early retirement planning

A Primer for Estate Planning

Posted by Mike Bonacorsi CFP® | Posted in April 3, 2013 | No Comments

Things to check and double-check before you leave this world.

Provided by Mike Bonacorsi, CFP®

Estate planning is a task that people tend to put off, as any discussion of “the end” tends to be off-putting. However, those who leave this world without their financial affairs in good order risk leaving their heirs some significant problems along with their legacies.

No matter what your age, here are some things you may want to accomplish this year with regard to estate planning.

Create a will if you don’t have one. Some people never get around to creating a will, even to the point of buying a will-in-a-box at a stationery store or setting one up online.

A solid will drafted with the guidance of an estate planning attorney may cost you more than a will-in-a-box, and it may prove to be some of the best money you ever spend. A valid will may save your heirs from some expensive headaches linked to probate and ambiguity.

Complement your will with related documents. Depending on your estate planning needs, this could include some kind of trust (or multiple trusts), durable financial and medical powers of attorney, a living will and other items.

You should know that a living will is not the same thing as a durable medical power of attorney. A living will makes your wishes known when it comes to life-prolonging medical treatments, and it takes the form of a directive. A durable medical power of attorney authorizes another party to make medical decisions for you (including end-of-life decisions) if you become incapacitated or otherwise unable to make these decisions.

Review your beneficiary designations. Who is the beneficiary of your IRA? How about your 401(k)? How about your annuity or life insurance policy? If your answer is along the lines of “Mm … you know … I’m pretty sure it’s…” or “It’s been a while since …”, then be sure to check the documents and verify who the designated beneficiary is.

When it comes to retirement accounts and life insurance, many people don’t know that beneficiary designations take priority over bequests made in wills and living trusts. If you long ago named a child now estranged from you as the beneficiary of your life insurance policy, he or she will receive the death benefit when you die – regardless of what your will states.¹

Time has a way of altering our beneficiary decisions. This is why some estate planners recommend that you review your beneficiaries every two years.

In some states, you can authorize transfer-on-death designations. This is a tactic against probate: TOD designations may permit the ownership transfer of securities (and in a few states, forms of real property, vehicles and other assets) immediately at your death to the person designated. TOD designations are sometimes referred to as “will substitutes” but they usually pertain only to securities.²

Create asset and debt lists. Does this sound like a lot of work? It may not be. You should provide your heirs with an asset and debt “map” they can follow should you pass away, so that they will be aware of the little details of your wealth.

* One list should detail your real property and personal property assets. It should list any real estate you own, and its worth; it should also list personal property items in your home, garage, backyard, warehouse, storage unit or small business that have notable monetary worth.

* Another list should detail your bank and brokerage accounts, your retirement accounts, and any other forms of investment plus any insurance policies.

* A third list should detail your credit card debts, your mortgage and/or HELOC, and any other outstanding consumer loans.

Think about consolidating your “stray” IRAs and bank accounts. This could make one of your lists a little shorter. Consolidation means fewer account statements, less paperwork for your heirs and fewer administrative fees to bear.

Let your heirs know the causes and charities that mean the most to you. Have you ever seen the phrase, “In lieu of flowers, donations may be made to …” Well, perhaps you would like to suggest donations to this or that charity when you pass. Write down the associations you belong to and the organizations you support. Some non-profits do offer accidental life insurance benefits to heirs of members.

Select a reliable executor. Who have you chosen to administer your estate when the time comes? The choice may seem obvious, but consider a few factors. Is there a stark possibility that your named executor might die before you do? How well does he or she comprehend financial matters or the basic principles of estate law? What if you change your mind about the way you want your assets distributed – can you easily communicate those wishes to that person?

Your executor should have copies of your will, forms of power of attorney, any kind of healthcare proxy or living will, and any trusts you create. In fact, any of your loved ones referenced in these documents should also receive copies of them.

Talk to the professionals. Do-it-yourself estate planning is not recommended, especially if your estate is complex enough to trigger financial, legal and emotional issues among your heirs upon your passing.

Many people have the idea that they don’t need an estate plan because their net worth is less than X dollars. Keep in mind, money isn’t the only reason for an estate plan. You may not be a multimillionaire yet, but if you own a business, have a blended family, have kids with special needs, worry about dementia, or can’t stand the thought of probate delays plus probate fees whittling away at assets you have amassed … well, these are all good reasons to create and maintain an estate planning strategy.

*LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com www.MikeBonacorsi.com

Mike Bonacorsi is a Registered Representative with and, securities are offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Mike Bonacorsi LLC, a registered investment advisor and a separate entity from LPL Financial.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.knoxnews.com/news/2012/may/07/retirement-accounts-not-governed-by-wills/ [5/7/12]

2 – www.investopedia.com/university/estate-planning/estate-planning5.asp#axzz1vjRm6aPe [3/20/13]

Can Stocks Advance Further Without a Weak Dollar?

Posted by Mike Bonacorsi CFP® | Posted in April 1, 2013 | No Comments

Are we seeing the early signs of a dollar bull run?

Provided by Mike Bonacorsi, CFP®

What happened to the weak buck? In recent years, stock market gains have been associated with a weak dollar (among other factors). This latest rally on Wall Street seems to be an exception: years of dollar weakness may be giving way to renewed foreign investment in U.S. currency, spurred by global belief that things are getting better in America.

If the trend keeps up, it threatens to toss a wet blanket on a sizzling market. As the Dow and S&P 500 have logged gains, so has the U.S. Dollar Index. The USDX is up since the start of February, and it reached a six-month peak against a basket of foreign currencies on March 13. On that day, the euro sank to a three-month low against the dollar while the yen approached a four-and-a-half-year low against the buck.^1,2

If a rising dollar does pressure stocks, the pressure may subside. High unemployment and slow growth may signal that the country is still in an economic recovery. In response, the Federal Reserve is keeping interest rates at historic lows and creating dollars to buy bonds. So even if stocks pull back a bit in the coming weeks, you could still see central bank policy encouraging a soft dollar.

While printing money can promote inflation, the Fed faces little pressure to stop easing – at last look, yearly gains in consumer and producer prices were well within its annualized target. For Fed policy to change, inflation would have to pose a real macro threat. It doesn’t today and it probably won’t until GDP and wage growth approach historical norms. That may not happen until 2014 or 2015.

What if this show of strength isn’t fleeting? If the U.S. is leading the way in a global recovery –as it has in many past economic cycles – we could see a bull market in the dollar in the distant future, and it could coincide with a bull market in equities.

For a dollar rally to happen, you need three conditions in place. The dollar has to be cheaply valued; the U.S. economy has to be on the upswing, especially relative to the rest of the world; and, interest rates need to rise.

At the moment, defense spending isn’t on the rise and the NASDAQ is a long way from 5,000. While times have certainly changed, other conditions might function as catalysts for a sustained strong dollar anyway: a very weak euro, a yen slipping into a bear market, and America’s decreasing reliance on foreign oil. All of these conditions may persist for some time.

Some statistics worth noting: here in March, the yield on the 10-year Treasury has risen to its highest premium in 19 months versus the yield on Japan’s 10-year note. The yield on our 2-year note is nearly 0.20% higher than that of Germany’s, the biggest gap in yield since early January. As for the USDX, it is currently more than 30% below its 2001 peak.³

It is also worth noting that the dollar bull markets of the 1980s and 1990s did not obstruct the concurrent bull markets in U.S. stocks. A dollar rally can be rough for emerging markets, however – witness the debt crises that hit Latin America in the 1980s and Southeast Asia in 1997.

Maybe the relationship is changing. It could be that the recent correlation between a weak dollar and a bull market is fading, and that the course of the dollar is in sync with the course of the market – that is, leading the way for the rest of the world. As CEF Holdings CEO Warren Gilman told CNBC, “The dollar is the best currency among a sad group [of currencies] and that will continue as anticipation of strength in the economy grows.” Relatively speaking, the dollar looks good – and perhaps U.S. stocks will look even better as the year continues.⁴

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com www.MikeBonacorsi.com

*Stock investing involves risk including loss of principal.

**The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

***International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Citations.

1 – online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [3/14/13]

2 – abcnews.go.com/blogs/business/2013/03/economic-boost-from-stronger-us-dollar/ [3/14/13]

3 – www.ft.com/cms/s/0/1dd0417e-8a61-11e2-9da4-00144feabdc0.html#axzz2NYTQsFke [3/12/13]

4 – www.cnbc.com/id/100541247 [3/11/13]

Retirement Seen Through Your Eyes

Posted by Mike Bonacorsi CFP® | Posted in March 25, 2013 | No Comments

After you leave work, what will your life look like?

Provided by Mike Bonacorsi, CFP®

How do you picture your future? If you are like many baby boomers, your view of retirement is likely pragmatic compared to that of your parents. That doesn’t mean you have to have a “plain vanilla” tomorrow. Even if your retirement savings are not as great as you would prefer, you still have great potential to design the life you want.

