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Archive for the 'Retirement Planning' Category

Many Approaching Retirement Without Adequate Savings

Posted by Robert Louis on 28 Jul 2010 | Tagged as: Retirement Planning

A study by the Employee Benefit Research Institute concludes that many people will be at risk of running out of funds sufficient to pay living costs at some point after retirement. Not surprisingly, the results differ based upon the level of pre-retirement income. For people in the highest quartile of pre-retirement income, 5% are at risk of running out of funds within 10 years of retirement, and 13% within 20 years. But at the lowest income quartile, 41% could run out of funds within 10 years and 57% within 20 years. Yet another reason for doing whatever is possible to maximize retirement saving.

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It’s Still Worth Considering A Roth IRA Conversion

Posted by Robert Louis on 29 Jun 2010 | Tagged as: Retirement Planning, Income Tax

At the beginning of this year (2010), there was discussion in the press and in legal publications about the ability to convert IRAs and qualified plan accounts to Roth IRAs. This conversion involved paying taxes now and then being free of them thereafter, plus avoiding the necessity of minimum distributions during life. In effect, for those people who really didn’t need the amount being converted, conversion was a very effective multi-generational planning technique. To the extent you believe income tax rates will be higher in the future (a good bet), conversion makes sense. There’s a choice you can make when converting, whether to pay taxes this year at this year’s rates or over the next two years at whatever the rates will be then. Some people prefer to pay this year, because they like knowing what the tax rates will be.

Another advantage of conversion now is that security values are still low. The stock market is still far off its high values of a few years ago, so conversion now, before (we hope) the stock market recovers, is a good idea. Conversion is not for everyone. It requires some thinking about the future and personal planning. But there is still time to begin that process.

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Two Planning Ideas to Consider

Posted by Robert Louis on 04 Jan 2009 | Tagged as: Retirement Planning, Income Tax

Tax legislation that was passed unanimously by both houses of Congress and quickly signed by the President offer some helpful ideas for retirement and estate planning.

First, required minimum distributions from defined contribution retirement plans and individual retirement accounts are suspended for 2009. This means that if you have reached age 70 1/2 and are required to take out a calculated minimum amount for 2009, you will not have to do so. This relief is to help account owners who suffered substantial losses in 2007 and 2008, by not requiring them to liquidate assets with depressed values to make the minimum payments. Most people who have retirement accounts and have reached age 70 1/2 need to take distributions for their living expenses, but for those who do not, this temporary change in the law might be helpful. It does have a revenue effect for the Treasury, because if less than the minimum amounts are withdrawn, less will be paid in taxes for 2009.

Second, a change has been made in distribution rules from qualified plans. This is how it works. Most qualified plans provide that if the participant dies leaving an account balance, that balance must be paid out promptly to the participant’s beneficiary. If the beneficiary is the participant’s spouse, the spouse can roll over the balance to an individual retirement account and avoid immediate taxation. But if the beneficiary is a child, for example, it was long the rule that no rollover was permissible. Therefore, the child would be taxed on the distribution immediately, rather than being able to stretch out distributions through an IRA rollover. A few years ago, legislation was passed to permit rollovers by non-spouse beneficiaries, but it appeared that this would only be permitted if the retirement plan specifically allowed it. There was confusion as to whether Congress meant that this provision should be optional, and the recently enacted tax legislation has now made it mandatory for qualified plans, beginning for plan years after December 31, 2009. This can be a very valuable planning technique for retirement benefits. It’s a good idea to find out what your employer’s plan provides at a participant’s death, and to ask that the non-spousal rollover provisions be added as soon as possible.

