Small business owners have many concerns, not least of which is retirement benefits for themselves and their employees. Many employers offer a 401(k) plan to their employees to help address retirement needs. While many small business owners take advantage of the deferred compensation available to them under the 401(k) plan, there are ways to increase the benefit and value of these plans.

While employee contributions are limited to $17,500 for 2013, the annual tax deferral limit is $51,000 ($56,500 for those over age 50). The tax deferral limit is the maximum amount that can be contributed to an individuals 401(k) account in a single year, it combines both the employee’s contribution as well as the employer’s contribution. As an example, a small business owner might contribute the full $17,500 deferral available to herself in a year under the 401(k) rules. In addition, the business makes a profit sharing contribution of $33,500 to the owners account, for a maximum contribution to the business owner of $51,000. This is obviously a tidy sum to receive.

For small business owners looking to maximize their savings and minimize their taxes, utilizing a profit sharing option in a 401(k) plan can be a very good decision. Here are some of the benefits for small business owners:

- Employee contributions to the plan are not taxed by the federal and most state governments until they are distributed (usually at retirement age).

- Employer profit sharing contributions are an allowable business deduction. Contributions to the plan are not taxed until they are distributed.

- The small business owner can defer up to $51,000 to his / her 401(k) account in a single year. Significantly more than if they just maximize the $17,500 employee contribution limit.

- Flexibility – The profit sharing contribution is discretionary and can vary by year. If the business has a difficult year, the profit sharing contribution can be reduced.

- Attract employees – A well designed and funded profit sharing plan can help attract great employees.

- Administration and costs are generally low.

There are several different types of profit sharing plans. The one I see the most is called a New Comparability Plan. A new comparability plan is a profit sharing plan that divides employees into groups. A simple division between groups might be an owner group and a non-owner group. Each group receives a profit sharing contribution match based on a percentage of compensation. However, the match percentage for each group does not have to be the same. As such, profit sharing contributions can be allocated significantly in favor of the small business owner.

As an example, the non-owner group might receive a contribution based on 1.5% of their salary and the owner group might receive a contribution based on 4.5% of their salary. If there is one employee in the non-owner group and their compensation is $40,000, the company will make a profit sharing contribution of $600 to the non-owner. If the owner’s compensation is $100,000, the company makes a profit sharing contribution of $4,500. So for a total cost of $5,100,which is fully tax deductible, the owner will receive $4,500 into her account. The goal for a small business owner might be to reach the annual tax deferral limit of $51,000 in a given year. Deferring this amount of income annually will save significant tax dollars and should create significant long term wealth for the small business owners.

There are some restrictions, including discrimination testing. However, most of these restrictions can be overcome by contributing 5% to the employees’ accounts, then the small business owner should be able to defer the full $51,000 for herself. Additionally, you will need to engage someone experienced in creating these types of plans, which has an administration cost. However, for many small business owners, the tax benefits can be substantial.

One of my all around favorite books relating to money matters is Rich Dad’s Guide to Investing by Robert Kiyosaki. I was expecting this book to be something similar to Benjamin Graham’s Security Analysis, an in depth discussion of what to look for in buying stocks. However, the book is not so much about investing as it is about the investor. And it was filled with good ideas that were novel to me.

The concept that most stuck in my mind was how Mr. Kiyosaki measured wealth. He teaches that wealth should not necessarily be measured in units of dollars, but in units of time. This measure of time looks at how long your assets can carry you, without the need to work. In other words, if you stopped working today, how long could you survive financially with the assets that you have?

To determine this, you need to do a little work and create both a budget of your monthly expenditures as well as determine your net assets (value of what you own versus what you owe). Say your household expenditures are $4,000 per month and you have net assets that total $12,000. If you quit your job today, your assets could carry you for about three months, before significant financial hardship set in. Your wealth measure would be 90 days as you could survive that long under your existing lifestyle without working.

The “work” that Mr. Kiyosaki encourages is increasing ones portfolio and passive income. Portfolio income includes things such as interest and dividends. Passive income includes things such as rental income or royalties. Mr. Kiyosaki believes that you should spend some of your time trying to increase these types of income. Let’s say you are successful and after ten years, you can generate $5,000 per month in net rental income and still have only $4,000 per month in living expenses. In this case your wealth number is infinite. You could expect to be able to continue your lifestyle in perpetuity without the need to show up at the office ever again.

A good definition of financial independence might be when your assets generate more income that your household expenses consume. You no longer have to work for money, because your money works for you.

By John Napolitano, Financial Planning Association of Massachusetts

John Napolitano is president of the Financial Planning Association of Massachusetts and chief executive of US Wealth Management. He will be hosting a live Boston.com chat on Friday, Nov. 9 at 3 p.m.

We all eventually clean out a closet or basement, and find things that you forgot about and deem useful or valuable. From a financial perspective, the same process may also yield unexpected treasures. Living proof of this is your home state's unclaimed property list. In my home state of Massachusetts, it is estimated that one in 10 residents has unclaimed property.

FULL ENTRY

You can start collecting Social Security at 62, but it might not be the best idea. If you can hold out longer -- say, until you are 70 -- then you could have a much nicer regular income coming in.

FULL ENTRY

With growing uncertainty about the future of Social Security funding, the Social Security Administration (SSA) suspended mailings of its annual statements. The move is expected to save the agency $60 million in fiscal 2012.

Previously, the SSA had sent all working Americans an annual statement about three months before their birthday. The statement included one's lifetime earnings record, as well as estimates of retirement, disability, and family survivor benefits. It also reported earned credits, which indicated if one would qualify for Medicare at age 65.

Mailings for the remainder of 2012 will be limited to workers over 60, and longer term, the agency is working on an online download option for everyone else.
In the interim, you can access the same information online at SSA.gov, using one of the following methods:

The Retirement Estimator (http://www.ssa.gov/estimator/) gives estimates of your retirement monthly benefit, based on your actual Social Security earnings record. The calculator shows early (age 62), full (ages 65-67 depending upon your year of birth), and delayed (age 70). The Retirement Estimator also lets you create additional "what if" retirement scenarios based on current law.

If you do not have an earnings record with Social Security or cannot access it, there are also other benefit calculators that do not tie into your earnings record. The calculators will show your retirement benefits as well as disability and survivor benefit amounts if you should become disabled or die.

Social Security should be a part of your retirement income planning. Make a point of checking out your estimated benefits at least annually so you know how much to expect -- and how much you'll need to provide from your own savings.

Also, remember that Social Security benefits don't automatically increase every year. In 2011, benefits stayed the same as the previous year. For 2012, benefits will rise by 3.6% to reflect an increase in inflation.

The Saver’s Credit is a tax credit that provides an added benefit for low to moderate-income workers who save for retirement. The saver’s credit will offset part of the first $2,000 that workers contribute to their IRAs or 401(k) plans (as well as other similar employer-sponsored retirement plan. This credit is also known as the Retirement Savings Contributions Credit.

The maximum credit that a single taxpayer can receive is $1,000. Married taxpayers can receive a maximum credit of $2,000. This credit is refundable which means that it can increase your refund or reduce your tax owed. The actual amount of the credit is based on the taxpayer’s filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement plans.

The Saver’s Credit supplements other tax benefits typically available for those who make retirement contributions such as the ability to deduct IRA contributions and make pre-tax 401(k) or 403(b) contributions.

The Saver’s Credit can be claimed by:
* Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;
* Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and
* Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.

Additional requirements to be eligible for this credit include:
* Eligible taxpayers must be at least 18 years of age.
* Anyone claimed as a dependent on someone else’s return cannot take the credit.
* A student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a student.
* Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return. Form 8880 and its instructions have details on making this computation.

In order to claim this credit for 2011, you will need to make your qualifying IRA contribution by April 17, 2012 or make your contribution to your employer sponsored retirement plan (e.g., 401(k), 403(b), 457 Plan, and Thrift Savings Plan) by December 31, 2011.

For more information about the Saver’s Credit visit the IRS’ web site at http://www.irs.gov/newsroom/article/0,,id=107686,00.html

In late 2008 and early 2009, many investors jokingly referred to their 401(k)s as "201(k)s" because their account balances had fallen so drastically. However, a recent survey by Fidelity Investments says that account balances are at their highest levels since the company began tracking account values in 1998.

Fidelity recently reported that the average 401(k) retirement plan balance rose to $74,900 as of March 31, 2011. That represents an increase of 12 percent from March 31, 2010. The company also reported that participants in its 401(k) plans saved an average of 8.2 percent of their salaries.

Vanguard reported figures that were very similar. The average balance in its 401(k) accounts was just over $79,000 at the end of 2010. Again, this represented the highest balance since Vanguard began tracking balances in 1999.

So, the fact that account balances are rising is good news but account balances and annual contributions are still at very low levels. An 8 percent contribution might sound reasonable, but depending on the employee's age and the amount he or she has already saved, contributions of 10 to 20 percent of income are generally required. Also, the guideline for a safe withdrawal rate is generally 4 to 5 percent. If an employee is retiring with a 401(k) account balance of $75,000, the amount they can safely withdraw each year is just $3,000 to $3,750.

Fortunately, Fidelity points out that the $74,900 figure is an average for all participants so it includes the balance of employees in their 20s as well as their 60s. Older participants hopefully have higher balances. Fidelity reports that employees who are 55 years old or older and who have participated in their company plans for 10 year or more have balances that average $233,800. Definitely an improvement, but even these individuals should not be withdrawing more than $11,600 from their accounts if they want their money to last throughout their retirement.

Do you have financial questions that you'd like an informed opinion about? Then join certified financial planner Dana Levit today at 11 a.m. for a chat about money. Dana is owner of Paragon Financial Advisors in Newton.

The Social Security Administration (SSA) recently announced a couple of changes designed to reduce its costs and increase the use of the online tools and information available at the SSA’s web site (www.ssa.gov). Both of the changes noted below are expected to help the SSA save more than $190 million each year. The changes include the following:

• Suspension of the annual Social Security Benefits statements: Each year, the SSA sends out a Social Security Statement to each person, which includes their earnings history and an estimate of the retirement, disability and survivors benefits that they and their family are expected to receive (based on the earnings in the statement). Statements are sent out about three months before a person’s birthday each year.

As of last month, the SSA suspended those mailings to everyone for the remainder of this year. The SSA expects to resume the mailings in 2012 to those who are 60 or older. For those who are younger than 60, you can still request a copy of your benefits statement but they will not be automatically sent out each year. In addition, the SSA is working on options for people to download or access their benefit statements online. In the meantime, you can still use the SSA’s Benefit’s Estimator (http://www.socialsecurity.gov/pubs/10510.html) to help you estimate your social security retirement benefits.

The information from these statements - regardless of how to receive it - can be valuable in your financial planning or retirement planning process for a couple of reasons. First, it will provide you with an estimate of the retirement, disability, and survivor benefits that you are likely to receive. Secondly, it provides you with the earnings history that the SSA uses to calculate your benefits. It’s important to check (and correct, if necessary) your earnings history to ensure that you receive the benefits you are entitled to.

• Switching from paper checks to electronic payments: Those who are applying for Social Security benefits on or after May 1, 2011 will receive their benefits checks electronically (through Direct Deposit or Direct Express). Those who are receiving benefits prior to May 1, 2011 can continue to receive paper checks but will need to switch to one of the electronic methods noted above by March 1, 2013. For more information about the SSA’s electronic payment methods visit www.GoDirect.org.

What is a Stretch IRA account?

A "stretch IRA" is a not an actual type of IRA account that you can “open” like you do for a traditional IRA, Roth IRA, SEP-IRA, or SIMPLE IRA. Rather, the term “stretch IRA” refers to a traditional IRA or Roth IRA that includes certain provisions that make it easier to keep funds in the IRA after the IRA owner dies. These provisions will generally allow the beneficiaries to continued the tax-deferred growth of the funds in the IRA over a longer period of time. An IRA or Roth IRA that does not have these provisions may be required to distribute the funds in the IRA account more aggressively than the beneficiary needs or desires.

Many people may know that owners of non-Roth IRAs are required to take minimum distributions from their non-Roth IRAs during their lifetime starting at age 70.5 (also referred to as “lifetime requirement minimum distributions”). However, many may not know that all IRAs (including Roth IRAs) are also subject to certain required minimum distribution rules after the IRA or Roth IRA owner dies. The amount and timing of these required minimum distributions are determined based on several factors including, who the owner names as his/her beneficiaries, whether or not successor beneficiaries are named, and whether or not the IRA owners dies before beginning his/her lifetime required minimum distributions.

Keep in mind that IRA “stretch” provisions and strategies are largely based on the required minimum distribution rules, which can be complicated and confusing. In addition, they are not the right solution for everyone. In general, “stretch” provisions are more useful in situations where the IRA’s beneficiary can afford to minimize the distributions from the inherited IRA and thus, extend the tax-deferred growth of the inherited IRA for their heirs. If you are considering the use of these strategies, you may want to consult with a financial planning and estate planning professional as part of your comprehensive retirement and estate planning work.

I have a SEP IRA from when I was self-employed. I now work for another employer that has a 401(k) plan. Can I continue to make contributions to my SEP IRA if I am no longer self-employed?

A SEP IRA is a type of employee pension plan that allows employers to make contributions towards their employee’s retirement as well as their own retirement (if they are self-employed). If you are no longer self-employed and earning income from that business, you will not be able to continue to make contributions to that SEP IRA because contributions are based on earnings from that business.

If the SEP IRA is no longer active, you generally have a couple of options including keeping the SEP IRA account as is (and not making any additional contributions) or terminating the SEP IRA plan and rolling your account over to an IRA. If you choose to terminate the plan, you can do so by contacting the financial institution that administers your plan. Although it is not required, you should let your former employees (if you had any) know that you will not be making any additional contributions and that the plan will be discontinued. You do not need to contact the IRS to let them know that you are terminating the plan.

More information on SEP IRAs, can be found in IRS Publication 560 at http://www.irs.gov/publications/p560/index.html.

A new year brings about a renewed vigor for many people to better their financial situation. If you want to start the year off with a bang for your financial buck, then make your 2011 IRA contribution now.

Many people wait until the end of the year, or even until they pay their income taxes in April of the following year, to make IRA contributions. But making a contribution now means your money has more time to grow. You get an extra year of tax-deferred (or in the case of a Roth IRA, tax-free) growth.

So if you have the cash and you know you are qualified to make a contribution, go ahead and fund your IRA or Roth IRA now. Even if you haven’t earned enough income to match the contribution yet you can do so, as long as you know you’ll earn it by the end of the year.

If you can’t make the whole contribution now (the maximum is $5,000, with an extra $1000 allowed for those age 50 or older by the end of the year) at least get started. Contribute what you can now and add more later. Or set up direct deposit from your paycheck or bank account so you don’t have to think about it later in the year.

As more employers shift away from offering defined benefit plans to defined contribution plans (such as 401(k) and 403(b) plans), employers are trying to provide employees with a wide menu of products to choose from. In part, this is to ensure that employees with various personal financial situations have the ability to select investments that best fits their particular needs. While this flexibility is generally a good thing, it does come with a price. In addition to understanding the fees associated with the administration of the overall plan, employees must also understand the fees and expenses for the individual investment products. To further complicate matters, each plan administrator and investment product may have different fees and different ways of charging those fees.

