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Monday, November 9, 2015

IRA Required Minimum Distribution Table

Most people know that once you reach age 70.5 the IRS requires you to begin taking distributions from your IRA (Individual Retirement Arrangements.) What most people don’t realize is if you do not take the required minimum distribution (RMD) in a timely fashion every year you could face a 50% penalty. Let’s say you had one million dollars in your IRA, then your required minimum distribution the year you turn 70.5 would be approximately $36,496. If you failed to take the distribution, then the penalty would be $18,248. This is one of the steeper penalties I’ve ever encountered in the tax code. Be sure to make yourself a reminder on your calendar to take your distribution every year.

To calculate how much you need to take from your IRA you might want to visit the IRS website or consult a tax adviser. It would also be a good idea to review publication 590 to see which table you need to use for determining your withdrawal. Most of the people we have worked with over the years seem to use Table 3, which is the uniform life time table listed below. People who use this table are either unmarried owners, married owners whose spouse is not more than 10 years younger, or married owners whose spouses are not the sole beneficiary of their IRA.

To calculate your IRA Minimum Required Withdrawal you would take the value of your IRA from December 31st of the prior year and divide it by the distribution period. For example: your IRA had a $100,000 balance on December 31st last year, and you are currently 71 years old. You would determine your IRA RMD by dividing $100,000 by 26.5, and you would need to take a distribution of $3,773.59.

A question we are often asked is, “What percentage do I need to withdrawal from my IRA to meet the required minimum distribution.”  In the example above, we show you the correct way for determining your required minimum withdrawal, but just to satisfy our curiosity we backed into the numbers to show approximately what percentage you would have to withdrawal to equal the correct withdrawal rate. We are including the chart showing the percentages below merely as an interesting side note, and you should not use these numbers for calculating your required minimum withdrawal from your individual retirement account.

FINRA, the financial industry regulatory authority created a handy little required minimum distribution calculator, which you can check out by clicking here.

As always be sure to get expert advice before taking a distribution to satisfy your RMD. I’d hate to see you end up with a 50% penalty. This article was written on April 1, 2013 and it is possible that the information in this post may change. So again please consult the IRS publication 590 and a qualified tax adviser before taking action.

Wednesday, September 16, 2015

7 Times You Need to Talk to a Financial Advisor

You may want to manage your money on your own, but there are times when it's a mistake to go it alone. Ian Kutner, an advisor with San Diego Wealth Management, was among the country's very first certified financial planners. It's been more than 40 years since he was certified, and he says he still finds that people overlook the value of a planner and misunderstand what they do.
"Sometimes people think a planner might be employed by a particular insurance company and direct [clients] into investments sold by that company," he says.
On the contrary, a good financial planner isn't going to sell you a specific product in order to make a commission. Instead, a quality advisor will listen to your goals, look at your current finances and recommend how best to move forward with your money.
While you don't always need to work with a planner on an ongoing basis, there are times when it makes sense to stop in for a consultation and a financial check-up.
1. When you get your first job.
It doesn't matter whether it pays $20,000 a year or $200,000 a year, your first job is a good reason to check in with a financial planner. Not only can they advise on how best to begin saving for retirement, they may also provide insight on how to maximize your employer's benefits package.
"You may not engage with a financial planner for years after that," says Keith Klein, a certified financial planner and owner of Turning Pointe Wealth Management in Phoenix. "But go in for an initial consultation to learn about how all [your financial options] work."
2. When you get married or divorced.
Another good time to get input from a financial planner is whenever you enter or leave a marriage. Bringing in an unbiased third party can help minimize financial losses in a divorce and may make it easier for engaged couples to have conversations about combining assets and income in marriage.
"One of the biggest reasons people should work with a financial planner is so that they don't make emotional mistakes," says Richard Wald, managing director of Merrill Lynch Global Wealth Management. For example, a spouse might feel attached to a family home and insist on keeping it as part of a divorce settlement. In exchange, he or she may lose out on retirement savings that could prove to be much more valuable in the long run.
3. When you receive a large sum of cash.
Receiving a large sum of money, such as from an inheritance, bonus, buyout or big raise, should be a boon to your financial health. Unfortunately, many people to squander the opportunity it presents.
A 2012 study from Ohio State University's Center for Human Resource Research found most people save only half the inheritance money they receive. In the study, 826 people received an inheritance, with the median amount being $11,340. Of those, one-third saw their overall wealth remain the same or even decline after receiving an inheritance, apparently as a result of poor financial decisions.
Regardless of the amount of your windfall, meeting with a financial advisor can ensure you put the money to good use. "People think they need $1 million to work with a planner," says Cecilia Beach Brown, a certified financial planner at Lincoln Financial Securities in Annapolis, Maryland. "Nothing could be further from the truth."
4. When you need to take care of aging parents.
Kutner says people should think outside the box when considering how a financial planner can be useful. "Aging parents want to stay in their homes, and how do you pay for that?" he says. "It's amazing how much a financial planner can [help]."
According to Genworth Financial, the average annual cost of a home health aide is $45,760. If you think your parents or another elderly loved one will need care, either in-home or in a nursing home, talking to a financial planner sooner rather than later can help you prepare for this sizeable expense.

