before age 59½. Of course, the employee must be eligible to take a distribution from the plan, and the funds have to be eligible for a direct IRA rollover.

This option may be very interesting to highly compensated employees who want the tax benefits of a Roth IRA. The income limits that prevented them from having a Roth IRA have been repealed, and they may have sizable 401(k) account balances.

Does the plan allow the withdrawal? Good question. If a company’s 401(k) plan has been customized, it may allow an in-service withdrawal for an IRA rollover. If the plan is pretty boilerplate, it may not. 

The five-year/two-year rule also has to be satisfied. IRS Revenue Ruling 68-24 says that for an in-service withdrawal from a qualified retirement plan to take place, an employee has to have been a plan participant for five years or the funds have to have been in the plan for two years.

401(k) plan administrators may need to amend their documents. Does the Summary Plan Description (SPD) on your company’s 401(k) plan allow non-hardship withdrawals? If it doesn’t, it may need to be customized to do so. This year, plan administrators nationwide are fielding employee questions about rollovers to Roth IRAs.

401(k) plan participants need to make sure the plan permits this. An employee should request a copy of the SPD. If you ask and no one seems to know where it is, then call the toll-free number on your monthly 401(k) statement and ask a live person if in-service, non-hardship withdrawal distributions are an option. In some 401(k)s, an in-service non-hardship withdrawal will prevent you from further participation; be sure to check on that.

If this is permissible and you want to make the move, you better make an IRA rollover with the assets withdrawn. If you don’t, that distribution out of your qualified retirement plan will be slapped with a 20% federal withholding tax and federal and state income taxes. Oh yes, you will also incur the 10% early withdrawal penalty if you are younger than age 59½. Additionally, if you have taken a loan from your 401(k), any in-service withdrawal might cause it to be characterized as a taxable distribution in the eyes of the IRS.

Obviously, this IRA rollover possibility is not a big hit with the national and regional retirement plan providers, who would like to see you keep participating in their 401(k) programs rather than partly or fully bail out. But many employees would like a broader and more diverse range of investment options - and some would like the chance to direct their money into vehicles designed to produce future income streams.

Don’t forget to talk to the professionals. Retirement plan administrators and participants should talk to the financial consultant that has helped them with their 401(k) program before making a move. This article is simply an overview, and there will be different details to attend to with each employee. So be sure to touch base with the financial professional you trust.

The New Aging Paradigm

The old quip goes "I'm getting older but it beats the alternative" comes to mind more often these days. Maybe its because the question of "when are you going to retire?" comes up more frequently. I have to admit with the frequent reminders from well meaning people it's hard not to think about it every so often.

Having had the distinct privilege to work with so many people who have retired I have accumulated some observations about the topic. I find that these groups often fall into three distinct categories. I'll call them the "Tried Its", the "Love Its" and the "My Timer's.

The "Tried Its" as a group decided to retire but, after a short period of time found that there really was only so much golf, travel and other stuff that they really wanted to do. They wanted and needed the intellectual stimulation of "being in the game" and eventually found ways to do so by going back to work in some fashion or starting a business.

The "Love Its" are quite a bit different. They will often say "I don't know how I found time to work before!" and similar statements. They are often engaged in a number of activities that fill their needs for intellectual stimulation, socialization and curiosity.

From my experience the "Tried Its" and Love Its" are equally happy groups of people that look forward to each day. The "My Timers" on the other hand retire because they had reached retirement age felt it was "my time" and my days of being useful have passed. These people tend to be crotchety, resentful and look for issues to complain about. I tend to have short conversations , if any, with the "My Timers". They are no fun!! Fortunately, this is usually a small group relative to the other two.

I came across an interesting article the other day and thought you might like to see it as well. In the article the notion of a retirement age at 65 or 67 is brought into question. Since the age of 65 was first presented in the late 1800's in Germany, the question may be appropriate! The fastest growing age group in our country is the 100+ category and the ideas it puts forth about how this will likely change how work is performed and the choices that we and future generations will need to consider are, in my opinion, timely and important to consider.

As for me (for those of you wondering) it has reinforced that I love what I do and retirement is a very long way away. Based on the trends in place there seems no reason for me to change my mind for now!

Self-Employed Retirement Plan Options

What options do hands-on owner-operators have? If you have a small company and want a retirement program, you want to consider these plan choices.

The SIMPLE IRA. These plans are very easy to create, and they have very low administrative costs and no annual IRS reporting requirements. You set up traditional IRAs for each eligible employee; they can contribute to the IRA on a tax-deferred basis (via payroll deductions, and you can either match the contributions of plan participants or contribute a fixed percentage of all eligible employees’ pay. The employees own the money in their IRAs.

The SEP. A Simplified Employee Pension plan lets you make contributions toward your retirement and your employees’ retirements. (You can even have a SEP and another kind of retirement plan at your business simultaneously.) A SEP allows business owners annual tax-deductible contributions equal to 25% of your compensation (if you have a corporation) or 20% of self-employment income (for a sole proprietor).

The solo 401(k). Yes, you can have a 401(k) when you are self-employed. A business owner may establish one and include their spouse in the plan, provided the spouse is an employee of the business. A solo 401(k) throws in a profit-sharing twist on the standard 401(k). Solo 401ks may be funded by the employee (deferred compensation) and the business (a percentage of profit). As an employee of your business, you can contribute an amount up to the standard yearly 401(k) contribution limit (catch-up contributions permissible if you are 50 or older). Additionally, solo 401(k) plans allow you to make tax-deductible profit-sharing contributions equal to 25% of your compensation (corporate entity) or 20% of self-employment income (sole proprietor). It is even possible to have a solo Roth 401(k). These plans do require a TPA (third-party administrator).

