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Maximize Your 401(k) & IRA

Four Key Issues to Maximize the Value of Your 401(k) and IRA

Money that you have accumulated in your 401(k) and your IRA represents perhaps your biggest financial opportunity and your biggest financial challenge. It represents opportunity because for most Americans the greatest accumulation of wealth that they have is in their retirement accounts. This is the money that one day if properly managed can provide for both a comfortable retirement for you and a meaningful and enduring legacy for your loved ones. It represents a challenge because this is money that has never been taxed and therefore can be like a ticking tax time bomb ready to go off unless careful planning is done to defuse it. There are four key retirement account issues I would like to discuss with you today to help you accomplish that.

Strategy One: Should I Roll Over My 401(k) into an IRA?

Of course, every situation is different, but the value of rolling over a 401(k) into an IRA (and when done properly this is a non-taxable event) is that you are no longer limited to the investment options of the 401(k) administrator but can now explore the broader universe of financial products. This could be of great value to you in matching up your investments with your financial objectives and risk tolerance level. Also, 401(k) plans often have restrictions particular to that plan that can be cumbersome. Having your own IRA can help there as well. Also, with a 401(k) plan, you often have a 1-800 number to call for assistance, but you do not have a local financial advisor that you can work with who knows you and can help you implement a plan that is tailored just for you. If you are retired, you may want to consider a 401(k) rollover. If you are still working, many companies allow employees to roll over part of their 401(k) into an IRA in something called an In Service rollover. Your human resources department should be able to tell you whether this is allowable for you. Either way, feel free to call my office and request a complimentary 401(k) rollover kit that I have put together to assist you as you consider this option.

Strategy Two: Should I Convert My IRA into a Roth IRA?

The second retirement account issue that is worth considering is whether or not it is wise to convert a traditional IRA into a Roth IRA. The upside and the downside of this decision are both obvious. The downside is that you would have to pay taxes on the value of your IRA to convert. The upside is that once you have converted to a Roth and you eventually decide to start taking money out of the account for retirement, that income would be tax free. Money that would go to your children at your death would go to them income tax free as well. Right now, there is concern that with all of the government spending taking place, taxes may go up in the future. Converting to a Roth IRA can remove the tax uncertainty of what tax brackets will look like when you start to take income from your IRA … if the income is tax free, it wouldn’t matter! Call my office if this is of interest to you. I have a Roth Conversion calculator that can help you think the decision through, and we can work with your accountant or an accountant that I can refer you to if you decide it would be in your best interest to do so. This decision becomes even more relevant in the year 2010 for two reasons. First of all, normally if your adjusted gross income exceeds $100,000 you are not even eligible to convert your IRA to a Roth. That ceiling is being lifted in 2010. Secondly, if you do convert in 2010, you will be allowed to spread the paying of the tax to do so over two years.

Strategy Three: Should I Stretch My IRA For My Children?

The third retirement account consideration that I want to mention is whether to consider what is commonly called a Stretch IRA strategy for your heirs when they eventually inherit your IRA. This can be a dynamic planning opportunity to create a legacy that would live on long after you are gone. Because of rule changes that the IRS has implemented when it comes to non-spouses such as your kids and grandkids inheriting your IRA, your heirs now have the option of not cashing in the IRA all at once (and paying a mountain of taxes) but of receiving a check each year for the rest of their lives based upon a government table of life expectancies. The rules that explain how this works can be found in IRS publication 590, which you can download from the IRS web site at, or you can call my office and I would be happy to forward a copy to you. By receiving a check each year but leaving the unused portion of the IRA alone to grow each year your heirs can end up with very large lifetime distributions, by taking advantage of what Einstein called the 8th wonder of the world, the power of compound interest over time. Business Week Magazine had this to say about the Stretch IRA when the IRS first changed the rules: “The benefit is dramatic. In fact, assuming an 8% annual rate of return, an 18 year old inheriting $250,000 would realize $7.85 million of income over his lifetime provided he takes only the minimum required. You are now assured that these account, if planned for properly, can stay in the family for two generations or longer.” Now, I would quibble with Business Week about their (in my opinion) aggressive assumption of 8% annual growth, but the point is that this can be a dynamic legacy planning opportunity, particularly if you do not plan to take more than the Required Minimum Distribution from your IRA while you are alive. I have software that can help us to evaluate whether the Stretch IRA is something that you ought to explore. Feel free to give me a call at (304) 346-7782.

Strategy Three: What is my exit strategy for my retirement account?

The final retirement account, issue that I would like to share with you is the need to have an exit strategy for your IRA. What I mean by that is people often spend years growing their retirement account, and virtually no time planning how they are going to distribute that money one day for a comfortable retirement. Life is not a dress rehearsal, and neither is retirement. We get one opportunity to get it right and your IRA can be an important toll in getting it right. There are any number of income strategies that can be employed to help your money to keep working for you long after you have stopped working. People today are living longer and longer lives. An article in the Wall Street Journal in July of 2006 said that if you are a 65 year old married couple, there is a 68% chance that at least one of you will be alive at age 85 and a 42% that one of you will survive into your 90s. The tension of income planning is to on the one hand create enough income for you to live retirement the way that you want to live it, but on the other hand have a plan in place for your money to live as long as you do. Call my office at (304) 346-7782 and let’s together map out a sustainable plan for a happy and long retirement.

Next Steps

Sometimes a fresh set of eyes and an independent voice can help you to determine if you are on the right track or if changes are called for. Perhaps it is time that you asked for a second opinion when it comes to your financial health. Call our office at (304) 346-7782 or (800) 361-1792 and arrange a time to talk with Shawn Moran, either in person or on the phone. You’ll be glad that you did.