Ann Wolfson Associates

Do Not Cash Out Retirement Plans When Switching Jobs

author3 — Wed, 23 Jun 2010 20:12:33 +0000

When you leave a job, the vested benefits in your retirement plans are an enticing source of money. It may be difficult to resist the urge to take the money as cash, particularly if retirement is many years away. But generally you will have to pay federal income taxes, state income taxes (if applicable) and a 10% penalty if you are under age 55. This can cut into your investment significantly. If your state income tax is 7.5%, for example, someone in the 25% federal tax bracket would loose 42.5% of the amount he or she took.

25.0% (Federal Tax)
7.5% (State Tax)
10.0% (Penalty)
42.5% (Total Tax and Penalty)

Conveniently located in Central New York state, Ann Wolfson Associates is a financial planning and consulting firm dedicated to helping individuals, families and organizations reach their financial goals. If you have questions about this article or if you would like to become a client of Ann Wolfson Associates, please call (315)449-4730.

The information presented is general in nature and should not be considered legal or tax advice. You should consult your legal or tax advisor for information concerning your own specific tax situation.

Tax Breaks

author3 — Wed, 23 Jun 2010 20:11:51 +0000

A new law lets employers avoid the 6.2% share of Social Security tax on wages paid to new hires who certify they worked fewer then 40 hours in the prior 60 days. That even includes students who didn’t work because they were taking classes. The payroll-tax exemption is available for compensation paid after March 18^th, 2010 and before January 1, 2011 to employees hired on or after February 4, 2010.

401(K) Plan Choices for Job Changers

author3 — Wed, 23 Jun 2010 20:11:05 +0000

When you leave an employer, you are likely to have several options. You may

Stay invested in your previous employer’s plan if your balance meets plan’s minimum
Invest your assets in the new employer’s plan
Take your distribution in cash. Before taking cash think long and hard about penalties and taxes.
Roll over assets to an IRA.

While making choices

Look at the whole picture of your current plan.
Understand all the requirements of a new plan.
Be aware of any financial penalties in taking a cash distribution.

If you do a direct rollover

You will have no exposure to taxes or penalties.
Assets can potentially grow tax deferred.
Consider only a new IRA that offers diversified choices.

By the number
The IRS requires an employer to withhold 20% federal tax from the money when an employee takes a 401(K) distribution in cash.

Most importantly consider your age. There is one benefit of leaving your 401(K) with a former employer and that is if you are close to retirement age but no 59.5 years and you need a distribution, many 401(K) plans allow for distributions at age 55 years without the IRA 10% penalty you would face after a rollover.

The information presented is general in nature and should not be considered legal or tax advice. You should consult your legal or tax advisor for information concerning you own specific tax situation.

A Big Idea

author3 — Wed, 23 Jun 2010 20:09:32 +0000

One way to insure that your retirement savings last as long as you do, is to consider an immediate annuity that will give you monthly payments for life.* This is a strategy for a portion of your retirement assets. Perhaps taking in a portion of your 401(K) and use an immediate annuity to provide your monthly income need for life. Invest the other portion of your 401(K) to provide growth and income to hedge inflation or provide for any lump sum needs (like a vacation or new car).

You may think you will never spend it all but don’t underestimate how long you are likely to live.

*Payments are based on the claims paying ability of the issuing insurance company.

What To Do When A Relative Dies

author3 — Wed, 23 Jun 2010 20:08:46 +0000

When a loved one dies the details that need to be taken care of by survivors may be overwhelming during such an emotional time.

Immediately

Determine decedent’s wishes.
Contact the funeral home and determine cost. (Veterans can be buried in a national cemetery free.)
Create an obituary.
Track donations, flowers and cards received.

After The Funeral

Notify the decedent’s attorney of the death to review the steps necessary to administer the decedent’s estate (the probate process). Bring as much information as possible about finances taxes and debts.
Copies of death certificate can be obtained from funeral director
Obtain a copy of the decedent’s birth certificate
Note the decedent’s creditors and close any credit card accounts.
The estate not the surviving family members are responsible for any debts of the decedent. Paying off the debts only increases the net value of the estate, which means higher inheritance taxes.
Determine if there is a will and if so who has been appointed executor.
The executor needs to determine the contents of the decedent’s safe deposit box
If the decedent was receiving social security benefits
If the decedent was receiving Social Security benefits, the social security office must be notified. In certain circumstances monthly benefits may begin.

