Moving Towards Retirement Goals:
Expert Advice From Money Insider Jeff Fleming
Dennis Noon is avidly looking forward to his retirement. However, before he starts thinking about tee times and meeting his buddies at the 19th hole, there's a lot of planning to do.
Moving Toward Retirement Goals
As the Noons consider trading sand for snow, they need to be aware that they may be faced with a tax bill when they sell their house. While they can exclude from their income up to $500,000 of the gain from the sale, any gain above that would be taxable as a long-term capital gain, subject to a 15 percent maximum. The sale would also be subject to California income tax to the extent of any gain above the exclusion.
They can cut down on the gain by remembering to add the price of any significant improvements and their selling expenses to their cost. Typical selling expenses include real-estate commissions and fixing-up expenses. They get the exclusion even though they buy a new home for far less. The excluded capital gain can be invested to supplement their income in retirement.
There is potential for the Noons to realize some tax savings by making the move to Colorado. The maximum income tax rate is 5 percent in Colorado, substantially less than that of their current state, 9.3 percent in California.
Putting a Plan Together
The best way for the Noons to prepare for retirement is to create a comprehensive retirement plan -- one that identifies the sources and amounts of anticipated expenses and income. Dennis has a good idea of how he wants to spend his retirement, but the Noons also need to consider how his wife wants to spend hers. Also, plans should be made for the time if or when Dennis can no longer play golf.
To assure adequate retirement savings, both Dennis and his wife should continue to contribute the maximums to their retirement plans. They should also consider contributing to IRA accounts to get additional tax-free (if to a Roth) or tax-deferred (if to a traditional IRA) growth. Given his plans for the future, an adequate savings cushion will be a necessity.
If Dennis retires in three years and finds that he needs distributions from retirement accounts before age 59 1/2, he will be subject to income tax and the 10 percent premature distribution penalty distribution, unless an exception applies. Two possible exceptions may apply:
- First, because he will separate from service after age 55, any withdrawals Dennis makes directly from the company 401(k) plan will not be subject to the 10 percent penalty. However, if instead he rolls the 401(k) assets into an IRA, the 59 1/2 rule applies again.
- To avoid the 10 percent penalty on withdrawals from the IRA Rollover account, Dennis can take substantially equal periodic payments based on his life expectancy until the later of the end of five years or the attainment of age 59 1/2. The five-year period applies in Dennis's case because payments will not start until age 56 at the earliest.
If the Noons have traditional IRA accounts, they may want to consider converting to a Roth IRA. However, their current income may put them above the $100,000 limit to qualify for a Roth conversion. After retirement, they may fall below that limitation.
Building an Investment Plan
The Noons should also consider an overall investment plan that takes into account their risk tolerance. Many individuals approaching retirement consider some sort of income and growth portfolio. This type of portfolio may be appropriate for the Noons. The growth-oriented investments will help keep pace with inflation, and the income from the portfolio can be used to meet daily expenses. Although Dennis travels for free (through his employer), lodging, dining and greens fees will be out of pocket.
Dennis seems to have a sizable portion of his assets in an employer-sponsored 401(k) plan. While he has stated that he is currently comfortable with the way his 401(k) is being invested, he should consider reallocating his retirement assets to conform to his overall investment strategy when the time comes for retirement. Since employer sponsored plans generally offer fewer investment alternatives, this may be accomplished more easily through a rollover to an IRA (but watch for premature distribution penalties).
Estate and Legacy Planning
Because the Noons are embarking on a new stage in their lives, they should review, with their tax and estate-planning professionals, their wills and any trusts that they may have in order to adequately plan for the disposition of their estates at the lowest tax costs. This would include the use of unified credit provisions and other estate planning techniques. They should also review any beneficiary designations on their accounts and retirement plans to assure that property will pass as they so desire.
Although their medical expenses will be covered through Mrs. Noon's employer, the Noons are young enough that they could inexpensively purchase long-term care insurance to cover the cost of any serious illnesses that may otherwise jeopardize their retirement lifestyle. With that in mind, the Noons should discuss with their attorney the potential benefits from a Durable Power of Attorney, which can allow for the management of assets, even in the event of disability.
Expert Advice for Dennis
The Planning Process
Selling Your Home
Optimizing Savings
Preparing for the Home Stretch, from our sponsor, Merrill Lynch
back to Financial Futures intro
|
