Some things to consider about your Retirement Plan

In 2013, the maximum 401(k) contribution is $17,500 (plus a $5,500 catch-up contribution for those 50 or older by the end of the year). If you are self-employed, you have other retirement savings options. We will review these alternatives with you when you come in for your appointment. One of my favorites for many one person self- employed businesses is the one person 401(k) plan.

In light of the new increased tax rates effective in 2013, plus the addition of the new Medicare surtax on Net Investment Income, higher income taxpayers may want to consider switching from Roth 403(b) and Roth 401(k) elective deferral contributions back to tax deductible contributions. The current savings may outweigh the benefits of tax-free growth on the Roth accounts. As mentioned earlier, the focus moving forward for higher income taxpayers is toward reducing adjusted gross income.

You can also contribute to an IRA for 2013 up through April 15, 2014. The maximum is $5,500 with a catch-up (for taxpayers 50 or older) provision of $1,000.

– Excerpt from Jim Lange’s 2013 Year-End Tax Report


Numbers to Know: COLA for 2014

The Social Security Administration has announced new cost-of-living adjustment, or COLA, numbers for 2014.  The cost-of-living adjustment is decided by comparing consumer prices in July, August, and September of each year to the prior year’s numbers.  Since 1975, Social Security increases have averaged around 4%—less than 2%, only six times.  This year we will see one of the smallest COLAs since the program was adopted, just 1.5%.

Advocates for seniors say the 2013 Consumer Price Index measurements aren’t entirely fair.  While gasoline and electronics prices were down significantly in 2013, the cost of food increased slightly, and housing, medical, and utility costs rose dramatically.  Unfortunately, seniors generally spend more on healthcare goods and services, so they are facing dramatic increases in their spending.

‘‘This (cost-of-living adjustment) is not enough to keep up with inflation, as it affects seniors,’’ said Max Richtman, who heads the National Committee to Preserve Social Security and Medicare.  ‘‘There are some things that become cheaper, but they are not things that seniors buy.  Laptop computers have gone down dramatically, but how many people at age 70 are buying laptop computers?’’  Nearly 58 million Americans receive Social Security benefits of some kind. This 1.5% COLA will add an average of only $17 to the typical American’s monthly benefit.

The Clear Advantage of IRA and Retirement Plan Savings during the Accumulation Stage

If you are working or self-employed, to the extent you can afford to, please contribute the maximum to your retirement plans.

Mr. Pay Taxes Later and Mr. Pay Taxes Now had identical salaries, investment choices, and spending patterns, but there was one big difference. Mr. Pay Taxes Later invested as much as he could afford in his tax-deferred retirement plans—even though his employer did not match his contributions. Mr. Pay Taxes Now contributed nothing to his retirement account at work but invested his “savings” in an account outside of his retirement plan.

Please look at Figure 1. Mr. Pay Taxes Later’s investment is represented by the black curve, and Mr. Pay Taxes Now’s, by the gray curve. Look at the dramatic difference in the accumulations over time—nearly $2 million.

There you have it. Two people in the same tax bracket who earn and spend an identical amount of money and have identical investment rates of return. But, based on the simple application of the “Pay Taxes Later” rule, the difference is poverty in old age versus affluence and a $2 million estate.

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Retirement Assests, IRAs vs. After-Tax Accumulations

Retire Secure! Pay Taxes Later – The Key to Making Your Money Last, 2nd Edition, James Lange, page. xxxi

Roth vs Traditional

It’s been said that one of the two things that are certain in life is taxes. What the aphorists never provide, though, are the details. Understandably so: The push and tug of politics can make future tax rates unpredictable—as the “fiscal cliff” drama of late 2012 reminded us yet again.

Knowing what future tax rates will be would make life easier for retirement savers who wonder whether to contribute to tax-deductible traditional IRAs or to Roth IRAs. When it comes time to withdraw from an IRA, one type of account can be superior to the other, depending on what those future rates turn out to be.

The same dilemma applies to those saving in tax-advantaged “defined contribution” employer plans—such as 401(k), 403(b), and 457 plans—who are considering whether to contribute to a Roth 401(k) plan, if available.

And then there’s the question of whether to convert an existing account to a Roth IRA or a Roth 401(k). An insight into the future would help here, too.

But what do you do if your crystal ball is cloudy, as most are? You could consider diversifying the tax treatment of your retirement accounts.

Three “ifs”

The first step is to understand the IRS rules.

If a tax-deductible traditional IRA is of interest, you must meet income (and other) requirements: Details are at With this type of IRA, contributions reduce your taxable income and taxes on earnings are deferred. When you withdraw from the account in retirement, you’ll pay taxes on both the original contribution and the earnings. The same tax-treatment rules apply to tax-deferred employer plans.

If your income level disqualifies you from a deductible IRA, you can contribute to a “nondeductible” version. As its name implies, your contribution is after-tax; that is, it doesn’t lower your taxable income. Taxes, however, are deferred on earnings in the account until withdrawal.