DOWN THE ROAD
The probate can be lengthy, sometime stretching two to three years. In some cases probate may be avoided completely, such as when an estate consists of trust assets. Work with your investment and legal professionals to deals with all the issues involved

Diversification Is It Still Important?

author3 — Wed, 23 Jun 2010 20:07:06 +0000

The idea of spreading your investments into many asset classes that rise and fall independently throughout market cycles has been considered a safe and sure move to make sure your assets are protected. So if any one basket falls, the other basket should keep your portfolio intact. That sounds good, but then there was 2008 to date, that keeps us all of wondering what to do. But using the financial crises to conclude that diversification is pointless because stocks, bonds, and other assets will move in tandem forevermore is a misreading of recent history.

As economic conditions improve, regions are recovering at different paces. It is a good idea to maintain a global perspective, not just the US or hot emerging markets for a big score. Make sure your portfolio will benefit from extraordinary changes in the world.

Make sure you are paying attention to prices. Consider investing in attractive proceed areas like beaten down blue chips that under performed in the S&P in 2009.

Review your objectives and time horizons. Are you buying a home in the next five years, saving for college or is retirement your goal. Review your portfolio with a focus. Remember that lowering volatility through diversification can actually improve your return.

Economic Outlook

author3 — Wed, 23 Jun 2010 20:06:05 +0000

We’re Back!

Just when it appeared that the economy was strengthening, some old bugaboos from 2008 and 2009 found their way back to the US. The Obama Administration’s home purchase tax credit program ended in April, as did the mini-housing recovery. Once again we have to pay attention to foreclosures and the risk of home prices sliding. Four quarters of small gains in employment came to a halt in May. Even though employment is a lagging indicator — it doesn’t recover until several quarters of economic growth — the end to nascent job gains will hurt still-negative consumer confidence. Indeed, a small boomlet in retail spending by consumers petered out in the Spring. And, recent stock market volatility reminds investors of recent events they would rather forget in 2001 and 2008. Is this time different, or are we destined to relive the bad old times?

This time around, we have one important difference: Europe. The size and impact of huge budget deficits in Europe scare investors — not just declining value of the Euro, which is bad enough — but because it seems that “no one’s in charge.” The lack of political and economic leadership in Europe is appalling and events may turn much worse before any major change. The problem isn’t Greece, Portugal or Spain as much as the lack of preparation by Finance Ministers and the European Central Bank. But — and this is a big but — Europe’s problems will have limited impact on the US. Some US exporters will sell less in Europe, and some US companies with European operations will be affected, but most Americans will so no impact. And, as US stocks have moved in lockstep with the Euro’s value, Europe does seem to be 90% of the problem.

However, the other 10% remains US employment. Why only 10%? Investors seem to have already been prepared for slowing job growth. It was unrealistic to expect the US economy to bounce back sharply, as this was the first recession in 70 years based on excessive debt and lower asset prices. Some of the accumulated debt has been repaid, but continued repayment will pressure consumer spending for at least several more years. And, since consumers normally spend us out of recessions, this pressure will limit the speed of any recovery. A new factor this time is added pressure from state & local government budgets, now being pared back sharply, and a new-found reluctance by Congress to add new stimulus programs due to the size of the Federal deficit. Budget cutting slows economic growth in the near term, even as fiscal discipline is positive in the long run.

As for stocks, the market had been getting expensive and had gotten ahead of itself in March and April. That always seems to be a reason for any selloff. I do not see this as “the big one.” Investors continue to avoid stocks, as they have through the entire 60+% rally from March 2009, so there is limited stock to be “dumped” from frustrated holders. Expectations both for the economy and stocks are limited, so negative surprises may be few. There might well be some near term limited downside — maybe even lasting into the Fall — but widespread investor fear and indifference always seems to eventually result in higher stock prices.