With that in mind, here are some things to think about.

What do you absolutely need to accomplish? If you could only get four or five things done in retirement, what would they be? Answering this question might lead you to compile a “short list” of life goals, and while they may have nothing to do with money, the financial decisions you make may be integral to achieving them. (This may be the most exciting aspect of retirement planning.)

What would revitalize you? Some people retire with no particular goals at all, and others retire burnt out. After weeks or months of respite, ambition inevitably returns. They start to think about what pursuits or adventures they could embark on to make these years special. Others have known for decades what dreams they will follow … and yet, when the time to follow them arrives, those dreams may unfold differently than anticipated and may even be supplanted by new ones.

In retirement, time is really your most valuable asset. With more free time and opportunity for reflection, you might find your old dreams giving way to new ones. You may find yourself called to volunteer as never before, or motivated to work again but in a new context.

Who should you share your time with? Here is another profound choice you get to make in retirement. The quick answer to this question for many retirees would be “family”. Today, we have nuclear families, blended families, extended families; some people think of their friends or their employees as family. You may define it as you wish and allocate more or less of your time to your family as you wish (some people do want less family time when they retire).

Regardless of how you define “family” or whether or not you want more “family time” in retirement, you probably don’t want to spend your time around “dream stealers”. They do exist. If you have a grand dream in mind for retirement, you may meet people who try to thwart it and urge you not to pursue it. (Hopefully, they are not in close proximity to you.) Reducing their psychological impact on your retirement may increase your happiness.

How much will you spend? We can’t control all retirement expenses, but we can control some of them. The thought of downsizing may have crossed your mind. While only about 10% of people older than 60 sell homes and move following retirement, it can potentially bring you a substantial lump sum or lead to smaller mortgage payments. You could also lose one or more cars (and the insurance that goes with them) and live in a neighborhood with extensive, efficient public transit. Ditching land lines and premium cable TV (or maybe all cable TV) can bring more savings. Garage sales and donations can have financial benefits as well as helping you get rid of clutter, with either cash or a federal tax deduction that may be as great as 30-50% of your adjusted gross income provided you carefully itemize and donate the goods to a 501(c)(3) non-profit.¹

Could you leave a legacy? Many of us would like to give our kids or grandkids a good start in life, or help charities or schools – but given the economic realities of retiring today, there is no shame in putting your priorities first.

Consider a baby boomer couple with, for example, $285,000 in retirement savings. If that couple follows the 4% rule, the old maxim that you should withdraw about 4% of your retirement savings per year, you are talking about $11,400 withdrawn to start. When you combine that $11,400 with Social Security and assorted investment income, that couple isn’t exactly rich. Sustaining and enhancing income becomes the priority, and legacy planning may have to take a backseat. In Merrill Lynch’s 2012 Affluent Insights Survey, just 26% of households polled (all with investable assets of $250,000 or more) felt assured that they could leave their children an inheritance; not too surprising given what the economy and the stock market have been through these past several years.²

How are you planning for retirement? This is the most important question of all. If you feel you need to prepare more for the future or reexamine your existing plan in light of changes in your life, then confer with a financial professional experienced in retirement planning.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com

www.MikeBonacorsi.com

*Examples used are hypothetical and not representative of any specific situation. Your results will vary.

Citations.

1 – www.bankrate.com/finance/financial-literacy/ways-to-downsize-during-retirement.aspx [2/28/13]

2 – wealthmanagement.ml.com/Publish/Content/application/pdf/GWMOL/Report_ML-Affluent-Insights-Survey_0912.pdf [9/12]

What Beneficiaries Need To Know

Posted by Mike Bonacorsi CFP® | Posted in March 21, 2013 | No Comments

What do you do when an account owner passes away?

Presented by Mike Bonacorsi, CFP®

If your loved ones have invested, saved or insured themselves to any degree, you may be named as a beneficiary to one or more of their accounts, policies or assets in the event of their deaths. While we all hope “that day” never comes, we do need to know what to do financially if and when it does.

Legally, just who is a beneficiary? IRAs, annuities, life insurance policies and qualified retirement plans such as 401(k)s and 403(b)s are set up so that the accounts, policies or assets are payable or transferrable on the death of the owner to a beneficiary, usually an individual named on a contractual document that is filled out when the account or policy is first created.

In addition to the primary beneficiary, the account or policy owner is asked to name a contingent (secondary) beneficiary. The contingent beneficiary will receive the asset if the primary beneficiary is deceased.

