Retirement

Q&A: IRA interest rate terms

March 16, 2015 By Liz Weston

Dear Liz: I went to renew my IRA certificate of deposit and the bank officer suggested that I renew at the greater rate being offered for a five-year term (about 1.5% APR) rather than the lower rate for a one-year term (about 1% APR). She explained that since I am over 59 1/2, I can close the account at any time and roll it over to a new IRA should rates rise (for example to 1.75% in 15 months) with no penalty whatsoever. Is this true?

Answer: You don’t have to close and reopen IRAs when a CD matures or you want to change investments. The IRA is the bucket that holds your investment, not the investment itself. You also should be skeptical about claims that you would pay no penalty for early withdrawal. Not only are such penalties the norm, but a Bankrate survey found 9 out of 10 banks won’t just require you to forfeit the interest but will dip into your principal to pay the fees if necessary. The bank may offer a one-time opportunity to lock in a higher rate; if that’s the case, you should get the details in writing as well as the penalties if you have to withdraw the money prematurely.

In fact, any time someone pitches you an investment for your retirement funds, you should ask a lot of questions and get every detail and promise in writing. If the pitch is coming from someone who will profit from your investment — which is often the case — you should consider running it past a neutral third party such as a fee-only planner.

By the way, the Federal Reserve has signaled that it’s considering raising interest rates this year. That’s no guarantee that it will, but locking up your money now is a gamble.

Q&A: Social Security survivor benefits

March 10, 2015 By Liz Weston

Dear Liz: I earned more than my wife, who died at age 57 after 18 years of marriage. When I turn 60, can I take survivor Social Security benefits based on her work record and then request my benefit at age 70?

Answer: In a word, yes, and doing so may be smart.

Survivor benefits are different from spousal benefits, which inflict some severe penalties for starting checks early. When you start spousal benefits before your own full retirement age, you’re locked into a permanently smaller check and you can’t later switch to your own benefit, even if it’s larger. The only way to preserve the ability to switch is to file a restricted application for just the spousal benefit at your own full retirement age (which is 66 for people born from 1943 to 1954 and gradually increases to age 67 for people born in 1955 and later). Then you preserve the right to change to your own benefit when it maxes out at age 70.
With survivor benefits, starting early means a reduced check — your widower benefit at 60 would be 30% smaller than if you waited until your full retirement age — but you can switch to your own benefit later. And if you don’t work, starting survivor benefits at 60 is the better course, said economist Laurence Kotlikoff, coauthor of “Getting What’s Yours: The Secrets to Maxing Out Social Security.”

“Getting a reduced benefit for 10 years, from 60 to 70, is better than getting an unreduced benefit for fewer years,” Kotlikoff said.
If you work, however, the math becomes less clear. When you start benefits early, your check is reduced $1 for every $2 you earn over a certain limit, which in 2015 is $15,720. That penalty disappears once you hit your full retirement age.

Online calculators can help you determine the best Social Security claiming strategy. AARP and T. Rowe Price are among the sites that provide free calculators, but they don’t factor in survivor benefits. Consider spending about $40 for one of the more sophisticated calculators, such as Kotlikoff’s MaximizeMySocialSecurity.com, that can include this important benefit.

Q&A: Balancing savings vehicles and tax benefits

March 9, 2015 By Liz Weston

Dear Liz: I’m 26 and make $45,000 per year. I currently have about $60,000 saved with no debt. Roughly half of my assets are in retirement accounts, and the other half are in non-retirement accounts. I strive to save 30% of my income (about 15% in pre-tax retirement accounts and 15% in taxable accounts). I hope that my savings habits will provide me the option to retire early. But I am concerned that I am locking up too much of my money in retirement accounts and that a couple decades down the road, I will not be able to access my money when I would like to. How should I balance various savings vehicles and tax benefits, so that I have most options down the road?

Answer: Your savings habits are admirable, but you shouldn’t worry too much about “locking up” your money. There are a number of ways to tap retirement funds if you really need the cash. Ideally, you’d leave the money alone to grow tax-deferred until you’re ready to retire, but you’re not required to do so.

One way to save for retirement with plenty of flexibility is to fund a Roth IRA each year. You don’t get a tax deduction upfront, but you can withdraw your contributions at any time without penalty. If you don’t tap the money until you’re 59 1/2 or older, your contributions and your earnings are tax free if you’ve had the account at least five years. Another advantage of a Roth is that you’re not required to start distributions after age 70 1/2, as you are with other retirement accounts.

Q&A: IRA’s and 401(k)’s

February 16, 2015 By Liz Weston

Dear Liz: You answered a reader who asked whether to contribute to her IRA, her Roth IRA or her regular or Roth 401(k) account. I thought that if you have access to a 401(k) at work, you couldn’t make a contribution to an IRA or Roth IRA.

Answer: That’s a common misconception. You can contribute to an IRA even if you have a workplace plan. What you may not be able to do is deduct the contribution. The tax deduction depends on your modified adjusted gross income and phases out in 2015 between $61,000 and $71,000 for singles and $98,000 to $118,000 for married couples filing jointly.

You also may be able contribute to a Roth IRA if you have a workplace plan. Contributions to a Roth are never deductible, but your ability to contribute phases out between $116,000 to $131,000 for singles and $183,000 to $193,000 for married couples filing jointly.

Q&A: Maxing out retirement savings

February 9, 2015 By Liz Weston

Dear Liz: My husband and I are in our late 40s. We’re in a good financial position and trying to max out our retirement savings. We have small traditional IRAs and are now above the income limit to deduct contributions to it. We have Roth IRAs that we converted from traditional IRAs several years ago (our income is borderline for being able to contribute directly to a Roth). We also recently got a Health Savings Account that we are maxing out and saving for retirement. But the bulk of our retirement savings is in our 401(k)s, which we max out every year. I hear I should have a mix of pre-tax and after-tax sources of income in retirement. Can I wait until the first year we retire and roll some of my 401(k) into a traditional IRA and then convert it to a Roth, at presumably a lower tax rate due to lower income? Or would it be better to contribute now to a Roth 401(k) at work instead of a regular 401(k), even knowing that our tax rate will probably be lower in retirement?

Answer: You already have a mix of pre- and after-tax sources of income in retirement. Withdrawals from your Roth IRAs will be tax free in retirement, as will your HSA withdrawals if they’re used for medical expenses.

Roth conversions and contributions to Roth 401(k)s make the most sense when you expect to be in a higher tax bracket in retirement, rather than a lower one. Otherwise, you’re giving up a tax break now (your deductible contributions) for what’s likely to be a lesser tax benefit later. Conversions at retirement are particularly tricky, since you may not have decades of tax-free compounding ahead of you to make up for the fact that you accelerated the tax bill.

Talk to a tax pro, but it’s likely that maxing out your regular 401(k)s is the best move.