George Burns summed it up well when he joked that had he known he was going to live to be 100, he would have taken better care of himself. Never has a punch line more profoundly put the aging process in the proper perspective.
Anyone who is 40 years of age today could live to be 100 years old and their grandchildren could live even longer than that. Many people express a reluctance to examine this possibility for fear they will outlive their assets.
There are many software programs that can help you determine how much money you will need in retirement and can take into consideration living perhaps another 30 years or more after retirement. These programs analyze current assets and assign a projected growth rate, based on historical data, on different classes of assets. Many of these programs allow you to run several thousand models using different rates of return on each class of assets. They are, of course, just projections.
It is interesting to note that a good return in the early years of retirement can add significantly to total assets. If, in the early years of retirement, the return was negative you may never be able to recover. Generally the higher balances in the early years are necessary to generate sufficient funds to support the draw down in subsequent years.
For example: let's assume stocks increase 9.3% per year over the next ten years. If "Ted" had $100,000 and was taking out $10,000 per year to supplement his income, in 10 years the balance would be $89,211. This is of course assuming a flat 9.3% increase per year when dealing with stocks.
If the return on average is 9.3% but most of the good returns were achieved in the first five years (while the balance was higher) the balance would be much different than the $89,211 mentioned above. If the good returns over the first five years were as follows: +30%, +25%, +20%, +15% and +10% and assuming the second five year returns were: +7%, +1%, 0% and -10%, the balance at the end of ten years would be $120,540. The returns over the ten years still averaged 9.3% per year.
If the better returns on Ted's assets were in the last five years instead of the first five years, the balance at the end of the ten years would be significantly different. Let's assume the returns in the first five years were as follows: -10%, -5%, 0%, +1%, and +7%, and the second five years were: +10%, +15%, +20%, +25%, and +30%. The balance at the end of the ten years would be $17,049. Thus you see the vast difference in the dollars left after ten years.
With a flat 9.3% each year, the balance was $89,211. With good returns in the first five years, the balance was $120,540, with an average annual return of 9.3%, and with the better returns in the last five years, still averaging 9.3% annually, the balance was $17,049.
Obviously we cannot predict with any certainty when good or poor investment returns will occur. It is, however, for most of us, important to continue to fully fund as much as possible for retirement while you can. This includes making full contributions to an IRA and any corporate plans you may be participating in. No matter what happens in the market, it is always better to start with a higher account balance.
Make sure you talk to a competent, educated financial advisor about all of your retirement assets.
Tuesday, December 1, 2009
Tuesday, November 17, 2009
IRS Grants Relief
What is keeping you up at night?
The Worker, Retiree, and Employer Recovery Act of 2008 signed into law on December 23, 2008 suspended required minimum distributions (RMDs) for 2009 for IRA owners and beneficiaries of inherited IRAs. Since this Act came out late in the year, many individuals received distributions and were not able to roll them over timely due to confusion over the rules.
On September 24, 2009 the IRS issued Notice 2009-82 allowing IRA owners to put back unwanted RMDs for 2009.
Generally an RMD is not eligible to be rolled over to an IRA. Because there are no RMDs for 2009, any money taken out that would have been an RMD could be rolled over to an IRA or rolled back into the same IRA. Prior to IRS Notice 2009-82 an individual had 60 days to put rollover eligible distributions into an IRA after receipt. IRS Notice 2009-82 extended the 60 day rollover period and allows an individuals to put back the funds into an IRA up to November 30, 2009.
This extension does not apply to amounts in excess of what would have been the 2009 RMD amount if there were RMDs in 2009. It also does not apply to IRA beneficiaries. A non-spouse beneficiary can never do a 60-day rollover.
Another IRS regulation states that you can only do one rollover from any one IRA per 12 months and that rule is unchanged. For example, an individual that was taking monthly or quarterly distributions for their RMD in 2009 could only do a rollover for one of those distributions under this relief. No more than one distribution per IRA, per year will be eligible for a rollover. If an individual did a rollover of any distributed amounts already this year, they cannot do another rollover for the RMD amount.