Under the current Employee Retirement Income Security Act (ERISA), employers are required to follow certain rules about the administration of 401(k) plans including the plan’s fees and expenses. However, the rules do not specifically dictate what the fees are and how they are charged. The responsibility for determining the fees paid are left to the employer and the employee (through the investments he/she chooses).

According to the US Department of Labor (DOL), fees and expenses associated with a 401(k) plan can generally be grouped into the following three categories:

1) Plan administration fees: These are fees paid for the daily management of the plan including record keeping, accounting, legal, educational seminars, etc.;

2) Investment fees: These are fees associated with the specific investment. For mutual funds this may include transaction costs, loads, sales charges, 12b-1 fees, management fees and commissions. For annuities this may include wrap fees, surrender or transfer charges, insurance-related charges, etc.; and

3) Individual service fees: These are fees for optional services that a plan participant chooses. For example, a participant may be charged an administration fee associated with taking a loan from his/her 401(k) account.

As the responsibility for building a retirement nest egg continues to shift from employers to employees, understanding the impact of fees and expenses on your 401(k) account is critical.

In October 2010, the DOL issued new rules that should make it easier for employers and employees to understand the fees that are associated with their 401(k) plan. Starting on January 2012 employers will need to provide more transparent information about the fees associated with their 401(k) plans and the investments offered by their plan.

The new rules require employers and plan administrators to provide more detailed, user-friendly information about two main areas including:

* Plan-related information such as administrative expenses and the fees and expenses deducted from individual plan participant’s account, and

* Investment-related information for each investment such as performance data, benchmark information, and expense and fee information.

Regardless of these new rules the DOL recommends that you review your fees though your account statements, investment documents (e.g., prospectuses), and the various plan documents (such as the summary plan description and the Form 5500) available from your employer or plan administrator.

The Small Business Jobs Act of 2010 that was enacted into law in late September includes a provision that allows certain 401(k) and 403(b) plan participants the ability to convert their 401(k) and 403(b) assets to a Roth 401(k) or Roth 403(b) account. In addition, if the conversion is done in 2010, the payment of the taxes due on any of the converted amounts can be deferred until 2011 and 2012. This is the same benefit offered to those who are converting their Traditional IRAs to Roth IRAs in 2010.

While this seems like a great benefit for those looking to turn their future retirement distributions into tax-free distributions, the following criteria need to be satisfied to convert to a Roth 401(k) or Roth 403(b).

1) The participant’s existing 401(k) or 403(b) plan needs to include a Roth option as part of the plan itself. While many employers have been adding this option to their plans since its introduction in 2006, many others have not. Be sure to check with your employer to see if their plan offers the option to set up a Roth account.

2) If your employer offers a Roth option, you will need to check to see if they offer the ability to do a Roth conversion (or if they plan to offer this option) within their existing plan. Under the Small Business Jobs Act of 2010, employers have the option but are not required to offer the conversion provision.

3) If your employer’s plan offers a Roth option and you are allowed to do a Roth conversion within their plan, you will need to make sure that you are eligible to take a distribution from your plan. Plan participants are not generally allowed to take distributions from their 401(k) or 403(b) plans without satisfying certain criteria set out by the employer’s plan. Each employer will have different criteria for determining who is eligible for a distribution, so be sure to check with your employer to see what criteria need to be satisfied.

Regardless of whether or not you are considering a Roth conversion from your Traditional IRA or your 401(k)/403(b) account you should answer the following questions as they apply to your specific financial situation:

* What are the advantages and disadvantages of doing a Roth conversion?
* How much should I convert?
* How will I pay the taxes owed on the conversion (if any)?
* Can I offset the taxes owed on the conversion with other circumstances within my tax situation?
* Should I pay the taxes owed on the conversion in 2010 or defer them until 2011 and 2012?

Medicare’s Extra Help Program provides assistance to Medicare Part D recipients who have limited resources and income to pay for expenses related to their prescription drug plan. These expenses include monthly premiums, annual deductibles, and prescription co-payments.

As of January 1, 2010, a new law went into effect that allowed more Medicare beneficiaries to qualify for the Extra Help Program. Prior to this law, financial resources and income such as life insurance policies and income received from others to pay for household bills were included in determining the Medicare recipient’s eligibility. Under the new law, Medicare recipients do not need to include, as income, the assistance they receive if someone pays for their household expenses such as food, mortgage payments, rent, utilities, and property taxes. In addition, life insurance policies will no longer be included as a financial resource for purposes of calculating the recipient’s eligibility.

To qualify for the Extra Help Program, the Social Security Administration outlines the following requirements for the Medicare recipient:

* He/She must reside in one of the 50 states or the District of Columbia;
* His/Her resources must be limited to $12,510 for an individual or $25,010 for a married couple living together. Resources include such things as bank accounts, stocks, and bonds. The person’s house and car are not counted as resources; and
* His/Her annual income must be limited to $16,245 for an individual or $21,855 for a married couple living together. Even if their annual income is higher, they may still be able to get some help.

To apply for this program you will need to complete the Social Security’s Application for Extra Help with Medicare Prescription Drug Plan Costs (SSA-1020). This form is available at your local social security office, online at http://www.ssa.gov/prescriptionhelp/forms_notices.htm, or via telephone at 1-800-772-1213.

For more information visit the Social Security Administration’s web site at: http://www.ssa.gov/prescriptionhelp/index.htm.

About three weeks ago, my wife and I refinanced our home for the second time in 18 months. We have shaved about $460 per month off our original mortgage payment. We are definitely a benefactor of the Federal Reserve current interest rate policy. No sane bank would ever provide my wife and me a 30 year loan at 4.25 percent. As of Wednesday, a 30 year US Treasury bond was yielding 4.25 percent. Consequently, the US Government is borrowing money at the same rate that we are borrowing money. Not that we are bad credit risks, we just are not as good as the US government.

Last week the Federal Reserve announced that it will purchase an additional $600 billion of Treasuries in an attempt to further reduce interest rates. Maybe my wife and I will hit pay dirt again and refinance our home at an even lower rate. While these low interest rates have been a blessing to us, they have been a curse to others. Those cursed in the current environment are primarily seniors and savers.

My Grandmother was the model of fiscal prudence and responsibility. She lived through the Great Depression and knew how to stretch and save her money. After retiring, she lived on a modest Social Security annuity and her savings. All of her savings were in CD’s. Like many elders, she preferred not to tap into the principal of her savings and lived on the interest that it earned. After passing this summer, most of her CD’s were earning interest at rates considerably less than one percent. She could no longer live solely on the interest and was dipping into the principal. She was being squeezed and had to cut back where she could. I know others are being squeezed as well.

As if this is not bad enough for seniors, the Federal Reserve wants to INCREASE the rate of inflation. So in addition to earning no interest on their savings, their savings accounts will actually be worth less, i.e. your $100,000 CD will only buy you $97,000 worth of goods next year.

What is the rationale to redistribute money to borrowers (like myself) from savers (like my Grandmother)? This is the net effect of the Federal Reserve’s policy. I save $460 per month and my Grandmother probably gave up a similar size stream of income each month. Is this the new era of responsibility that President Obama was talking about when he ran for President? Are the savers no longer the responsible party and the borrowers are? Maybe my wife and I will go run up our credit cards on frivolous trinkets and become even more responsible. Instead of saving for the kids college (and earning no interest), we will take a vacation.

Although the IRS generally allows loans to be taken from 401(k) plans, your employer may not allow it in their particular plan. If your employer does allow you to borrow from your 401(k) balance, there may be further restrictions. Loans from your 401(k) cannot exceed the lesser of 50 percent of your vested balance or $50,000 dollars and they usually need to be repaid within 5 years. In addition, employers may impose restrictions on the purpose of the loan. For example, some employers will only allow loans for unreimbursed medical expenses, educational expenses, first-time home buyers, and financial hardships. Be sure to check with your company or your company’s 401(k) plan administrator to confirm if you can borrow money from your 401(k) and, if so, under what conditions. Aside from these restrictions, you should keep in mind that there are advantages and disadvantages to borrowing from a 401(k) plan.

The main advantages of borrowing from your 401(k) plan include:
* No credit check - If your company allows the loan, it is usually easy to qualify for it without having to go through a credit check;

*Lower interest rates - The interest rates you repay the loans with are usually more favorable than commercial loan rates;

* The repayment of interest goes back into your account - You are paying yourself for the loan as opposed to paying a bank or credit union;

* Loan proceeds received are not taxable - The loan you receive is not considered taxable income unless you default on the repayment of the loan; and

* No early withdrawal penalty - As long as you do not default on the repayment of the loan, you are not subject to the 10 percent early withdrawal penalty if you take out a loan before age 59.5.

The main disadvantages of borrowing from your 401(k) plan include:
* The loan needs to be repaid - If you lose your job or leave voluntarily, you will usually need to repay the loan in full, right away, or be subject to income taxes on the outstanding balance and a 10 percent premature distribution penalty;

* Repayment is made with after-tax dollars - Each dollar you earn to repay the loan will have income taxes taken from it. That same dollar will be taxed again when you retire and withdraw your money from the 401(k). For example, if you are in the 25 percent tax bracket and you earn $100 dollars. After income taxes are taken from that $100 dollars, you will be left with $75 dollars to repay your loan. That same $75 dollars will be taxed again when you retire and withdraw the funds as a distribution; and

* Opportunity loss - By reducing your 401(k) balance you are losing the potential for that money to grow and earn interest over the long-term.

In general, taking a loan from your 401(k) is not a good idea for most people and not widely recommended. However, in certain circumstances it may be the only feasible option available. Keep in mind that 401(k) plans are setup with incentives to encourage people to create and maintain long-term savings for retirement.

The Social Security Administration (SSA) recently confirmed that there will not be an automatic cost-of-living-adjustment (COLA) for those who receive monthly Social Security and Supplemental Security Income benefits in 2011.

Under current social security laws, Social Security and Supplemental Security Income benefits increase automatically each year based on the inflation measure known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Each prospective year’s COLA is determined based on the change in the CPI-W from the third quarter of the prior year to the current year’s third quarter. Therefore, the COLA for 2011 is based on the change in the CPI-W from the third quarter of 2009 to the third quarter of 2010. Since there was no increase in the CPI-W for that period, there would be no COLA increase for 2011.

The lack of an increase for 2011 may not come as a surprise to many, especially since there was no increase for 2010. According to the SSA, this would only be the second time since 1975 (when COLAs went into effect) that an automatic COLA will not be made.

In addition to holding Social Security and Social Security Income benefits flat for 2011, the lack of an automatic COLA increase also prevents other amounts from increasing. For example, the maximum amount of earnings that are subject to Social Security taxes for 2011 will remain at the current 2010 amount of $106,800 dollars. Also, the retirement earnings test exempt amounts for 2011 remain unchanged. If you will not reach your Normal Retirement Age (NRA) anytime during 2011, you can year $14,160 dollars before your Social Security benefits are reduced. If you will reach your NRA during 2011, you can earn $37, 680 dollars for the months in 2011 prior to reaching your NRA, before your Social Security benefits are reduced.

For more information, visit the SSA’s web site at http://www.ssa.gov/.

For additional information about the 2011 COLA, go to http://www.socialsecurity.gov/cola/.

Qualified small businesses and self-employed individuals who are considering establishing a SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA for this calendar year but must do so by October 1, 2010 in order to make contributions for the 2010 tax year. A SIMPLE IRA is a type of employer-sponsored, tax-deferred, retirement plan that allows small employers to make retirement contributions to their retirement and their employees’ retirement. In addition to employer contributions, employees are also allowed to make their own SIMPLE IRA accounts.

Qualified small businesses are defined as (1) those who do not currently maintain another retirement plan (such as a qualified plan, SEP or 403(b) plan), and (2) those with 100 or fewer employees who each earned $5,000 or more in compensation during the preceding calendar year.

For a small business a SIMPLE IRA offers several advantages over other types of tax-deferred retirement plans including:
• An easy way for employees to contribute towards their retirement;
• A relatively inexpensive tax-deferred, retirement plan to set up and administer;
• An ability to offer an employer match for the contributions made by employees;
• Potential tax credits for the costs incurred to set up the SIMPLE IRA plan; and
• Potential tax deductions for contributions made to employees’ accounts.

Keep in mind that SIMPLE IRA plans may not be appropriate or beneficial for all small employers. For more information about SIMPLE IRA retirement plans, visit the IRS web site at: http://www.irs.gov/retirement/sponsor/article/0,,id=139831,00.html

The Pension Benefit Guaranty Corporation (PBGC) recently reported that they are holding approximately $197 million in unclaimed pension benefits from private employer pension plans that have been terminated. The PBGC is the federal entity that was created to protect and guarantee retirement benefits for defined benefit pension plans offered by private companies.

Although not as common as they once were, defined pension plans are retirement plans offered by private companies that pay a fixed, monthly amount of money to an employee when they retire. The monthly benefit paid is typically based on the employee’s salary and number of years worked at that company. When a company terminates its defined pension plan - usually because the company merged or was acquired or if the company experienced financial distress such as bankruptcy, the PBGC would step in to ensure that the participants of those plans receive a basic level of retirement benefits. The PBGC pays participants of terminated plans with funds collected from the companies with defined pension plans (in the form of insurance premiums), the proceeds generated from its investments, and the funds from terminated plans.

The PBGC is currently paying retirement benefits to almost 750,000 workers and has unclaimed benefits of $197 million owed to approximately 36,000 people. If you want to check to see if you are one of the 36,000 people who are owed any of these unclaimed benefits, use the PBGC’s Pension Search directory at http://search.pbgc.gov/mp/. This search service is free of charge and available 24 hours a day.

For more information about unclaimed pension benefits and how to find them, the PBGC offers additional tips, suggestions, and resources in their “Finding A Lost Pension” booklet available at www.pbgc.gov/docs/Finding_A_Lost_Pension.pdf.

What prevents someone from making a contribution to a Roth IRA? I am single, my AGI (Adjusted Gross Income) for 2009 was under $100,000, and I have a 40lk plan from my job. When I did my taxes using one of the tax preparation software programs, it told me that I wasn't eligible for a Roth IRA. Last night, while watching a financial planning show, a viewer was told to max out her 401K and max out her Roth IRA. What gives?

The eligibility requirements to contribute to a Roth IRA for 2009 for a person whose tax filing status is single or head-of-household are as follows:
- You must have earned income equal to at least the amount of your contribution, and
- Your Modified Adjusted Gross Income (MAGI) cannot exceed $120,000.
- Keep in mind that your participation in an employer’s 401(k) plan does not impact your eligibility to contribute to a Roth IRA.

Based on the information in your question it is difficult to know if you were eligible to make a Roth IRA contribution for 2009 or not. Your eligibility to contribute to a Roth IRA is based on your MAGI and not your AGI. Therefore, you should double check that your Modified Adjusted Gross Income (MAGI), and not your Adjusted Gross Income (AGI), is below $120,000.

To calculate your MAGI, you need to start with your AGI and add back the following items:
- Traditional IRA contributions that were deducted.
- Student loan interest amounts deducted.
- Tuition and fees deducted.
- Domestic production activities deducted.
- Foreign income or housing costs excluded on Form 2555.
- Foreign housing deduction taken on Form 2555.
- Savings bond interest excluded on Form 8815.
- Adoption benefits from an employer excluded on Form 8839.