Some retirement accounts and policies may have multiple beneficiaries. Charities are also occasionally named as beneficiaries. If you have individually listed one (or more) of your kids or grandkids as designated beneficiaries of your 401(k) or IRA, that designation will usually override any charitable bequest you have stated in a trust or will.¹

A will is NOT a beneficiary form. When it comes to 401(k)s and IRAs, beneficiary designations are commonly considered first and wills second. Be mindful of who you select. If you willed your IRA assets to your son in 2008 but named the man who is now your ex-husband as the beneficiary of your IRA back in 1996, those IRA assets are set up to transfer to your ex-husband in the event of your death.¹

If a retirement account owner passes away, what steps need to be taken? First, the beneficiary form must be found, either with the IRA or retirement plan custodian (the financial firm overseeing the account) or within the financial records of the person deceased. Beyond that, the financial institution holding the IRA or retirement plan assets should also ask you to supply:

* A certified copy of the account owner’s death certificate

* A notarized affidavit of domicile (a document certifying his or her place of residence at the time of death)

If the named beneficiary is a minor, a birth certificate for that person will be requested. If the beneficiary is a trust, the custodian will want to see a W-9 form and a copy of the trust agreement.²

If you are named as the primary beneficiary, you usually have three options for claiming the assets, regardless of what kind of retirement savings account you have inherited:

1 – Open an inherited IRA and transfer or roll over the funds into it.

2 – Roll over or transfer the assets to your own, existing IRA.

3 – Withdraw the assets as a lump sum (liquidate the account, get a check).

Before you make ANY choice, you should welcome the input of a tax advisor, and discuss any limitations or consequences that may apply to your situation.²

What if you are a spousal beneficiary? If that is the case, you may elect to:

* Roll over or transfer assets from a traditional IRA, Roth IRA, SEP-IRA or SIMPLE IRA into your own traditional or Roth IRA, or an inherited traditional or Roth IRA

* Withdraw the assets as a lump sum

* Roll over or transfer qualified retirement plan assets from a 401(k), 403(b), etc. into your own retirement account, or take them as a lump sum.^2,6

What if you are a non-spousal beneficiary? If this is so, you may elect to:

* Roll over or transfer assets from a traditional IRA, Roth IRA, SEP-IRA, SIMPLE IRA or qualified retirement plan into an inherited IRA

* Withdraw the assets as a lump sum.²

What if a qualified (i.e., irrevocable) trust is named as the beneficiary? If that is the circumstance, the trustee has two choices:

* Transfer assets from a traditional IRA, Roth IRA, SEP-IRA, SIMPLE IRA or qualified retirement plan into an inherited IRA

* Withdraw the assets as a lump sum.²

The next calendar year will be very important. Inheritors of retirement accounts have until September 30 of the year following the original account owner’s death to review and remove beneficiaries, and until December 31 of that year to divide the IRA assets among multiple beneficiaries. Usually, December 31 of the year after the original retirement plan owner’s passing is the deadline for the first RMD (Required Minimum Distribution) from an inherited traditional or Roth IRA.^3,4

Now, how about U.S. Savings Bonds? If you are named as the primary beneficiary of a U.S. Treasury Bond, you have three options:

* Redeem it at a financial institution (you will need your personal I.D. for this).

* Get the security reissued in your name or the names of multiple beneficiaries. You do this via Treasury Department Form 4000, which you must sign before a certifying officer at a bank (not a notary). Then you send that signed form and a certified copy of the death certificate to a Savings Bond Processing Site.

* Do nothing at all, as the primary beneficiary automatically becomes the bond owner when the original bond owner passes away.⁵

What about savings & checking accounts? Bank accounts are often payable-on-death (POD) assets or “Totten trusts.” All a beneficiary needs to claim the assets is his or her personal identification and a certified copy of the death certificate of the original account holder. There is no need for probate. (Some states limit charities and non-profits from being POD beneficiaries of bank accounts.)⁵

How about real estate? Lastly, it is worth noting that about a dozen states use transfer-on-death (TOD) deeds for real property. If you live in such a state, you have to go to the county recorder or registrar, usually with a certified copy of the death certificate and a notarized affidavit which informs the recorder or registrar that ownership of the property has changed. If the deed names multiple beneficiaries and some are dead, the surviving beneficiaries must present the recorder or registrar with certified copies of the death certificates of the deceased beneficiaries.⁵

