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Retirement Planning

You’d think that planning ahead for retirement would be a fairly simple job based on the number of savings strategies being publicized. However, many investors are finding themselves unsure about the many strategies for building a retirement nest egg capable of meeting long-term financial goals.

In the “good old days” the picture seemed simpler – you could end a 30-year career with assurance that a pension and social security benefits would be enough to provide you with a comfortable retirement. Today, the social security system faces an uncertain future and many people are pessimistic about the stability of both privately funded and employer-sponsored retirement plans.

Financial Planning Building Blocks

Start saving –– the sooner, the better!

The results are stunning when you start investing and earning interest on your money as early in life as possible. The classic example is the 25-year old who invests $250 a month in an account at 8.5%, compounded monthly. By the time that 25-year old reaches age 65, savings have mounted up to a million dollars! The key to this success is regularity: investment of a specific amount on a specific schedule.

It’s never too late to start saving- just because you’re over 25 doesn’t mean you can’t start today. Regardless of your stage in life, you’ll be pleasantly surprised to see how your efforts can pay off after just a few years of compound interest!

Watch your investment mix

It can be tricky to find the right blend of investment choices – a concept called “asset allocation.” Your blend will depend on your financial goals, your stage of life, and your comfort with risk.
For example, if you’re relatively young you might invest a larger portion of funds more aggressively to get a higher return. However, as you get closer to retirement age, you would probably want to shift a bigger portion to something that offers greater security, like bonds or government-insured savings.


Diversification helps keep your portfolio balanced. It spreads out investments over a wide range of investment media. No matter how much you invest, diversifying is a wise choice because it allows a gain in one market to counteract a loss in another.

Account for inflation

Don’t forget about inflation when planning your investment strategy. Even when the inflation rate is low, savings will lose purchasing power over a period of time. When you factor inflation into even “safe” investments, you may see that, over time, the ones you thought were doing well are actually costing you more than you’re gaining on them.

Consider Taxes

You will eventually have to pay taxes on most of your invested funds; tax-deferred annuities, IRAs, etc., will eventually be withdrawn and become taxable. With a little bit of planning you can find legal ways to lower Uncle Sam’s bite from your hard-earned money!

The Plan Should Be Adjustable

Changing circumstances are an eventuality for all of us! You may need to change your financial plan in the event of marriage, divorce, birth or death in the family, a new business, purchase or sale of a home, or retirement.

Try to avoid locking funds up permanently. The ideal financial plan has room you to maneuver and switch investment vehicles if necessary.

Long-Range Planning Can Help Meet Future Needs

There are certain areas in tax and financial planning where long-term planning can make a significant contribution to your future financial well-being, such as:
College Educational Funds for Your Children – early planning yields the greatest benefits.

Planning for Your Retirement – Early planning can maximize your tax benefits now and minimize your taxable income at retirement.

Gift and Estate Planning – Passing your wealth on to your heirs while minimizing the government’s take is an important long-range planning issue for everyone.

Selling Real Estate – To minimize your tax liability when selling real estate thought pre-planning.

Business Exit Strategies – Whether retiring, passing a business on to family members, or just moving on to other ventures, long-range planning can make the transaction smooth and orderly.

Give Your Plan a Regular Tune-Up

Checking up on investment performance is important, especially when staying flexible amidst major life changes. Your plan needs regular attention to make sure it’s on track, regardless of whether circumstances have changed.

Getting Help with Financial Planning

Due to the intricacies and volatility of financial markets, you should seek advice from a financial professional before determine and enacting and plan. We are well-qualified to help. We’re trained to help find answers to questions like:

– Is there a best way to look for high returns on your investments?
– How can you manage risk?
– How should you divide your portfolio between stocks, bonds, and cash savings?
– What are the best ways to handle inflation?
– Is there any way to reduce taxes on investment income?
– How long should you stick with a particular investment?

Planning for your financial future doesn’t need to be mysterious and confusing. Having realistic expectations and taking an overall long-term approach to finding investment solutions can be a huge help as you move toward attaining your financial goals. Here are some highlights of a few of the general principles and strategies which have traditionally been the foundation of sound financial planning; they are designed to help you weather the ups and downs of a changing economic climate.

Please don’t hesitate to call with your own questions and to find out about the many services we offer!

Are You Comfortable with Risk?

Some investments are riskier than others. So when you begin planning for your financial future, you need to determine your risk tolerance. You don’t want to stay awake at night worrying about your investments.


A wealth of information on taxes and how they affect IRAs.

Planning Your IRA Strategy

Almost everyone who receives compensation can contribute to an IRA. There are a variety of types or IRAs. This section highlights various IRA options and some of the advantages of each.
You can only open an IRA if you receive compensation (wages, commissions, salaries, tips, professional fees, self-employment income, and alimony).

IRA Penalties
Although some penalties may be avoided in certain circumstances, if you contribute more than your IRA limits allow, withdraw from the account too early, or don’t take sufficient distributions when required – penalties may be assessed.