For step by step directions on calculating your MAGI, the IRS provides a worksheet on page 16 of Publication 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf).

Roth IRA contributions for 2009 were due by the April 15, 2010 (unless you live in an area where the IRS extended the individual tax filing deadline). If, after calculating your MAGI, you are eligible to make a Roth IRA contribution for 2009 based on the criteria noted above, you should contact the IRS to see if they will allow you to make the contribution for 2009 since the normal deadline has passed. Be prepared to explain the specifics of your situation and reason for your request.

How often should I update my will and my other estate planning documents?

Regardless of the amount of assets you have or your net worth, I generally recommend that most adults have five basic estate planning documents. These include a will, a durable power of attorney, a health care proxy, a living will and medical release or HIPAA release (Health Insurance Portability and Accountability Act).

These documents are considered "living documents" that should be reviewed on a regular basis and updated to reflect your personal and financial circumstances over time. I usually recommend that these basic documents be reviewed and updated every 2 to 5 years depending on the changes that occur in your life.

These documents should be updated more frequently if any of the following significant life events occur:

• Changes in your family situation such as marriage, divorce, new children or grandchildren (by birth, adoption, or marriage);
• Changes in your career or professional situation such as starting or purchasing a business, becoming a partner in a business, dissolution a business, changing jobs, or career;
• Death, disability, or illness of a family member;
• Changes in the number of dependents you have because you provide the care for an elderly parent or adult child;
• Significant increases or decreases in the value of your assets due to things such as changes in the stock market, changes in salary or compensation, changes in how your assets are valued;
• Borrowing or lending substantial amounts of money;
• Taking on significant amounts of debt or liabilities;
• Changes related to the receipt or disposition of a large inheritance, bequest, or gift;
• Changes in your life insurance coverage;
• Changes in federal or state laws;
• Changes to those who you have named as a trustee, guardian, or executor;
• Significant changes to your or your spouse's health; or
• Changes in your or your spouse's wishes and goals.

The events named above do not represent an exhaustive list but they should provide you with an idea of the type of things that may trigger a review of your estate plan.

Employers sometimes match employee’s 401(k) contributions by using company stock. Once the stock is deposited to the account the employee can sell it (although they may be restricted to holding it for a certain amount of time first.) Employees also amass company stock through ESPP, or Employee Stock Purchase Plans, in which the stock is offered to the employee at a discount. I often find that employees hold on to company stock, letting it build up to become a large portion of the account. This is dangerous for a couple of reasons.

When a client comes to me in this situation he (or she) usually tells me that they “know the company” and are very confident in the stock. But how well do you really know the company? Unless you’re in a top management position you don’t know what decisions are being made that could affect the bottom line. And if you did know, the stock you would be given would come with a lot more restrictions on your ability to sell it. In addition, any company can succumb to poor or fraudulent management. Remember Enron anyone?

Another reason to diversify is that your income is dependent on that company. Why should your investments be dependent on the same risk? Why open yourself up to the risk of losing your income as well as some percentage of your portfolio, both for the same reason?

Finally your company may well be financially strong, with good long-term prospects. But forces beyond their control – like the market downturn we have just experienced – could reduce its value. I often think of a prospective client who walked into my office in 2007 with a $1 million 401(k), all in GE stock. He “knew the company” and wasn’t going to diversify until the stock hit $40 (it was around $36 at the time.) Needless to say he didn’t hire me because my advice was to diversify. I thought of him over the next few years as I watched GE hit $40 briefly – and then sink to about $5 during the recent recession. I certainly hope he sold when he said he would.

Ninety percent of the 21 million US businesses are family owned. Yet only thirty percent of family run companies today succeed into the second generation, and only 15 percent survive into the third (Source SBA.gov). The reason for this significant failure is obvious; these businesses lack an orderly succession plan.

Family run businesses have struggled through the recent recession. For many, sales and cash flows have declined. The inability of many small businesses to get adequate bank financing has exacerbated the problem. However, some families businesses are taking advantage of this recession by executing their succession plan.

There are several reasons that the recession is a prime time to execute your succession plan. They are as follows:

Business valuations are low – A business generating less income is worth less money. The reduction in value makes it much more tax efficient to move these assets out of one’s estate and into the hands of the next generation. Just a few years ago the same transfer may have cost the business owner a significant amount of taxes.

Commercial real estate valuations are low - If your business also owns real estate, these assets also have likely declined in value. If this is the case, this may be a good time to transfer these assets to your heirs.

Tax rates are low – The maximum capital gains rate is 15% in 2010. This rate is increasing to 20% in 2011. With the federal government operating a $1.6 trillion deficit, do not expect rates to be this low anytime in the next generation. You may consider taking advantage of this now.

There are many strategies and techniques used to execute a succession plan. If you are in need of developing a succession plan for your family business, please see the following “Business Succession – A Ten Step Checklist”.

Business owners are obviously distracted by economic issues, but please do not miss out on this opportunity to align you business for the future and to reduce your taxable estate. If you have any questions, please submit them on the bottom right side of this webpage.

Are funds in my 401(k) plan and Roth IRA protected in bankruptcy?

When filing for Chapter 7 bankruptcy - also referred to as personal bankruptcy, a debtor's property is classified as exempt or non-exempt. Exempt property is considered protected in bankruptcy because the debtor can keep these assets. Non-exempt property is property that can be used to pay creditors.

Under federal law, funds in your 401(k) are exempt from Chapter 7 bankruptcy, however, Traditional IRA and Roth IRA accounts are only partially exempt. As of April 1, 2010, funds in Traditional IRAs and Roth IRAs are protected up to $1,171,650. This exemption amount does not apply to certain funds that were rolled over into your Traditional IRA or Roth IRA accounts. Other retirement plans that are exempt for federal purposes include 403(b) accounts and Section 457 plan accounts.

In addition to the exemptions provided under federal law, many states have bankruptcy laws that also provide protection for a debtor's property. Some states will allow you to choose between the federal exemptions and the state exemptions. Other exemptions include certain amounts for your homestead and educational savings accounts.

I have a 401(k) from work which my employer matches 50 percent. It has about $68,000 in it as of today and I contribute 17 percent, bi-weekly. I also have an IRA which I pay a quarterly fee to have managed and the return is about 13 percent. However, I do not contribute new money to my IRA. I'm wondering if I should contribute to both accounts simultaneously.

Based on the information in your question, I would generally recommend that you contribute to both, your 401(k) and your IRA if you are able to afford it from a cash flow perspective. It is difficult to do a side-by-side comparison of your two accounts, however I would suggest that you continue to fund your 401(k) first. At a minimum, you should fund your 401(k) enough to receive the full amount of your employer's matching contribution. Your employer's matching contribution is effectively free money which you should not pass up if you can afford to make your contribution.

After funding your 401(k) enough to receive your employer's matching contribution, I would evaluate the advantages and disadvantages of contributing more money to your 401(k) or to your IRA account. Some of the key factors to evaluate are:

1) Investment options - Evaluate which account offers you the best selection of investment choices to help you create a diversified portfolio within that account and/or across all of your investments. This includes evaluating the quality and performance of those investment options. Keep in mind that an account with a higher number of investment choices is not necessarily better than one with fewer choices if the investment options offered are not as good.

2) Costs - Evaluate the cost to invest in the options available in each account as well as the costs to maintain the account. This includes transaction fees, commissions, advisory fees, mutual fund expenses, etc.

3) Tax benefits - Evaluate your current tax situation in the context of contributing to each type of account. For example, contributions to an IRA may be tax deductible, if you qualify, but contributions to your 401(k) may reduce your taxable income.

4) Investment Risks - Evaluate the risks associated with each investment offered relative to your own risk profile.

Starting in 2010, the federal government has new rules that encourage converting a traditional IRA to a Roth IRA. This has been discussed ad nauseam throughout the financial media. However, one important consideration not usually discussed is the impact a conversion has on your state taxes. Here in Massachusetts converting a traditional IRA to a Roth IRA will also be subject to state income taxes. As such, the cost of this levy should also be considered.

Massachusetts tax law does not allow a deduction for contributions to a traditional Individual Retirement Account. (Why would Massachusetts want to allow a deduction and encourage something as frivolous as retirement savings?) If you convert your IRA account to a Roth IRA, the portion of your IRA account relating to contributions previously taxed in Massachusetts will not be subject to state income tax. However, untaxed contributions as well as any accumulated earnings and appreciation in your IRA will be subject to the 5.3% Massachusetts income tax. Under the federal guidelines, you will be allowed to pay any tax on this conversion in the current year, or defer it and pay half in 2011 and half in 2012. This two year payment option has also been adopted in Massachusetts.

Here are two examples as provided by the Massachusetts DOR:

"A taxpayer eligible to make a 2010 rollover, has a $20,000 traditional IRA, which is comprised of $10,000 of contributions that were deducted for federal purposes but subject to Massachusetts tax, and $10,000 of accumulated earnings or appreciation. If the taxpayer rolls over the traditional IRA into a Roth IRA, the entire $20,000 would be included in federal gross income in the taxable year beginning in 2010. However, the taxpayer may elect to defer the inclusion in federal gross income ratably over the two succeeding taxable years: $10,000 for the taxable year beginning in 2011 and $10,000 for the taxable year beginning in 2012.

Section 2(a)((3)(A) of chapter 62 provides that only the portion of the rollover previously not subject to Massachusetts taxation, in this case, the $10,000 of earnings and appreciation, will be included in Massachusetts gross income in 2010. If the taxpayer elected to defer payment of federal income tax, the taxpayer must also defer the inclusion in Massachusetts gross income ratably over the two succeeding taxable years: $5,000 for the taxable year beginning in 2011 and $5,000 for the taxable year beginning in 2012."

In my case, much of my IRA account is a rollover from a 401(k) account. I did receive a deduction in Massachusetts for these contributions. As such, if I chose to convert to a Roth IRA, the entire amount of the conversion will be subject to Massachusetts income tax of 5.3 percent. This is a big consideration. If you are planning on moving to a no income tax state upon retirement, i.e. Florida or New Hampshire, you may not be subject to state income taxes upon drawing of the IRA accounts. Consequently, a conversion may subject you to Massachusetts income tax now where as not converting you may not be subject to state income taxes at all.

Do you know how much your 401(k) costs you each year in expenses?  If your answer is "I have no idea", you are not alone.  401(k)s are famous for "burying" their costs.  It is rare that you see actual fees listed on a statement (and if you do, the odds are that there are other expenses that you are also paying which are not listed.)

So, how can you check up on how much your plan is currently costing you?  A recently launched website (www.brightscope.com) lets you see exactly what kind of expenses you are incurring. 

Brightscope, a San Diego firm that launced in January 2009, currently tracks over 35,000 401(k) and 403(b) plans and is adding more everyday.  The firm bases its ratings on over 200 data points including total plan costs, the size of the company match and the quality of investment options.  Originally, HR and benefits departments used Brightscope's data to compare plan features but now plan participants have become the big users of the data.

Brightscope lists all the firms it rates alphabetically so it is easy to find your company's plan.  Top plans include AARP, Abbott Labs, FedEx, and Microsoft.  The company reports that total costs for some plans are as low as 0.20 percent while some other firms have expenses as high as 5 percent.

You can get general information about your plan without having to log into the site but if you want detailed information about the specific funds that you hold, you will need to spend a few minutes getting an account on the site and entering your holdings.  You will need a recent copy of your 401(k) statement to help with this process. 

The result is a personal 401(k) fee report.  This report provides a thorough overview of all the plan's costs and an analysis of how the fees will ultimately impact your retirement.  If your plan's fees are high, the report tells you how much you "lose" over time in excess fees and how much longer you have to work to make up the loss. Plans are rated on a scale from 0 to 100 and the average plan rating is 58.  If you get the report and don't like what you see, you can approach your benefits or HR department and lobby for plan changes.

Social Security offers an additional retirement benefit for those who were on active duty between January 1957 and December 2001. You paid Social Security on those earnings and therefore are entitled to benefits. Active duty includes active duty for training. Inactive duty training does not qualify.

If you served between 1957 and 1977 you are credited an additional $300 in earnings for each calendar quarter in which you received active duty pay. Service from 1978 to 2001 earns you a $100 credit towards earnings for every $300 you earned of active duty base pay, up to a maximum of $1200 per year. These credits don't translate dollar-for-dollar into your retirement benefit, but will increase what you receive.

If your active duty occurred between 1957 and 1967 the extra credits will be added to your record when you apply for benefits at retirement. However you must ask for the benefit – it isn't automatically applied. Bring your DD-214 with you to the Social Security office. If you served between 1968 and 2001 you don't need to do anything, the benefit is automatically added.

Many know that it is important to have a will but there is usually a lot of confusion about what wills can and cannot do. A will generally provides a person with an opportunity to control how his or her property and assets will be passed upon their death. Without a will, the decedent's property and assets will pass according to the state's laws of intestacy. The intestacy laws that apply are usually determined based on where the decedent resided and/or where the property/asset is located.

A will can generally be used to:

• Pass property/assets to heirs in a manner that differs from those stated in the state's intestacy law;
• Pass property/assets to those who would not normally inherit it under the state's intestacy laws;
• Prevent a person (other than a surviving spouse or minor child) who would normally inherit property under the state intestacy laws from inheriting it;
• Name a personal representative for the estate;
• Nominate a guardian for minor children;
• Name a custodian or guardian to hold or manage the assets of their minor children;
• Provide instructions on how to pass property in the event that a beneficiary child predeceases the decedent; and
• Establish a trust upon your death such as a Bypass Trust or Special Needs Trust.

A will cannot be used to avoid probate or to distribute non-probate assets - such as life insurance policies and IRA accounts. In addition, a will cannot be used to disinherit a surviving spouse if he or she is entitled to a share of the estate based on the state's intestacy laws.

Regardless of the size of your estate, I generally recommend that every adult have a will so they can control the passing of their property. If you have minor children, it is even more important to have a will so you can nominate a guardian for your children.

A recent article by US News and World Report shed some interesting light on just who really is "middle class' and who is not.  If you have always wondered how you fit in, check out these statistics from the article:

Income: Household income for the middle class ranges from $51,000 to $123,000 for the typical four person, two parent household with the median income being $81,000.

Housing: The median home size for those in the middle class is 2,300 square feet

Cars: The typical family has car expenses of $12,400 for two medium sized sedans.

Saving for College: The typical middle class family saves just over $4,000 per year for their two kids.  The article says that this amount of savings should cover 75 percent of the expenses at a state university.

Medical Expenses: It seems that the average middle class family spends just over $5,000 per year on health insurance and other out-of-pocket medical expenses and the article notes that this category is the fastest growing expense in a family's budget.

Vacations:  Now here is where it gets interesting.  The article says that the average cost of a family vacation for four is $3,000 and that families that are slightly more affluent spend about $6,100.

Retirement Savings: The study indicated that the target savings goal should be 3.2 percent of income.  (However, if you have ever run even very basic retirement projections, you know that, depending on your age and current savings, a much higher savings rate is probably much more appropriate.  Shoot for at least 10 percent if you can manage it).

