It's possible to strike a balance between checking your investment account every morning (and tempting yourself to make inopportunely timed changes) and complete and utter portfolio neglect. The following steps should get you on your way.
Step 1: Do your own heavy lifting. Whether you're talking about home prices or the stock market, forget the days when rising prices did all the heavy lifting for us. Most people who have amassed real wealth in this world did it the hard way: They deferred spending today in order to save for tomorrow.
Step 2: Get a plan. Investors need a blueprint--an overarching view of how much they should have invested in stocks, bonds, and cash given the age at which they hope to retire, how much they're saving each year, and their risk tolerance. Instead of getting a big-picture view of how they should be investing, many investors proceed straight to picking individual funds, often basing important decisions on the meager information their employer and plan provider have given them.
Not having a target asset-allocation mix can leave you feeling particularly adrift at a time like this, but there are some basic rules of thumb for determining the appropriate stock/bond mix. A common one is to subtract your age from 100% to determine how much you should have invested in stocks and stock funds. That's better than nothing, and holding at least a little in bonds would've helped many portfolios hold up much better than they did in 2008.
Step 3: Make sure you have a rock-solid core. Because many plans offer a long menu of choices, it's tempting to fill up on a little bit of this and a little bit of that. But the biggest favor you can do is to stay away from the niche offerings and instead build out a solid core of rock-solid funds. Such holdings should make up 75% to 80% (or more) of your portfolio.
Step 4: Avoid the big mistakes. Last, but not least, vow that you'll do your part to avoid the big mistakes that can bedevil investors by loading up on company stock. The demise of Lehman Brothers, where many employees had also invested heavily in company stock, provides an updated case study.
Sunday, January 25, 2009
Investing Rules
Two rules of investing to follow.
Warren Buffett said that the two rules of investing are: #1: Don't lose money, and #2: Don't forget rule number one. He then explained some more basics: When you buy a share do so as though you are becoming a partner in the business; Make sure you use the market to serve you, not to instruct you; And before buying be certain there is a sufficient margin of safety, a cushion of comfort between the price you are paying and the value of the company.
I want to add one more: Make sure the company can stay in business. That's sort of a corollary to part three, about the sufficient margin of safety, but it's more dramatic. And in these times, you need to figure this part out first before you begin working on all other valuation metrics.
For example, value investors look for low P/E (price to earnings) ratios, high cash positions, low debt, low price to book, preferably less than half, etc. They're looking for the margin of safety Buffett recommends.
The second important factor is access to capital. That is, the ability to raise capital when needed. Large companies with strong balance sheets can do this now, especially in the debt markets. Not so much in the equity markets. No matter how large or strong the company is at the moment, it's almost impossible to raise equity unless it's a special arrangement like a private placement or preferred stock. Common equity is not accepted because investors appetite for risk is almost zero now. They don't want just equity. They want some income (hence the preferreds have a better chance). But only companies with strong balance sheets qualify.
When looking for a specific stock the most important to analyze is cash management. A good company that exemplifies this is CommScope.
Warren Buffett said that the two rules of investing are: #1: Don't lose money, and #2: Don't forget rule number one. He then explained some more basics: When you buy a share do so as though you are becoming a partner in the business; Make sure you use the market to serve you, not to instruct you; And before buying be certain there is a sufficient margin of safety, a cushion of comfort between the price you are paying and the value of the company.
I want to add one more: Make sure the company can stay in business. That's sort of a corollary to part three, about the sufficient margin of safety, but it's more dramatic. And in these times, you need to figure this part out first before you begin working on all other valuation metrics.
For example, value investors look for low P/E (price to earnings) ratios, high cash positions, low debt, low price to book, preferably less than half, etc. They're looking for the margin of safety Buffett recommends.
The second important factor is access to capital. That is, the ability to raise capital when needed. Large companies with strong balance sheets can do this now, especially in the debt markets. Not so much in the equity markets. No matter how large or strong the company is at the moment, it's almost impossible to raise equity unless it's a special arrangement like a private placement or preferred stock. Common equity is not accepted because investors appetite for risk is almost zero now. They don't want just equity. They want some income (hence the preferreds have a better chance). But only companies with strong balance sheets qualify.