If your income meets the guidelines for a Roth IRA, or if your employer plan includes a Roth option, you would also contribute with after-tax dollars. But you’d owe no taxes (including the new Medicare surcharge) on qualified withdrawals. And you won’t have to take “required minimum distributions” from your Roth IRA after reaching age 70½, or from your Roth 401(k) if you roll it over to a Roth IRA.

Three more “ifs”

If you believe your tax rate will decline in retirement, a traditional deductible IRA would be best. By reducing your taxable income, you’d minimize what you owe at the higher current tax rate and withdraw funds at a lower tax rate in the future.

On the other hand, if you believe that your tax rate in retirement will be the same as now or higher, consider a Roth IRA. You’d pay taxes on your income at the current rate and fund the IRA with after-tax dollars. But there would be no taxes on withdrawals.
But if you don’t have a strong view about future rates, you may want to diversify by holding both types of IRAs. “Future tax rates, like market performance, are difficult to predict accurately,” says Maria Bruno, a Vanguard investment analyst. “That’s why an approach that combines both traditional and Roth accounts is worth consideration. In retirement, you could then withdraw from whichever account minimizes the tax bite in any given year.”

A conversion conversation

The least painful way to achieve tax diversification is by setting up the accounts you want and contributing to them; you can have more than one type. Another option is to convert an existing tax-deferred retirement account to a Roth (assuming, in the case of employer plans, that this option is available).

For individual accounts, there are no income restrictions on the ability to convert some or all of a traditional IRA to a Roth. If you don’t qualify outright for a Roth, a two-step maneuver allows you to open a “backdoor” Roth IRA: First contribute to a nondeductible IRA; then convert it to a Roth.

The newest change, in January 2013, allows you to convert some or all of your balance in a tax-deferred employer retirement plan to a Roth 401(k). Be aware, however, that this is likely to be a distant choice: Plan amendments are required, which may not be implemented soon.

There is a price for conversion: taxes.

If you are converting an IRA or employer-plan account that has been funded with pre-tax contributions, you’ll owe tax on the amount converted. For backdoor Roths, no tax should be due on the conversion amount, assuming the conversion was done so quickly that earnings did not accrue. However, if you own other IRAs that you aren’t converting, you will owe tax based on a proration that factors in the balances in your other tax-deferred IRAs, including traditional, SEP, and SIMPLE IRAs, but not inherited IRAs.**

“To get the most benefit from a conversion strategy,” Ms. Bruno cautions, “you should pay the tax bill with funds outside of your retirement accounts.”

To Roth or not to Roth? That is the question 

How does today’s tax rate compare with the tax rate you expect when you make withdrawals? Here’s a rule of thumb.

Higher todayConsider a pre-tax traditional IRA or tax-deferred defined contribution plan account.
Lower todayConsider a Roth IRA or a Roth 401(k), if available.
UncertainConsider diversifying between account types.

Source: Vanguard.

* Withdrawals from a Roth IRA or a Roth 401(k) are tax-free if you are over age 59½ and have held the account for at least five years. Withdrawals from an individual Roth IRA taken prior to age 59½ or if you have held the account less than five years may be subject to ordinary income tax or a 10% federal enalty tax, or both. For withdrawals from a Roth 401(k) taken before age 59½ and less than five years from the first contribution, the portion of the withdrawal that is attributable to earnings would be subject to ordinary income tax and a 10% federal penalty tax.

**Coverdell education savings accounts are not mentioned because they are not technically IRAs. They are intended to support saving for education, not retirement.


  • All investing is subject to risk, including the possible loss of the money you invest
  • We recommend that you consult a tax or financial advisor about your individual situation.

Source: Vanguard


“Obamacare” is the most ambitious shake-up of America’s health care system since the 1960s. There are an estimated 55 million, or 1 in 7, people in the United States without health insurance. Starting January 1, 2014, these people will be required to buy insurance or pay a fine. Those who cannot afford it will receive subsidies; part of a big expansion of coverage to the sick and the poor.

The success or failure of this program in the coming months will be influenced by people signing up for health care exchanges, the types of plans they select, and their actual health experience. Democrats believe “Obamacare” can move the country toward universal coverage while keeping costs down. However, Republicans argue that you cannot extend health insurance coverage to 55 million additional people while simultaneously improving the quality of care and lowering costs. They view it as unaffordable, socialized medicine.

One of the biggest problems with America’s system is that insurers have long charged extremely high rates to the sick, or refused to cover them at all in many circumstances. Starting in January, this practice will be banned. Since insurers would soon go bankrupt if they sold only cheap plans to sick patients needing expensive treatment, “Obamacare” pushes the young and fit to buy insurance, too. This will give insurers revenue from cheap, healthy patients to offset the cost of insuring sick ones.