Everyday Expenses: The average middle class family spends about $14,000 per year on the somewhat descretionary spending categories of food, clothing, entertainment and other expenses.

Net Worth: The typical household has a net worth of about $84,000 but obviously that number varies widely with age and other circumstances.

Mortgage Payments and Other Debt: The average family devotes 18 percent of their disposable income to mortgage payments, car loans and credit cards. 

 

 

 

 

If you listen to any TV news station you will hear the current day's market activity related in terms of the Dow Jones Industrial Index ("the Dow.") The Dow represents 30 of the largest public companies, but is it a good representation of the "market" and, more importantly, should you use it to guage the performance of your portfolio?

The companies that comprise the Dow are chosen by a committee. Some criticisms of this process include the argument that companies are added after they have experienced their prime growth period, and evidence shows that new Dow stocks lose, on average, 20 percent of their value in the first year of inclusion. In addition the index is weighted according to share price, thus stocks with a higher share price have a higher weighting in the index. A $1 change in value of a higher-priced stock counts more than a similar change in a lower-priced stock. Does this make the index a good proxy for the stock market in general? Most advisors think the S&P 500 Index or Wilshire 5000 Index make better benchmarks.

It is just as important to remember that if you have a diversified portfolio of stocks and bonds, no one market index is going to represent the activity in your portfolio for a given day. If you have 60 percent in large company stocks and 40 percent in bonds and you see that the Dow (or the S&P 500 Index) are down a point, it is likely that your portfolio changed by about 6/10 of that point. Add to the mix your bonds, small company and foreign stocks and you can see that the Dow or any other large company index is not a good illustration of your portfolio.

So watch the day-to-day changes of the Dow with mild interest, but don't take it as an indication of the performance of your portfolio.

I have a significant amount of credit card debt and can only make the minimum payments due to my other monthly expenses. The interest that I am paying on the credit card debt is very high. While I know it is not good to withdraw money from my IRA account before retirement, should I take money from my IRA to pay down my credit card debt?

During tough economic times, people often consider tapping their retirement accounts as a source of funds to help make ends meet. While this may seem like an attractive option, making a non-qualified withdrawal from your IRA before age 59.5 can be costly. The federal government (and some state governments) imposed steep penalties in order to discourage these withdrawals. The federal penalty is 10 percent of the taxable amount withdrawn (i.e., pre-tax or deductible contributions and earnings on those contributions). There is no penalty for withdrawing your after-tax or non-deductible contributions from your IRA.

In addition to the penalty, amounts withdrawn are subject to federal and state income taxes unless the withdrawal includes after-tax or non-deductible contributions. For example, a $20,000 withdrawal would cost you approximately $7,000 in taxes and penalties (assuming a combined federal and state tax rate of 25 percent and an early withdrawal penalty of 10 percent).

I generally advise against taking an early distribution to pay off your credit card debt for a variety of reasons including the out-of-pocket costs mentioned above. That said, I can certainly appreciate the financial, emotional, and psychological benefits associated with reducing or ridding yourself of your credit card debts. From a short-term, financial standpoint, I think you should evaluate if it is worth the cost of the penalties and taxes to rid yourself of your credit card debt. Just as important though, is determining how you can satisfy your monthly expenses without incurring new debts while continuing to save and replenish your retirement funds.

As a final note, there are exceptions to the 10 percent early withdrawal penalty. If any of the follow apply to your situation you may be able to reduce the impact on your retirement savings of making an early withdraw. The exceptions include withdrawals made for:

• Medical expenses (to the extent they exceed 7.5 percent of your Adjusted Gross Income),
• Health insurance premiums paid by unemployed individuals,
• Qualified higher education expenses,
• First time home purchases (up to $10,000 dollars per lifetime), and
• Individuals called to active duty.

This is a question often asked by newlyweds: After marriage, does a good or bad credit rating of one spouse affect the other spouse?

The answer is that one spouse does not affect the other spouse directly. You continue to maintain your own credit rating and credit history regardless of whether you get married or divorced (and is also not affected by a name change after either event.) Credit that has been taken out in your name alone goes into the making of your individual history.

However a spouse's rating can indirectly affect you, by affecting your ability to establish a joint liability. For instance, suppose you want to take out a joint credit card or a mortgage. If one party has a poor credit score it might affect your rate. In this circumstance the spouse with the better score could take out the loan in his or her name alone.

Something else to consider is why one spouse has a low credit score. Does that person have poor credit habits, making payments late or building up a lot of debt? In this case you might want to keep all of your credit separate. Both parties on a joint loan are liable for the debt, regardless of who is responsible in your eyes for making the payments, and it affects both your credit scores.

On the other hand, taking out a joint loan and making sure you stay current may be a way to help the spouse with a poorer score to boost his or her numbers.

It is important for both spouses or partners to be upfront and honest about their credit history. It could affect your ability to save together for retirement, vacation, or other goals.

Can I do a rollover of the mutual funds in my 401(k) to an IRA and keep the same funds? Or, do I have to sell the funds in my 401(k), transfer the cash, and repurchase the same funds in my IRA account?

In general, you should be able to rollover the mutual funds in your 401(k) to your IRA account as long as the mutual funds being transferred are not propriety to the 401(k) and the custodian of your IRA account can hold the funds being transferred. To be sure, you should check with your employer's HR department or your 401(k) plan administrator to see which funds, if any, are propriety. In addition, you should check with your IRA custodian to make sure that they can hold the funds being transferred.

Once you've confirmed which funds can be transferred, you should transfer the funds in-kind, by doing a "direct transfer" to your IRA. A direct rollover is a transfer of your 401(k) assets directly from the trustee of your 401(K) to the trustee/custodian of the IRA in your name. Mutual funds that cannot be transferred will be liquidated and the cash proceeds will be transferred.

A direct transfer is also known as a "trustee-to-trustee" transfer because you do not receive actual possession of the assets being transferred. Direct transfers are preferable because they allow you to avoid the mandatory federal income tax withholdings on distributions from tax-deferred retirement plans.

Tax refunds are always nice, but if you are getting money back every year you're being really nice to Uncle Sam – loaning him money for free. Why not make some adjustments and make that money work for you?

Sometimes unusual events can result in a large tax refund; perhaps you sold some securities at a loss, had a baby or put money into an IRA for the first time. It takes some work to try to estimate our tax bill exactly and adjust withholding during the year and it is not always worth it for a one-time event. But if you find you're consistently getting a tax refund you should consider taking steps to adjust payments to reduce it. Why give your money to the IRS to hold interest-free for you? You could put that money to good use yourself.

First of all, review your withholding status with your employer. You should be declaring either married or single, depending on your status, and some number of dependents. Dependents include yourself, your spouse and your children or other legal dependents. If you are claiming less dependents than you really have then too much tax may be withheld. You can use the IRS withholding calculator to help you figure it out.

Even if your withholding status is correct, your tax situation may cause you to owe less taxes than a typical wage earner of your status. For instance you may have high medical expenses or a lot of mortgage interest and property taxes that result in higher than typical itemized deductions. In this case you should adjust your withholding (increase the number of dependents) so that less tax is taken out. Don't try to adjust it to match your refund exactly, but try to get it in the vicinity. If you find that your tax bill is usually very low or nothing, consider having no federal taxes withheld at all (and perhaps paying a little at tax-time.) Click here to go to the IRS website for more help.

Now, with your extra take-home pay you can increase your 401(k) or IRA contributions. That way you can boost your savings without feeling any difference in your pocketbook.

Some people like their big refunds, and use that money to pay for a vacation or pay off debt. Financial planners will tell you it's not a good spending habit. It is better to save regularly then to loan your money interest-free for a year and wait for the refund.

What is a Spousal IRA and what are the rules around making contributions to it?

A spousal IRA is not a special type of IRA account. Rather, it is a term used to describe how a person can make an IRA contribution to their spouse's IRA account even if that spouse has little or no taxable income. If you and your spouse meet the conditions outlined below, you are allowed to contribute to his or her traditional or Roth IRA account.

In order to make a "spousal IRA" contribution you must satisfy all of the following criteria for the year in which you are making the IRA contribution:

- You must be married to your spouse at the end of the tax year;
- You must file a joint federal income tax return for the tax year;
- You must have taxable compensation for the tax year; and
- Your taxable compensation (for the tax year) must exceed your spouse's taxable compensation for that year.

If you and your spouse satisfy the criteria noted above and your spouse is younger that age 70.5, you can contribute to your spouse's traditional IRA. In addition, some or all of those contributions may be tax deductible. If your spouse is over the age 70.5 you cannot contribute to a traditional IRA for your spouse because contributions to traditional IRAs are not allowed after the account owner reaches age 70.5.

If you and your spouse meet the "spousal IRA" criteria above as well as the criteria to contribute to a Roth IRA, you can make a non-deductible contribution to your spouse's Roth IRA.

The amount that you are allowed to contribute for your spouse is based on your tax filing status, and the taxable compensation each of you receive. For the 2009 tax year, if you and your spouse file a joint tax return and your taxable compensation is higher than that of your spouse's, the contribution to your spouse's IRA is limited to the lesser of the following two amounts:

1) $5,000 ($6,000 if your spouse is age 50 or older), or
2) The total compensation included in the gross income of both you and your spouse for the year, reduced by your spouse's IRA contribution for the year to a traditional IRA AND any contributions for the year to a Roth IRA on behalf of your spouse.

Therefore the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $10,000 ($11,000 if only one of you is age 50 or older or $12,000 if both of you are age 50 or older).

Here's an example from IRS Publication 590:
Kristin, a full-time student with no taxable compensation, marries Carl during the year. Neither was age 50 by the end of 2009. For the year, Carl has taxable compensation of $30,000. He plans to contribute (and deduct) $5,000 to a traditional IRA. If he and Kristin file a joint return, each can contribute $5,000 to a traditional IRA. This is because Kristin, who has no compensation, can add Carl's compensation, reduced by the amount of his IRA contribution, ($30,000 - $5,000 = $25,000) to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her case, $5,000 is her contribution limit, because $5,000 is less than $25,000 (her compensation for purposes of figuring her contribution limit).

For more information about a spousal IRA review IRS Publication 590 at http://www.irs.gov/publications/p590/ch01.html#en_US_publink1000230412

You might be aware that IRAs have some creditor protection.  In fact, a 2005 bankruptcy law allows an individual to protect an IRA worth as much as $1M from creditors.  However, a recent court case seems to indicate that this bankruptcy protection does not apply to IRAs that are inherited from another person. 

The precedent-establishing Texas case involves a daughter who inherited an IRA from her mother and later filed for bankruptcy.  The daughter maintained that the inherited IRA should receive the same $1M in protection afforded to other IRAs.  However, the Texas court ruled that only the debtor's own funds qualify for the protection.  The case likely hinged on the fact that inherited IRAs remain titled in the name of the original account holder.  (When you inherit an IRA from anyone other than a spouse, you actually keep the name of the original account holder and add "for benefit of the beneficiary")

Finally, you should know that the $1M exemption put in place with the 2005 law has now increased to $1,171,650 due to the impact of inflation. 

"I'm getting a bonus soon. Should I put it in my 401(k) and avoid the tax? My coworker told me it doesn't make a difference, since I have to pay tax on it when I withdraw it later."

Banking your bonus money is a great way to boost your savings. But the type of account you choose can also make a difference. I think your coworker is wrong – putting the money into your 401(k) makes a lot of sense.

Your ability to put some or all of the bonus into your company retirement plan depends on how much you're on track to contribute for the year without the bonus. The contribution limit in 2010 is $16,500 for individuals under age 50 and $22,000 for those 50 and older. Look at your most recent paycheck to see how much you've contributed to date and add to it the remaining contributions for the year. As long as you're under the limit you can add some or all of your bonus money. If your company matches your contribution then you don't want to hit the limit before December 31st because you will probably lose out on some of the match, so be careful not to put in more than is needed to get you just to the limit (besides, that excess contribution will have to be withdrawn anyway.)

Another benefit of the 401(k) is, as mentioned above, the company match. You may earn more of a match by increasing your contribution.

We can't know for sure what tax bracket you'll be in when you retire, but if you think it will be at or less than your current bracket then it makes sense to utilize the 401(k) instead of depositing the money into a taxable account. All of the growth that your money earns over the years will be able to stay in the account and compound, boosting the chances of long-term returns that exceed that in a taxable account.

As an alternative, if your income is less than $105,000 and you are single, (or $167,000 if married) and you are in a very low tax bracket you might consider using a Roth IRA. You won't get the tax deduction now but the money will grow tax-free for retirement.

If you are a senior paying Medicare premiums and you are considering doing a Roth conversion, you need to be aware that a large conversion can result in dramatically higher Medicare Part B premiums.  That is because Medicare Part B premiums vary according to your income.  Retirees with higher incomes pay higher Medicare premiums than people with lower incomes. 

The higher Medicare premiums are imposed on single filers who have an Adjusted Gross Income (AGI) of $85,000 and married filers with an AGI greater than $170,000.  The premiums reach their maximum for single filers with AGIs over $214,000 and married filers with AGIs over $428,000.

Those may sound like relatively high income limits but if you are single and convert a $200,000 IRA this year, you could see a huge increase in your Medicare premiums.  It is possible for Medicare premiums to increase by as much as $3,000 a year.  A married couple could see increases of $6,000 per year. 

Finally, remember that a Roth conversion can also have the negative impact of increasing the amount of your Social Security benefits that are taxable.

We've talked about many of the finer points on paying the taxes due on a Roth Conversion in 2010.  One of the special aspects of converting in 2010 is that you can opt to defer the taxes that would be due and report half the income in 2011 and the other half in 2012.  Despite the fact that tax rates are expected to rise in 2011 and 2012, many people will want to defer the payment of the conversion taxes.  But, did you know that if you elect to defer the payment for one Roth conversion, that election applies to any and all conversions you make that year?  That is, you can't convert two different IRAs and elect a different tax treatment for each conversion.  However, in a somewhat surprising twist, couples who each do a Roth conversion can elect different tax treatments.  For example, the husband could elect to defer the taxes while the wife may chose to pay the taxes in 2010.

 

If I start receiving my social security benefit at age 62 and continue to work, I understand that there will be an offset over a certain threshold. If I only work for two years, not reaching FRA, will my social security be fully restored, with no offset?

In general, the total value of your Social Security retirement benefits are estimated to be the same whether or not you elect to receive your Social Security retirement benefits before or at your full retirement age (FRA) assuming that you live to an average age. Therefore, if you elect to start your Social Security retirement benefits before you reach your FRA, the amount of your monthly benefits will be permanently reduced to reflect the fact that you will receive retirement benefits for a longer period of time than you would if you had waited until your FRA.

This reduction is permanent and is calculated based on how early - before your FRA, you begin to receive benefits. In some cases, this reduction can be as much as 30 percent of the amount you would receive if you wait until your FRA. You can start receiving your Social Security retirement benefits as early as age 62.