When looking for a specific stock the most important to analyze is cash management. A good company that exemplifies this is CommScope.
Tuesday, January 13, 2009
Drop in Gas Prices - Stimulus Package
The drop in gas prices provides a huge stimulus package to the economy. Below is the math based upon the price of gas dropping from $4/gallon to $1.50/gallon.
Using that an average car driver drives 15,000 miles a year and a vehicle gets 25 miles per gallon then each car uses 600 gallons each year. Each car saves $2.50 per gallon on 600 gallons each year or roughly $1500 per year or $120/month. Using 150 millon cars in our country this equates to $18 Billion per month or $200 Billion per year.
In the news, we hear how bad things are and how the drop in oil and gas prices represents bad things. My wallet tells me that when I fill my gas tank that I feel better. It is ok with me if the price of gas stays down for a long time.
Using that an average car driver drives 15,000 miles a year and a vehicle gets 25 miles per gallon then each car uses 600 gallons each year. Each car saves $2.50 per gallon on 600 gallons each year or roughly $1500 per year or $120/month. Using 150 millon cars in our country this equates to $18 Billion per month or $200 Billion per year.
In the news, we hear how bad things are and how the drop in oil and gas prices represents bad things. My wallet tells me that when I fill my gas tank that I feel better. It is ok with me if the price of gas stays down for a long time.
Social Security Stimulus Package
The annual increase in Social Security benefits provides a $38 Billion Stimulus. The below article explains the impact on Social Security benefit increases and how it is calculated.
How Social Security's cost of living increase became 2009's first stimulus package. While a new Congress and a new White House debate details of an economic stimulus plan, Social Security recipients are already reaping a $38 billion windfall. The extra money comes thanks to a quirk in the Social Security Administration's regularly scheduled cost of living adjustment.
Every year, Social Security payments increase along with the Consumer Price Index for Urban Wage Earners and Clerical Workers. The increase is set at whatever the change in inflation was between July and September from one year to the next.
Last year, soaring gas prices sent the Consumer Price Index skyward, and in October the Social Security Administration set the cost of living increase at 5.8% for 2009. That's the largest adjustment since 1982, amounting to an extra $35.8 billion, says SSA spokeswoman Kia Green. The increase for Supplemental Security Income is an additional $2.5 billion.
Since then, prices have collapsed. In November, the most recent month the figure is available, the index used to calculate Social Security benefits decreased 2.3%. In December, it's likely to have fallen further, increasing the economic impact of the checks for recipients and potentially helping to stoke consumer spending.
"If they perceive they're getting a raise in their Social Security benefits, it should have a stimulative effect," says Andrew Biggs, a former deputy commissioner for the Social Security Administration and a resident scholar at the American Enterprise Institute. "Seniors seem to be very pleased that they're getting such a large COLA," Biggs says.
Couples, both receiving benefits, would expect to see their average monthly payment in 2009 increase to $1,876 a month, from $1,773 in 2008. Over the course of the year that works to just over $1,200 which, coincidentally, is the same amount of tax rebate couples received from last year's stimulus checks. Those increased Social Security checks start going out on Jan. 14.
How Social Security's cost of living increase became 2009's first stimulus package. While a new Congress and a new White House debate details of an economic stimulus plan, Social Security recipients are already reaping a $38 billion windfall. The extra money comes thanks to a quirk in the Social Security Administration's regularly scheduled cost of living adjustment.
Every year, Social Security payments increase along with the Consumer Price Index for Urban Wage Earners and Clerical Workers. The increase is set at whatever the change in inflation was between July and September from one year to the next.
Last year, soaring gas prices sent the Consumer Price Index skyward, and in October the Social Security Administration set the cost of living increase at 5.8% for 2009. That's the largest adjustment since 1982, amounting to an extra $35.8 billion, says SSA spokeswoman Kia Green. The increase for Supplemental Security Income is an additional $2.5 billion.