Traditional IRAs
Contributions made to a traditional IRA are usually deductible on your tax return, but you can designate them as non-deductible. This allows you to build up a basis in your IRA so that when you begin to withdraw from the account, part of each withdrawal is non-taxable.

A Traditional IRA may be set up as a spousal IRA if you are married, file jointly, and your spouse has little or no compensation. This allows your spouse to make IRA contributions based upon your compensation. However, neither spouse may deposit more than the annual limit to his/her individual account.

Roth IRAs
Distributions from Roth IRAs are tax-free if certain requirements are met. Annual contributions are limited to the smaller of the annual limit or your compensation, and if you have other IRAs, your combined annual contributions to all of them must not be more than the annual contribution limit. Roth IRAs allow contributions even after you turn age 70-1/2, and spousal Roth IRAs are also allowed. The due date for making your contributions to a Roth IRA is the same as for Traditional IRAs.

Avoiding Premature Traditional IRA Distribution Penalties
There are financial situations which necessitate the withdrawal of funds from your IRA account. It’s important to know that funds withdrawn from a Traditional IRA are taxed at the regular income tax rates and are subject to an additional 10% early withdrawal penalty if you are under 59-1/2. If you meet certain requirements or the funds are withdrawn to cover qualified expenses, you can escape this penalty. However, even if you avoid the penalty with one of the following exceptions, the withdrawal is still taxable for regular tax purposes.

– Higher education expenses (tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a qualified student at an eligible educational institution) are qualified expenses. If the individual is at least a half-time student, room and board is also a qualified expense.
– First-time homebuyer acquisition costs for the primary home of a first-time homebuyer is a qualified expense, although the distribution is limited to $10,000 for each individual (for example, husband and wife).
– Unreimbursed medical expenses, that do not exceed the amount you paid for unreimbursed medical expenses during the year of the withdrawal or 7.5% of your adjusted gross income for the year of the withdrawal, are qualified expenses.
– Medical insurance premiums that you made as a result of becoming unemployed are qualified expenses.
– If you are considered disabled (you cannot perform gainful activity because of your physical or mental condition), you may withdraw early from an IRA without penalty. To qualify as disabled, a physician must determine that your condition can be expected to last for a continued and indefinite duration or to result in death.

Minimum Required IRA Distributions

The IRS does not allow IRA owners to keep funds in a Traditional IRA indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the IRA owner will be assessed a 50% penalty on the amount not distributed as required.

Beginning Date Required
Starting in the year IRA owners reach age 70½ they must take at a minimum amount from their IRA yearly. Taxpayers who do not make the required distribution in the year they reach 70½ may avoid a penalty by taking that distribution no later than April 1st of the following year.

Multiple IRA Accounts
When calculating the minimum distribution, all Traditional IRA accounts owned by an individual are treated as one. The minimum distribution may be withdrawn from any combination of the accounts. IRA trustees may require written certification that the owner took the minimum distribution from other accounts if the owner chose not to take the minimum distribution from each account.

Maximum Distribution
There is no maximum limit on distributions and owners may withdraw as much as much as he or she wishes. Keep in mind that excess cannot be applied toward the minimum required amounts for future years if more than the required distribution is taken in a particular year.

Not Required to File
Even though the owner of an IRA account is not required to file a tax return, they could still be liable for the under-distribution penalty.

Death of the IRA Owner
If the IRA owner dies on or after the required distribution date, trustees must make a distribution in the year of death. The minimum amount must be distributed to a beneficiary if the distribution is after the owner’s death.

Beneficiary Distributions
If an IRA owner dies after beginning the required distributions, and if the beneficiary is an individual, they will have to begin taking distributions the year after the IRA owner’s death.

The IRS permits a spouse who is the sole beneficiary of an IRA many more options than it does other beneficiaries. Spouses who are sole beneficiaries have the following options:
1. Convert the IRA to their own account and delay additional distributions until they reach age 70½.
2. Convert the IRA to their own account and begin taking RMD based on their attained age using the Uniform Distribution Table if they are already age 70 ½.
3. Re-characterize the IRA to a “Beneficial IRA” and name new beneficiaries. The spouse will need to begin taking minimum distributions in the year following the owner’s death.

The choice depends on the surviving spouse’s financial needs and goals.

If the beneficiary or beneficiaries are individuals other than a spouse, the first required distribution must be made in the year following the IRA owner’s death.

An individual beneficiary may elect to take the entire account by the end of the fifth year following the IRA owner’s death. In this case, no distribution is required until the fifth year.

Planning Can Minimize the Tax
Advance planning minimizes or eliminates taxes on Traditional IRA distributions. In fact, in some circumstances where a taxpayer’s income is unusually low because of losses or extraordinary deductions, taking more than the minimum in a year can be beneficial. Please call us today if you need help planning your IRA strategy.

