Keep Your Assets. Take My Advice.

A New Way of Thinking – A Tax Free Retirement I will tell you how to invest properly later in this book. But, for now, you must remember to think differently from the herd. After all, the baton has been handed off to you. So, don’t drop it like they did in China at the Olympics! Does it really make sense to keep funding your IRA or 401(k), especially since we all believe taxes may go higher in the future? If we delay the inevitable, are we not increasing our tax liability every year? It makes better sense to pay the taxes now. I have met people with a million dollars in their IRA accounts. They are proud that they have accumulated those funds. The only trouble is they do not really have a million dollars. If they do like everyone else in America and wait until age 70 ½ to pull the required minimum distribution out each year, then they will likely pay a ton more in taxes over their life expectancy. After they pass away, what do you think the kids will do? They will want that money, especially, if they are not educated enough in how to properly structure their share of the IRA. They will most likely squander most of it away to taxes. Nothing happens automatically here folks. You have to have a knowledgeable professional who knows how to stretch an IRA properly. They must know how to get the funds to an Inherited IRA. They must know whether to take distributions because of the deceased person being over 70 ½ at death or under 70 ½ at death. They must know the deadlines to take the required minimum distributions for the beneficiaries. A lot of people think that they are supposed to take their required minimum distributions by April 15th of the year following when they turn 70 ½, but in fact it is April 1st, not April 15th. It certainly helps to also know what to do if there is a failure to take the required minimum distribution. The penalty for failure to take these distributions out properly is 50% of the required distribution. We met a client once whose mother had died and he had setup the Inherited IRA about eight years ago. The only problem was that he never took out the required minimum distribution in any of those eight years. Guess what, he had a 50% penalty for each of the years that he missed. He didn’t get much of that Inherited IRA. The IRS got it. Is this what you want to happen to your adult children? You had better work with a professional who knows these rules. Think about what it would be like to use your home equity or a Reverse Mortgage and convert a portion of your IRA or 401(k) to a tax free Roth IRA account. You would never have to pay taxes on the Roth IRA from that point on. No required minimum distributions ever. The Roth 403(b) is also available for school teachers, professors, medical professionals and other groups. A lot of people who come and see us think that they cannot convert their IRA to a Roth. As long as your Adjusted Gross Income is under $100,000 then you can. In 2010, anyone can convert because they are removing this $100,000 AGI limitation. It is a good idea to begin planning now. Further, there are ways to reduce your AGI in order to convert to a Roth IRA today. What do you do if you are one of the unfortunate Americans who do not have a Roth 401(k)? You make the full contributions to your Roth IRA each and every year. Put it away each year and act like you never had those funds in the first place. Better yet, every time you receive a raise in pay, bump up your contribution a little more, until you max out. The Roth 401(k), the Roth 403(b) and the Roth IRA will all have their maximum limit for contributions raised for the next few years. Okay, here is another quiz question for you. Did you know there was such a thing as a Roth 403(b)? That’s what I thought! Putting money into these Roth accounts are without a doubt one of the best things that you could ever do for yourself and your family. Don’t make the mistake of beating yourself up with regard to how to invest it. After all, in year one if you make 20% and all you put in is $1,000, then your account will only grow $200. Is this really going to make you dance in the streets? The best thing that could happen to you is your account doesn’t make a dime for the first 5 years. Just sock it away. After several years of maximizing your contributions, you will be pleasantly surprised to see how it jumps up when you do make a good return. If you are self-employed, then you may utilize a more recent option to start a Roth 401(k). The best thing to do is to hire a professional to help you figure out what might be the best fit for your business. The point is that being a self-employed businessperson will allow you great flexibility in saving for retirement with after-tax dollars. Build your emergency cash position first. Then pay off your debt. After you have accomplished these two things, then you can begin to think about saving and investing for growth. Save all that you can in your Roth retirement plans. If you are lucky enough to have additional funds left over, then continue to invest on a regular basis month in and month out. Don’t make the mistake of believing the lump sum that you have accumulated today is all that you need to make it the rest of your life. Don’t listen to financial advisors and CPA’s who tell you to make the most of pre-tax IRA and 401(k) contributions. All they are doing is creating a big retirement plan for the IRS, not you. Tax free is a big, big difference over taxable. Instead go with the Roth all the way. You do not have to walk into the tax slaughterhouse. You can do something about it today. Now you know.