Since then, prices have collapsed. In November, the most recent month the figure is available, the index used to calculate Social Security benefits decreased 2.3%. In December, it's likely to have fallen further, increasing the economic impact of the checks for recipients and potentially helping to stoke consumer spending.
"If they perceive they're getting a raise in their Social Security benefits, it should have a stimulative effect," says Andrew Biggs, a former deputy commissioner for the Social Security Administration and a resident scholar at the American Enterprise Institute. "Seniors seem to be very pleased that they're getting such a large COLA," Biggs says.
Couples, both receiving benefits, would expect to see their average monthly payment in 2009 increase to $1,876 a month, from $1,773 in 2008. Over the course of the year that works to just over $1,200 which, coincidentally, is the same amount of tax rebate couples received from last year's stimulus checks. Those increased Social Security checks start going out on Jan. 14.
IRA Rules
Below is an article that I found on IRA rules that gives good information.
Make no mistake about it: The IRA is America's savings vehicle of choice. In 2007, assets in such accounts totaled $4.75 trillion, more than any other type of retirement account, according to an Employee Benefit Research Institute study published Wednesday. That's the good news.
The bad news is that most Americans still don't have a clue about IRAs, even though they've been available for more than 25 years. Most Americans -- even those who don't have access to a 401(k) plan at work -- don't contribute to an IRA.
Just 10% of eligible taxpayers contributed to IRAs each year from 2000 to 2004, according to EBRI. And much of the growth in IRAs comes from rollovers (when a worker leaves his employer and transfers his 401(k) to an IRA) rather than new contributions.
So, it would appear that Americans still have much to learn about IRAs. Here are the best features - and least-known facts -- about IRAs, according to the experts:
The Nondeductible IRA
Here's one fact many people don't realize: Everyone under the age of 70-1/2 who either has earned income or is married to someone with earned income is eligible to contribute to a traditional IRA, said Barry Picker, author of "Barry Picker's Guide to Retirement Distribution Planning" and a principal with Picker, Weinberg & Auerbach, CPAs.
"Too many people confuse inability to deduct the contribution with the perceived inability to make a contribution," he said.
There are several kinds of IRAs, including traditional, Roth and SEP. And there are two kinds of traditional IRAs: deductible and nondeductible. Taxpayers whose adjusted gross income is above certain thresholds and who have an employer-sponsored retirement plan typically can't deduct their contribution to an IRA.
"For traditional IRAs, the income limits only affect whether your contribution is deductible," said Michael Kitces, editor of the Kitces Report. "There is no upper limit on income that would prevent you from being able to make at least a nondeductible contribution to an IRA, as long as you have the minimum amount of earned income."
To be sure, nondeductible IRAs have some disadvantages. There's paperwork. Nondeductible IRA owners have to file Form 8606 every year with their tax return. And there's a bit of tax work required come distribution time. Owners of nondeductible IRAs must calculate the taxable vs. the nontaxable portion of their distributions when that time comes. Plus, there's some number crunching required. One should examine whether investing in certain securities (those that produce capital gains) inside a taxable account is better at building after-tax wealth than a non-deductible IRA.
Still, those costs don't seem to outweigh one of the chief benefits of any type of IRA. And that, according to Kitces, is the power of tax-deferred compounding over long periods of time.
Read IRS Publication 590 for the rules regarding nondeductible IRAs. Of note, those who save for retirement using a nondeductible IRA will have to file Form 8606 with their tax return each year. See Publication 590 on IRS site. See Form 8806.
Tapping IRAs
Many IRA owners assume they have to wait a long time until they can get at the money in their IRA. Not so, say Kitces.
One can start taking money out of IRAs before age 59-1/2 by using the substantially equal periodic payments (SEPP) rules or what some call the 72(t) rules. It's complicated, but IRA owners can withdraw a fixed amount of money for a minimum of five years or to age 59-1/2, whichever comes last. Owners have to pay ordinary income tax on the distribution, but they don't have to pay the early distribution penalty. Learn more about SEPP rules here.