How Taxable Distributions from a Roth IRA are Determined

Withdrawals from a Roth IRA are tax-free if the funds have met the five year aging requirement as well as at least one of the following criteria:
– The funds are used for a qualified first-time home purchase
– The account owner is at least 59-1/2
– The accountholder becomes disabled or dies

Funds contributed to an IRA are always tax-free, since taxes were paid before they were deposited. Only the earnings are taxable. So which funds should you withdraw first?

The IRS has established a set of Ordering Rules to specify the sequence in which funds are withdrawn.
1. Withdraw from contributions until all contributions have been withdrawn (tax-free)
2. Withdraw from converted funds until all have been withdrawn (tax-free)
3. Withdraw from earnings (taxable and subject an early withdrawal penalty if you are under 59-1/2 years of age)

Retired Spouse IRA Strategy

The IRS allows a non-working spouse to base their contribution to an IRA on the income of their working spouse, an often overlooked tax benefit when one spouse retires after both were accustomed to working and basing their individual contributions on their own income for years. A non-working spouse may even make a contribution if their working spouse has a pension plan at work and his or her income precludes him or her from making an IRA contribution.

Is a Roth IRA Right for You?

Most taxpayers are familiar with traditional IRAs which provide a fairly simple method of saving for retirement deferring taxes in the process. However, there is one major drawback with the Traditional IRA: once you begin taking withdrawals, distributed earnings and contributions get taxed.

A Roth IRA allows no tax deduction of contributions, but it does allow tax-free accumulation on the account. That means that at retirement, all distributions from a Roth IRA are tax-free.

How Much Can You Contribute?
To qualify for Roth IRA contributions, you or your spouse must have taxable compensation. There are limits to how much you can contribute in a single year, but taxpayers 50 years old and older are permitted to make “catch-up” contributions, enabling them to make larger contributions in the years approaching retirement. These limits change year to year, so talk with a professional for more details.

The annual limit applies to all of your IRA contributions in a given year, meaning that you can contribute to multiple IRAs as long as the combined total does not exceed the annual IRA limits.
Handling Roth IRA Distributions

Distributions from a Roth IRA are treated as coming primarily from contributions on which you have already paid tax, so most distributions are tax-free. Distributions are also tax-free if they are not made within five years after you first established your account and they are made:
*After you reach age 59-1/2
*After your death
*On account of you becoming disabled
*So that you can pay up to $10,000 in expenses as a first-time homebuyer

Roth IRAs are preferable because they are not subject to minimum required distribution rules at age 70-1/2, allowing you to leave it untapped for heirs.

Conversions of Traditional IRAs to Roth Accounts
Congress has provided taxable rollover provisions to allow taxpayers to convert Traditional IRAs to Roth accounts. All future earnings after conversion accumulate tax-free. However, when choosing this option, tax on the Traditional IRA must be paid in the year the conversion is made.

Paying the Tax on Conversion
If you made nondeductible contributions to your Traditional IRA, your account will include amounts that have already been taxed, so these contributions won’t get taxed again when converting to the Roth.

The tax on a Roth conversion could be paid from other funds or from the IRA funds being converted, but if you choose to pay from the IRA funds, they will not be considered part of the rollover and will be subject to early withdrawal penalties if you are under 59-1/2 at the time of the withdrawal. In fact, choosing this option can severely limit the benefit of converting to a Roth IRA by eroding the funds available for investment.

Factors That Favor Your Conversion to a Roth
*Your Traditional IRA has been open for a fairly short time.
*Most of your Traditional IRA comes from nondeductible contributions.
*You have other funds from which to pay the tax on the conversion.
*Roth accounts don’t require distribution at age 70-1/2.
Factors That Don’t Favor Your Conversion to a Roth
*You do not have other funds with which to pay the tax on the conversions.
*You expect to need to withdraw from your Roth account before meeting the five year holding period.
*You expect to be in a lower tax bracket when you withdraw from your IRA.

Substantially Equal Payment Exceptions

The value of retirement investments for many taxpayers has been adversely affected by stock market declines; and, has uniquely affected taxpayers who have taken early retirement.

If you withdraw from your pension plan (including IRAs) prior to reaching age 59½, you will be subject to a 10% early withdrawal penalty. You can avoid this substantial penalty by using a special exception. This exception requires you to take substantially equal payments from your pension plan for at least five years or until you reach 59½, whichever is longer. The amount of those payments is calculated based on the value of the retirement account.

Those who retired before the market decline may have substantially equal payments that are excessive for an account that has significantly declined in value and may be depleting the plan to a point that future recovery is threatened. Because of this, the IRS will allow taxpayers to make a one-time change to the Minimum Required Distribution method (and this method only).

Making this switch can drastically reduce the annual distribution and may even keep the taxpayer from withdrawing the funds they need to meet their current financial obligations. Many of them are relying on early pension withdrawals until they start receiving their Social Security or employer retirement, but once they switch to the MRD method, they cannot change their withdrawal without violating the exception.

Taxation Solutions, Inc.

12250 Queenston Blvd Suite H, Houston, TX 77095