Profit-sharing plans. Here’s one way to compete with larger companies for prime employees. Contributions are usually deductible at both the federal and state level, with contribution limits equivalent to a SEP. Contributions aren’t mandatory. If your business has a bad year, you don’t have to make them. The assets placed within the plan grow tax-deferred. Again, annual tax-deductible contributions may be made according to the 25%/20% rule depending on your business entity.

New comparability plans. Basically, this is a form of profit-sharing plan that rewards senior or key employees more than others. The classic situation for this plan is when you have a small business whose multiple owners take home similar earnings, but are of different ages. The plan must be tested to meet Internal Revenue Code nondiscrimination requirements, of course. It allows different levels of compensation to different groups within a small business.

What plan might work for you? If you are reading this, you are probably thinking about putting a plan into place or switching to a retirement program more easily administered than the one you have now? But which one should you choose – and what is the next step? Take a big step today and take advantage of all that is available in the marketplace - consult an independent financial advisor to review your options and find the program that fits your needs.

What NO COLA Increase?

SSI will remain flat for the first year since 1975. Social Security benefits are keyed to inflation. So what happens when year-over-year inflation becomes negative? No cost-of-living adjustment (COLA) occurs to increase your Social Security income. On October 15, the Social Security Administration announced that there would be no COLA for 2010. (The 2009 SSI COLA was 5.8%, the largest boost since 1992.)

“What do you mean, negative inflation?” That’s the question some SSI recipients are asking. Aren’t prices seemingly going up at the grocery store every day – and going up everywhere else?

Unfortunately, the federal government doesn’t measure consumer inflation with a price check on aisle six. It uses the Consumer Price Index (CPI), which is really an estimation of the average prices of consumer products we buy. There is also core CPI, which excludes food and energy costs.

From September 2008 to September 2009, overall CPI fell by 1.3%. Across that span, overall food prices actually fell 0.2% and prices on dairy products and fruits and vegetables respectively dropped 9.5% and 6.4%. Food prices only account for about a seventh of CPI, and rents actually constitute about 40% of the “prices” measured by core CPI. In September, rents fell in the United States for the first time since 1992. (We also have a decline in retail gasoline prices from last fall to this fall.)

With year-over-year inflation negative, the SSA has no logical reason for a COLA. Yet roughly two-thirds of America’s seniors live on less than $20,000 a year, some entirely on SSI.

Another stimulus check? President Obama is urging Congress to authorize one-time $250 stimulus payments to Social Security and Supplemental Security income recipients, veterans, railroad retirees and government retirees. That $250 would equal about 2% of the average annual SSI benefit for a retiree. These checks would be mailed sometime in 2010 to about 57 million people. Recipients could not qualify for multiple checks.

Retirement plan contribution limits will stay the same. These are also inflation-indexed. On October 15, the Internal Revenue Service chimed in with a statement that 401(k) contribution limits will remain at $16,500 for 2010. The maximum contribution limits for other types of defined-contribution and defined-benefit retirement plans will also remain the same for 2010.

While we’re referencing the IRS, some other important figures aren’t changing next year. The standard deduction will remain at $11,400 and $5,700 for joint and single filers; it will go up $50 to $8,400 next year for heads of household. The yearly gift tax exclusion will stay at $13,000 for 2010, and the value of a personal exemption will remain at $3,650.

No COLA … but more purchasing power? A former deputy Social Security commissioner who now works for the conservative American Enterprise Institute contends that the average retiree will actually have $725 more in purchasing power in 2010 thanks to falling prices and the freeze in Medicare Part B premiums (which will not increase in 2010 for most Social Security recipients). A senior policy analyst for the non-partisan Center on Budget and Policy Priorities told the Christian Science Monitor that if Social Security income was wholly determined by consumer prices, SSI recipients would have their checks cut by 2.1% next year.

What can you do in response here? Even if you are really wealthy, your SSI is a big chunk of money. If you were hoping for a COLA and want and need to have more money on hand for 2010, this is the time of year to meet with a financial advisor or tax advisor who may work with you and help you plan to find it.

Are You Retirement Ready?

64% of Americans have no financial strategy at all. That’s right – no plan whatsoever to build wealth or keep it. That finding comes from the 2009 National Consumer Survey on Personal Finance conducted by the Certified Financial Planner Board of Standards, Inc. (The survey collected data from 1,700+ U.S. residents.)

Only 17% of us have a written financial plan that is updated regularly. So congratulate yourself if you are in that group. The CFP Board found that just 17% of the 36% polled who did have a written financial plan had reviewed it in light of changing times. Notably, 48% said they had benefited from having a written plan.

Just 38% of the 36% having written financial plans retain a financial advisor. The really troubling part: 37% of those with written plans are doing their financial planning on their own. Another 12% of respondents with written plans have consulted a friend or family member who isn’t a financial services professional for advice.

Why don’t more people have a financial plan? After all, Americans of all incomes and savings levels certainly are free to set financial goals. In the survey, the reasons varied. Some cited the expense of engaging a financial advisor; some said they get along just fine without a financial plan, and others felt their finances weren’t complicated enough to warrant one. Others were hazy about financial services industry qualifications - 40% of respondents had no idea that there were professional credentials or designations for financial advisors.

Syndicated financial columnist Humberto Cruz recently noted that when he told some fellow vacationers in Orlando that he wrote about financial planning, they all asked him if he gave stock tips. He had to explain that he was simply a journalist, not a financial planner.