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com

www.MikeBonacorsi.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – smartmoney.com/taxes/estate/how-to-choose-a-beneficiary-1304670957977/ [6/10/11]

2 – www.schwab.com/public/file/P-1625576/CS13416-02_MKT13598-10_FINAL_118091.pdf [12/10]

3 – retirementwatch.com/IRASample4.cfm [1/31/13]

4 – retirementwatch.com/IRASample1.cfm [1/31/13]

5 – nolo.com/legal-encyclopedia/claim-payable-on-death-assets-32436.html [1/31/13]

6 – montoyaregistry.com/Financial-Market.aspx?financial-market=who-should-inherit-your-ira-andor-401k&category=22 [1/31/13]

A Roth IRA’s Many Benefits

Posted by Mike Bonacorsi CFP® | Posted in March 20, 2013 | No Comments

Why do so many people choose them over traditional IRAs?

Provided by Mike Bonacorsi, CFP®

The IRA that changed the whole retirement savings perspective. Since the Roth IRA was introduced in 1998, its popularity has soared. It has become a fixture in many retirement planning strategies, because it offers savers so many potential advantages.

The key argument for going Roth can be summed up in a sentence: Paying taxes on your retirement contributions today is better than paying taxes on your retirement savings tomorrow.

Think about it. All other variables aside, would you like to pay more taxes in retirement or less?

What if federal tax rates are higher in the future than they are today? Would you like to see a) your retirement savings taxed at those higher rates tomorrow, when you may have medical bills or other emergency expenses to contend with, or b) have the dollars you are saving for retirement today taxed at possibly lower rates?

Here is a closer look at the trade-off you make when you open and contribute to a Roth IRA – a trade-off many savers are happy to make.

You contribute after-tax dollars. You have already paid federal income tax on the dollars going into the account. But in exchange for paying taxes on your retirement savings contributions today, you could potentially realize great benefits tomorrow.¹

You position the money for tax-deferred growth. Roth IRA earnings aren’t taxed as they grow and compound. If, say, your account grows 6% a year, that growth will be even greater when you factor in compounding. The earlier in life that you open a Roth IRA, the greater compounding potential you have.²

You can arrange tax-free retirement income. Roth IRA earnings can be withdrawn tax-free as long as you are age 59½ or older and have owned the IRA for at least 5 years. (That 5-year clock starts on January 1 of the tax year in which you make your initial Roth IRA contribution.)³

The IRS calls such tax-free withdrawals qualified distributions. They may be made to you, to your estate after you are deceased, and/or to a beneficiary. (If you die before the Roth IRA meets the 5-year rule, your IRA beneficiary will see the IRA earnings taxed until it is met.)⁴

If you withdraw money from a Roth IRA before you reach age 59½, it is called a nonqualified distribution. If you do this, you can still withdraw an amount equivalent to your total IRA contributions to that point tax-free and penalty-free. If you withdraw more than that amount, though, the rest of the withdrawal may be fully taxable and subject to a 10% IRS penalty as well. (If you are younger than 59½ and have owned a Roth IRA for at least 5 years, you are allowed to withdraw 100% of your contributions and up to $10,000 of IRA earnings tax- and penalty-free to buy a principal residence, assuming the buyer has not owned a home within the past 2 years.)^1,3

You never have to make a withdrawal. When you own a traditional IRA, you must start pulling money out of it in your in your seventies. These withdrawals are called Required Minimum Distributions (RMDs), and the amount is calculated for you using an IRS formula. These forced withdrawals saddle some traditional IRA owners with tax problems. In contrast, Roth IRA owners never have to take RMDs. They are never required to take a penny out of their IRAs.¹

Withdrawals don’t affect taxation of Social Security benefits. If your total taxable income exceeds a certain threshold – $25,000 for single filers, $32,000 for joint filers – then your Social Security benefits may be taxed. (These limits are not adjusted for inflation, incidentally.) An RMD from a traditional IRA represents taxable income, and may push retirees over the threshold – but a qualified distribution from a Roth IRA isn’t taxable income, and doesn’t count toward it.⁵

You can direct Roth IRA assets into many different kinds of investments. Invest them as aggressively or as conservatively as you wish – but remember to practice diversification. The range of investment choices is often broader than that offered in a typical workplace retirement plan.¹

You can shift dividend-producing investments into a Roth IRA from a taxable account. As dividends are being taxed at higher rates in 2013, keeping dividend-producing stocks out of a taxable account has definite virtues.