Also, Kitces says, few Americans are aware of their ability to tap IRAs without penalty for medical and educational expenses. Yes, such distribution are only allowed under certain conditions (when medical expenses exceed 7.5% of adjusted gross income, for instance), but many savers are not aware it's even an option, he said.
Beneficiary Form Problems
For those that already own (or may soon own) an IRA, Beverly DeVeny, an IRA technical consultant with Ed Slott & Company, says beneficiary form problems rank high on her list of least-known facts. The beneficiary form details who will receive the IRA when the account owner dies. In many cases, account owners fail to change the names of their beneficiaries after a divorce, death or birth.
"Just make sure there is a form on file and that it names the beneficiary that you want to inherit the account," she said. "Without a form, the account will likely go to your estate and be taxable." Or, the account could go to an ex-spouse or some other unintended person. Also, she suggested IRA owners need to look at the distribution options that will be available to their beneficiaries and make sure that they offer the flexibility that they want for their beneficiaries.
Rollover Problems
Also, DeVeny said, IRA account owners need to follow-up diligently on any transfers they make to be sure they get into the correct accounts. "Don't rely on anyone else to do this for you," she said. Likewise, IRA account owners need to be sure that rollovers are back into an IRA account within the 60-day timeframe. And finally, they need to know that they can do only one rollover every 365 days per IRA. Although the same IRA can receive more than one rollover, once it has received a rollover it cannot then distribute funds for rollover until the 365 days have passed.
Inherited IRAs
Beneficiaries need to know that the name of the decedent must always remain in the title of an inherited account and that the funds can move only in a trustee-to-trustee transfer, DeVeny said. "It is important for beneficiaries to know this because too many advisers and companies do not know it," she said. A distribution paid to the beneficiary or transferred into an account in the beneficiary's name is taxable to the beneficiary and there is no way to undo the transaction, she said.
Make no mistake about it: The IRA is America's savings vehicle of choice. In 2007, assets in such accounts totaled $4.75 trillion, more than any other type of retirement account, according to an Employee Benefit Research Institute study published Wednesday. That's the good news.
The bad news is that most Americans still don't have a clue about IRAs, even though they've been available for more than 25 years. Most Americans -- even those who don't have access to a 401(k) plan at work -- don't contribute to an IRA.
Just 10% of eligible taxpayers contributed to IRAs each year from 2000 to 2004, according to EBRI. And much of the growth in IRAs comes from rollovers (when a worker leaves his employer and transfers his 401(k) to an IRA) rather than new contributions.
So, it would appear that Americans still have much to learn about IRAs. Here are the best features - and least-known facts -- about IRAs, according to the experts:
The Nondeductible IRA
Here's one fact many people don't realize: Everyone under the age of 70-1/2 who either has earned income or is married to someone with earned income is eligible to contribute to a traditional IRA, said Barry Picker, author of "Barry Picker's Guide to Retirement Distribution Planning" and a principal with Picker, Weinberg & Auerbach, CPAs.
"Too many people confuse inability to deduct the contribution with the perceived inability to make a contribution," he said.
There are several kinds of IRAs, including traditional, Roth and SEP. And there are two kinds of traditional IRAs: deductible and nondeductible. Taxpayers whose adjusted gross income is above certain thresholds and who have an employer-sponsored retirement plan typically can't deduct their contribution to an IRA.
"For traditional IRAs, the income limits only affect whether your contribution is deductible," said Michael Kitces, editor of the Kitces Report. "There is no upper limit on income that would prevent you from being able to make at least a nondeductible contribution to an IRA, as long as you have the minimum amount of earned income."
To be sure, nondeductible IRAs have some disadvantages. There's paperwork. Nondeductible IRA owners have to file Form 8606 every year with their tax return. And there's a bit of tax work required come distribution time. Owners of nondeductible IRAs must calculate the taxable vs. the nontaxable portion of their distributions when that time comes. Plus, there's some number crunching required. One should examine whether investing in certain securities (those that produce capital gains) inside a taxable account is better at building after-tax wealth than a non-deductible IRA.