In addition to receiving a permanently reduced retirement benefit for early retirement, anyone who receives retirement benefits before their FRA is subject to the following earnings tests:

• If you are under your FRA throughout 2010, your permanently reduced benefits will be further reduced by $1 for every $2 earned above the $14,160 limit.
• If you will reach your FRA in 2010, your permanently reduced benefits will be reduced by $1 for every $3 earned above the $37,680 limit. This applies to the months in 2010 before you reach your FRA.
• Beginning with the month in which you reach your FRA, you will no longer be subject to an earning test.

Any reductions in your retirement benefits due to the earning test will be added back to your benefits once you reach your FRA. However, reductions in your benefits due to early retirement (i.e., taking retirement benefits before your FRA) are not generally restored once you reach your FRA.

For more information, visit the Social Security Administration's web site at www.ssa.gov.

My employer offers a 401(k) plan, and I participate. My company was recently acquired, and plans to change the mutual fund company that currently manages our 401(K) plan. I prefer the current mutual fund company because I have another 401k plan with them from a previous employer, can I move funds between the different 401(k) plans?

Based on my interpretation of your question, it sounds like you would prefer to move your funds in your current employer's 401(k) plan to your previous employer's 401(k) plan that is managed (or will be managed after the acquisition) by a different fund company.

In general, the ability to move funds between 401(k) plans is dependent upon the provisions of each employer's specific 401(k) plan. It is more common to allow employees the ability to transfer funds into their current employer's plan rather than transferring funds into a former employer's plan. In fact, most employer's have specific provisions in their plan which limit ongoing contributions by former employees and require former employees to withdraw, transfer, or distribute their 401(k) funds after they discontinue their employment with their company.

If you prefer to stay with the mutual fund company used by your previous employer, one option would be to rollover your 401(k) funds from your previous employer into an IRA account at your preferred mutual fund company. This would allow you to make ongoing contributions to your IRA and may provide you with a more investments options than your previous employer's plan provided.

In terms of moving your funds in your current employer's plan to your preferred mutual fund company, you should check with your employer about the options allowed under their plan. You may have the option to set up a Self-Direct Account that could allow you to use your preferred mutual fund company or offer you options similar to those offered by your preferred mutual fund company.

As a final note, from an administrative standpoint, it may make sense to consolidate your accounts with a single mutual fund company. However, the fund company that your current employer plans to use may offer you the same or better investment options than those offered by your preferred fund company. In my opinion, the investment options offered to you and the costs associated with those options by each mutual fund company should play a greater role in helping you to decide where to invest your retirement and investment savings.

Can I fund a Roth IRA for 2010 if I will be age 70 and a half in 2010 and my modified adjusted gross income (MAGI) is over $350,000?

Based on the information in your question, it appears that you will not be eligible to contribute to a Roth IRA for 2010 if your modified adjusted gross income (MAGI) exceeds $350,000. Your question does not specify your filing status, however, your modified adjusted gross income of at least $350,000 would disqualify you from being eligible to contribute to a Roth IRA under any filing status.

Although the income limits have been lifted for Roth IRA conversions in 2010, the same is not true for Roth IRA contributions. Your ability to contribute to a Roth IRA is determined by your MAGI and your tax filing status. Generally, you are eligible to contribute to a Roth IRA if any of the following situations apply to you:
 

• If your tax filing status is single or head of household and your MAGI does not exceed $120,000 for the year in which you are making the contribution.
• If your tax filing status is married filing jointly or qualified widower and your MAGI does not exceed $177,000 for the year in which you are making the contribution.
• If you are married filing separately and your MAGI does not exceed $10,000 for the year in which you are making the contribution.

Inheriting a Roth IRA is a great thing because all the distributions that you take will be tax free.  And, if you are lucky enough to inherit a Roth IRA when you are young, you could have decades and decades of tax free withdrawals ahead of you.  You may even find that the total of all the distributions you take over your lifetime exceed the initial value of the account many times over.  That is why it is important to try to take only the required minimum distributions (RMDs) from an inherited IRA if at all possible.

However, if you must take distributions faster than the schedule required for RMDs, you need to be aware of the 5 year rule.  Beneficiaries can withdraw the earnings portion of a Roth IRA tax free, but only if the account has been opened for at least 5 years.  So, if the person who left you the Roth IRA opened the Roth recently and died soon after, you may have to wait a few years to avoid taxation. 

Here is an example: if you inherit a Roth that was opened on May 1, 2007, the account was considered to be opened as of January 1, 2007.  To avoid paying taxes on the earnings portion of the Roth once you inherit it, you must not take out the earnings until after January 1, 2012.

This doesn't mean that you cant take any withdrawals before that date -- you are always free to withdraw the contributions to a Roth tax free.  It is only the earnings portion that has a waiting period and the other nice thing about Roths is that any withdrawal you do take is assumed to come from the contributions first.  Earnings are assumed to be withdrawn last.

If you inherit the Roth IRA from your spouse, you can elect to treat the account as if it were your own.  If you elect to treat it as your own, however, you may not be able to withdraw earnings free of tax until you reach age 59 and a half.

 

 

I have $9,400 in my IRA. What would my penalty and taxes be if I withdraw early?

While I don't have enough information about your specific circumstances to determine your tax liability, here are the rules that apply to the early withdrawal of funds from a Traditional IRA.

Withdrawals or distributions from a Traditional IRA generally consist of several components including deductible contributions, non-deductible contributions, investment earnings (including interest and dividends), and pre-tax and after-tax funds (if your IRA includes assets rolled over from an employer sponsored plan). The portion of your withdrawal/distribution that represents deductible contributions, investment earnings, or pre-tax funds are typically subject to federal and state income taxes because those amounts were not previously taxed. The portion of your withdrawal that represents non-deductible contributions or after-tax funds is not usually subject to federal or state income taxes.

The early withdrawal penalty, also called the Premature Distribution Rule, is a 10 percent federal tax that is applied to withdrawals made before age 59.5. This tax applies to the amount of your withdrawal that is subject to federal income taxes. Keep in mind that the Premature Distribution Penalty is a federal tax. Some states may also impose their own early distribution penalty for IRA withdrawals made before a certain age.

There are exceptions to the penalty under the Premature Distribution Rule. If you meet any of the following exceptions you may not have to pay the 10 percent penalty.

• You are using the withdrawal to pay for
• unreimbursed medical expenses in excess of 7.5 percent of your adjusted gross income, or
• health insurance premiums for you, your spouse, or your dependents during a year in which you collected unemployment benefits for more than 12 consecutive weeks, or
• qualified higher education expenses for you, your spouse, your children or grandchildren, or your spouse's children or grandchildren, or
• first-time homebuyer expenses of yourself, your spouse, your children, your grandchildren, or an ancestor of your spouse or you ($10,000 lifetime limit), or
• unpaid federal income tax liability levied by the IRS;
• Your withdrawal is a qualified reservist distribution;
• You make a qualifying, nontaxable rollover or direct trustee-to-trustee transfer;
• Your beneficiary or your estate is receiving the funds from your IRA after your death (regardless of your or your beneficiary's age or your age at the time of your death);
• You are receiving the funds due to your qualifying disability;
• You are taking the withdrawal in the form of an annuity known as "substantially equal periodic payments".

Many of these exceptions apply to specific circumstances. Therefore, you should consult a tax adviser or review the specific rules from the IRS if you believe that any of these exceptions apply to your situation.

Recently a New York couple sued their financial advisor and Fidelity for damages related to a loss of more than $2 million in their portfolio. FINRA, who arbitrated the case, denied the claim against Fidelity in part because the couple had stopped opening their account statements through the summer and fall of 2008. In fact during their 4-year relationship with their advisor they had opened statements only half of the time. The award statement noted that the losses were caused by the actions of the financial advisor, "coupled with the failure of the claimants to monitor their accounts."

Over the past couple of years I've had more than one investor tell me that they had stopped opening their account statements because they didn't want to see how much money they'd lost. I always tell them that that's a dangerous thing to do. If you don't look at your statements you lose track of what's going on with your account. If you are uncomfortable with the level of losses you see then it's time to call your broker or advisor and have a discussion. Ask your advisor why the losses are so large and talk about the strategy going forward.

Just as importantly, if you don't monitor the activity in your account you won't know if something goes on that you didn't approve. This is exactly how brokers/advisors are able to steal money from clients - by withdrawing money that they know the client isn't going to notice. And I'm not singling out any specific kind of advisor. I've seen theft happen with both brokers and independent financial advisors. I also had an elderly client who's credit card number, which was tied to her Merrill Lynch Account, was stolen (they didn't steal the card, the thief just got the number). The thief used it for a Las Vegas vacation and to sign up for Match.com. The client didn't see the unauthorized charges and it was a family member, reviewing the statements, who noticed her 80-year-old mother's Match.com charges!

So don't stick your head in the sand. Open those statements every month and read them thoroughly. It's the only way you will stay in control of your finances.

January is the best time to double check the amount of money you're contributing to your company retirement plan. Contribution levels may have changed during 2009 for various reasons: for instance you may have changed the level yourself in order to increase or decrease contributions, or a mid-year raise may have caused the dollar amount of contribution to go up. Adjustment could be needed to make sure you reach your target goal in the last pay period of 2010.

For most plans you can go online to see what you're set up to contribute. Whether you are adding a specific dollar amount per pay period or a percentage of pay, figure out what dollar amount is being contributed and multiply it by the number of pay periods in 2010 to determine what your total annual contribution will be. If need be, adjust the amount up or down so that you contribute every pay period and reach your goal at the end of the year.

Remember, contributing every week maximizes your company match. So you don't want contributions to stop in November - you want to stretch them out all the way to December 31.

For 2010 individuals under age 50 can contribute $16,500 to 401(k)s and 403(b)s and $11,500 to SIMPLE IRAs. Individuals age 50 and older can add another $5,500 to their 401(k)s and 403(b)s and an additional $2,500 to SIMPLE IRAs.

A little over three years ago, my wife made the wisest decision in her life: she married me.  I must admit, this event also worked out pretty well for me.  However, subsequent to our nuptials, I no longer qualified to fund my Roth IRA (my wife is a highly compensated public school teacher).  This all came to an end yesterday when I funded what is known as a “back-door” Roth IRA.

 

A few years ago, President Bush signed the “Tax Increase Prevention and Reconciliation Act of 2005”.  One of the beautiful parts of this legislation was the ability for anyone to convert a Traditional IRA to a Roth IRA.  This clause of the legislation became effective starting January 1, 2010. 

 

Yesterday I executed the “back-door” Roth IRA strategy.  This eliminates the income limitations and allows almost anyone the ability to fund a Roth IRA.  While I had known about this process, it sounded as though it was a bit convoluted and would take some time.  In the end, neither of these concerns had any justification.  I had an existing account at T. Rowe Price and completed the process online.  The entire process took me less than 15 minutes. 

 

Here is how the process works:

 

Step One: Fund a Traditional IRA.  Almost anyone under the age of 70 ½ can fund a Traditional IRA.  There are income limits on these being deductible. But we don’t want to make a deductible contribution anyway.  You can put $5,000 into the Traditional IRA per annum ($6,000 if you are 50 or older.)  If you act now, you can fund for both the 2009 and 2010 tax years.  Consequently, my wife and I could fund up to $10,000 each.  Total elapsed time to complete: four minutes.  (As a side note, does anyone else notice the age discrimination that is widespread throughout the tax code?  Why should those over 70 ½ be shut out from this process?)

 

Step Two: Convert the Traditional IRA to a Roth IRA.  I had to fill out a form and submit it to T. Rowe Price.  I just answered a couple basic questions and presto, the Traditional IRA that I had funded on Tuesday is now a Roth IRA.  I will not have any tax consequences, as I already paid taxes on the funds in the account (I am not taking a deduction for this.)  Total elapsed time to complete: ten minutes.

 

If you have been shut out of the Roth IRA in recent years due to the income limitations, you are back in business.  A married couple can fund $20,000 into a Roth almost immediately.  This is exciting stuff (at least for an accountant).  Any questions or concerns, feel free to submit a question in the bottom right of this webpage or shoot me an email.

 

This process is very effective if you have no other existing IRA accounts.  If you have other existing IRA accounts, you should discuss this with your tax professional to determine other possible tax implications of the conversion.

Beginning in January, qualified plans have to allow non-spouse beneficiaries (NSB) to roll over an inherited account into an inherited IRA. This is part of the Worker, Retiree and Employer Recovery Act of 2008.

Qualified plans are company retirement plans such as 401(k)s and 403(b)s. Until 2006 these plans did not allow NSBs to roll over an account to an IRA - they were stuck with the qualified plan account and forced to take distributions over a shorter time period than their own life expectancy. This was partially corrected by the Pension Protection Act of 2006, which allowed rollovers but didn't require plans to offer this benefit. The WRERA now makes it mandatory that plans include this option.

The Act also allows non-spouse beneficiaries to roll qualified plan accounts directly to an inherited Roth IRA, something that is not allowed for those who inherit a traditional IRA.

The rules around inherited IRAs and rollovers are complicated so you should always consult an accountant or financial planner when considering moving IRA or retirement plan funds.

Are funds in my 401(k) plan protected from creditors if I file personal bankruptcy?

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (a.k.a. the Bankruptcy Reform Act) tax-exempt retirement plan accounts (including qualified plans, traditional IRAs, Roth IRAs, 403(b) plans, 457(b) plans, SEPs, and SIMPLE plans), are protected from an employee's creditors in the event of bankruptcy. With the exception of the Traditional IRA and Roth IRA assets, all of these tax-exempt retirement assets are protected without a dollar limit.

Traditional IRAs and Roth IRAs are protected up to $1 million dollars under the federal law. However, some states may provide additional protection beyond the federal limits. Additionally, the language in the federal law seems to suggest that any funds rolled over from an employer retirement plan are fully protected even if the amount exceeds the $1 million dollar limit.

Keep in mind that there are exceptions to the protection provided under the Bankruptcy Reform Act. Certain liens and debts are not discharged or fully discharged under this law. These include:

• Tax liens,
• Debts for luxury goods/services,
• Cash advances,
• Judgments against you for death or injury caused while intoxicated,
• Domestic support obligations,
• Educational loans,
• Debts incurred to pay taxes, fines and penalties,
• Debts from divorce or separation,
• Homeowner association, condominium, and cooperative fees,
• Fees on prisoners,
• Pension or profit sharing debts, and
• Debts or liens incurred from interference with lawful provision of services.

As expected for some time now, the Social Security Administration (SSA) recently confirmed on their web site that there will not be an automatic cost-of-living-adjustment (COLA) for those who receive monthly Social Security and Supplemental Security Income benefits in 2010.

Under current social security laws, Social Security and Supplemental Security Income benefits increase automatically each year based on the inflation measure known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Each prospective year’s COLA is determined based on the change in the CPI-W from the third quarter of the prior year to the current year’s third quarter. Therefore, the COLA for 2010 is based on the change in the CPI-W from the third quarter of 2008 to the third quarter of 2009. Since there was no increase in the CPI-W for that period, there would be no COLA increase for 2010.

According to the SSA, this would be the first time since 1975 (when COLAs went into effect) that an automatic COLA will not be made. To make for the lack of the COLA increase for next year, some including the commissioner of the SSA, Michael Asture, are calling for the Obama Administration to make an additional $250 recovery payment to people who receive Social Security and Social Security Income benefits.