5. When you are thinking about retirement.
Retirement planning is one area where financial planners shine. However, to make the most of their advice, you need to consult with a planner well before your expected quit date.
"Would you plan a vacation a day before you leave?" Kutner asks. Likewise, retirement planning shouldn't be left to the last minute.
Klein says you should begin planning in your 50s, at the latest. "Some of the best strategies for retirement income need to be set up 10 to15 years in advance," he says.
However, that doesn't mean you can't begin consulting with a financial planner even earlier. "Everyone around age 40 should check in with a planner just to see where you stand and what you are not thinking about," Brown says. By taking stock of your situation 20 to 30 years in advance of retirement, you still have plenty of time to make adjustments and save more if needed.
6. When you are preparing to pass on your wealth.
At some point, you and your money will be parted forever. When you start to think about estate planning, it can be smart to bring in a professional for the discussion. A financial advisor may be able to suggest ways to minimize estate taxes, plan for final expenses and review beneficiary details on accounts.
7. When you are worth a quarter million.
In most of the above cases, you may only want to pay for a single visit with a financial advisor, or ongoing consultation may not be necessary. However, once your income and assets reach a certain point, you may want to develop a regular working relationship with a planner who can keep you in check. According to some financial experts, a quarter million in assets is a good time to step away from your investments and let an objective third party step in.
"Once people accumulate $150,000 to $250,000 in assets, they begin to react a little too emotionally to their money," Klein says.
Wald says bear markets and volatile market conditions make it difficult for people to be prudent with their money. Rather than allow a market to stabilize, they may react in fear, sell off declining investments and then lock in their loss by missing the inevitable bounce back in fund values.
Beyond helping you make rational money decisions, a professional advisor can help decipher increasingly complex tax laws and investment strategies that apply to high-income earners. "Once you have over $500,000 in assets, an entirely new investment world opens to you," Brown says.
Even if you're a savvy money manager on your own, you may find value in bringing in a professional from time to time.
After all, Klein says, "even professional athletes have coaches."

Thursday, August 20, 2015

Three key decisions to make before you retire
When to take Social Security, how to pay for health care, and how to generate income.
As retirement nears, you will have three big decisions to make: when to take Social Security, how you will pay for health care, and how will you generate cash flow. The three are interconnected and will make a difference in your budget and lifestyle in retirement, and even on deciding when to retire.
How and when will you claim Social Security?
Waiting to age 70 to claim can significantly increase your Social Security benefit.
Social Security Administration data: Fast Facts and Figures about Social Security, 2014; Social Security Basic Facts (April 2, 2014); Annual Statistical Supplement 2014; and Annual Statistical Supplement 2015 (In Progress). FRA = full retirement age.
You can claim Social Security as early as age 62, but that may not be in your best interest financially. Why? Because Social Security payments increase if you delay claiming your benefits; your monthly benefit can go up until age 70. The difference between your check at 62 and 70 could be as much as 75%. For example, a monthly benefit of $1,500 if claimed at 62 could increase to more than $2,600 each month at age 70.1
Your Social Security benefit is guaranteed for as long as you live, and it will go up over time to keep up with inflation. So even though delaying means you would pass up some extra money in hand during your 60s, having a larger guaranteed source of inflation-protected monthly income for life is a big benefit for most people.
Of course, delaying isn’t always better—or always possible—for everyone, particularly for people with health issues, because it can take years to reach the breakeven point. Other families may need the Social Security income right away. But if you can defer until age 70, and you live a long life, you will collect more by waiting to start your benefits.
Figuring out when to collect benefits isn’t always as simple as deciding how long to wait. Married couples have a number of options to potentially boost their lifetime benefits by as much as $250,000, according to Fidelity research.1
How will you pay for health care?
It probably won’t surprise you that health care costs tend to go up as you get older. What may be surprising is by just how much: Our research suggests that the average couple retiring in 2014 could expect to spend about $220,000 on out-of-pocket health care costs during their retirement.2
You probably can’t escape health care costs, but you can plan for them. That starts with the government’s retiree health care insurance program—Medicare. No matter when you claim Social Security, Medicare won’t kick in until 65. So if you retire early, you will need to buy health insurance privately. Fidelity estimates that a couple retiring at age 62 instead of age 65 might have to spend an extra $17,000 on health care before they are eligible for Medicare.3
While you are still working, you should also consider a health savings account (HSA), in conjunction with a high-deductible health plan, to save for health care costs in retirement. You may want to buy supplemental health insurance or long-term care insurance to pay for expenses not covered by Medicare. Finally, it pays to be a choosy consumer of health care services, ask a lot of questions about the cost and necessity of services, and compare prices from different providers.
How will you generate cash flow once you stop working?
In retirement, Social Security will likely just be one of several sources of income. Others may include your savings, pension, annuities, rental income, or working part time. So how do you come up with a plan to make sure your money lasts?
There are many approaches, but it starts with a budget that identifies your needs—essential expenses like food, housing, and health care—and your wants—discretionary expenses like travel, eating out, and entertainment. The definitions between needs and wants will be different for everyone, but once you have your list, it makes sense to match essential expenses with guaranteed income—money that you can’t outlive—like Social Security, pensions, and lifetime annuities (which let you convert savings into guaranteed income). Then use your other savings and income for discretionary expenses.
One practical test to see whether you are financially ready for retirement is to try living off your retirement budget before you retire. If it’s too tight, you still have time to make adjustments. For instance, you can work longer, use home equity, or find part-time work.