The cost of insurance will vary significantly and requires insurers to cover a minimum set of services. In most states, the simplest plans will become more comprehensive. Because there are many variables, “Obamacare” will have dramatically different effects from place to place and person to person. The law will raise health costs for some and lower them for others. For example, a 27 year old will pay $130 a month for a basic plan in Kansas, compared with $286 in Wyoming (see chart.) (Source: The Economist, October 5, 2013)

Overhauling America’s $2.7 trillion health sector is no easy task. America spends 18% of GDP on healthcare. The people of Britain, Norway, and Sweden, to name a few, spend half as much but actually live longer. Health spending is growing faster than wages, and is set to hit 20% of GDP by 2022, according to the Congressional Budget Office (CBO). The CBO states health costs remain the biggest long-term threat to America’s finances.

Public support is fragile—only 39% of Americans support “Obamacare”, while 51% disapprove, according to a recent poll by the New York Times and CBS. However, 56% would rather try to make the law work than stop it by stripping it of cash. Whether we eventually judge “Obamacare” a success or a catastrophe, only time will tell. (Source: The Economist, October 5, 2013)

Take your RMD now to avoid an IRS penalty

If you’re age 70½ or older, you’re required to withdraw a minimum amount each year from your IRAs and employer-sponsored retirement plans, excluding Roth accounts. Failure to take this year’s required minimum distribution (RMD) before   4 p.m., Eastern time, on Tuesday, December 31, 2013, could result in a stiff IRS penalty—50% of the amount you were supposed to withdraw.

There are some exceptions. For example, if you’re age 70½ or older and still employed, you may be able to delay RMDs from your workplace retirement plan. Also, when you reach age 70½, you may have until April 1 of the following calendar year to take your first RMD payment.

Be aware that you must take RMDs from IRAs and employer plans separately—you can’t combine the total required amount and take a distribution from only one account type. (Contact your plan administrator for details.) And if you’re planning to roll over assets from an employer plan or convert from a traditional IRA to a Roth IRA, you must take your RMD first.

Use your RMD wisely

If you don’t need the money for day-to-day living expenses, you have several other options for your RMD. You could pay insurance premiums, use it as a charitable contribution or a gift toward a child’s education, or reinvest the money in a nonretirement account.

Source: Vanguard


A Roth Can Benefit Heirs

Part 10 of 10 Things You Must Know About Roth Accounts

Unlike traditional IRAs—which you must begin to tap at age 70 1/2—Roth IRAs have no minimum distribution requirements for the original owner. So, if you don’t need the money, it can grow in the tax shelter until your death. If your spouse inherits the account, he or she never has to make withdrawals, either.

If the Roth IRA passes to a nonspouse heir, the rules change. They are required to take minimum distributions starting the year following the death of the original owner, or empty the account within five years of the account owner’s death. Distributions, though, will still be tax-free and can be stretched over the beneficiary’s life time.A young child or grandchild who inherits a Roth has the potential for decades of tax-free growth.

Wealthy taxpayers may find another estate-planning advantage to a Roth conversion. The taxes paid on a Roth conversion will be removed from their taxable estate.


Kiplinger Online

You Can Take a Mulligan

Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017. 

Part 9 of 10 Things You Must Know About Roth Accounts

Roth IRA conversions come with an escape hatch. If you converted $50,000 but the Roth is now worth $35,000, you would still owe tax on the $50,000. Undoing the conversion—known as a recharacterization—wipes away the tax bill. Recharacterizing can also pay off if you can’t afford the tax bill or the conversion unexpectedly pushes you into a higher tax bracket.

You have until October 15 of the following year to undo a conversion. So a 2013 Roth IRA conversion can be reversed up until October 15, 2014.

But note: While you can now convert a traditional 401(k) to a Roth 401(k) within a company plan, an in plan conversion cannot be reversed.


Kiplinger Online

Three’s an Order to Withdrawals

8 of 10 Things You Must Know About Roth Accounts

The rules for determining the source of money coming out of a Roth work in the taxpayer’s favor. The first money out is considered contributed amounts, so it’s tax- and penalty-free. Once contributions are depleted, you dip into converted amounts (if any). This money is tax- and penalty-free for owners 59 1/2 and older or younger ones who have had the converted amount in a Roth for more than five years. Only after you have cashed out all converted amounts do you get to the earnings. Once the account owner is 59 1/2 and has had one Roth for at least five years, earnings, too, can be withdrawn tax- and penalty-free.

The ability to tap money in a Roth IRA without penalty before age 59 1/2 allows for flexibility to use the Roth IRA for other purposes. For example, the account could be used as a fallback for college savings.

Once you reach retirement, having a pot of tax-free income to draw upon may allow you to lower your tax bill. Roth money doesn’t count in the calculation for taxing Social Security benefits, for example, or in the calculation for the new tax on investment income.


Kiplinger Online