In addition to holding Social Security and Social Security Income benefits flat for 2010, the lack of an automatic COLA increase also prevents other amounts from increasing. For example, the maximum amount of earnings that are subject to Social Security taxes for 2010 will remain at the current 2009 amount of $106,800 dollars. Also, the retirement earnings test exempt amounts for 2010 remain unchanged. If you will not reach your Normal Retirement Age (NRA) anytime during 2010, you can year $14,160 dollars before your Social Security benefits are reduced. If you will reach your NRA during 2010, you can earn $37, 680 dollars for the months in 2010 prior to reaching your NRA, before your Social Security benefits are reduced.

For more information, visit the SSA’s web site at http://www.ssa.gov/.

At the end of last year, President Bush signed a law waiving the required minimum distributions (RMDs) for 2009 from IRAs and employer sponsored defined contribution plans such as 401(k) plans, 403(b) plans, 457(b) plans and profit sharing plans. Despite the passage of the law before the end of the year, many IRA owners and plan participants ended up receiving their 2009 RMD because IRA custodians and plan administrators did not have enough information on how to comply with the new law.

Although RMDs are not generally eligible to be rolled over, the new law provides individuals (who received their 2009 RMD) with the ability to roll their 2009 RMD over into an IRA or other eligible retirement plan. Rollovers usually need to be accomplished within 60 days. However, many individuals failed to meet this deadline because of the confusion and lack of information surrounding the new law.

Recently, the IRS has issued a notice (IRS Notice 2009-82) providing additional time for individuals who received their 2009 RMD and failed to complete the rollover within the 60-day period. Under the notice, IRA owners, plan participants, and spouse beneficiaries have until November 30, 2009 to complete the rollover.

Keep in mind that this waiver does not apply to RMDs received in 2009 for 2008. In addition, the waiver does not change the one-rollover-per-year rule which only allows an IRA account owner one (non-direct) rollover per year from each IRA account.

For more information about this IRS notice, visit the IRS web site at http://www.irs.gov/pub/irs-drop/n-09-82.pdf

A spousal IRA is a traditional IRA or Roth IRA that a working spouse can establish and make contributions to for his or her spouse. It is usually set up in situations where one spouse earns the majority of or all of a couple’s income. (For purposes of this discussion, I’ll refer to the spouse who has little or no taxable income as the “non-working spouse” even if he or she does have an income.) Keep in mind that a “spousal IRA” is not a special type of IRA. The term “spousal IRA” is just a description of the way contributions are made to a non-working spouse’s IRA.

In order to make contributions to a non-working spouse’s IRA, the working and non-working spouse needs to satisfy the following criteria:
• They need to be married as of the end of the tax year;
• They need to file a joint federal income tax return for the tax year in which the contribution is being made;
• The working spouse must have taxable compensation for the year in which the contribution is being made; and
• If the “non-working” spouse has taxable income, it must be less than the income earned by the “working” spouse.

For a Roth IRA, the couple also needs to have a Modified Adjusted Gross Income (MAGI) of less than $176,000 (in 2009) to be eligible to contribute to a Roth.

FULL ENTRY

Ninety percent of the 21 million US businesses are family owned. Yet only thirty percent of family run companies today succeed into the second generation, and only 15 percent survive into the third (Source SBA.gov). The reason for this significant failure is obvious; these businesses lack an orderly succession plan.

FULL ENTRY

According to a list published by the Pension Rights Center, almost 200 companies have eliminated or reduced the employer match on 401(k) plans since December of 2008. Many of the companies on the list like Chrysler, Ford and GM are in dire financial condition but some of the others are big names and may surprise you -- NCR, UPS, Hewlett Packard, Morningstar, Paychex, Xerox, Forbes, NPR and AARP.

The loss of the employer match can have a noticeable impact on how much you are able to save for retirement. If you earn $80,000 a year and your employer matches 50 cents on the dollar for your contributions up to 6 percent of pay, a single year of missed matching will cost you $2,400. If the matching is suspended for several years, and you "miss" several decades of growth of the money, the impact is pretty dramatic. To mitigate the impact, you should consider increasing your own contributions and contributing to other savings vehicles like traditional and Roth IRAs.

Is this happening to you? Has it caused you to stop participating in your company's plan? Write in and tell us about how you are dealing with the change.

I turn 63 on July 1st. I am looking at drawing my Social Security but continue to work. I make $28,000 dollars a year. What would I receive in payments? Also, if I work until I'm 70, how much would my Social Security benefits be at age 70.

The dollar amount of Social Security retirement benefits that you are entitled to is calculated based on your earnings history. Specifically, it is based on your highest 35 years of "indexed" earnings. Indexed earnings are your actual earnings each year that have been adjusted to make them comparable to wages earned today. Also, the retirement benefits you are entitled to increase if you wait until you reach your Full Retirement Age (FRA) to start receiving your benefits. If you wait until after your FRA to start receiving retirement benefits, you will earn Delayed Retirement Credits which will increase your benefits. Without knowing your specific earnings history, it would not be possible to estimate your Social Security benefits.

That said, I can tell you that based on the information in your question, if you begin receiving your benefits before your FRA (which is age 66) and you are earning $28,000 dollars per year, those benefits will be reduced and potentially taxed.

Receiving Social Security retirement benefits before your FRA (i.e., early retirement) permanently reduces the benefits that you receive. The actual reduction is based on how soon before your FRA you start receiving benefits. If you start your benefits at age 63 and your FRA is age 66, your benefits will be approximately 20 percent less than the amount you would have receive at your FRA.

In addition, to the "early retirement" reduction, your benefits may be further reduced because your earnings exceed the Social Security Administration's retirement earnings limit. Those who receive early retirement benefits and earn more than $14,160 dollars in 2009, will have their benefits reduced by $1 dollar for every $2 dollars of earning above the $14,160 limit. Therefore. your 2009 early retirement benefits will be reduced by about $6,920 dollars ([$28,000 - $14,160] / 2). This reduction will change each year depending on the amount you earn and the retirement earnings limit imposed by the SSA.

Another potential disadvantage of taking early retirement benefits and having non-social security earnings is that your social security benefits may be taxable. Depending on your tax filing status (e.g., single, married filing jointly, married filing separately) and your adjusted gross income, you may need to include up to 85% of your social security retirement benefits as income for federal tax purposes. Taxation of your social security benefits will change each year depending on your earnings.

Generally, I would suggest against taking social security benefits before your FRA if you have earnings above the retirement earnings limit unless you need the money for current living expenses.

After reaching full retirement age is there a limit on how much you earn at a job to receive a benefit from social security?

Once you reach full retirement age (FRA) there is no reduction in benefits due to earnings. However if you collect benefits before you reach FRA, and you work, your benefits may be reduced. Here is how it works:

FULL ENTRY

I get a statement every year regarding my future social security benefits. It now says I should be entitled to $1,500 dollars per month at age 65 (I'm now 40). Will this amount be increased for inflation? (e.g., compounded at 3 percent over 25 years it will be about $3,100 per month). Thanks.

Yes, based on the current social security system, your social security benefits are adjusted for inflation each year. This inflation adjustment is referred to the Cost-Of-Living-Adjustment (COLA). In October of last year, the Social Security Administration (SSA) announced that benefits paid in 2009 would include a COLA of 5.9 percent. This COLA is based on a variation of the Consumer Price Index known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The 2009 COLA of 5.9 percent is the largest in 26 years and should increase the average retiree’s benefits by about $60 dollars per month, according the SSA. During the past 15 years, the social security COLA has averaged about 3 percent per year.

The estimated benefits shown on the social security statement mailed to you each year is in today’s dollars. You can calculate your estimated future benefit by inflating the current benefit by an average inflation rate for each year until retirement. The SSA also has an online benefits calculator that you can use to estimate your benefits in today’s dollars and in future dollars (http://www.ssa.gov/retire2/AnypiaApplet.html).

To learn more about your estimated social security benefits and the statement you receive each year, visit the SSA web site at www.ssa.gov.

Can I borrow from my 401(k) plan for a down payment on a vacation home?

Generally, the IRS allows loans to be taken from 401(k) plans. However, your employer may not allow it in their particular plan. If your employer does allow you to borrow from your 401(k) balance, there may be further restrictions. Loans from your 401(k) cannot exceed the lesser of 50 percent of your vested balance or $50,000 dollars and they usually need to be repaid within 5 years. In addition, employers may impose restrictions on the purpose of the loan. For example, some employers will only allow loans for unreimbursed medical expenses, educational expenses, first-time home buyers, and financial hardships. You should check with your company or your company’s 401(k) plan administrator to confirm if you can borrow from your 401(k) for a vacation home down payment. Aside from these restrictions, you should keep in mind that there are advantages and disadvantages to borrowing from a 401(k) plan.

The main advantages of borrowing from your 401(k) plan include:
- No credit check (If your company allows the loan, it is usually easy to qualify for it without having to go through a credit check.);
- Lower interest rates (The interest rates you repay the loans with are usually more favorable than commercial loan rates.);
- The repayment of interest goes back to your account (You are paying yourself for the loan as opposed to paying a bank or credit union.);
- Loan proceeds received are not taxable (The loan you receive is not considered taxable income unless you default on the repayment of the loan.);
- No early withdrawal penalty (As long as you do not default on the repayment of the loan, you are not subject to the 10 percent early withdrawal penalty if you take out a loan before age 59.5).

The main disadvantages of borrowing from your 401(k) plan include:
- The loan needs to be repaid (If you lose your job or leave voluntarily, you will usually need to repay the loan in full, right away, or be subject to income taxes on the outstanding balance and a 10 percent premature distribution penalty);
- Repayment is made with after-tax dollars (Each dollar you earn to repay the loan will have income taxes taken from it. That same dollar will be taxed again when you retire and withdraw your money from the 401(k). For example, if you are in the 25 percent tax bracket and you earn $100 dollars. After income taxes are taken from that $100 dollars, you will be left with $75 dollars to repay your loan. That same $75 dollars will be taxed again when you retire and withdraw the funds as a distribution.
- Opportunity loss (By reducing your 401(k) balance you are losing the potential for that money to grow and earn interest over the long-term.).

In general, taking a loan from your 401(k) may not be the best idea for most people. However, in certain circumstances it may be the only feasible option available. Keep in mind that your 401(k) is intended for retirement years.

“I’ve always contributed to my 401(k), but I want to retire in 10 years and I’m so upset about the losses in this account over the last year that I’ve stopped contributing. Was that the right thing to do?”

This is a question I’ve heard from many investors who have seen their retirement account values shrink drastically in the past year. I’m sure you are worried that you are throwing good money after bad by continuing to add to your company retirement plan.

However there are several reasons why you should not stop contributing even if you don’t want to put money into the stock market. First of all if you don’t contribute you won’t get a tax deduction, which for most workers is anywhere from 15 percent to 33 percent of the contribution. In addition if your company matches contributions you are giving up some free money. So by all means please restart your contributions. Depending on how many pay periods you’ve missed you’ll need to increase the amount you contribute per period so that you reach the maximum of $16,500 ($22,000 for those age 50 or older) by year-end.

If you don’t want to put your contributions into equities, direct your money into a money market fund or stable value fund. Then when you feel more comfortable you can transfer this money into mutual funds that buy stocks.

Whether you are one year, ten years or twenty years from retirement you should continue to add to your retirement accounts. Tax deferral is a powerful contributor to wealth.

I have a company sponsored 401K with 80+% in my company stock through Fidelity. The plan is "frozen", no contributions and no match because my company was sold to another company. I am about 3 years away from retirement. How can I diversify? Within the plan, I have about 8 Fidelity choices. If I make an "in-service withdrawal" and open another Fidelity account I will have many more choices. How can I get unbiased advice?

While I don’t know how much of your total assets are represented by your 401(k) account, in general, having 80+ percent of your 401(k) account in one company’s stock seems very high. Given that, I think you are definitely doing the right thing to try to further diversify your portfolio.

It is difficult is say how well diversified your 401(k) account can be with only 8 mutual funds to choose from without knowing which funds they are but again, generally, the more funds you have to choose from the better. I usually like to be able to choose from a pool of 20 to 40 funds from a broad selection of asset classes. Opening an IRA account at a large mutual fund custodian that offers thousands of funds from all asset classes is a good start towards diversification. However, you will want to make sure that you are able to rollover your 401(k) account rather than withdrawing it. If done properly, rolling it over to an IRA should be a non-taxable event. Withdrawing your 401(k) balance, on the other hand, will likely be considered a taxable distribution. You should talk to your employer/plan administrator to fully understand how the funds will come out of your 401(k) and the taxability of those funds.

FULL ENTRY

It's difficult to comprehend how Bernie Madoff could have executed a $50 billion pyramid scheme that lasted over 30 years. However, like all pyramid schemes, it had to come to an end because there were not enough new investors to fund redemptions.

If it is true that all pyramid schemes are terminal, can we honestly expect Social Security to last indefinitely? It's not likely, especially considering that the Social Security Administration (SSA) itself has called the system unsustainable in the long run. One can expect significant changes to the system in coming years. By the time Generation X and Y reach retirement age, the system will be considerably different.

To support the notion that Social Security resembles a pyramid scheme, I compared the SSA and the Madoff fraud case. Here's where they share common ground:

FULL ENTRY

Why are fees associated with 401k plans so difficult to determine?

In short, it is because of flexibility and the array of financial products available to invest in. As more and more employers shift away from offering defined benefit plans to defined contribution plans (such as 401(k) and 403(b) plans), employers are trying to provide employees with a wide menu of products to choose from. In part, this is to ensure that employees with various personal financial situations have the ability to select investments that best fit their particular situation. While this flexibility is generally a good thing, it does come with a price. In addition to understanding the fees associated with the administration of the overall plan; employees must also understand the fees and expenses for the individual investment products. To further complicate matters, each plan administrator and investment product may have different fees and different ways of charging those fees.

Under the Employee Retirement Income Security Act (ERISA), employers are required to follow certain rules about the administration of 401(k) plans including the plan’s fees and expenses. However, those rules do not specifically dictate what those fees are or how they are charged. The responsibility for determining the fees paid are left to the employer and the employee (through the investments he/she chooses).

FULL ENTRY

The IRS recently announced the contribution limits for various retirement plans for 2009. The table below outlines the limits for the most popular types of retirement plans.

IRA: Contribution limit: $5,000 Catch-up limit: $1,000
Roth IRA: Contribution limit: $5,000 Catch-up limit: $1,000
401(k), 403(b): Contribution limit: $16,500 Catch-up limit: $5,500
SIMPLE IRA: Contribution limit: $11,500 Catch-up limit $2,500

Some individuals like to “front-end load” their retirement plans by contributing enough during the first 9-10 months of the year to reach the maximum, then stopping contributions during November and December to increase their income for Christmas. If your company matches contributions, you will likely miss out on some free money if you adopt this strategy. Here’s why:

FULL ENTRY

My wife and I have a monthly mortgage payment of $3,200 per month and our combined income is $180,000. We each made the maximum contribution to our 401(k) accounts of $15,500. I calculated that for the past 3 years, if we had redirected our 401(k) contributions to pay down our mortgage we would have done much better. Do you think it is wise to pay off our mortgage as opposed to contribute to our 401(k) account?