November 30, 2009 is fast approaching, so time is of the essence for these individuals to rollover what they thought was an RMD for 2009. If the money is rolled over there would be no income tax due on that amount.
SCENARIO:
Ryan took what he thought was a required minimum distribution in 2009 and wanted to roll over those funds to an IRA. He went to this financial advisor in late September, approximately three months after taking the distribution, and the financial advisor told him he was out of luck.
According to the financial advisor, Ryan had missed the 60-day rollover window and the opportunity to move that money into an IRA. However, Ryan's financial advisor wasn't up to speed on the latest IRA tax rulings and didn't know that IRS Notice 2009-82 extended the 60-day rollover period until November 30, 2009.
If Ryan is reading this piece (whoever Ryan is) -- I suggest changing financial advisors in a hurry or printing out a copy of this article and bringing it in for a quick lesson in current IRA events.
This just illustrates the importance of working with an educated, competent financial advisor. Make sure your financial advisor is current on the lates IRA rules and tax law changes and ask the following questions:
The Worker, Retiree, and Employer Recovery Act of 2008 signed into law on December 23, 2008 suspended required minimum distributions (RMDs) for 2009 for IRA owners and beneficiaries of inherited IRAs. Since this Act came out late in the year, many individuals received distributions and were not able to roll them over timely due to confusion over the rules.
On September 24, 2009 the IRS issued Notice 2009-82 allowing IRA owners to put back unwanted RMDs for 2009.
Generally an RMD is not eligible to be rolled over to an IRA. Because there are no RMDs for 2009, any money taken out that would have been an RMD could be rolled over to an IRA or rolled back into the same IRA. Prior to IRS Notice 2009-82 an individual had 60 days to put rollover eligible distributions into an IRA after receipt. IRS Notice 2009-82 extended the 60 day rollover period and allows an individuals to put back the funds into an IRA up to November 30, 2009.
This extension does not apply to amounts in excess of what would have been the 2009 RMD amount if there were RMDs in 2009. It also does not apply to IRA beneficiaries. A non-spouse beneficiary can never do a 60-day rollover.
Another IRS regulation states that you can only do one rollover from any one IRA per 12 months and that rule is unchanged. For example, an individual that was taking monthly or quarterly distributions for their RMD in 2009 could only do a rollover for one of those distributions under this relief. No more than one distribution per IRA, per year will be eligible for a rollover. If an individual did a rollover of any distributed amounts already this year, they cannot do another rollover for the RMD amount.
November 30, 2009 is fast approaching, so time is of the essence for these individuals to rollover what they thought was an RMD for 2009. If the money is rolled over there would be no income tax due on that amount.
SCENARIO:
Ryan took what he thought was a required minimum distribution in 2009 and wanted to roll over those funds to an IRA. He went to this financial advisor in late September, approximately three months after taking the distribution, and the financial advisor told him he was out of luck.
According to the financial advisor, Ryan had missed the 60-day rollover window and the opportunity to move that money into an IRA. However, Ryan's financial advisor wasn't up to speed on the latest IRA tax rulings and didn't know that IRS Notice 2009-82 extended the 60-day rollover period until November 30, 2009.
If Ryan is reading this piece (whoever Ryan is) -- I suggest changing financial advisors in a hurry or printing out a copy of this article and bringing it in for a quick lesson in current IRA events.
This just illustrates the importance of working with an educated, competent financial advisor. Make sure your financial advisor is current on the lates IRA rules and tax law changes and ask the following questions:
- Has the IRS come out with any recent provisions changing the existing law?
- What is the proper timeline for making the changes I need made to my retirement account?
- How will this affect me?
Tuesday, November 3, 2009
Advisor Mistakes Can Be Very Costly To Their Clients
Earlier this year the Financial Industry Regulatory Authority (FINRA) announced that it has fined a major investment company $3 million and ordered it to pay more than $4.2 million in restitution.