Defined goals lead to definite plans. If you set financial objectives and plan for them, you vault ahead of most Americans – at least according to the CFP Board’s findings. A written financial plan does not imply or guarantee wealth, of course; nor does it ensure that you will reach your goals. Yet that financial plan does give you an understanding of the distance between your current financial situation (where you are) and where you want to be. Too many Americans, it seems, have little comprehension of their financial situation or their financial potential.

How much planning have you done? Retiring without a financial plan is an enormous risk; retiring with a financial plan that hasn’t been reviewed in several years is also chancy. A relationship with a financial advisor can help to bring you up to date about what you need to do, and provide you with more clarity and confidence when it comes to the financial future.

Getting Older Happens

In many ways the financial planning movement is quite new. Many point to the origins of financial planning starting in the late 1960's and early 1970's. I consider myself fortunate to have started my career near the beginning in 1975. But I consider myself more fortunate to have had the opportunity to be around some of the true pioneers who had the passion and dedication to push the idea of objective financial advice forward.

One of those pioneers is a gentleman by the name of Ben Coombs. Ben was in the FIRST class of Certified Financial Planners to receive their designations in 1973. He has served in various leadership positions in the professional associations over the years. Ben is always a man with ideas that are timely and relevant to consumers and planners alike. One of his recent causes was to create a mentoring environment for new advisors in the growing profession. Another is the creation of his new content delivery system entitled "Getting Older Happens" designed to be a resource for the over 70 age group and their families/advisors. The link is http://www.gettingolderhappens.com/.

Take a look and pass it along to those who may receive some value from it.

I wonder how much it will take???????

A very common question is how much will it take to be financially independent and join the "Take This Job and Shove It" club. Of course, that is part of what we do to help our clients and have some pretty sophisticated tools to determine "a number" based on a wide variety of assumptions. As good as these tools are sometimes we just are looking for the quick answer either for reassurance or additional validation.

This post at Millionaire Mommy Next Door goes through four of these short answer results. Since I'm kind of a "belt and suspenders" type of person I tend to look at these as the minimum hurdle to jump over to feel financially secure. Clearly a more analytical approach will provide additional validation and likely should be done but for when your tossing and turning in the middle of the night these may come in handy.

In Service 401(k) Distributions

Can you withdraw money from your 401(k) while you are still employed? Not everyone should; not everyone can. However, if you can, it may mean that you can effectively implement part of your retirement income plan before you retire.

If your 401(k) plan permits it, you can take an in-service withdrawal and redirect some of your 401(k) funds into another investment vehicle that offers you income guarantees.
The reasons why. A non-hardship withdrawal can provide you with early access to a portion of your retirement assets, freeing you to manage them as you wish. If the mix of funds in your 401(k) have taken a big hit lately, you might be wondering how some of those assets would do if they were invested differently.

The self-directed IRA option. Some people are withdrawing assets from qualified retirement plans such as 401(k)s and place them in self-directed IRAs. An SD-IRA can allow you to invest your assets in real estate, commodities, and other sectors indirectly correlated or uncorrelated to stocks. While many kinds of IRAs can be converted to self-directed IRAs, you need to have an IRA custodian that will allow an SD-IRA and let you make non-traditional investments using IRA assets. This IRA custodian has to be a registered trust company.

You can take a self-directed IRA one step further and set up an IRA LLC. With an IRA LLC, you have “checkbook” control and don’t need your IRA custodian’s approval to make non-traditional investments.

Many SD-IRA owners invest in income property or other forms of real estate. Contrary to public perception, IRA assets may be invested in real estate and other options besides securities (providing your IRA custodian allows this). There are some notable prohibitions: IRS Code Section 401 IRC 408(a)(3) prohibits life insurance contracts from being held in IRAs, and IRS Publication 590 states that your IRA will be hit with additional taxes if you invest in collectibles.

The 72(t) strategy to avoid the early withdrawal penalty. If you are still working and pull money out of your 401(k) before age 59½, you will almost certainly pay a 10% early withdrawal penalty plus income taxes on the money you take out. But you might be able to make early withdrawals with the help of IRS Rule 72(t).

Rule 72(t), based on life expectancy, lets you schedule fixed income withdrawals for five years or until you reach 59-1/2, whichever is longer.6 It lets you receive fixed, equal payments according to IRS calculations.

First things first: make sure you can do this. Talk with your employee benefits officer at work, and see that the Summary Plan Description (SPD) permits non-hardship withdrawals. Talk with your financial or tax advisor to make sure this is an appropriate move for you given your overall financial plan. If you know you’ll need more retirement income, there can be real merit to reinvesting early withdrawals from a 401(k) in vehicles that generate it.

The New Retirement Age

Is 70 the new 65? It may be, for many Americans are electing to postpone retirement as an effect of the recent volatility in the financial markets. If 70 is the new 65, some workplace changes are worth noting – these trends may be affecting you, your employer, and your financial future.

Retirement will increasingly be a process, not an event. In the years ahead, more and more people will probably leave the workplace gradually. For baby boomers that want to stay active and engaged, this isn’t necessarily a bad thing. A vice-president who worked 50 hours a week may become a consultant or a coach working three days a week. Or he or she might simply want to work less, for less pay, or make a lateral move within a company that would allow an exit on his or her terms.

Boomers will have the opportunity to shape their exit. If gradual retirement becomes more common (and today’s financial pressures would seem to make it so), expect more and more mature employees to negotiate the terms of their retirement – how many hours they will work on their way out, how accessible they will be, if they will work from home or the office, and who will take the reins in their hands someday. If a boomer offers a personal exit plan of sorts that will help a business to cut labor costs without losing a valued employee, isn’t that a favor to management?

