What's new at Wells Financial Partners Have a Roth 401(k)?
A relatively new retirement plan option is the Roth 401(k). Instead of receiving a tax deduction when you contribute to your standard 401(k), the Roth 401(k) must be funded with after tax money. The advantage being all of the growth can be withdrawn tax free presumably many years down the road in retirement. The more time prior to retirement that you have to invest in a Roth 401k, the more favorable this strategy. When you retire, you would then roll the Roth portion of your 401(k) into a Roth IRA.
However, there is a catch. Unless you already have a Roth IRA, there is a five year waiting periodin the Roth IRA prior to making tax free withdrawals (assuming that you are over the age 59&fraq12;). Therefore, it is advisable to open either a contributory Roth IRA or convert a portion of a traditional IRA to a Roth IRA at least five years before you plan to rollover the Roth 401(k) and start taking distributions. This way when you retire, you can rollover the Roth 401(k) and begin taking tax free distributions without a wait.
To Probate or Not to Probate
In Massachusetts it is a good idea to avoid probate whenever possible. Most estates that are probated take a minimum of a year from start to finish, plus attorney's fees incurred to properly handle the paperwork process. Having a Will does NOT avoid probate - it simply dictates the distribution of your assets. Probate assures that the distribution is accomplished correctly. However, you can avoid probate by either establishing a Revocable Trust or by specifying beneficiaries.
While avoiding probate in Massachusetts is a good idea, avoiding it in other states is even better. Nevertheless, ancillary probate is inevitable if you own property in another state, incurring additional attorney's fees and time. Here too, probate can be averted by establishing a Nominee Trust. Both the Nominee Trust and Revocable Trust can easily be created by your attorney when preparing your estate plan documents.
ATTENTION EDUCATORS - Your Pensions Are Great BUT...
We counsel a lot of educators in our practice, and if you work in the education field in Massachusetts you have one of the best pensions around. But as good as the pension is, it may not be good enough and here's why - inflation!
Basically, if you have 30 years in the system and you're over the age of 55, your pension benefit would be 80% of the average of your three highest years of earnings. You might say Hallelujah! I can live on that! And you may be able to at least for a while. After all, your retirement deduction will cease and there is no state tax on your pension income. So you're home free, right? Well let's see.
We'll take the case of an educator earning $80,000 as the average of their three highest years. At 80% this provides for an annual pension of $64,000. Assuming an inflation rate of 2.4%, which is high by recent standards but low historically, the pension would grow each year by $288 because the increase is based on only the first $12,000 of the pension.
So unless your pension is $12,000 or less, you will not keep up with inflation. All right, you say, I can live on less than the $64,000 and save the difference to fight off future inflation. A rough calculation indicates that you would have to live on approximately $50,000, saving the difference in order to keep your earning power about the same for the next 30 years while earning 8% on the savings along the way. Going from earning $80,000 to living on $50,000 while saving $14,000 the first year of retirement represents a reduction in a standard of living that most people find difficult to accept; and as a result, their long term prospects are not as bright.
The bottom line is that even if you anticipate a great pension there is still a need for a supplemental fund like a 403b to be used to fight off inflation in the future. This need should not be overlooked.
Second Marriages
We have met recently with several couples who have children from previous marriages. Each couple had the same overall estate planning objective. They wanted to be sure that all assets would be used to support the surviving spouse for the rest of their lifetime. At the death of the surviving spouse, assets would then be distributed to the children of each spouse in a proportion that reflected assets individually brought to the marriage.
There are several pitfalls that can occur that can obstruct this approach. An IRA names the spouse as primary beneficiary and the children as contingent beneficiaries. When that IRA passes to the surviving spouse, that spouse is under no obligation to retain the children as contingent beneficiaries. The possibility of a remarriage can also create complexities.
Using an estate planning attorney to develop a proper trust, can avoid this type of difficult scenario. A trust would assure both spouses that the assets brought to the marriage will be disbursed as desired.
Providing good news to clients!
A short time ago, we spoke with a couple concerned about their ability to retire. In a review of their assets we found a number of small pensions accumulated from several prior jobs. Although not large, all together they provided a sufficient amount to retire on. Their ability to retain purchasing power due to future inflation did require the design of a side fund; however, we were able to show them that their concerns about retiring were unfounded.
College, College, College
A big concern of clients with children! With college costs being what they are, parents would need to save $1,000 a month per child starting the day the child is born. The cost of education generally comes prior to retirement, and it is tempting to use your retirement savings for college expenses. Consequently, it is important to remember that you can borrow for college but not for retirement. Although you can avoid the 10-percent penalty for early withdrawal if you are under 591/2, it is not advisable to put your retirement at risk.
Having a realistic discussion with your child prior to selecting a college is a good approach. This can prove to be a positive experience for both parents and children. Sharing some of the financial obligation with your college-bound child in many cases results in the student having a more serious approach to the college experience.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax or legal professional regarding their individual situation.
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