Two former registered representatives in its Rochester, NY branch office apparently persuaded Eastman Kodak and Xerox corporation employees to take early retirement based upon unrealistic promises of consistently high investment returns and by espousing unsuitable investment strategies.
FINRA said “at least 184 customers suffered financial hardships, including market losses, a reduction in principal, and the inability to sustain expected withdrawal rates. In many cases, the customer’s initial investment was eroded by market declines and the customer’s monthly withdrawals were not funded by income but were really distributions of principal. Some customers were forced to return to work at a greatly reduced income in order to meet their basic living expenses.”
We always stress the importance of dealing with a competent advisor and an advisor that has been trained in distributions from qualified retirement plans and IRAs. On our web site www.irahelp.com, click on Find an Advisor, and you will find a list of competent advisors in your area that have been trained by Ed Slott & Co. on all the current rules on distributions and traditional and Roth IRAs. A comfortable retirement starts with accurate IRA advice.
Another type of scheme is ensnaring many small businesses. One of them is a radio personality. We’ll call him I.M. Caught. Mr. Caught’s accountant recommended a way to reduce his taxes. The plan went like this:
Mr. Caught would create a corporation and the money he makes from speeches, appearances and endorsements, above what he earned as a radio personality, would go into that corporation. He would open a Roth IRA that would invest in the corporation and pay any corporate profits into the Roth IRA. The problem is, Mr. Caught could only contribute $5,000 a year to a Roth IRA.
The IRS had previously issued a warning about using Roth IRAs as tax shelters and added it to its listed transaction list. The IRS argued that Mr. Caught’s Roth IRA violated that warning. The IRS proposed $400,000 in fines to his corporation and $100,000 against him personally. This case is now in the IRS appeal process.
Mr. Caught saved less than $1,000 in taxes. This will be a very expensive piece of advice
If a transaction doesn’t sound or feel right it probably isn’t.
Two former registered representatives in its Rochester, NY branch office apparently persuaded Eastman Kodak and Xerox corporation employees to take early retirement based upon unrealistic promises of consistently high investment returns and by espousing unsuitable investment strategies.
FINRA said “at least 184 customers suffered financial hardships, including market losses, a reduction in principal, and the inability to sustain expected withdrawal rates. In many cases, the customer’s initial investment was eroded by market declines and the customer’s monthly withdrawals were not funded by income but were really distributions of principal. Some customers were forced to return to work at a greatly reduced income in order to meet their basic living expenses.”
We always stress the importance of dealing with a competent advisor and an advisor that has been trained in distributions from qualified retirement plans and IRAs. On our web site www.irahelp.com, click on Find an Advisor, and you will find a list of competent advisors in your area that have been trained by Ed Slott & Co. on all the current rules on distributions and traditional and Roth IRAs. A comfortable retirement starts with accurate IRA advice.
Another type of scheme is ensnaring many small businesses. One of them is a radio personality. We’ll call him I.M. Caught. Mr. Caught’s accountant recommended a way to reduce his taxes. The plan went like this:
Mr. Caught would create a corporation and the money he makes from speeches, appearances and endorsements, above what he earned as a radio personality, would go into that corporation. He would open a Roth IRA that would invest in the corporation and pay any corporate profits into the Roth IRA. The problem is, Mr. Caught could only contribute $5,000 a year to a Roth IRA.
The IRS had previously issued a warning about using Roth IRAs as tax shelters and added it to its listed transaction list. The IRS argued that Mr. Caught’s Roth IRA violated that warning. The IRS proposed $400,000 in fines to his corporation and $100,000 against him personally. This case is now in the IRS appeal process.
Mr. Caught saved less than $1,000 in taxes. This will be a very expensive piece of advice
If a transaction doesn’t sound or feel right it probably isn’t.
Wednesday, October 14, 2009
A Simple Question
This is a story that demonstrates how dealing with a competent financial advisor can potentially save you thousands of dollars.