Businesses and non-profits face a tough question. The 2009 Retirement Survey from the Employee Benefit Research Institute found that 51% of Americans age 25 and older now think they will retire at age 66 or older. In June 2009, the Bureau of Labor Statistics estimated that 23% of Americans employed or seeking work were age 55-64.

This is problematic for businesses, who in this economy might want to pay older workers to retire so that they can stay profitable. Universities, state and local governments and public agencies will probably not see the same kind of retirement turnover they did in the past. Should they stop recruiting new managers, new faculty, or new administrators for the near future? Organizationally, what is the economic value of retaining wisdom and experience?

Will we see a wave of “rehirement”? In the EBRI survey, 20% of the roughly 1,200 respondents felt they would never retire, compared to 11% in the 2007 poll. Part of that increase obviously reflects what happened in the stock market, but it also may represent a perception shift in progress. Baby boomers are doers, proud contributors to society who are tearing up the old retirement template. It could be that two distinct phases of American life are emerging – one in which you work for a living, followed by another in which you work for meaning. It may lead to a wave of mature employees, professionals and entrepreneurs – a zeitgeist of sorts, the likes of which this country has never seen.

Wealth Management Potpourri

Good choices are the recipe for financial and investing success. Unfortunately our brains need some training and re-wiring.

My parents told me that “watched pots never boil”. Will that happen with our inflation worries, Philip Brewer has some cautions about the CPI and differentiates it from inflation.

The current unemployment numbers are scary. It is not uncommon that unemployment numbers increase even after the economy starts to recover. It is often reported that the broader unemployment number is much worse. Worse than what is the question.

The current health care reforms in Congress a getting a lot of attention these days. Unfortunately the foundations of the financing for it are built on sand. Tax history shows what you tax goes away quickly.

Unemployment numbers slow their growth.

More “green shoots” for Housing. If the trend continues the economic numbers should also see improvement soon.

The best-laid plans for retirement sometimes don’t pan out according to this WSJ post. Flexibility needs to be brought into each financial plans for unintended detours.

Business Roth IRA

Why are more businesses offering Roth 401(k)s? Simply put, more firms are recognizing their advantages – especially when it comes to the retirement planning of professionals, business owners and executives.

Tax-free growth. Roth 401(k) assets grow without being taxed, as employee contributions are made with after-tax dollars. When you withdraw the money in retirement, you don’t pay taxes on it - provided you’ve owned the account for 5+ years and are 59½ or older when you start withdrawing.

With this tax-free growth, a Roth 401(k) can help professionals, business owners and executives save more to get their retirement planning back on track.

No income limitations. Income limits prevent high-salaried individuals from having a Roth IRA. There are no income barriers preventing you from having a Roth 401(k).

No required withdrawals. You don’t have to withdraw money from a Roth 401(k) at age 70½, unlike with a traditional 401(k).

Higher contribution limits than a Roth IRA. How much can you put into a Roth IRA? In 2009, the answer is $5,000, $6,000 if you are 50 or older. How much can you put into a Roth 401(k)? Much more. For 2009, the contribution limit is $16,500 ($22,000 for those 50 or older).

A rollover option. If you leave a business where you have a Roth 401(k), you can roll the money over into a Roth IRA to maintain tax-free growth.

An especially tax-smart move. Keep in mind, the federal government recently decided to spend more than a trillion dollars it didn’t have. Taxpayers will probably bear the cost in the future – particularly the highest-earning taxpayers. The government also needs to fund Social Security and Medicare in coming years. So who knows how high tomorrow’s taxes may be.

What would you rather pay - today’s taxes or tomorrow’s taxes? With all this financial pressure on the government, the consensus is that tax rates will go up. So as you save for retirement, isn’t it wise to have a Roth 401(k) that will let you pay taxes on your retirement savings today, rather than tomorrow?

Join the trend. A 2008 Grant Thornton survey of 186 companies sponsoring retirement plans found that 22% offered Roth 401(k)s, up from 12% in 2007 - and 19% more said they were considering Roth 401(k)s. Employer matches can be made to these accounts with pre-tax dollars.

Is your business offering the Roth 401(k)? It may be time. Owners, executives and professionals are among the highest-earning Americans – the Americans who have the greatest need for their retirement savings to grow tax-free.

Wealth Management Potpourri

Retirement may look different than it has recently and maybe that's not so bad.

Inflation may be reaching a low for a short time and the Fed is ready to pump more if it doesn't.

It's really cool that some banks have paid back the TARP funds and quickly. Here's an opinion about some of the rest.

Carl at Behavior Gap makes a good point about the choices we have in front of us.

The Administrations new regulatory proposal is falling flat with many observers.

The active versus passive debate rages on and will likely continue for some time to come. Russ Thornton shares some thoughts on the book "The Myth of the Rational Market".

More thoughts on pending financial services regulatory reform.

Roth IRA Conversion Opportunity

In 2010, anyone may convert a traditional IRA to a Roth IRA. No income limits will stand in the way of the conversion. Should you do it? Here's why it may (or may not) make sense for you to go Roth next year.

Why you might want to consider it. A Roth IRA permits tax-free growth and tax-free income distributions in retirement (assuming you are age 59½ or older and have held your Roth account for 5 years or longer). You can contribute to a Roth IRA after age 70½, without having to take mandatory withdrawals. While contributions to a Roth IRA aren't tax-deductible, the younger you are, the more attractive a Roth IRA may seem.