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How Economic Uncertainty Can Help Your Retirement

Posted by Robert Louis on 12 Oct 2008 | Tagged as: Retirement Planning

Many people are now thinking that they will have to postpone their retirement, based on the dramatic downturn in the stock market in recent weeks. It has been a shock, although there are already signs that savvy (and brave) investors are about to start buying at bargain prices. But one effect of the uncertainty, coming on top of the long term decline in real estate prices, is that people have to think more carefully about their current spending. That’s why I think this (I hope) brief downturn can provide a useful lesson. The lesson is, how much or how little we need to live on currently. If we strip away expenditures that we really didn’t need to make, we’ll understand how much it costs us to live where we are now, and that can be a good guide to what we’ll have to spend in retirement. As I’ve written before, the number is not some percentage of what we’re spending now, like 70%. It’s whatever it costs, in utilities, insurance, clothing, food, etc. By knowing what we need to spend now, we can learn what we’ll need to spend later. If our retirement savings cover those expenditures, it could tell us what more we can do in retirement, in the form of trips, second homes, etc. Some clients have asked for assistance in determining what their expenditures are, and I have prepared a template that I use myself and suggest to others as a way of gathering information on their expenses. If you would like a copy (gratis), e-mail me at rlouis@saul.com.

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Schadenfreude- Don’t Bother to Deny It

Posted by Robert Louis on 29 Sep 2008 | Tagged as: Retirement Planning

Schadenfreude is the German word for taking pleasure in someone else’s misfortune. Like when someone speeds by you on I-95 and a few miles later, you see him pulled over by a state trooper. Schadenfreude. I have read numerous articles in the past week detailing the losses of leaders of large bank and investment firms. The New York Times of September 22 had a chart showing before and after stock ownership values for the heads of several of large institutions in the news. The numbers were so large before that it’s hard to escape the feeling that it was too much, but it’s difficult to understand how the “after” numbers were reached so quickly.

It’s not possible to have the same feeling about the thousands of employees who were also invested in stock of their employers, either outright or through retirement accounts. For many of those people, plans for retirement and post-retirement, including estate planning, have been destroyed. These are human stories, and while we can’t do much about them, we can take steps to ensure that the same doesn’t happen to us.

A recent article on retirement and estate planning reminds us of the dismal statistic that many people in their 50s have saved amounts for retirement that are clearly inadequate. The personal control and personal responsibility that were touted as major benefits of defined contribution retirement plans have resulted in some people saving more than would have otherwise been possible, but has also resulted in many people saving far less. This method of saving for retirement is in strong contrast to the method that was more prevalent 30 or more years ago, the defined benefit pension plan. In a defined benefit pension plan, a benefit formula established what was to be received at retirement, and the employer had the obligation to provide the necessary funding for that benefit. The risk was on the employer. By contrast, in defined contribution plans, the risk is on the employee. There might be a greater reward for the employee in taking on that risk, but more often there was not. Perhaps our current retirement crisis is the time to give more thought to defined benefit plans.

What is abundantly clear in this economic crisis is the necessity of both younger and older people giving more thought to their retirement savings. Deciding to save more is an easy decision to make, and always the right decision, but it’s difficult to carry out. Once that decision is made, it’s necessary to decide how to invest the savings. My experience with our firm’s retirement plan has led me to conclude that nearly everyone lacks the skill and temperament to invest retirement savings. There are two possible solutions to that problem: for large retirement accounts, an outside adviser can be given authority to invest the account. That’s a decision made based on a high degree of trust, but it gives the average investor a skilled ally in dealing with an uncertain financial landscape. For smaller accounts, a very popular technique is the target retirement method. This is a means of getting expert assistance as well. You decide an approximate retirement date, and that choice results in a mix of mutual funds that is consistent with that intention. And the mix changes as you get closer to retirement, reducing the level of risk.

The process of saving for retirement, for a surviving spouse, or to pass on to children is an important part of the overall wealth planning process. We’ve seen in the past few weeks that some of those plans were based on a failure to understand the risk inherent in them, with disastrous results. As with those people affected by the recent hurricanes, we can feel sympathy, but we must also consider whether our own poor financial planning will put us in the path of a different type of hurricane.

Reprinted by permission of hte Legal Intelligencer.

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Lessons from the Hurricane

Posted by Robert Louis on 21 Sep 2008 | Tagged as: Retirement Planning

Not the one in Galveston; I’m not sure what lesson that teaches other than the need to live somewhere else. I’m referring to the one on Wall Street, which, it’s fair to say, hasn’t ended yet. In many similar situations, employees of the distressed or bankrupt companies had much of their wealth in stock of their employer, either owned outright or through retirement accounts. We have read reports that managements at these companies were urging their employees not to sell their stock, that the company would recover, a classic case of a conflict of interest where retirement accounts were involved. The employees at those companies have suffered and will continue to suffer, perhaps without a solution. Are there lessons for others in this disaster?