Sam Smith recently retired from a Fortune 500 Company at age 65. He had many concerns about retirement and contacted a financial advisor. One of the larger issues he was concerned about was his 401(k) plan that had a balance of well over $1 million. The financial advisor recommended that he roll over his 401(k) plan to an IRA rollover. By doing this, the advisor indicated that no income tax would be due and the money going into the IRA would continue to be tax deferred just as it was in the 401(k) plan. So far, so good.
However, the advisor never asked the question: Do you own any stock in your 401(k) plan that is stock of your employer? This should have been the first question asked by the advisor.
There is a little known provision in the tax code called Net Unrealized Appreciation of Employer Stock. The code gives special favorable treatment to distributions of employer securities referred to as "employer stock." These "securities" could be stock or bonds held in a qualified plan.
Under certain circumstances, the "net unrealized appreciation" (NUA) inherent in the stock is excluded from the employee's gross income at the time the securities are distributed to the employee. NUA is the excess of the stock's fair market value at the time of the distribution over the basis (cost to the plan) of the stock. When the stock is later sold, the NUA is taxed as a long-term capital gain; regardless of how long the plan participant (or the plan) actually held the stock. Currently, the long-term capital gain tax is 15%. Any appreciation in the stock after receipt from the plan would have to be held for one year to receive long-term capital gain treatment. In order to qualify for the NUA tax benefit, there must be a lump-sum distribution of the entire balance in the plan in one tax year.
Sam owned 10,000 shares of his employer's stock in his 401(k) plan at the time he retired from the company. He could have taken the 10,000 shares of the company stock out (as an in-kind distribution) and had it registered in his own name or simply put it in a brokerage account. All the rest of the balance could have gone into an IRA rollover or he could have taken it out. Sam could have decided to take any amount of shares out and rolled over the rest of the shares to his IRA or have them sold in the plan before rolling over to an IRA.
Because his advisor never asked the question, he did not take advantage of the NUA. If Sam now sells the stock in the IRA and withdraws the proceeds of the $700,000, his tax liability would be $245,000 ($700,000 x 35%). That's $80,000 more than if he had taken advantage of NUA.
This happened because the advisor didn't ask the one simple question: IS THERE ANY COMPANY STOCK IN YOUR 401(K) PLAN?
Tips to held you avoid what happened to Sam Smith:
Sam Smith recently retired from a Fortune 500 Company at age 65. He had many concerns about retirement and contacted a financial advisor. One of the larger issues he was concerned about was his 401(k) plan that had a balance of well over $1 million. The financial advisor recommended that he roll over his 401(k) plan to an IRA rollover. By doing this, the advisor indicated that no income tax would be due and the money going into the IRA would continue to be tax deferred just as it was in the 401(k) plan. So far, so good.
However, the advisor never asked the question: Do you own any stock in your 401(k) plan that is stock of your employer? This should have been the first question asked by the advisor.
There is a little known provision in the tax code called Net Unrealized Appreciation of Employer Stock. The code gives special favorable treatment to distributions of employer securities referred to as "employer stock." These "securities" could be stock or bonds held in a qualified plan.
Under certain circumstances, the "net unrealized appreciation" (NUA) inherent in the stock is excluded from the employee's gross income at the time the securities are distributed to the employee. NUA is the excess of the stock's fair market value at the time of the distribution over the basis (cost to the plan) of the stock. When the stock is later sold, the NUA is taxed as a long-term capital gain; regardless of how long the plan participant (or the plan) actually held the stock. Currently, the long-term capital gain tax is 15%. Any appreciation in the stock after receipt from the plan would have to be held for one year to receive long-term capital gain treatment. In order to qualify for the NUA tax benefit, there must be a lump-sum distribution of the entire balance in the plan in one tax year.
Sam owned 10,000 shares of his employer's stock in his 401(k) plan at the time he retired from the company. He could have taken the 10,000 shares of the company stock out (as an in-kind distribution) and had it registered in his own name or simply put it in a brokerage account. All the rest of the balance could have gone into an IRA rollover or he could have taken it out. Sam could have decided to take any amount of shares out and rolled over the rest of the shares to his IRA or have them sold in the plan before rolling over to an IRA.