However, older investors have reason to go Roth as well – especially if they don't really need to withdraw IRA assets. Under present tax law, converting an untapped traditional IRA to a Roth will shrink the size of your taxable estate, and careful estate planning could foster decades of tax-free growth for those IRA assets.

Currently, if you name your spouse as the beneficiary of your Roth IRA, your spouse can treat the inherited IRA as his or her own after you die and forego withdrawals. So those Roth IRA assets can keep compounding untaxed across the rest of your spouse's life.

If your spouse then names a son or daughter as a beneficiary, that heir has the choice to make minimum withdrawals according to his or her life expectancy, all while the assets continue to compound tax-free. Currently, withdrawals from an inherited Roth IRA are not subject to income tax.

Why you may want to think twice about it. The IRS regards a traditional IRA-to-Roth IRA conversion as a distribution from a traditional IRA – a taxable event. You'll need to pay taxes on the entire amount of the conversion. Do you have the money to do that?

Keep in mind, however: with the market down, many IRA values are lower than they have been for years. That translates to paying less tax on gains. It is also worth remembering that tax rates could increase in the years ahead – another reason why now may be a good time to convert. (You could simply do a partial Roth IRA conversion if converting the full amount would send you into a higher tax bracket.)

You may be tempted to use the current IRA assets to pay the conversion tax, but should you? If you're younger than 59½, you're looking at a 10% penalty on the amount you withdraw, and you'll lose the chance for tax-free compounding of those assets within the Roth IRA.

Why you might want to fund a Roth IRA this year.
In 2009, any withdrawals from a traditional IRA can be used to fund a Roth IRA. Interesting. Why is this so?

In years past, mandatory withdrawals from a traditional IRA typically couldn't be deposited into a Roth IRA. But the federal government has suspended mandatory IRA withdrawals for 2009. Any IRA withdrawals made in 2009 are thereby elective withdrawals. So, if your adjusted gross income (AGI) is $100,000 or less, you have an option to fund a Roth IRA with a withdrawal from a traditional IRA – at least through the end of 2009.

In 2009, you can fund a Roth IRA with after-tax contributions to a 401(k), 403(b) or 457 retirement savings plan.
This year, you can take those contributions and convert them to a Roth IRA tax-free, provided your AGI is $100,000 or less. More good news: there is no limit to the conversion amount.

A potential tax break for those who convert in 2010. If you do a Roth conversion during 2010, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns.

Be sure to consult your tax advisor before you convert. This is a very good idea before you arrange any rollover, trustee-to-trustee transfer, or same-trustee transfer of your IRA assets. In any year, you should fully understand the potential tax impact of a Roth conversion on your finances and your estate. Also, remember that while the income limit on Roth IRA conversions will go away in 2010, the income limits on Roth IRA contributions still apply next year and for the foreseeable future.

Medigap Coverage

Will you be 65 soon? If you're turning 65 in the next few months, you might consider getting a Medigap policy to supplement your Medicare coverage. Most people think Medicare covers more than it actually does.

For 2009, Medicare Part A gives you a $1,068 hospital deductible per stay; Medicare Part B asks you to pay 20% of physician, outpatient and home healthcare costs after a $135.00 deductible. With numbers like these, it's easy to see the value of Medigap coverage.

Are you in the GAP (guaranteed acceptance period)? The easiest time to qualify for Medigap coverage is right around 65 – specifically, the window of time starting three months before and ending six months after your 65th birthday. This is the "guaranteed acceptance" period, in which anybody with Medicare can get into a Medigap plan. Outside of this window of time, you need to be reasonably healthy to get Medigap coverage.

In most states, there are 12 Medigap plans offered - Medigap A through L. Plans A through J are the "traditional" plans; K and L are high-deductible plans and far less popular.

The A-J plans all offer you the same set of core benefits: 20% coinsurance after you pass the $135 Part B deductible, all Part A Hospital coinsurance for hospital stays between 61-150 days, 3 pints of blood (Parts A & B), and 365 more lifetime hospital days. While these basic benefits stay the same among Medigap plans offered through different companies, premiums differ quite a bit among insurance providers.²

Medicare Advantage plans. These private insurance plans are also called Part C plans, and they exist in different varieties - HMOs, PPOs, PFFSs (Private Fee-for-Service Plans), and MSAs (Medicare Savings Accounts). Plan members pay a percentage of the costs for medical services they receive, which means relatively low premiums.

By law, all Medicare Advantage plans are at least as wide-ranging as original Medicare, and many also provide coverage for drug costs. Most of these plans cap member payments at a certain level annually.³

Unfortunately, federal government subsidies on MA plans will shrink by as much as 5% in 2010, which will likely mean higher premiums and/or fewer benefits.

Read the fine print and shop around. Medigap coverage is not all the same, so be sure to compare and contrast Medigap plans.

What’s New Pussycat??????

When my wife wanted to go see Tom Jones recently I have to admit my excitement was not at a high level. After all, he is old now, or so I thought. During the performance I started seeing things in a new light however. At age 68 it is clear Tom Jones voice is still very strong and his energy level is higher than many of us usually display. While his trademark gyrations are a bit more geriatric now than years ago, the women in the audience young and less young, loved them just the same as evidenced by their screams and the occasional toss of some not often seen apparel onto the stage.

Watching the performance brought thoughts to mind once again that the idea of retirement can be too confining as modern society has been defining it. If you really have found something you like to do, as I believe Tom Jones has, why would you want to stop doing it? The notion of retirement is actually a fairly recent phenomenon. Age 65 for retirement originated in the late 1800's in Germany. The life expectancy for an average male at that time was the age of 47. That would be similar to working into our 70-80's today.

