Roth IRA

10 Years and Counting: Points to Consider as You Approach Retirement

If you're a decade or so away from retirement, you've probably spent at least some time thinking about this major life change. How will you manage the transition? Will you travel, take up a new sport or hobby, or spend more time with friends and family? Should you consider relocating? Will you continue to work in some capacity? Will changes in your income sources affect your standard of living?

When you begin to ponder all the issues surrounding the transition, the process can seem downright daunting. However, thinking about a few key points now, while you still have years ahead, can help you focus your efforts and minimize the anxiety that often accompanies the shift.

Reassess your living expenses

A step you will probably take several times between now and retirement--and maybe several more times thereafter--is thinking about how your living expenses could or should change. For example, while commuting and other work-related costs may decrease, other budget items may rise. Health-care costs, in particular, may increase as you progress through retirement.

Try to estimate what your monthly expense budget will look like in the first few years after you stop working. And then continue to reassess this budget as your vision of retirement becomes reality.

According to a recent survey, 38% of retirees said their expenses were higher than they expected. Keeping a close eye on your spending in the years leading up to retirement can help you more accurately anticipate your budget during retirement.

Consider all your income sources

First, figure out how much you stand to receive from Social Security. In early 2016, the average monthly retirement benefit was about $1,300. The amount you receive will depend on your earnings history and other unique factors. You can elect to receive retirement benefits as early as age 62, however, doing so will result in a reduced benefit for life. If you wait until your full retirement age (66 or 67, depending on your birth date) or later (up to age 70), your benefit will be higher. The longer you wait, the larger it will be.

You can get an estimate of your retirement benefit at the Social Security Administration website, ssa.gov. You can also sign up for a my Social Security account to view your online Social Security statement, which contains a detailed record of your earnings and estimates for retirement, survivor, and disability benefits. Your retirement benefit estimates include amounts at age 62, full retirement age, and age 70. Check your statement carefully and address any errors as soon as possible.

Next, review the accounts you've earmarked for retirement income, including any employer benefits. Start with your employer-sponsored plan, and then consider any IRAs and traditional investment accounts you may own. Try to estimate how much they could provide on a monthly basis. If you are married, be sure to include your spouse's retirement accounts as well. If your employer provides a traditional pension plan, contact the plan administrator for an estimate of that monthly benefit amount as well.

Do you have rental income? Be sure to include that in your calculations. Might you continue to work? Some retirees find that they are able to consult, turn a hobby into an income source, or work part-time. Such income can provide a valuable cushion that helps retirees postpone tapping their investment accounts, giving the assets more time to potentially grow.

Some other ways to generate extra cash during retirement include selling gently used goods (such as furniture or designer accessories), pet sitting, and participating in the sharing economy--e.g., using your car as a taxi service.

Pay off debt, power up your savings

Once you have an idea of what your possible expenses and income look like, it's time to bring your attention back to the here and now. Draw up a plan to pay off debt and power up your retirement savings before you retire.

Why pay off debt? Entering retirement debt-free--including paying off your mortgage--will put you in a position to modify your monthly expenses in retirement if the need arises. On the other hand, entering retirement with a mortgage, loan, and credit-card balances will put you at the mercy of those monthly payments. You'll have less of an opportunity to scale back your spending if necessary.

Why power up your savings? In these final few years before retirement, you're likely to be earning the highest salary of your career. Why not save and invest as much as you can in your employer-sponsored retirement savings plan and/or IRAs? Aim for maximum allowable contributions. And remember, if you're 50 or older, you can take advantage of catch-up contributions, which enable you to contribute an additional $6,000 to your 401(k) plan and an extra $1,000 to your IRA in 2016.

Manage taxes

As you think about when to tap your various resources for retirement income, remember to consider the tax impact of your strategy. For example, you may want to withdraw money from your taxable accounts first to allow your employer-sponsored plans and IRAs more time to potentially benefit from tax-deferred growth. Keep in mind, however, that generally you are required to begin taking minimum distributions from tax-deferred accounts in the year you turn age 70½, whether or not you actually need the money. (Roth IRAs are an exception to this rule.)

If you decide to work in retirement while receiving Social Security, understand that income you earn may result in taxable benefits. IRS Publication 915 offers a worksheet to help you determine whether any portion of your Social Security benefit is taxable.

If leaving a financial legacy is a goal, you'll also want to consider how estate taxes and income taxes for your heirs figure into your overall decisions.

Managing retirement income to result in the best possible tax scenario can be extremely complicated. Qualified tax and financial professionals can provide valuable insight and guidance.

Account for health care

In 2015, the Employee Benefit Research Institute reported that the average 65-year-old married couple would need $213,000 in savings to have at least a 75% chance of meeting their insurance premiums and out-of-pocket health-care costs in retirement. This figure illustrates why health care should get special attention as you plan the transition to retirement.

As you age, the portion of your budget consumed by health-related costs (including both medical and dental) will likely increase. Although original Medicare will cover a portion of your costs, you'll still have deductibles, copayments, and coinsurance. Unless you're prepared to pay for these costs out of pocket, you may want to purchase a supplemental Medigap insurance policy. Medigap policies are sold by private health insurers and are standardized and regulated by both state and federal law. These plans cover certain specified services, but offer different combinations of coverage. Some cover all or part of your Medicare deductibles, copayments, or coinsurance costs.