Because his advisor never asked the question, he did not take advantage of the NUA. If Sam now sells the stock in the IRA and withdraws the proceeds of the $700,000, his tax liability would be $245,000 ($700,000 x 35%). That's $80,000 more than if he had taken advantage of NUA.
This happened because the advisor didn't ask the one simple question: IS THERE ANY COMPANY STOCK IN YOUR 401(K) PLAN?
Tips to held you avoid what happened to Sam Smith:
- Always consider company stock in a 401(k) plan.
- Check to see if there has been any appreciation from the cost basis to the current market value.
- Take advantage of the NUA for all or perhaps some of the company stock.
- You also want to consider your total holding of your company stock outside the plan; you always want to ensure your portfolio is diversified.
Thursday, September 24, 2009
Retirement Fears Stories
For those just reading these stories for the first time -- Retirement Fears is a collection of advisor-consumer horror stories with fictional names but real-life problems. Each story illustrates the necessity of working with a competent, education financial advisor.
We hope you learn something from the stories posted on this blog, and always make sure you are keeping your retirement nest eggs safe and secure.
We hope you learn something from the stories posted on this blog, and always make sure you are keeping your retirement nest eggs safe and secure.
Living Trusts, Dead IRAs
“Sylvia” and “Robert” have been married for nearly 50 years and are each 74 years old. Although the couple's estate is worth well over $5,000,000, it wasn't until a recent health scare that they decided to take action and do some planning. With not even a simple will prepared, it was clear to them where to start – with an estate planning attorney of course!
With no previous planning done and no documents in place, there was a lot of work to be done. In fact, by the time they had finished the meeting, the attorney had recommended drafting no less than 8 documents. Sylvia and Robert would each have their own will, power of attorney, living wills and living trust. Upon the conclusion of the meeting, it was decided that they would meet again the following week to review the documents and go over the final recommendations. The following week, the three met as planned. As the attorney finished reviewing documents, he turned towards Sylvia and Robert. "Remember," he said, "your living trusts only work if you fund them." He encouraged each of them to take whatever checking, savings, brokerage and IRA accounts they had in their own names and gift them into their own trusts (this is commonly done by listing the assets on a schedule attached to the trust and by retitling the accounts in the name of the trust). Heeding this advice, Robert and Sylvia spent the much of the following week retitling their assets, including both their IRAs.
In February of the following year, while preparing their tax return, their accountant noticed two 1099-Rs, one from each of their IRAs – and each showed that the entire account was distributed! When he asked Sylvia and Robert about this they were baffled. They hadn't taken all the money out of their IRAs. In fact, other than their required distribution, they hadn't received any money from the accounts at all. They were at a loss. Was it the bank's mistake? Some rule they didn't know about? Perhaps identity theft?
Unfortunately for Sylvia and Robert, there was a mistake, but it wasn't made by the bank. Unlike most types of assets, IRAs cannot be “owned” by a trust. Assets like real estate or non retirement accounts can be retitled in the name a living trust without triggering taxes – but if you do it with an IRA… …well, you no longer have an IRA to worry about. You're left with a regular, trust-owned account and the entire amount is taxable. For example, if Sylvia and Robert's IRAs were each worth $500,000 (total of $1,000,000) the instant the accounts were titled as a trust accounts, they now had no IRAs and owed income tax on $1,000,000.
With increasing amounts of people choosing to use living trusts as an estate planning vehicle, situations like this one are happening more and more often. Here are some steps you can take to avoid ending up like Sylvia and Robert.
1) NEVER retitle an IRA to the name of your trust (unless you no longer need the IRA and want to pay the income tax).
2) Don't confuse a trust being the beneficiary of the IRA when you die with "owning" (or controlling) it while you are alive. Trusts as IRA beneficiaries can be very useful if the right situations are present.