Still, those costs don't seem to outweigh one of the chief benefits of any type of IRA. And that, according to Kitces, is the power of tax-deferred compounding over long periods of time.
Read IRS Publication 590 for the rules regarding nondeductible IRAs. Of note, those who save for retirement using a nondeductible IRA will have to file Form 8606 with their tax return each year. See Publication 590 on IRS site. See Form 8806.
Tapping IRAs
Many IRA owners assume they have to wait a long time until they can get at the money in their IRA. Not so, say Kitces.
One can start taking money out of IRAs before age 59-1/2 by using the substantially equal periodic payments (SEPP) rules or what some call the 72(t) rules. It's complicated, but IRA owners can withdraw a fixed amount of money for a minimum of five years or to age 59-1/2, whichever comes last. Owners have to pay ordinary income tax on the distribution, but they don't have to pay the early distribution penalty. Learn more about SEPP rules here.
Also, Kitces says, few Americans are aware of their ability to tap IRAs without penalty for medical and educational expenses. Yes, such distribution are only allowed under certain conditions (when medical expenses exceed 7.5% of adjusted gross income, for instance), but many savers are not aware it's even an option, he said.
Beneficiary Form Problems
For those that already own (or may soon own) an IRA, Beverly DeVeny, an IRA technical consultant with Ed Slott & Company, says beneficiary form problems rank high on her list of least-known facts. The beneficiary form details who will receive the IRA when the account owner dies. In many cases, account owners fail to change the names of their beneficiaries after a divorce, death or birth.
"Just make sure there is a form on file and that it names the beneficiary that you want to inherit the account," she said. "Without a form, the account will likely go to your estate and be taxable." Or, the account could go to an ex-spouse or some other unintended person. Also, she suggested IRA owners need to look at the distribution options that will be available to their beneficiaries and make sure that they offer the flexibility that they want for their beneficiaries.
Rollover Problems
Also, DeVeny said, IRA account owners need to follow-up diligently on any transfers they make to be sure they get into the correct accounts. "Don't rely on anyone else to do this for you," she said. Likewise, IRA account owners need to be sure that rollovers are back into an IRA account within the 60-day timeframe. And finally, they need to know that they can do only one rollover every 365 days per IRA. Although the same IRA can receive more than one rollover, once it has received a rollover it cannot then distribute funds for rollover until the 365 days have passed.
Inherited IRAs
Beneficiaries need to know that the name of the decedent must always remain in the title of an inherited account and that the funds can move only in a trustee-to-trustee transfer, DeVeny said. "It is important for beneficiaries to know this because too many advisers and companies do not know it," she said. A distribution paid to the beneficiary or transferred into an account in the beneficiary's name is taxable to the beneficiary and there is no way to undo the transaction, she said.
Monday, January 12, 2009
Change in Required Minimum Distribution (RMD) - 2009
For 2009 the Required Minimum Distribution from a tax advantaged account such as an IRA or 401(k). This means that the RMD for 2009 has been suspended. Below is an article that does a good job of explaining the change and the ramifications of the change. This change is only for 2009.
Congress Revises Retirement-Fund Rules
A new tax law will allow retirees to skip required withdrawals from individual retirement accounts and related accounts this year. The change -- signed into law by President Bush last month -- is intended to give beaten-down nest eggs time to rebound from the brutal bear market. But the new law may also create confusion, particularly for those just starting to take required withdrawals.
Here are answers to questions about the new law:
How do the existing rules governing IRA withdrawals work?
Normally, IRA owners over age 70½ must withdraw money each year. For your first withdrawal, however, the deadline is extended until April 1 of the year after you turn 70½. People who turned 70½ in 2007, for example, had until April 1, 2008, to take their first required distribution.