My economic forecast remains largely unchanged from earlier in 2010. Unemployment will remain elevated, and could reach 11% sometime later this year. The overall US economy will shrink 1% in 2010, and perhaps grow 3% in 2011. I had expected inflation to remain at low levels, but with weakness in the US dollar preventing actual deflation. Now, with our dollar a pillar of strength against the weak Euro and Yen, we will likely see lower oil and import prices later this year. This will provide some respite to the consumer, especially at the gas pump. That will be a welcome change in an economic backdrop that otherwise reminds us to much of the last time around.

Christopher H. DeVoe CFA is the Chief Investment Officer of Constellation Asset Management, Inc., an investment advisory firm located in Fayetteville, New York. Mr. DeVoe can be reached at (315) 449-1820.

Organizing Your Financial Records

author3 — Wed, 23 Jun 2010 20:05:23 +0000

Having an organized approach to financial records can remove much of the stress associated with living. We all play many roles, each with a trail of paper attached.

What to keep
Knowing what keep by separating your papers by your need to use them, keeping short-term items together and a longer term items together.

Immediate needs files should include items for the past year including

Unpaid bills
Paid bills
Bank statements
Credit card statements
An updated resume
Income tax receipts for deductions
Major purchase receipts
Insurance policies

Long term files should include

Bank statements (7 years)
Credit card statements with home improvement expenses
Canceled checks (7 years)
Warranties and operating instructions for appliances
Income tax record and back up for previous three years
Gift tax returns
Inheritance papers
Retirement and all investment statements (all year end)
Reports from trusts
Birth certificates
Social security cards
Burial vault/plot deeds
Will/living wills
Powers of attorney
Car titles
House titles/deeds

What about taxes?

There are two types of tax information that you need to be concerned about: information you need in case of an audit and information you need to support your claims of income.

Keeping tax returns and supporting documents for seven years (because the IRS has six years from when you file to investigate.

Keep forever or until assets are sold

Receipts for home improvements
Receipts for major appliances
Annual investment statements
Gift tax returns
Inheritance papers
Copy of your will
Health care proxy forms
Power of attorney form

Achieve Clarity with a Second Opinion

author3 — Wed, 13 Jan 2010 19:42:10 +0000

Getting a second opinion can help you to confirm that your investments are on track. It can also help you reduce risk and improve your return before it’s too late. A second opinion can determine whether or not your investment portfolio is designed as efficiently as it can be to achieve your goals.

If there is any consolation to be taken from the past eighteen months, it is that most people pay more attention to their financial picture – not just their stock and bond investments, but savings and spending habits as well. However, most people do not have time to focus on their savings.

Let us take an objective look at how to improve your finances – you will be surprised at the results. Through simple measures you can make sure your finances are back on track.

Our second opinion will be practical – through inventory of your assets and liabilities, i.e. using some savings in a cash account that yields zero to repay certain types of debt. We will revisit your retirement goals, explaining the impact of inflation on your nest egg. We will help you save, save, save. We will help you to be smart about your different insurance plans.

People should look at finances the way companies do. You need to protect the value of your work. We wouldn’t let panic dictate investment choices. Last year’s losses had many people changing their asset allocation and diversification strategies. Regardless of what the market is doing, sticking to a strategy that matches your investment principles is important especially when it comes to risk.

Make sure you can find someone you can trust. Get a second opinion and keep asking questions. We are here to help. Your success is our success.

The 403b Advantage

author3 — Wed, 11 Nov 2009 16:44:38 +0000

The 403(b) was established in 1958 by the federal government to encourage employees in certain tax-exempt organizations to establish retirement savings plans. The name 403(b) refers to the relevant section in the Internal Revenue Code.

Why contribute to a 403b when my employer provides a pension?

Few pension plans provide an amount equal to salary. Studies have indicated that we will need about 80-90% of our pre-retirement income to maintain our lifestyles. Your 403b will provide a healthy supplement to your pension and a huge inflation hedge.

My Favorite Advantages:

Ease of pay roll deduction

It is painless and automatic. You don’t have to think about it. Did you know that bear (down) markets may actually do wonders for retirement? Look beyond the short term and invest appropriately for the long term.