3) If you have made this mistake within the last 60 days, see an advisor who specializes in this area IMMEDIATELY. If you act quickly, there may be a chance to save your IRA and prevent unnecessary taxation.
4) When dealing with IRAs, make sure to work with advisors who specialize in this area. And that doesn't just mean your financial advisors! Some of the most important advice you may receive could come from an attorney or CPA. Wouldn't you want them to have this knowledge too?
With no previous planning done and no documents in place, there was a lot of work to be done. In fact, by the time they had finished the meeting, the attorney had recommended drafting no less than 8 documents. Sylvia and Robert would each have their own will, power of attorney, living wills and living trust. Upon the conclusion of the meeting, it was decided that they would meet again the following week to review the documents and go over the final recommendations. The following week, the three met as planned. As the attorney finished reviewing documents, he turned towards Sylvia and Robert. "Remember," he said, "your living trusts only work if you fund them." He encouraged each of them to take whatever checking, savings, brokerage and IRA accounts they had in their own names and gift them into their own trusts (this is commonly done by listing the assets on a schedule attached to the trust and by retitling the accounts in the name of the trust). Heeding this advice, Robert and Sylvia spent the much of the following week retitling their assets, including both their IRAs.
In February of the following year, while preparing their tax return, their accountant noticed two 1099-Rs, one from each of their IRAs – and each showed that the entire account was distributed! When he asked Sylvia and Robert about this they were baffled. They hadn't taken all the money out of their IRAs. In fact, other than their required distribution, they hadn't received any money from the accounts at all. They were at a loss. Was it the bank's mistake? Some rule they didn't know about? Perhaps identity theft?
Unfortunately for Sylvia and Robert, there was a mistake, but it wasn't made by the bank. Unlike most types of assets, IRAs cannot be “owned” by a trust. Assets like real estate or non retirement accounts can be retitled in the name a living trust without triggering taxes – but if you do it with an IRA… …well, you no longer have an IRA to worry about. You're left with a regular, trust-owned account and the entire amount is taxable. For example, if Sylvia and Robert's IRAs were each worth $500,000 (total of $1,000,000) the instant the accounts were titled as a trust accounts, they now had no IRAs and owed income tax on $1,000,000.
With increasing amounts of people choosing to use living trusts as an estate planning vehicle, situations like this one are happening more and more often. Here are some steps you can take to avoid ending up like Sylvia and Robert.
1) NEVER retitle an IRA to the name of your trust (unless you no longer need the IRA and want to pay the income tax).
2) Don't confuse a trust being the beneficiary of the IRA when you die with "owning" (or controlling) it while you are alive. Trusts as IRA beneficiaries can be very useful if the right situations are present.
3) If you have made this mistake within the last 60 days, see an advisor who specializes in this area IMMEDIATELY. If you act quickly, there may be a chance to save your IRA and prevent unnecessary taxation.
4) When dealing with IRAs, make sure to work with advisors who specialize in this area. And that doesn't just mean your financial advisors! Some of the most important advice you may receive could come from an attorney or CPA. Wouldn't you want them to have this knowledge too?
Wednesday, September 2, 2009
Tax-Free Conversion From Loss
Sometimes planning is more about making the best of a bad situation than anything else. It’s in these “bad” times that the value an advisor can have is really able to shine through. The tale of “Bill” is an excellent example of this theory at work.
In early 2008, Bill decided that he had been an employee at his Internet technology company for long enough. After 20 plus years on the job, Bill believed that he had the knowledge, relationships and financial wherewithal to do it himself – and to do it better. So after talking it over with his family, he decided it was time to start his own company.
Well… Bill was blessed with many things, but timing was certainly not one of them. Just months after branching out on his own, the stock market crashed and took the economy down with it. Established companies were struggling to keep longstanding clients, so a new startup like Bill’s was pretty much doomed before it even started. By the end of November, Bill was already in the red $75,000! To make matters worse, his old employer had fallen on hard times as well and Bill’s old job was no longer available.