Wealth management, like life, has many risk and reward opportunities. Over the Thanksgiving holiday, my wife, daughter and I piled into our car and drove to New Jersey to visit relatives. We were fortunate to hit little traffic and for much of the way I set the cruise control at 72 miles per hour. I wanted to get to New Jersey as quickly as possible, but did not want the risk of getting a speeding ticket. I felt that at 72 miles an hour, I was unlikely to get a ticket in a 65 mile per hour zone. This was the maximum speed I could drive without significant risk of being pulled over. Unlike Burt Reynolds in “Smokey and the Bandit”, my appetite for risk of receiving a ticket was pretty low and I did not want to encounter Sheriff Buford T. Justice (Jackie Gleason).

FULL ENTRY

During the past couple of months there have been a lot of discussion about the possibility that Congress or the Treasury will waive the required minimum distribution (RMD) rules on employer-sponsored retirement plans and traditional IRAs for 2008. However, with less than a month to go before the end of the year and still no changes to the current rules, time is running out to take your distribution.

The current RMD rules generally require those who are at least age 70½ to take annual distributions from their traditional IRA accounts. If you are retired and at least age 70½, you are also required to take RMDs from your employer-sponsored retirement plan. Required minimum distributions are mandated by the federal government so that tax deferred balances in those accounts do not accumulate indefinitely. The minimum amount that you are required to take each year is calculated by taking the previous year’s account balance as of Dec. 31 and dividing it by the appropriate life expectancy factor given by the IRS. Therefore, RMDs for 2008 would be calculated using the account balances for Dec. 31, 2007. Failure to take some or all of your RMD comes with a stiff, 50 percent tax penalty of any shortfall.

FULL ENTRY

I will probably make $200,000 dollars plus this year. I am 51 yrs old and I would like to convert my 401K which totals $80,000 to a Roth. How would that affect me tax wise?

The good news is that beginning in 2008, direct conversions from your 401(k) plan to a Roth IRA are permitted. Prior to 2008, individuals who wanted to convert their 401(k) or parts of their 401(k) accounts to a Roth IRA were required to follow a two step process. They would need to convert their 401(k) to a traditional IRA and then convert the traditional IRA to a Roth IRA. While the Pension Protection Act of 2006 eliminated this two step process, you will still need to meet certain criteria to qualify for a Roth IRA conversion. In addition, you will need to be sure that your employer’s 401(k) plan allows in-service distributions to withdraw funds to convert. Although the law allows the direct conversion, your 401(k) may not allow the withdrawal/distribution of your 401(k) assets (without a penalty) until you reach a certain age or until you discontinue working for that employer.

FULL ENTRY

I have $15,000 in credit card debt. I have $40,000 in a Rollover IRA. I have a 1 year old and a 3 year old that are both in daycare so my weekly expenses are high. I charge on my credit card monthly about what I pay for my minimum payment. I was thinking that if I took out $20,000 out of my IRA and paid off my credit card that the money I am spending on my minimum payment I could use for my monthly expenses. I know it is bad to take money out of an IRA but what I am paying in interest on credit cards is going to cost more than taking a hit on taxes by taking out the money out of my IRA. What are your thoughts?

In difficult economic times, one of the more common places that people want to turn to in order to make ends meet is their IRA account. While this may look like an attractive option to get cash, making a non-qualified withdrawal from your IRA before age 59½ can be costly. The federal government and some state governments discourage non-qualified, early withdrawals by imposing steep penalties on these transactions.

FULL ENTRY

I have a small portfolio of mutual funds that have lost a good 33 percent during this crisis. If I have my broker sell $5,000 dollars of that portfolio and contribute it to my Roth IRA, would I be able to claim a loss for my 2008 taxes? Then, when the market gains, would those gains be taxable in the Roth?

Roth IRAs are great retirement vehicles but they can be confusing. Your question does not specifically mention if your portfolio of mutual funds is in a taxable account or in a retirement account so I am reading into your question a little and assuming that it is in a taxable account.

Generally, if you sell your mutual funds at a loss, you will be able to use that loss to reduce any taxable gains realized in that same year. If you do not have any gains during that year or if your losses exceed your gains, which may be more likely given the state of the financial markets this year, you can claim up to $3,000 dollars of net capital losses on your tax return. Any net losses above $3,000 dollars can be carried forward to your 2009 tax return.

FULL ENTRY

My husband has Alzheimer's Disease. He's been living in a Memory Care facility for three months. He is 82 while I am 64 and just retired. Between us, our portfolios have dropped in value over 25 percent. We do not have many years ahead of us to recoup our losses. I think we should contact our broker and sell everything and put our money in CD's. Should we close out our accounts?

A big market downturn is scary for everyone and it is especially scary for new retirees. I totally understand your wanting to move to the safety of cash but I urge you to not do anything in haste. As many advisers say: "panic is not an investment strategy."

Your husband is 82 but you are only 64. You can reasonably expect your retirement to last for 25 to 30 years. In order for your retirement assets to keep up with the effect of inflation, you will likely need some allocation to equities (stocks). I can't say what allocation is appropriate for you because I don't know enough about your particular situation. But the odds are good that you need at least a small allocation.

Selling everything now and moving to cash will simply lock in your losses and, once you are in cash,how much can you earn? Very little over the long term. And, to add insult to injury, you would likely be falling behind once you account for the effects of inflation.

Furthermore, once you are in cash, you need to be able to tell when to get back into the market. If you are scared of the market, there is a good chance that you will wait too long and miss most of the run-up in the market when it does eventually happen.

All this being said, if you find yourself unable to sleep at night and consumed with anxiety about what is going on in the market, you may be more risk averse than you thought and maybe it is appropriate to ratchet down your allocation to equities. If this is the case, I would consider lowering your stock allocation over time. Consider selling a certain percentage each month until you are at a level that you feel better about.

"Switching to Cash May Feel Safe but Risks Remain" is a great article. Check it out.

Good news! The limits on several retirement plans are due to increase in 2009. Be sure you visit your payroll/benefits office to sign up for the maximum contribution permitted.

In 2009, you can contribute $16,500 to your 401(k). That is $1,000 higher than in 2008. If you are age 50 or higher, you will be able to contribute $22,000 - an increase of $1,500. These increased limits also apply to 403(b) plans and 457 plans.

Unfortunately, there are no increases in the amounts you are able to contribute to traditional and Roth IRAs. Those limits remain at $5,000 and $6,000 if you are age 50 or older.

While these increased limits are good news, there is also some bad "tax news" to throw into the mix. That bad news comes in the form of a higher Social Security wage base in 2009. In 2009, wages up to $106,800 will be subject to 6.2 percent in FICA taxes and 1.45 percent in Medicare taxes. In 2008, the limit was $102,000 so this increased limit causes an extra $298 tax bill for employees.

Many about-to-be retired people are surprised to learn that the benefits they receive from Social Security can be subject to taxes. Years ago, very few people saw their Social Security benefits taxed. However, today, a full third of all Social Security recipients are taxed and that number will grow to 43 percent in just 10 years.

The reason is that the income limits for taxation of benefits were established years ago and, like the alternative minimum tax (AMT) that so many of us get hit with, the limits were not indexed for inflation.

These days, if you are single and half of your Social Security benefit plus all the other income you have exceeds $25,000, up to half of the benefits are taxable. If half your Social Security benefit plus all other income exceeds $34,000, 85 percent of your benefits are taxable.

If you are married and half your Social Security benefit plus all other income is between $32,000 and $44,000, up to 50 percent of the benefits is taxable. If your income exceeds $44,000, 85 percent of your benefits are taxable.

A recent study by the Employee Benefit Research Institute (EBRI) found that the average 65 year old man would need to have $122,000 in current savings available to have a 90% chance of being able to cover his health care costs in retirement. And, if that figure isn't high enough for you, that amount is required for people who are fortunate to have a previous employer subsidizing the premiums. If that same man does not have any coverage from a previous employer, he must set aside $196,000 to cover his health care costs in retirement.

And the news is even worse for women. A 65 year old woman with some employer subsidized assistance would need to set aside $140,000. Without employer subsidized premiums, that amount jumps to $224,000. Nearly a quarter of a million dollars just to cover health care expenses.

Dare you ask about the expenses for a married couple? I hope you are sitting down. The figures are $235,000 for a couple with some employer provided assistance and $376,000 for those paying their own way.

And these projections could actually turn out to be on the low side because these figures do not include the savings necessary to cover long term care expenses. Also, if you retire before age 65, as many people do, you can expect to pay even more.

EBRI is a private, non-profit research institute based in Washington DC that focuses on health, savings, retirement and economic security issues. I have found a lot of great information on their website: www.ebri.org

I just turned 70 years old and I am still working full time. I have been told by the administrator of my 401(k) that within the next six months I will need to pull my money or begin withdrawing from my 401(k). What would be my best option?

I'm not sure what you or your administrator mean by "pull your money" but I would ask the administrator to double-check their information. Generally speaking, if you are still working at 70½, you can postpone withdrawals from your 401(k) until April 1 of the year following the year you retire.

Different plans have different rules so it is technically possible that your plan requires distributions but generally that is not the case. One exception occurs if you own at least 5% of the company. In that situation, you generally can’t postpone taking distribution and you must begin withdrawals on the regular schedule.

An important point to note: you can only postpone distributions past age 70 1/2 for the plan in place at the company you work at now. If you have old 401(k)s from previous employers, you must begin taking withdrawals from those accounts.

The American Association of Retired Persons (AARP) conducted a survey last month of over 1,600 baby boomers (defined to be those age 45 and older) and found that 34 percent of the participants are considering a delay in their retirement age and a full 20 percent have stopped contributing to their 401(k) plans over the past year.

That's unfortunate because with the market hitting new lows on what seems to be an everyday basis, now is very definitely the time to keep buying and, if at all possible, increase your contributions. I know that that is easy to say but sometimes hard to do as it does take some faith and a belief in the capital markets.

It also requires some confidence in your personal financial situation. The AARP study further revealed that 27 percent of those surveyed were having difficulty making their rent or mortgage payments and that 13 percent had taken a premature withdrawal from their IRA or 401(k). If your situation is that dire, it probably does make sense to turn off the 401(k) contributions for a while to get yourself back on more solid financial footing. The taxes and penalties associated with a premature withdrawal make it a last ditch option. However, if you are simply worried about the market because it keeps dropping and you have an adequate emergency fund and a well diversified portfolio, the thing to do is keep contributing. Two or three years from now, you will look back on all this market turmoil and wish you had bought more.

For more information about the AARP study, check out this article in the Wall Street Journal.

The markets are down and new retirees are looking for the most tax efficient places to live because, all else being equal, living in a lower tax state can make your retirement assets last longer. According to the retirementliving.com website, the nation as a whole will pay 9.7 percent of its income in state and local taxes in 2008. However, in some states, you can expect to pay significantly more and in others, significantly less.

What are the most expensive states? New Jersey tops the list with its residents paying 11.8 percent of their income in state and local taxes. New York is right behind New Jersey at 11.7 percent and Connecticut wraps up the top 3 most expensive states at 11.1 percent.

If you really want to stretch your retirement dollar, you might want to consider a move to Alaska, where residents pay just 6.4 percent of their income in state and local taxes. Nevada is in second place at 6.6 percent. Wyoming residents pay 7.0 percent, Florida residents pay 7.4 percent, New Hampshire residents pay 7.6 percent and the other top ten states include South Dakota at 7.9 percent, Tennessee at 8.3 percent, Texas at 8.4 percent, Louisiana at 8.4 percent and Arizona at 8.5 percent.

The retirementliving.com website is a source of a lot of great information. Their state by state guide tells you the specifics of nearly every tax imaginable including: sales tax, gasoline tax, cigarette taxes, and personal income taxes. The site also includes information about the Homestead Exemptions available in each state. For paid subscribers, you can get reports on the top retirement cities and the newest and best active adult communities and senior living facilities.

I'm 23 years old and fortunate enough to be gainfully employed with very modest debt. My parents shouldered a lot of my tuition payments, but now I realize they should have been saving for their own retirement.

My father recently lost his job, and is 62 years old. Other than Social Security and his pension plan,they have nothing saved. I was thinking about opening up a retirement account for them.

What do I need to know? Should I set it up in their names? What's the best place to put the money, knowing that they'll probably be drawing on it in 5-10 years? Could this count as a gift and therefore be a tax deduction for me?

First, I think it is great that you realize (and so obviously appreciate) the sacrifices that your parents made to get you through college. It is unfortunate that it now appears that their own retirement is in jeopardy. However, the good news is that there are several ways you can help them out.

Assuming your Dad had at least $6,000 in earned income this year, he is able to open a traditional or Roth IRA in the amount of $6,000. You could gift him this money and he could use it to open the IRA in his name. (Unfortunately, you won't be able to take a tax deduction for this gift.) Your Mom could also open a traditional or Roth IRA if she has earned income in 2008 of at least $6,000 (I am assuming she is at least 50 years old). If your Mom does not work, she could open a Spousal IRA assuming your Dad earned at least $12,000 this year. There are many factors to consider when deciding between a Roth and a Traditional IRA and it would take many paragraphs to explain all of them. Which option is better for your parents depends on their personal circumstances, but I'd urge you to look closely at a Roth assuming your parents met the income limits ($159,000 to $169,000 for joint filers).

There are a few rules about gifting that you should be aware of. In 2008, anyone can make a gift to anyone else without the need to file a gift tax return if that gift is $12,000 or less. So, you could give your Dad $12,000 and your Mom another $12,000. This gifting "limit" is based on the calendar year so you can gift again in January, 2009. Plus, in 2009, the amount you can gift increases to $13,000. So you can give each of your parents $12,000 this year for a total of $24,000 and $13,000 each in January for a grand total of $50,000.

Another way you could help your parents would be to volunteer to pay any medical expenses they may be incurring. If you pay the amounts owed directly to the hospital or medical provider, the amount paid does not count against your annual gift tax exclusion. Eligible medical expenses would include any medical expense that would be deductible for income tax purposes. It is critical, though, that the payment be made by you and directly to the provider.

As far as how you should invest the money, I really can't say without knowing more about your parent's personal situation and their tolerance for risk. You, however, might want to do some research on target date funds. Fidelity, Vanguard and T Rowe Price all offer target date funds and picking them is pretty easy because you would simply choose the fund that has a "target date" closest to the year your parents expect to retire and/or need to access the money. A fund with a target date of 2010, for example, could be appropriate for people expecting to retire between 2008 and 2012. It is important to note that these funds can lose money, so if you want to to be absolutely sure that you would never lose a penny, these funds are not for you.

"I don't even have one K, let alone 401 Ks" said 23 year old Zack Teibloom in a recent New York Times article.

I had to laugh when I read that quote but what wasn't so funny was the rest of the article that said that only 49 percent of eligible workers in their 20s participate in the 401(k) plans offered by their employers. Less than half! That is pretty discouraging, especially when you consider that most employer's plans provide some form of matching. That means that many workers in their 20s are turning down totally free money.

This is an incredible shame because, as a financial adviser, I know that the people who are well on their way to a secure and fulfilling retirement are almost always the people who started saving even a small percentage of their income as soon as they started their first professional position. It is amazing what saving even 5 or 10 percent of your income can amount to if you start when you are 22. We are talking about four to five DECADES of compounding growth. People who don't start early and wait until they are in their late 30s and early 40s can usually never catch up. The amount they need to save is just too great.