Lowers your tax bill

403(b) plans are made on pretax basis, which can greatly reduce your tax bill. You can lower your federal and state taxes because your contributions are taken directly out of your paycheck before taxes are paid. This has the potential to accumulate faster because you are not paying any taxes on the earnings in the account until you withdraw them (this advantage is called tax deferral). Contribute $150 to your plan per paycheck and you’ve reduced your tax bill by 33% (includes federal and state tax). In effect, your $150 contribution costs you only $101 dollars. Please note that your contributions do not reduce your wages thus your social security benefits will remain in tact.

There is another special tax credit for low income savers. Eligible 403(B) participation will receive a tax credit of up to 50% (up to $2,000). For 2009 the full credit is available to joint filers whose adjusted gross income (AGI) is less then $53,000 and single filers whose AGI is under $26,500

Use it as a planning tool. Have a big tax year or offset college cost.

Annually you can contribute (2009) $16,500 with a catch-up for those who turn 50 years anytime during the year of $5,500. There is another catch-up provision for those who have at 15 years or more service for the same employer. So, let’s say you inherited money you can offset or you have a kid going to college. The plan offers flexibility.

Before committing to a 403b option what questions should you ask?

Will I be penalized for pulling my money out? This is the most important question you can ask. How available is my money?

Generally, penalty free distributions cannot occur until the participant reaches 59.5 years of age unless they have separated from service in the year they are turning 55.

For retirement before 55, you are eligible for substantially equal periodic payments.

You become disabled.

Hardship withdrawals are allowed if under severe financial distress. The participant must have no other resources available. A hardship withdrawal may be taken for un-reimbursed medical expenses, eviction or foreclosure on primary residence. Please note that for hardship withdrawal only contributions, not earnings, can be withdrawn.

So I have decided to payroll deduct into a 403b. How do I set up my plan?

The regulatory requirements affecting retirement plans for tax exempt organizations have changed dramatically in the last year. From written plan documents to vendor and investment approval these changes have made many new demands for employers and employees alike.

Ask your employer for a list of the participating investment companies available to you. This is known as a vendor list. Select several investment companies from the list and then most importantly research these choices with an eye toward performance and cost. Next, determine the amount of $$$ you would like to contribute per paycheck. Finally, return the necessary paperwork to your employer and you are on your way.

What are my Investment Options?

Fixed annuities are contracts with insurance companies that guarantee that you will receive a rate of interest during your accumulation phase.

Variable annuities are contracts with insurance companies under which you make a series of payments into a tax deferred account. In return, the insurer agrees to make periodic payments to you at some future date. Make sure the variable annuity is worth the money you are paying.

Mutual funds are pools of money invested in many different securities that are managed according to set objectives. For example, you can choose an aggressive fund for growth or a more stable fund for stability.

Other Considerations

Can you change the amount you contribute?

Yes.

Can you stop contributing altogether?

Yes.

Are there loans on my plans?

Possibly though not all vendors oblige.

What are my options for my 403(b) if I switch jobs?

Move money into your new employers 403(b), roll it into an IRA, or leave it where it is. Or, take a lump sum. Although this is not wise because it will trigger all kinds of penalties.

What happens to my 403(b) in the event of a divorce?

A distribution to an alternate payee will be permitted if pursuant to a qualified domestic relations order (QDRO). The spouse can roll the proceeds into an IRA or qualified plan.

What happens to my plan in the event of death?

Death benefits get paid under a 403(b) plan depending on when death occurs and who is named as the designated beneficiaries.

How will my 403(b) be taxed?

In most cases distributions are taxable as ordinary income. Assets can not be left in the plan indefinitely, you must begin withdrawals no later than April 1 of the year following the year you turn 70.5 years of age.

Can you contribute to a 403(b) and 401K

Yes, as long as your aggregate contributions may not exceed your elective deferral limit.

Can I contribute to a ROTH IRA

Yes, ROTH 403(b) contributions are after-tax dollars that will grow tax deferred. Withdrawals will not be taxed

Remember that planning for retirement is an on going process. The earlier you get started the better off you will be. Your best friend when investing is time.