Being financial Independent provides the ability to follow your passions, whether they are economically positive or require monetary resources, seem to be a better course to follow than a paradigm established over 100 years ago that has not recognized the changing dynamics of how we live today. Targeting financial independence allows individuals to pursue the course best for them whether their passion is a life's work, a philanthropic cause, or any other pursuit

Because of my wife's encouragement I now count Tom Jones amongst some of my heroes. Someone that has the ability and freedom share his unique talents and abilities for his and our benefit. What can be cooler than that?

401(k) Borrowing Often a Bad Idea

While you might be able to borrow from a 401(k), that doesn't mean you should.
Yes, we are in a recession. Yes, times are tough. But borrowing from your 401(k) could prove highly detrimental to your financial health.

Some 401(k) plans will not even allow you to take a loan. Those that do commonly permit you to borrow up to 50% of your vested account balance or $50,000, whichever is less. How do you pay the money back? You pay it back (with interest) from future paychecks. How long have you got to pay it back? Usually, up to 5 years. If you use what you borrow to buy a home that will be your primary residence, you may be given longer to pay back the money.

But again, this doesn't mean you should. Here's why this idea belongs in the category of "last resort".

It could pressure you to reduce your 401(k) contributions.
You'll repay the loan out of your paychecks. Can you do that and continue to contribute to your 401(k)? If you have to lessen or cease 401(k) contributions as a consequence of this move, it could further hurt your retirement savings potential, especially if your company offers you a match on contributions.

If you can't repay the loan, it becomes a distribution. If you can't pay the money back within the time period allowed, it is considered a distribution, subject to federal and state income taxes. If you are younger than age 59½, you will face the usual 10% penalty for making a premature withdrawal from your retirement account on top of that.

If you lose your job, guess what: in most cases, you have to pay the loan back within 60 days, or it becomes a taxable distribution. Ow.

The money isn't tax-sheltered after you borrow it. Nor is the loan tax-deductible.

It works against the time value of money. In other words, compounding. One of the key tenets of investing is that money available to you now is worth more than money available to you in the future. Any money you put in a bank account or tax-advantaged investment account now has potential earning capacity – the capacity to grow and compound over time.

This is why we would all prefer to have, say, $20,000 to invest today rather than $20,000 to invest 30 years from now. If you wait 30 years to invest it, you will lose 30 years of time value. Additionally, that idle $20,000 will be worth less 30 years from now due to inflation.

If you borrow from your 401(k), you are working against the time value of money and the power of compounding. By removing assets from that tax-advantaged account, you are hindering its potential earning capacity.

Every 401(k) plan loan carries an opportunity cost. Years from now, you may have to reckon with some sobering questions – how much could those funds have earned if they were left inside the 401(k), and how much did they earn for you when you took them out of the 401(k)? Did the money you borrowed earn you a dime? Did you take on another debt using the money you borrowed?

Are you paying yourself interest? Think again. As you pay back a 401(k) plan loan, the 401(k) program puts the principal and interest back into your 401(k) account. So it looks like you are paying yourself interest. Technically, you are. But to pay that interest, you need to earn money (a salary) and pay income tax on what you've earned. You pay the interest on your loan with post-tax dollars. Guess what: when you withdraw those dollars from your 401(k) at retirement, they're taxed again (as taxable income). So in essence, those dollars are being taxed twice. (It must be noted that specific tax rules apply to Roth 401(k) contributions.)

Why harm your retirement fund? Borrowing from your 401(k) could amount to an injurious financial mistake, one that could haunt you for years. If the thought has crossed your mind, talk to your financial or tax advisor – there may be other ways to find the money you need.

Increasing Your Social Security Benefit

A couple of years ago, Boston University economics professor Laurence Kotlikoff publicized a mindblowing discovery: retirees could dramatically increase their Social Security checks by reapplying for Social Security benefits.

It was entirely legal; it was an opportunity that had lay unnoticed for years. It was soon discussed on National Public Radio and PBS, and in USA Today and a number of in financial magazines. Let's discuss it here.

Hit "restart" and reset your SSI. Everyone eventually applies for Social Security, but few people reapply – and that's the key to this strategy, which can potentially bring retired couples $1,000 or more in additional SSI per month. Kotlikoff calls it "restarting the Social Security clock". If you have retired within the last few years, it is a move worth considering.

You can start collecting Social Security benefits when you're first eligible, and then restart your payments at a higher rate later. You simply file Form SSA-521 (www.ssa.gov/online/ssa-521.pdf) to request a withdrawal of your Social Security application. After the SSA processes that form, you reapply for Social Security – and since you are older now than when you first applied, this time you will receive much higher payments.

For example, a 63-year-old individual who started Social Security benefits in 2008 at age 62 would have received a payout of $18,794 a year; waiting until age 66 or age 70 would have meant $25,732 or $35,250 annually for that person.

So if you feel you applied for Social Security too soon, this presents you with a remedy. As Kotlikoff noted in USA Today in 2008, a 70-year-old receiving $11,556 as a result of claiming early retirement benefits could reapply for Social Security benefits at age 70 and boost her standard of living by 14%. It would be like having an inflation-indexed annuity for about 40% less than the cost of a similar investment from an annuity provider.

What's the catch? You have to repay the Social Security benefits you have already received. But you don't have to pay interest on that money. Basically, you're repaying an interest-free loan from Uncle Sam.

Now if enough people do this, there is the risk that the federal government may say, "Wait a minute – look at all these people exploiting this opportunity." But very few retirees do.