As to retirement accounts, these problems suggest a theme often discussed in these blogs: the need to pay attention to retirement accounts and to manage them or obtain skilled management for them. It seems very unlikely that there will be a bailout for the rest of us, so it’s our obligation to find out what to do and do it. This task fall into several categories. I suppose the most difficult is to develop the discipline to save more. Sometimes that means living on less in the present, and that’s always difficult. Perhaps putting a picture of those Lehman employees cleaning out their offices on the refrigerator would help.

Once that decision is made, how are the funds to be invested? My opinion is that nearly everyone lacks the skill to invest for retirement. There are at least two solutions: one is to have a professional adviser. The key is to have a skilled one and to develop a level of trust in that adviser, but never to stop asking questions or trying to understand what’s happening. The second option is to use a target retirement method, by which you choose an approximate retirement date and have an automatic allocation among mutual funds. This allocation changes over time, reducing the riskiness of investments as you get older. Again, the retirement account owner should continue to watch what’s happening and ask questions.

Another element that needs planning is the distribution of retirement assets. In addition to the statutory requirements for minimum distributions, there are questions as to which accounts should be spent first, taxable or tax-deferred, and also which tax-deferred accounts should be spent. Again, it’s important to have advice on this process, because the wrong choice can result in an unnecessary waste of savings.

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ERISA: A Sword, a Shield, Perhaps, But Definitely the Law

Posted by Robert Louis on 17 Sep 2008 | Tagged as: Retirement Planning

The turmoil in the financial markets is certain to result in the loss of many thousands of jobs. The people who hold those jobs undoubtedly enjoy a variety of employee benefits, and some or maybe most of those benefits will be lost along with the jobs. Whatever happens, it’s important to remember that there is substantial regulation of benefits by the Employee Retirement Income Security Act of 1974, known as ERISA, as well as by numerous provisions of the Internal Revenue Code. ERISA and the Code provide rules that must be complied with, and they offer protections for both employees and employers.

ERISA details the rights that employees have to know what their benefits are and what recourse they have if those benefits are lost. ERISA also limits rights, and gives employers the ability to change or eliminate benefits under some circumstances. There are many thousands of lawsuits that have been brought under ERISA, and many of them could have been avoided if one or both parties had simply followed the ERISA rules in claiming or reducing benefits. Here are a couple of examples:

If an employee was covered by health insurance, a law called COBRA contains provisions added to the Internal Revenue Code, permitting a continuation of health coverage for specific periods of time, but at the employee’s expense. If the employer goes out of business and no longer has a health plan, the COBRA rights could be lost.

Many of these employees will have retirement plan accounts. ERISA and the Code describe an employee’s rights to those benefits once employment has ended, and also permit employers to limit those rights to those set forth in the law. If an employee is only partially vested in benefits, the unvested portion may revert to the plan and benefit other employees. It’s important for employers to explain fully the rights that employees have, to avoid accusations by the employees that they were misled.

Employees may have continuation rights in other benefits, such as the right to convert life insurance policies provided by the employer to their personal ownership, or the right to continue disability income coverage.

Employees who have lost or expect to lose their jobs need to examine the documentation of their employee benefits and see what they may retain or continue. Employers need to understand the rights they have to change or eliminate those benefits, as well as their obligations to advise employees of their rights. If both sides know and comply with the law, the process of terminating employment, while still an unfortunate occurrence, will at least be carried out fairly.

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‘The Dean is Furious! He’s Waxing Wroth!’

Posted by Robert Louis on 24 Jul 2008 | Tagged as: Retirement Planning, Income Tax

This was the only quote I could think of to introduce a discussion of planning with Roth IRA and retirement plan benefits. In response to this statement, Groucho Marx said: “Is Roth here too? Tell Roth to wax the Dean for a while.”

Delaware Sen. William Roth gave his name to this type of retirement benefit. It’s simple, sort of. You don’t get a tax deduction when the contributions are made, but you don’t pay taxes when the account is distributed at retirement. You give up a current tax saving in exchange for a greater one later. Is this a good deal? The answer is definitely, sometimes.