And now is an incredible time to start saving for retirement. When we see a market downturn like we are seeing today, everything you buy is at a reduced price.

My advice to young investors:

Absolutely sign up for your employers 401(k) plan as soon as you are able.

Contribute as much as your budget will allow, ideally enough to capture the full employer match.

You will be saving for 40 years, so a high allocation to equity mutual funds is appropriate.

Whatever you do, don't cash out your balances when you change jobs. Forty percent of workers in their 20s do and that is a huge mistake even when it doesn't seem like a lot of money is involved.

The volatility in the markets recently has forced many investors to delay their retirement dates. People who hoped to leave the workforce in their early 60s are now seriously considering working until age 70.

A recent Wall Street Journal article says that only 23 percent of workers age 55 and older have savings and investments of $250,000 or more. When you consider that a "safe" withdrawal rate in retirement is approximately 4 percent, even a $250,000 retirement account would only support $10,000 per year in inflation adjusted withdrawals. And we know that only one in four workers age 55 and older have that amount saved -- what about the other 77 percent? They had significantly lower account balances:

-18 percent had savings between $100,0000 and $249,999,
-16 percent had savings between $50,000 and $99,999,
- 7 percent had savings between $25,000 and $49,999,
- 8 percent had savings between $10,000 and $24,999, and
-28 percent had less than $10,000 saved.

So, a startling 60 percent had less than $100,000 saved for retirement. Using the same 4 percent safe withdrawal rate, investors with $100,000 in savings would have to limit withdrawals to $4,000 per year.

And, these days, investors can't even rely on their home values to supplement their retirement. So, what other options remain? The only real alternative appears to be working longer. Delaying retirement by even two or three years can greatly improve anyone's retirement picture. First, accounts can grow longer, and second, there will be fewer years of withdrawals. The Journal article quotes a study by T Rowe Price that determined that a 62 year old man earning $100,000 per year who had $500,000 in retirement savings could see his retirement income increase 6 percent for every additional year worked. That's a very noticeable difference.

I am 60 years old and only have a small amount in my 401k - approximately $90,000 (in a Fidelity Freedom 2015 account). I know I will never be able to retire on what I have but I don't want to lose the little bit I do have. I want to know, given how the market is going down, should I continue to contribute 15 percent of my salary to my 401k or contribute less and put some after tax money in a savings account?

I would urge you to consider continuing your 401(k) contributions. I know that it can be scary when the newspapers are splashed with headlines about one crisis after another, but you need to stick to your long term plan. If you continue to contribute to your 401(k), the shares you are buying on the days that the market is down 450 or 500 points are incredible bargains. Literally, everything you buy is on sale.

The only real way to "win" the investment game is develop a well diversified portfolio and make a promise to yourself that you will stick with the plan in good times and bad. You have to suffer through the bad in order to capture the good. You can't just have the benefit of equity market returns without also accepting the volatility that comes along with it.

The Fidelity Freedom 2015 is probably a good choice for you if you will be retiring in your mid to late 60s. It gradually becomes more and more conservative so you don't have to think or worry about changing your investment mix.

I am very concerned about my in-laws' financial situation. They are in their mid- and late-60s, still working, and to my knowledge, have no retirement money saved. The only thing that I see as an asset is their house, which is probably worth over $1 million, though I'm certain they have a number of loans against it.

What financial issues should we anticipate as they get older? In cases like this, will the responsibility of paying for their medical treatment (should it be necessary) or debts fall on us?

This is certainly a very tough situation. It seems to me that your in-laws will almost certainly have to continue working well into their 70s and possibly longer. You (and they) have to hope that their health is good enough to permit that.

I would suggest approaching your parents with your concerns. It is possible that they have some retirement savings that you are not aware of. Tell them that you are concerned about their future financial security and ask them if they think they might need some professional assistance. There are many financial planners who do financial "check-ups" and maybe you could arrange one for your in-laws. Cost for these kinds of meetings would be approximately $500. You won't get a full plan with this type of consulation but the planner can make the "tough calls" about what kind of retirement your in-laws will face if they can't change their habits.

If your in-laws started aggressively saving right away, they could still build a retirement nest egg. They should also probably delay taking Social Security until age 70 so they can receive the largest possible benefit. It might also be necessary for them to sell their home, pay off their loans and move to a less expensive property when they retire. They may even have to relocate to a less expensive area of the country.

You would generally not be legally responsible for any of your parents expenses or debts but you might feel an emotional obligation to help them out if their situation becomes particulary dire. If you think this will be the case, you should adjust your financial plans accordingly.

This is one of the big reasons that financial planners always tell clients to save for their own retirement first. It doesn't do anyone any good if parents direct all of their excess savings to their children's college tuition at the expense of their own retirement.

My husband wants me to resign and relocate so we can be together, but I'm not sure how I can retain the same security my employer provides. How can I began to assess this difficult decision?

There are certainly a lot of factors to consider in this situation. Here are my thoughts from the "financial front":

Does your employer provide the health insurance for the family?

If yes, you need to confirm that your husband can get coverage for you and any other family members at a reasonable cost or plan to arrange for COBRA coverage (which will likely cost more than what you are currently paying.)

Does your employer provide you with life insurance benefits?

You don't want to find yourself without life insurance because you have left your job. If you rely on employer-provided coverage, get a private policy instead. But apply now so you won't be without coverage for any period of time.

Does your employer provide you with disability insurance?

If you leave your job, you would lose this very important coverage and the odds of suffering a disability are much higher than most people think. Most people would never think about going without life insurance but disability insurance is actually more important because you are much more likely to be disabled than to die. In fact the average person has a one in five chance of being disabled for a period of time before age 65.

Does your employer offer a retirement plan with a company match or, even better, a pension?

If your employer offers a great retirement plan which would be difficult to find elsewhere, you might want to think hard about leaving this benefit behind.

Have you prepared a realistic budget?

This is essential. If you don't have a firm grasp on your expenses, how do you know that you can afford to live on just one income even for a couple of weeks? It could take several months for you to find a suitable job in your new location. Do you have a sufficient "supplemental income" fund available to tide you over?

Do you have an adequate emergency fund and income reserve?

Assuming that you don't have a job waiting for you somewhere else, do you have an emergency fund equal to three to six months of your typical expenses? If your finances are shaky now, leaving a job voluntarily is probably not a smart move.

How does your credit look?

If your credit isn't in the best of shape, it might be wise to postpone a move and work on improving your credit. A poor credit history can impact your ability to get a new job.

Obviously, money and finances shouldn't be the only factors considered, but they certainly are important. Good luck.

Approximately one year ago, Vanguard instituted a controversial beneficiary designation policy. Under the new policy, which took effect in September 2007, customers must have identical beneficiary designations for all IRAs of the same type. There is no issue if you have only one IRA at Vanguard. However, if you had multiple IRAs and each IRA had a different beneficiary designated, it is time to re-check your beneficiaries.

Here is an example: let's say you had four contributory IRAs at Vanguard because you wanted to leave one IRA to each of your four children. Previously, you could have designated each child as the sole beneficiary on each of the IRAs. (Among other reasons, you might have wanted to arrange things this way if there was a significant age difference between the four children.) Under the new policy, the only beneficiary recognized by Vanguard would be the individual listed on the last beneficiary designation form that Vanguard processed. In this example, the fourth child might have been the last beneficiary added and that child would receive the proceeds from all four IRAs.

Vanguard says that it sent letters to the 170,000 account holders who would be impacted by this change but some Vanguard investors complain that the communication was not clear enough. Also, if Vanguard did not hear back from account holders, it changed the beneficiary designations for them -- a pretty bold step.

To learn more about this peculiar arrangement, read this article in Forbes. In the meantime, remember that the beneficiary designations must only be the same for each "type" of IRA. The three recognized IRA types are rollover IRAs, contributory IRAs, and Roth IRAs. So you can specify one beneficiary for a contributory IRA and another for your Roth, but you can no longer specify three different beneficiaries for each of your three Roth IRAs. The workaround to this problem is to name all three individuals as beneficiaries on a single Roth IRA or consider moving your accounts away from Vanguard. If you are not certain who your beneficiaries are, it never hurts to double check. This is true no matter where you keep your accounts.

I have my retirement fund in a CD which comes due next month. With CD rates being low, I was looking into rolling it over into a mutual fund where you pick the date closest to your retirement date. What do you think of these funds?

You are talking about target date funds. Target date funds have names like:

Fidelity Freedom 2015
Vanguard Target Retirement 2035
T Rowe Price Retirement 2040

Target date funds consist of a diversified portfolio of stocks, bonds and cash. As the fund gets close to its target date, it decreases the allocation to stocks and adds more bonds and more cash. The end result is a portfolio that gets more conservative over time.

The idea is to invest in the fund that most closely matches your planned retirement date. So, for example, if you are 49 now, you will be 65 in 2024. You would probably invest in a fund that has 2025 in its name if you wanted to retire at age 65. Alternatively, if you consider yourself more aggressive than most, you could also invest in a 2030 fund because that fund would have a higher allocation to stocks for a longer period of time. Similarly, if you are exceedingly conservative, you can invest in a target date fund with an earlier "due date".

My opinion of these funds is mixed. If you know that you are the type of person to select funds once and then never re-visit the choice, target date funds might be a good option because it puts your retirement savings on "auto-pilot". In essence, all the future investment choices get made for you.

However, this auto-pilot feature is also what bothers me about target date funds. These funds basically treat all investors the same -- with the only differentiating factor being age. And all investors of the same age shouldn't be treated the same. For example, I am the same age as Melinda Gates. Melinda and I might share a similar investment philosophy and tolerance for risk, but that doesn't mean that our assets should be invested in exactly the same manner. I am stretching this popular analogy a little here, but you get the picture.

As is the case with all funds, beware of expenses because they can vary widely across fund families. You should also look at the composition of several funds with the same target date. You will find that even funds with the same target date can have noticeably different allocations to stocks, bonds and cash. Pick the fund that most closely matches your risk tolerance.

Finally, you need to know that target date funds are not guaranteed in any way like your CD. You could lose money.

I am a federal government retiree and 68 years old. I currently have $122,500 in my Thrift Savings Plan. I did not yet roll it into an IRA. What is a good company to roll the TSP into -- Vanguard? T Rowe Price? Fidelity? Which company might have the lowest fees?

All three of the companies you mentioned would be solid choices. However, I would probably put in a plug for keeping your money where it is. The government's Thrift Savings Plan (TSP) is as close to perfect a plan as you will likely find.

There are only five fund choices available but those five include a government securities fund, a fixed income fund, a common stock fund, a small cap fund and an International stock fund. All five are index funds and all of them have a rock-bottom expense ratio of .015 percent or 1.5 basis points. That means the fees are only 15 cents for every $1,000 invested! You would be hard pressed to find lower expenses in many other places.

The plan also now offers 5 lifecycle plans, so if you are retired and want to put your retirement savings on "autopilot", you could choose one of the 5 target retirement funds. If you have an average risk tolerance, you would choose the lifecycle fund that most closely matches your year of retirement. If you wanted to be more aggressive, you could choose a lifecycle fund with a date later than your retirement date. This is a wonderful plan and you probably shouldn't be in a rush to leave it.

A lot of the people writing in to this blog want to know how much they need to be saving for retirement. There are a lot of calculators out there that will help you answer that question and I wanted to call your attention to one that I really like. It is called a "Ballpark E$timate" and you can complete it on line or in paper format.

There are a couple of things that I like about this calculator. First, it is very simple to use. Second, it gives you helpful pointers about how to use the calculator. For example, one question asks how much annual income you want in retirement as a percentage of what you currently earn. The instructions suggest you use:

70 to 80 percent if you want to cover all the basics and you will have employer-paid retiree health insurance,

80 to 90 percent if you will be paying Medicare Part B and D premiums and expect to do some traveling while retired, and

100 to 120 percent if you will need to cover all Medicare and health care costs, want a very comfortable retirement lifestyle and need to cover the possibility of long term care.

You can also fine-tune the calculator to account for an average life expectancy or a longer life expectancy. By answering less than 20 questions, you can get a pretty accurate projection of how much you need to be saving. The "answer" is quoted as an annual dollar amount to be saved and as a percentage of your current income. The calculator will also tell you how much of your current income you can replace in retirement if you do not save any additional money.

This calculator has a special version for federal government employees covered by the Civil Service Retirement System (CSRS) and there is also a Spanish version available as well.

Previously in this blog, I have talked about the 4 percent safe withdrawal. Four percent of the original account balance, adjusted in future years for inflation, is the amount that most retirees can safely withdraw from their portfolio without being too worried about running out of money in retirement. As I've mentioned, the 4 percent rate has a high probability of success, but it is not a guarantee.

Many factors influence how long a retirement portfolio will last. It makes sense to most of us that overall return is an important factor, but perhaps what is not as clear is the importance of the TIMING of the returns. Studies have shown that a few years of poor returns right at the beginning of retirement can have a big impact on the overall sustainability of the portfolio.

A recent New York Times article does a great job of explaining how a retirement portfolio can be affected by a string of "bad" years at the beginning of retirement. Specifically, it shows that if a person retires at the start of a bear market and they make no changes to their spending habits, a 4 percent withdrawal rate could fail them a third of the time or more.

Fortunately, most retirees are willing to make adjustments when the market takes a turn for the worse. The best option involves returning to employment. If you can turn off your withdrawals by earning income instead, that is the optimal solution. However, that is probably not a option for most people. And, fortunately, it also probably not necessary. Less drastic changes, like temporarily reducing your withdrawals, improves your chances quite a bit. Even keeping the withdrawals constant for a few years and simply not taking an inflation adjustment can go a long way.

So what's the take-away here? If you retire at a time when the market is performing poorly, it is not the end of the world, but you have to be more careful than someone who retires at the beginning of a tremendous bull market. If you are newly retired, you don't have to start living on macaroni and cheese but you do need to keep an eye on expenses. If you can possibly return to work, even on a part time basis, you will probably be just fine. If you can't or don't want to return to the working world, consider reducing your withdrawals for a couple of years. Whatever you do, don't panic and move to an all cash or all bond portfolio. You really need to keep a healthy allocation to equity mutual funds if you want your portfolio to keep up with inflation and last for 20 or 30 years. Finally, remember that 4 percent is a general guideline. Higher or lower withdrawal rates are definitely possible/necessary depending on your personal circumstances.

TJ writes:

I am 28 years old. I started working 3 years ago and I am saving 2 percent of my pay in my 401(k). My employer does not match my contributions at all. What are my options for maximizing my retirement savings? Would I be better off with IRA accounts?

TJ, it is wonderful that you are looking at how you can maximize your retirement savings. Even though your employer does not offer a match, the 401(k) is probably your best opportunity to sock away the largest amount of money. At your age, you are able to contribute up to $15,500 to your 401(k). IRAs are also a great option, but the contribution limits on those accounts are $5,000. Keep in mind that you can contribute the max to both the 401(k) AND the IRA, so it is possible to be saving as much as $20,500. If you can save at least 10% of your salary now and throughout your working career, you will be in great shape for retirement when the time comes.