Another option is Medicare Advantage (also known as Medicare Part C), which allows Medicare beneficiaries to receive health care through managed care plans and private fee-for-service plans. To enroll in Medicare Advantage, you must be covered under both Medicare Part A and Medicare Part B. For more information, visit medicare.gov.

Also think about what would happen if you or your spouse needed home care, nursing home care, or other forms of long-term assistance, which Medicare and Medigap will not cover. Long-term care costs vary substantially depending on where you live and can be extremely expensive. For this reason, people often consider buying long-term care insurance. Policy premiums may be tax deductible, based on a number of different factors. If you have a family history of debilitating illness such as Alzheimer's, have substantial assets you'd like to protect, or want to leave assets to heirs, a long-term care policy may be worth considering.

Ease the transition

These are just some of the factors to consider as you prepare to transition into retirement. Breaking the bigger picture into smaller categories and using the years ahead to plan accordingly may help make the process a little easier.

*Disclaimer: This commentary is provided for educational purposes only. The information, analysis and opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed. Past performance is not indicative of future results.

Investment Advisory Services offered through Asset Strategy Advisors, LLC (ASA), a SEC Registered Investment Advisor. Securities offered through Triad Advisors, LLC, a broker-dealer, Member FINRA/SIPC. Insurance offered through Charles River Financial Ins Agcy (CRFG). ASA, CRFG and Triad are separate companies.

To Rollover or Not To Rollover Your 401k Plan – It Depends

One of the biggest decisions many of our clients face is what to do with their 401k plan when they leave their employer. There is no clear cut answer as to whether you should roll over your 401k plan to an IRA, another employer’s 401k plan, or simply to leave it where it is, because it involves several different factors, including long term investment costs and the availability of investment options within the plans. Both can impact the long term performance of your retirement plan. However, the most critical factor that can have a big impact, both short and long term, are the tax implications of a rollover.  Understanding these implications is essential before making any decision regarding your 401k plan.

Here are some of the more common tax complications that arise from a rollover:

Taxation of Indirect Rollovers

An indirect rollover occurs when you take a distribution from your 401k plan with the intent of rolling it into an IRA or a new 401k plan. With some exceptions, any distribution from 401k plan is subject to ordinary income taxes; and, if a distribution is made before age 59 ½, a 10 percent penalty may apply. If your intent is to roll your distribution from a 401k plan into an IRA, it must be done within a 60 day period to avoid the tax and penalty. It’s not uncommon for someone to take a distribution from a 401k plan with the intent of rolling it over into another plan and miss the deadline.

The big tax complication comes when the plan sponsor, as they are required to do, withholds 20 percent of your distributions for tax purposes regardless of your intent to roll it over into an IRA. As a result, you would then be rolling just 80 percent of your funds into the new plan. Even though you would eventually get it back through an IRS refund, the other 20 percent that is withheld must be made up by you within the 60 day time limit in order to avoid the tax and penalty on the entire distribution.

To avoid this possibility, the better course, might be to ask your new custodian (for an IRA) or plan sponsor (for a new 401k plan), to initiate a direct transfer of the funds from the old plan into the new plan.

Roth Rollover

Depending on your income level and tax circumstances, you may decide to roll your 401k plan into a Roth IRA. With a Roth IRA your funds grow tax free and they can be withdrawn tax free. That’s because a Roth IRA takes only before-tax dollars as contributions. So, when you transfer 401k funds into a Roth IRA, you must first pay the taxes on the distribution to the extent of the amount being rolled over less any after-tax contributions included in the amount being rolled over. But once your funds are inside the Roth IRA you will enjoy both tax free accumulation and tax-free withdrawals.

Rolling Over Company Stock(Net Unrealized Appreciation)

If your 401k plan includes company stock, you should consider the tax implications of rolling it into an IRA or transferring instead to a non-qualified brokerage account. Here’s why: When you distribute assets (money or stock) from your IRA, you pay income taxes on the portion comprised of pre-tax contributions. When company stock is issued to 401k plan, the difference between its value at that time and the time it is distributed is referred to as “net unrealized appreciation.”  That means that stock assets which have appreciated will be taxed as ordinary income instead of at the more favorable capital gains tax rate.

If, instead, you were to withdraw your company stock from your 401k and place it in a taxable brokerage account, you can still benefit from capital gains taxation versus ordinary income taxation on the appreciation. You will be required to pay the ordinary income taxes on the original pre-tax value of the stock, but your capital gains tax is deferred until you actually sell the stock.

Net unrealized appreciation is a complicated provision of the tax code and should only be considered with the guidance of a tax professional.

Early Retirement Withdrawal

If you foresee yourself retiring early, you may not want to roll over your entire 401k plan to an IRA. With a 401k plan, you can begin taking withdrawals as early as age 55 without penalty. If you roll your funds into an IRA, you will lose that option; although the IRA does allow for the Substantially Equal Periodic Payment rule, a somewhat complicated formula for withdrawing funds prior to age 59 ½.

Deciding what to do with your 401k plan after leaving an employer must take into consideration many factors – your current circumstances, your personal financial outlook for the future and the tax consequences of any of the options you may choose. You should always consult with a tax advisor to determine both the tax consequences and the benefits of an IRA Rollover.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.