If you knew that you would pay a higher tax rate in retirement, Roth tax treatment would clearly be better. Conversely, if you knew that your tax rate would be much lower in retirement, it might be better to stay with the traditional method of planning: a deduction up front and taxation later. Opinions vary on this subject, and studies have been made to try to determine when and whether one method is superior to the other. There are some unknown elements: not only your own tax rate but tax rates in general. Who can predict what income tax rates will be 10 or 20 years from now? Or that Roth treatment will still be in effect?

For now, here are two situations in which Roth treatment makes sense. First, if you have a child who has a summer job, it makes sense that the child have a Roth IRA. In most cases, kids with summer jobs have little or no income tax liability anyway, so a deduction for an IRA contribution is of no value to them. Then, they will have many years in which the Roth IRA can grow tax-free. When the funds are distributed, perhaps 50 years later, the small contributions from summer jobs could be a large amount.

Here’s another possible benefit: Roth IRAs do not have minimum distribution rules, unlike standard IRAs and qualified plans. If an individual has other assets such that he or she won’t need the Roth money, the balance can be left in for the rest of the individual’s life and be paid out only in the next generation. This extremely long-term accumulation period, followed by no tax on distribution, can make Roth a valuable planning benefit.

People with standard benefits can convert them to Roth benefits by paying taxes on them now. After that, any distributions will be free of tax. The ability to convert is limited to those with income below certain levels, but that restriction will end by 2010. At that time, anyone will be able to convert to Roth treatment. This opens up the possibility of interesting estate planning with Roth benefits, which we’ll discuss in another blog.

Republished with permission of The Legal Intelligencer.

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Retirement Havens: Florida, Arizona…Pennsylvania

Posted by Robert Louis on 16 Jun 2008 | Tagged as: Retirement Planning, Income Tax

Part of planning for the future is deciding where to spend the golden years, as marketing types like to call them. For those people who have an option where to live in retirement, there are the usual suspects: Florida, Arizona, North Carolina and there is the state that is one of the most popular among retirees, Pennsylvania.

By the way, the idea that you need to remain in the city where your law practice is located in order to continue to have an involvement in that practice is fast fading away. Just last week, a lawyer from a suburb of Detroit, who is suing one of my clients, called me from somewhere deep in the heart of North Carolina, from where he is able to be heavily involved in the frivolous litigation he is pursuing.

Why is Pennsylvania so popular among retirees, especially those in the neighboring states of New York, New Jersey, Delaware and Maryland? One important reason is the taxation of retirement income, such as Social Security and retirement plan distributions. There is no income tax imposed by Pennsylvania on bona fide retirement income, which is not the case in the neighboring states. If your income in retirement consists only of Social Security benefits and amounts you withdraw from a 401(k) plan, for example, your Pa. income tax will be zero. That is not the case, again for example, in New Jersey. And if you worked in New Jersey to earn a retirement benefit, New Jersey can’t reach across the river to tax it if you move to Pennsylvania, under federal law. (But here’s a caveat: Be sure to check the Pennsylvania rules to be certain that your retirement distributions qualify. Nearly all distributions after age 59 1/2 will qualify, but check the rules anyway.)

Yes, we have a sales tax, which Delaware does not have (although there are a large number of “big box” stores suspiciously close to the Pennsylvania border) and yes, we still have the state store system (again, some really good wine stores just across the border in New Jersey and Delaware, I’m told), but Pennsylvania has a big advantage in the taxation of retirement income. That, combined with reasonable property taxes and access to a world of sports, culture and recreational activities, is why Pennsylvania has one of the largest populations of retirees of any state.

Republished with permission of The Legal Intelligencer.

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Archive for the 'Retirement Planning' Category

Many Approaching Retirement Without Adequate Savings

It’s Still Worth Considering A Roth IRA Conversion

Two Planning Ideas to Consider

How Economic Uncertainty Can Help Your Retirement

Schadenfreude- Don’t Bother to Deny It

Lessons from the Hurricane

ERISA: A Sword, a Shield, Perhaps, But Definitely the Law

‘The Dean is Furious! He’s Waxing Wroth!’

More News on Retirement Plan Problems

Retirement Havens: Florida, Arizona…Pennsylvania

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