Needless to say, when Bill and I met in early December he was feeling pretty down. Although he had found another job, he was still going to have a loss of almost $70,000 for the year. But that loss didn’t have to become a “total loss.” You see, over the years Bill had accumulated several hundred thousand dollars in his old employer’s 401(k) plan. Now that he was no longer employed there, he had access to that money to do whatever he wished. Although Bill had always liked the idea of a Roth IRA, his high income and low desire to pay the tax on the conversion had prevented him from doing so. Now, in one fell swoop, both problems were solved.
Bill’s loss left no doubt that his income would fall below the $100,000 conversion limit in place (repealed in 2010). Plus, after adding his exemptions and deductions to his loss, we were able to convert almost $85,000 of Bill’s tax-deferred 401(k) to income tax-free Roth IRA money – and without paying one penny of tax!!!
Sure, no one wants to have the kind of year that Bill did. But many times your success in retirement is not determined by the decisions you make during the good times, but the ones that you make during the tough times. You know the old expression - when life hands you lemons, make lemonade – well that’s the attitude you have to take with your financial life as well.
Here are a few tips you can use when times get tough to make sure you make the most of any situation:
1) Take the long view. Remember, anything worth having takes a long time to achieve. Try not to think too much about today, tomorrow, next month or even next year. Instead, try to focus on the long-term goal of a happy, healthy retirement.
2) Before making any financial decision, way all the options carefully. Ask yourself what’s likely to happen, the best that could happen and the worst that could happen. If you’re okay with all three answers, then it’s probably OK to move forward.
3) Make sure to work with an advisor who has specialized knowledge in the retirement area. Remember, a good advisor will provide value in ALL times, not just the good ones.
In early 2008, Bill decided that he had been an employee at his Internet technology company for long enough. After 20 plus years on the job, Bill believed that he had the knowledge, relationships and financial wherewithal to do it himself – and to do it better. So after talking it over with his family, he decided it was time to start his own company.
Well… Bill was blessed with many things, but timing was certainly not one of them. Just months after branching out on his own, the stock market crashed and took the economy down with it. Established companies were struggling to keep longstanding clients, so a new startup like Bill’s was pretty much doomed before it even started. By the end of November, Bill was already in the red $75,000! To make matters worse, his old employer had fallen on hard times as well and Bill’s old job was no longer available.
Needless to say, when Bill and I met in early December he was feeling pretty down. Although he had found another job, he was still going to have a loss of almost $70,000 for the year. But that loss didn’t have to become a “total loss.” You see, over the years Bill had accumulated several hundred thousand dollars in his old employer’s 401(k) plan. Now that he was no longer employed there, he had access to that money to do whatever he wished. Although Bill had always liked the idea of a Roth IRA, his high income and low desire to pay the tax on the conversion had prevented him from doing so. Now, in one fell swoop, both problems were solved.
Bill’s loss left no doubt that his income would fall below the $100,000 conversion limit in place (repealed in 2010). Plus, after adding his exemptions and deductions to his loss, we were able to convert almost $85,000 of Bill’s tax-deferred 401(k) to income tax-free Roth IRA money – and without paying one penny of tax!!!
Sure, no one wants to have the kind of year that Bill did. But many times your success in retirement is not determined by the decisions you make during the good times, but the ones that you make during the tough times. You know the old expression - when life hands you lemons, make lemonade – well that’s the attitude you have to take with your financial life as well.
Here are a few tips you can use when times get tough to make sure you make the most of any situation:
1) Take the long view. Remember, anything worth having takes a long time to achieve. Try not to think too much about today, tomorrow, next month or even next year. Instead, try to focus on the long-term goal of a happy, healthy retirement.
2) Before making any financial decision, way all the options carefully. Ask yourself what’s likely to happen, the best that could happen and the worst that could happen. If you’re okay with all three answers, then it’s probably OK to move forward.
3) Make sure to work with an advisor who has specialized knowledge in the retirement area. Remember, a good advisor will provide value in ALL times, not just the good ones.
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