If you do reapply, there's nothing fishy about it. Visit your local Social Security office (make an appointment by calling 1-800-772-1213). Bring Form SSA-521 with you, or ask for it and fill it out while you are there. Don't be surprised if the person on the other side of the desk doesn't know what you're talking about when you mention reapplying for benefits. So bring a copy of the formal SSA explanation (www.ssa.gov/OP_Home/handbook/handbook.15/handbook-1515.html ) with you.

Once you repay your benefits, you can restart them whenever you want. If you fill out Form SSA-521 and hand over a check repaying the money you've received, you can reapply for benefits right then and there – the request is routinely approved.

For the record, Form SSA-521 only allows you to check one of two boxes for why you want to reapply for benefits. The first is "I intend to continue working" and the other is "Other (please explain fully)". Mickie Douglas, a spokeswoman with the Social Security Administration, told Financial Advisor Magazine that it is entirely legitimate to write down that you are reapplying because it is "financially better for you".

What risks do I run by doing this? The big risk is that you could die soon after you repay your benefits – you could be out, say, $50,000 or $60,000 without living long enough to enjoy much of the additional income. But survivor benefits would be larger for your spouse, of course. Speaking of spouses, widows and widowers cannot employ this strategy to reapply for a deceased spouse's benefits.

Is this a good move for you? It might be. In case you are wondering, Kotlikoff is no hack - he holds a Harvard Ph.D. in economics and is a former member of the President's Council of Economic Advisors. He knows his stuff, and so should you. If you have the money to repay a lump sum equivalent to the benefits you have received, this may be a great move – but talk with your financial or tax advisor to see how this decision affects your overall financial strategy.

SEP IRA’s

Do you own a small business with a few employees? Are you self-employed? In either case, the SEP IRA may be the ideal low-cost, easily administered retirement savings plan for you.

This is a simple pension plan using a traditional IRA. (SEP stands for Simplified Employee Pension.) It lets you put aside money into individual IRAs for you and your employees, with lower administrative fees and less paperwork than other types of retirement plans.

Tax-deferred compounding of pre-tax dollars. You contribute pre-tax dollars to a SEP IRA, and that has the effect of lowering your tax bill. The money in the IRA grows tax-deferred, and your business doesn't pay any taxes on the IRA earnings. The assets can be invested in many ways.

The traditional IRA rules apply. When you take the money out of a SEP IRA for retirement, you pay ordinary income taxes on it. (Should you withdraw SEP IRA assets before age 59½, you'll likely be assessed a penalty, with some exceptions.)

Contributions are discretionary. Each year, you can contribute or not contribute to the IRA(s) involved. The amount you put into the IRA(s) can also vary.

In 2009, you can contribute up to 25% of an eligible employee's compensation, up to a limit of $49,000. No catch-up contributions are permitted for older employees.

A three-point employee eligibility test. Generally, employees of a small business are eligible for a SEP IRA if they 1) are older than 21, 2) have worked for the business in at least three of the five years preceding the year in which the IRA contribution is made, 3) have received $550 or more in compensation from the business in 2009 (this can rise with COLA adjustments in future years). However, the IRS states that an employer "may use less restrictive requirements to determine an eligible employee."

Employees covered by a union contract may be excluded from a SEP, as well as non-resident aliens who have not earned income from your business.

All eligible employees must participate in the SEP – including part-time and seasonal workers and employees who die, quit, or get laid off or fired during the year.

Are you self-employed? Assuming your business is unincorporated, you can contribute up to 20% of your net adjusted self-employment income to a SEP each year. If you have a bad year, you have the option of skipping your SEP contribution, and no penalty will come your way if you do.

Starting up a SEP IRA is easy. You can open up one of these plans with the help of almost any financial advisor or financial institution. In fact, you can even have other retirement plans at your business in addition to SEP IRAs, and you can set up a SEP IRA for your small business even if you are already participate in another retirement plan at another company.

Sole proprietors, partnerships, and corporations can all create SEPs. In fact, they may qualify for annual tax credits of up to $500 during the plan's first three years, which can be applied toward the plan's start-up costs.

Is It Time For a Roth Conversion?

Is it time for a break – that is, a tax break? With the stock market down 25-40% from its fall 2007 highs, it's certainly a time to consider converting your traditional IRA to a Roth IRA, especially if you're not planning on retiring soon.

You will pay a one-time tax on the conversion. (See below for one exception to this.) But with the market down, many IRA values are lower than they have been in years. So if you convert your deductible IRA to a Roth in 2009, it will almost certainly cost less than it would have in 2007 or 2005. The conversion will also allow you to have more flexibility with your money when you are ready to use it.

In 2009, you can fund a Roth IRA with distributions from a traditional IRA. In years past, you couldn't convert a Required Minimum Distribution (RMD) from a traditional IRA into a Roth IRA. You could convert any portion that was not part of the RMD. That is, if you withdrew more than the required amount from your traditional IRA, you could elect to convert the excess amount into a Roth, provided you were eligible to do so. Otherwise, you were prohibited from pouring cash from one IRA into the other.

However, the federal government has suspended mandatory IRA withdrawals for 2009. Since no one has to take an RMD from a traditional IRA this year, any traditional IRA withdrawals made during 2009 become elective. This year, any withdrawals from a traditional IRA can be used to fund a Roth IRA.

In 2009, you can fund a Roth IRA with after-tax contributions to a 401(k), 403(b) or 457 retirement savings plan. This year, you can take those contributions and convert them to a Roth IRA tax-free, provided your adjusted gross income is $100,000 or less. More good news: there is no limit to the conversion amount.