In a typical year, to calculate how much to withdraw, you look at your account balance as of the previous Dec. 31 -- and then divide that figure by your remaining life expectancy. (Life-expectancy tables can be found in Internal Revenue Service Publication 590.) Most people who inherit IRAs or 401(k)s can spread withdrawals over their own life expectancies.
These requirements also apply to 401(k)s and some other employer-sponsored plans, but not to defined-benefit pension plans or Roth IRAs. (If you are still working, you aren't required to take distributions from your current employer's retirement plan.)
What impact will the new law have?
The new law suspends required distributions in 2009. This gives those who can afford to leave their nest eggs alone a better chance of recovering some of the investment losses they sustained last year.
"They'll have more dollars working for them in the event of a stock-market rebound," says Elizabeth Drigotas, a principal at Deloitte Tax.
If you don't need to pull money out of retirement accounts for living expenses, the new law will also delay the tax you would have owed on your 2009 distribution.
Unless Congress decides to extend the moratorium, those over age 70½ -- along with those who have inherited IRAs or 401(k)s -- will be forced to resume taking withdrawals in 2010. (Note: Neither Congress nor the Treasury Department took any action involving withdrawals, or taxes on withdrawals, for 2008.)
If I turned 70½ in 2008 and had planned to take my first withdrawal by the April 1, 2009, deadline, does the new law permit me to skip it?
No. The law suspends distributions only for 2009. Although first-timers are allowed to delay 2008's distribution until April 1, 2009, the withdrawal still counts toward your obligation for 2008, Mr. Slott says. So, if you turned 70½ last year and decided to wait until close to April 1 of this year to make your first withdrawal, that deadline still applies. To calculate this distribution, you would use your account balance as of Dec. 31, 2007.
What if I turn 70½ this year?
This gets a bit more complicated. In effect, you will have until Dec. 31, 2010 to take your first withdrawal -- even though the IRS will consider that withdrawal to be your second distribution. Here's how it works:
Under the usual rules, people who reach age 70½ in 2009 -- and who wait until early 2010 to take their first withdrawal -- would have to take two distributions in 2010: one for 2009 (their first distribution) and one for 2010 (their second distribution). That second distribution would have to be taken by Dec. 31, 2010. Of course, the new law suspends distributions for 2009. Thus, first-timers -- anyone who turns 70½ in 2009 -- won't be required to make a withdrawal in 2009, or in the first three months of 2010. In short, such individuals simply can skip that "first" distribution.
But Uncle Sam will still want you to take the "second" distribution -- the one for 2010 -- even though, as far as your retirement savings are concerned, it's your first withdrawal. Again, you would have until Dec. 31, 2010, to take that "second" distribution.
Can I still donate money from my IRA to charity without paying income taxes first?
Yes. In October, lawmakers resurrected a tax break available to those who make donations directly from their IRAs to charity in 2008 and 2009. Under the law, individuals age 70½ or older can donate as much as $100,000 from an IRA to a public charity. No taxes are due on the withdrawal, and the donation counts toward a person's required annual withdrawal. This year, of course -- with mandatory distributions suspended -- the tactic loses a bit of its luster. But those who wish to make a direct donation from an IRA can still do so -- income-tax free, says Mr. Slott.
Can I convert some or all of my IRA to a Roth IRA in 2009?
Yes, provided your adjusted gross income is $100,000 or less, you'll be eligible to make such a move. Typically, those taking mandatory distributions from a traditional IRA aren't allowed to turn around and deposit that money into a Roth IRA, Mr. Slott says. (You can take your required payment and then convert all or part of the IRA balance if you wish.) But in 2009, any withdrawals can be used to fund a Roth, he says.
Congress Revises Retirement-Fund Rules
A new tax law will allow retirees to skip required withdrawals from individual retirement accounts and related accounts this year. The change -- signed into law by President Bush last month -- is intended to give beaten-down nest eggs time to rebound from the brutal bear market. But the new law may also create confusion, particularly for those just starting to take required withdrawals.
Here are answers to questions about the new law:
How do the existing rules governing IRA withdrawals work?