You can potentially “stretch” the assets. If an original Roth IRA owner passes away after owning the IRA for at least five years, then its earnings can be withdrawn tax-free by its beneficiaries. (Relevant estate taxes may need to be paid, of course.) If a Roth IRA beneficiary is not a spouse, then other factors come into play: that beneficiary cannot contribute to the inherited Roth IRA, or combine it with an IRA he or she owns. The non-spouse beneficiary can decide to a) receive a distribution of 100% of the inherited Roth IRA assets by December 31st of the fifth year following the year of the IRA owner’s death, or b) receive periodic payments from the IRA over the course of his or her life, an option which may potentially be “stretched” (given proper planning) and extended to subsequent beneficiaries.⁶

You have 16 months to make a Roth IRA contribution for a given tax year. For example, IRA contributions for the 2012 tax year may be made up until April 15, 2013. While April 15 is the annual deadline, many IRA owners who make lump sum contributions for a given tax year make them as soon as that year begins, not in the following year. Making your Roth IRA contributions earlier gives the funds in the account more time to grow and compound with tax deferral.¹

Who can open a Roth IRA? Anyone with earned income (and that includes a minor).¹

How much can you contribute to a Roth IRA annually? The 2013 contribution limit is $5,500, with an additional $1,000 “catch-up” contribution allowed for those 50 and older. (The annual contribution limit is adjusted periodically for inflation.)⁷

You can keep making annual Roth IRA contributions all your life. You can’t make annual contributions to a traditional IRA once you reach age 70½.⁷

Does a Roth IRA have any drawbacks? Actually, yes. One, you will generally be hit with a 10% penalty by the IRS if you withdraw Roth IRA funds before age 59½ or you haven’t owned the IRA for at least five years. (This is in addition to the regular income tax you will pay on the funds withdrawn, of course.) Two, you can’t deduct Roth IRA contributions on your 1040 form as you can do with contributions to a traditional IRA or the typical workplace retirement plan. Three, you might not be able to contribute to a Roth IRA as a consequence of your filing status and income; if you earn a great deal of money, you may be able to make only a partial contribution or none at all.^3,7

Rollovers are permitted if you make too much to contribute. Even if your income prevents you from funding a Roth IRA, you can still roll traditional IRA assets into a Roth with the help of a financial professional. While this is a taxable event, you may realize significant long-term financial benefits as a result of it – tax-free retirement income withdrawals, and the potential for some of the Roth IRA assets to pass tax-free to your heirs with further growth and compounding. You also will gain the relief of never having to take an RMD each year.⁸

All this may have you thinking about opening up a Roth IRA or creating one from existing IRA assets. A chat with the financial professional you know and trust will help you evaluate whether a Roth IRA is right for you given your particular tax situation and retirement horizon.

*Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment can change.

**Traditional IRA account holders should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

***”Stretch IRA” is a marketing term implying the ability of a beneficiary of a Decedent’s IRA to withdraw the least amount of money at the latest allowable time in order to maintain the inherited IRA assets for the longest time period possible. Beneficiary distribution options depend on a number of factors such as the type and age of the beneficiary, the relationship of the beneficiary to the decedent and the age of the decedent at death and may result in the inability to “stretch” a decedent’s IRA. Illustration values will greatly depend on the assumptions used which may not be predictable such as future tax laws, IRS rules, inflation and constant rates of return. Costs including custodial fees may be incurred on a specified frequency while the account remains open.

****There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Mike Bonacorsi may be reached at (603) 769-3111 or Mike.Bonacorsi@lpl.com

www.MikeBonacorsi.com

Citations.

1 – www.kiplinger.com/article/retirement/T046-C006-S001-8-reasons-you-need-a-roth-ira-now.html [4/5/12]

2 – www.nj.com/business/index.ssf/2013/01/biz_brain_are_roth_iras_really.html [1/21/13]

3 – www.smartmoney.com/taxes/income/when-roth-ira-withdrawals-arent-taxfree-1293571638217/ [12/29/10]

4 – www.hrblock.com/free-tax-tips-calculators/tax-help-articles/Retirement-Plans/Early-Withdrawal-Penalties-Traditional-and-Roth-IRAs.html [1/2/13]

5 – www.investmentnews.com/article/20121216/REG/312169988 [12/16/12]

6 – www.investorguide.com/article/11816/understanding-the-tax-ramifications-of-an-inherited-roth-ira/ [1/8/13]

7 – www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits [11/28/12]

8 – www.boston.com/business/personalfinance/articles/2012/05/20/roth_ira_conversion_not_for_everybody/ [5/20/12]

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