Are you eligible to make a Roth conversion? In 2009, you can make the conversion if your AGI is less than $100,000. In 2010, there will be no income limits – next year, anyone can convert a traditional IRA to a Roth IRA.

Are you eligible to contribute to a Roth IRA? In brief, individuals who make up to $120,000 and married couples who make up to $176,000 may contribute up to $5,000 to a Roth IRA in 2009 ($6,000 if they are past age 50).

The pros of a Roth conversion. A Roth IRA gives you two huge benefits: tax-free growth and tax-free income distributions in retirement (providing you are age 59½ or older and have held your Roth IRA account for 5 or more years). Additionally, you can still contribute to a Roth IRA after age 70½ - and you don't have to take mandatory withdrawals from it. These facts alone might motivate you, especially if you are in your thirties or forties.

A Roth IRA conversion can also be useful for older investors who don't need their IRA assets. If you don't think you'll need to tap your IRA, you might consider doing a Roth conversion and leaving the Roth IRA to your heirs. Untouched, those Roth IRA assets can keep compounding tax-free across the rest of your life (and subsequently, the rest of your surviving spouse's life). Here's another advantage: converting that untapped traditional IRA to a Roth will lower your taxable estate.

The cons of a Roth conversion. On the downside, the conversion does normally trigger a tax, and you'll need the money to pay it. You will pay tax on any earnings and pretax contributions in lieu of paying taxes upon subsequent withdrawals from the Roth IRA.

Don't think about using your current IRA assets to pay the conversion tax – if you're younger than 59½, you're looking at a 10% penalty on the amount you withdraw, and you'll throw away the chance for tax-free Roth IRA compounding of those assets. (If the amount you want to convert might send you into a higher tax bracket, you could simply do a partial Roth IRA conversion.)

You also don't want to do this if you think you'll drop into a much lower tax bracket after retirement. For example, if you're in the 25% federal tax bracket now and the numbers seem to indicate you'll be moving into the 15% bracket after you retire, you'll be paying income tax on the conversion at your current 25% rate. If you're moving down only a handful of percentage points (from, say, the 28% bracket to the 25% bracket), then it's a different story.

For the record, contributions to a Roth IRA aren't tax-deductible.

Your do-over option. Should the market perform poorly through 2010, you could reverse (or "re-characterize") your decision to convert your traditional IRA to a Roth IRA, which could end up dramatically lowering your taxes on the Roth conversion. The recharacterization deadline on 2009 Roth conversions is October 15, 2010.

Talk to your CPA or tax advisor before you make a move. Keep in mind that the tax code isn't exactly set in stone right now, and who knows what will happen with parts of the tax code after 2010. So consult your CPA or tax advisor before arranging any rollover, trustee-to-trustee transfer, or same-trustee transfer of your IRA assets.

Long Term Care Insurance

How will you pay for long term care? The sad fact is that most people don't know the answer to that question. But a solution is available.

As baby boomers leave their careers behind, long term care insurance will become very important in their financial strategies. The reasons to get an LTC policy after age 50 are very compelling.

Your premium payments buy you access to a large pool of money which can be used to pay for long term care costs. By paying for LTC out of that pool of money, you can preserve your retirement savings and income.

The cost of assisted living or nursing home care alone could motivate you to pay the premiums. AARP and Genworth Financial conduct an annual Cost of Care Survey to gauge the price of long term care. The 2008 survey found that

• The national average annual cost of a private room in a nursing home is $76,460 - $209 per day, and 17% higher than it was in 2004.
  
• A private one-bedroom unit in an assisted living facility averages $36,090 annually – and that is 25% higher than it was in 2004.
  
• The average annual payments to a non-Medicare certified, state-licensed home health aide are $43,884.
  

Can you imagine spending an extra $30-80K out of your retirement savings in a year? What if you had to do it for more than one year?

AARP notes that approximately 60% of people over age 65 will require some kind of long term care during their lifetimes.

Why procrastinate? The earlier you opt for LTC coverage, the cheaper the premiums. This is why many people purchase it before they retire. Those in poor health or over the age of 80 are frequently ineligible for coverage.

What it pays for. Some people think LTC coverage just pays for nursing home care. Not true: it can pay for a wide variety of nursing, social, and rehabilitative services at home and away from home, for people with a chronic illness or disability or people who just need assistance bathing, eating or dressing.

Choosing a DBA. That stands for Daily Benefit Amount, which is the maximum amount your LTC plan will pay for one day's care in a nursing home facility. You can choose a Daily Benefit Amount when you pay for your LTC coverage, and you can also choose the length of time that you may receive the full DBA every day. The DBA typically ranges from a few dozen dollars to hundreds of dollars. Some of these plans offer you "inflation protection" at enrollment, meaning that every few years, you will have the chance to
buy additional coverage and get compounding - so your pool of money can grow.

The Medicare misconception. Too many people think Medicare will pick up the cost of long term care. Medicare is not long term care insurance.
Medicare will only pay for the first 100 days of nursing home care, and only if 1) you are receiving skilled care and 2) you go into the nursing home right after a hospital stay of at least 3 days. Medicare also covers limited home visits for skilled care, and some hospice services for the terminally ill. That's all.

Now, Medicaid can actually pay for long term care – if you are destitute. Are you willing to wait until you are broke for a way to fund long term care? Of course not. LTC insurance provides a way to do it.

Why not look into this? You may have heard that LTC insurance is expensive compared with some other forms of policies. But the annual premiums (about as much as you'd spend on a used car from the mid-1990s) are nothing compared to real-world LTC costs.