Normally, IRA owners over age 70½ must withdraw money each year. For your first withdrawal, however, the deadline is extended until April 1 of the year after you turn 70½. People who turned 70½ in 2007, for example, had until April 1, 2008, to take their first required distribution.
In a typical year, to calculate how much to withdraw, you look at your account balance as of the previous Dec. 31 -- and then divide that figure by your remaining life expectancy. (Life-expectancy tables can be found in Internal Revenue Service Publication 590.) Most people who inherit IRAs or 401(k)s can spread withdrawals over their own life expectancies.
These requirements also apply to 401(k)s and some other employer-sponsored plans, but not to defined-benefit pension plans or Roth IRAs. (If you are still working, you aren't required to take distributions from your current employer's retirement plan.)
What impact will the new law have?
The new law suspends required distributions in 2009. This gives those who can afford to leave their nest eggs alone a better chance of recovering some of the investment losses they sustained last year.
"They'll have more dollars working for them in the event of a stock-market rebound," says Elizabeth Drigotas, a principal at Deloitte Tax.
If you don't need to pull money out of retirement accounts for living expenses, the new law will also delay the tax you would have owed on your 2009 distribution.
Unless Congress decides to extend the moratorium, those over age 70½ -- along with those who have inherited IRAs or 401(k)s -- will be forced to resume taking withdrawals in 2010. (Note: Neither Congress nor the Treasury Department took any action involving withdrawals, or taxes on withdrawals, for 2008.)
If I turned 70½ in 2008 and had planned to take my first withdrawal by the April 1, 2009, deadline, does the new law permit me to skip it?
No. The law suspends distributions only for 2009. Although first-timers are allowed to delay 2008's distribution until April 1, 2009, the withdrawal still counts toward your obligation for 2008, Mr. Slott says. So, if you turned 70½ last year and decided to wait until close to April 1 of this year to make your first withdrawal, that deadline still applies. To calculate this distribution, you would use your account balance as of Dec. 31, 2007.
What if I turn 70½ this year?
This gets a bit more complicated. In effect, you will have until Dec. 31, 2010 to take your first withdrawal -- even though the IRS will consider that withdrawal to be your second distribution. Here's how it works:
Under the usual rules, people who reach age 70½ in 2009 -- and who wait until early 2010 to take their first withdrawal -- would have to take two distributions in 2010: one for 2009 (their first distribution) and one for 2010 (their second distribution). That second distribution would have to be taken by Dec. 31, 2010. Of course, the new law suspends distributions for 2009. Thus, first-timers -- anyone who turns 70½ in 2009 -- won't be required to make a withdrawal in 2009, or in the first three months of 2010. In short, such individuals simply can skip that "first" distribution.
But Uncle Sam will still want you to take the "second" distribution -- the one for 2010 -- even though, as far as your retirement savings are concerned, it's your first withdrawal. Again, you would have until Dec. 31, 2010, to take that "second" distribution.
Can I still donate money from my IRA to charity without paying income taxes first?
Yes. In October, lawmakers resurrected a tax break available to those who make donations directly from their IRAs to charity in 2008 and 2009. Under the law, individuals age 70½ or older can donate as much as $100,000 from an IRA to a public charity. No taxes are due on the withdrawal, and the donation counts toward a person's required annual withdrawal. This year, of course -- with mandatory distributions suspended -- the tactic loses a bit of its luster. But those who wish to make a direct donation from an IRA can still do so -- income-tax free, says Mr. Slott.
Can I convert some or all of my IRA to a Roth IRA in 2009?
Yes, provided your adjusted gross income is $100,000 or less, you'll be eligible to make such a move. Typically, those taking mandatory distributions from a traditional IRA aren't allowed to turn around and deposit that money into a Roth IRA, Mr. Slott says. (You can take your required payment and then convert all or part of the IRA balance if you wish.) But in 2009, any withdrawals can be used to fund a Roth, he says.
Wednesday, January 7, 2009
Preparing for Retirement
Retirement is about being prepared both financial and non-financially. Here is some advice for getting ready for it. Below are 7 points that I found on Motley Fool that are very good advice.
1. Plan your typical post-retirement day. When will you wake up? How will you start your day? How much time will be spent doing things on your own, as opposed to with your partner? Aside from household bills, how will you spend most of your money shopping? Going out to eat?
Now plan a year. Answer such questions as these: How many months will you spend at home? Will you spend the winters in Florida? How much time will you spend visiting family?
After you each do this exercise, compare notes. You may see where you and your partner's goals are aligned and where they chafe. It's not too early to begin troubleshooting.
2. Talk about timing. Will you retire at the same time? When? Resentment can arise if one spouse is perceived as retiring "too early," since the financial impact of that decision can be significant. Talk about the criteria you'll use in deciding.
3. Set goals. Write a list of your individual goals, and then write a list of shared goals. Just seeing the ideas in print can fuel conversation and identify potential sources of conflict. Strive for a balance of both individual and shared goals.
4. Know thyself. If you have always defined yourself by your vocation, then know that having "nothing to do" may make you feel lost and miserable, feelings that you can then pass along to your spouse. Think of what will make you feel valuable and productive in your retirement years, and include it on your list of goals.
5. Set boundaries. What results when the "me and you against the world" mentality collides with the "more-the-merrier" mind-set? Feelings of rejection, annoyance, and jealousy, to name a few. Discuss finding a balance.
6. Define household roles. In retirement, the domestic landscape changes. How will household responsibilities be reallocated? Make sure that having more time doesn't translate into more time to micromanage. Conflict is inevitable if tasks your spouse has always handled alone are now up for your discussion -- and unsolicited advice.
7. Get specific about your plans. "We'll travel" could mean he wants to drive around the country in an RV while you want to lounge on the beach in Spain. Both technically fall under the category of "travel," but they involve different experiences, outlays of money, and time.
Plan the interpersonal aspects of your retirement, and you'll find that the gold in "golden years" isn't all about money. It's about enjoying the time we have with the people we love.
1. Plan your typical post-retirement day. When will you wake up? How will you start your day? How much time will be spent doing things on your own, as opposed to with your partner? Aside from household bills, how will you spend most of your money shopping? Going out to eat?
Now plan a year. Answer such questions as these: How many months will you spend at home? Will you spend the winters in Florida? How much time will you spend visiting family?
After you each do this exercise, compare notes. You may see where you and your partner's goals are aligned and where they chafe. It's not too early to begin troubleshooting.
2. Talk about timing. Will you retire at the same time? When? Resentment can arise if one spouse is perceived as retiring "too early," since the financial impact of that decision can be significant. Talk about the criteria you'll use in deciding.
3. Set goals. Write a list of your individual goals, and then write a list of shared goals. Just seeing the ideas in print can fuel conversation and identify potential sources of conflict. Strive for a balance of both individual and shared goals.
4. Know thyself. If you have always defined yourself by your vocation, then know that having "nothing to do" may make you feel lost and miserable, feelings that you can then pass along to your spouse. Think of what will make you feel valuable and productive in your retirement years, and include it on your list of goals.
5. Set boundaries. What results when the "me and you against the world" mentality collides with the "more-the-merrier" mind-set? Feelings of rejection, annoyance, and jealousy, to name a few. Discuss finding a balance.
6. Define household roles. In retirement, the domestic landscape changes. How will household responsibilities be reallocated? Make sure that having more time doesn't translate into more time to micromanage. Conflict is inevitable if tasks your spouse has always handled alone are now up for your discussion -- and unsolicited advice.
7. Get specific about your plans. "We'll travel" could mean he wants to drive around the country in an RV while you want to lounge on the beach in Spain. Both technically fall under the category of "travel," but they involve different experiences, outlays of money, and time.
Plan the interpersonal aspects of your retirement, and you'll find that the gold in "golden years" isn't all about money. It's about enjoying the time we have with the people we love.
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