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Retirement Investing - Retirement Investments and Tax Planning

December 5th, 2006 by Papabear

When it comes to retirement nightmares, there might be nothing worse than seeing your retirement investments, your pension, or whatever else it was you depended on to fund your retirement go up in smoke. After the dot-com stock market collapse and the Enron debacle, for example, people should know not to put all their eggs in one basket, that diversity in retirement investments can protect against losing everything.

But there’s another thing to look out for that can have the same disastrous effect on your retirement plans - Uncle Sam.

Most of us do our retirement investing with the goal of accumulating as much money in our retirement savings account as possible. When we think about taxes and our retirement investments, we generally are thinking only about whether or not we should invest with “pre-tax” dollars, use “tax-free” investments and so forth. We figure that later, when we start drawing on our retirement investments, we’ll worry about the taxes then and that, somehow, it won’t be a big deal because we supposedly won’t be in as high a tax bracket.

The truth, though, is that, without properly planning our retirement investing planning, Uncle Sam could take as much as 90% of your retirement funds!

As an example, once you reach 70 1/2, you have to begin withdrawing required minimum distributions from your retirement plan. If you don’t, you’ll have to pay a 50% penalty tax on any part of the required minimum distribution that you don’t withdraw.

If you’re still working, however, you can delay beginning your required minimum distributions until you do retire. (There are two exceptions, however. If you own at least 5% of the company or if your plan is an IRA, you have to begin taking your required minimum distribution even if you’re still working.)
Also, be aware that the payments you receive from ordinary retirement funds are taxed at regular income tax rates upon withdrawal. There’s no special ‘retirement rate’.

These payments are added to your total annual income and then taxed at the rate that applies to your income tax bracket. So, if you received a salary or earned significant income from sources other than your retirement plan, your retirement plan distributions may actually put you in a higher tax bracket than when you were simply working.

Then there is the so-called Death Tax. That is the taxes on your retirement investments that will apply should you die. They could eat up a huge portion of what you intended to leave to your heirs. One common solution nowadays is to buy a life insurance policy that will offset the estate taxes that will be charged on your Individual Retirement Account or IRA.

For many people, your tax situation in retirement could actually be more complicated than it was while you were working. And, if you’re like most people, you haven’t even thought about it. So start thinking. Consult with a professional. It’s money well spent, and if you plan to leave any serious amount of money to your heirs, they will appreciate your thoughtfulness and the fact that more money will pass to them and less will go to Uncle Sam.

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    Retirement Investing - Restitution - What The Bible Says

    November 18th, 2006 by Papabear

    Last Sunday I wrote a post based on Malachi 3:11, where God promises:

    And I will rebuke the devourer for your sakes, So that he will not destroy the fruit of your ground, nor shall the vine fail to bear fruit for you in the field, says the Lord of hosts.

    I’ve had feedback from a couple of people on that post, so I thought this Sunday, I’d share another Bible principle. This one may seem a little more radical than the last one to many people. But since I believe the Bible is clear here, I feel like a preacher I heard one time who said “don’t blame me, I didn’t write the book.”

    And like I said last week, for the benefit of any non-Christians or skeptics who are reading this post, it may not be for you. But for Christians this is the most practical kind of advise.

    First let’s go back and look at a verse in the Book of John:

    The thief does not come except to steal, and to kill, and to destroy. John 10:10

    I wrote last week about praying for protection, according to the promise in Malachi 3:11, that the Devil would not devour your crops (our investments). That’s a promise for the future. But what about what’s already been stolen from you? This certainly covers at least any money we may have lost to swindlers, literal thieves and robbers – or even to white-collar thieves.

    These kinds of conscious thievery are certainly covered by this principle. We’ll leave it to the theologians whether thievery here covers investments that went bad when the persons in charge of the investment originally only had the best intentions. Sometimes things just do not work out as planned. And the principle may well not cover a bad investment we made when we simply did not do our due diligence or got greedy and invested in something stupid that we should have known was too good to be true.

    What we’re talking about here is the obvious kinds of theft. So what was the Bible penalty for theft? This can be found in Proverbs:

    Yet when he is found, he must restore sevenfold; He may have to give up all the substance of his house. Prov. 6:31

    So if the Devil or evildoers have stolen from us, what are we entitled to? According to Prov. 6:31, the Devil and the evildoers owe us a sevenfold restitution. OK, the principle is clear, so where do we serve the papers then? What’s the thief, the Devil’s, mailing address?

    We know if we sue someone in a court of law, the judge and agents of the court can put a judgment against the guilty part. So where do we find a judge to settle our claim? The Bible talks about the ultimate Judge:

    If one man sins against another, God will judge him. 1 Samuel 2:25 and

    Let the heavens declare His righteousness, for God Himself is Judge. Ps. 50:6

    The same principle and process applies here. God is our righteous Judge. But where do we find a lawyer to plead our case? In 1 John the Bible says”

    My little children, these things I write to you, so that you may not sin. And if anyone sins, we have an Advocate with the Father, Jesus Christ the righteous. 1 John 2:1

    This verse tells us who we can get that will represent us.

    So we’ve established the legal principle of our right to restitution (Prov. 6:31). We have established that God is the ultimate Judge (1 Samuel 2:25) and that Jesus will act as our advocate (1 John 2:1). So how will we collect on what is owed us? Where will the money come from to pay restitution? Should we expect the Devil to write us a check? No, it doesn’t work that way. For the anser, let’s look at how God gets money to us in response to our obedience in tithes and offerings.

    Give, and it shall be given unto you; good measure, pressed down, and shaken together, and running over, shall men give into your bosom. For with the same measure that ye mete withal it shall be measured to you again. Luke 6:38

    God doesn’t literally drop the money down out of Heaven. God uses other men to get money to us. God can then be our process server to collect the judgment from the thief and can get the money to us through others, not even necessarily or even usually not the person who stole the money from us in the first place.

    We can nearly all remember specific instances where money has been stolen from us, either by force or deception. Satan is the great thief, whoever did the actual stealing. Thievery is one of his specialties. God is the Supreme Judge, and Jesus is our advocate or attorney.

    To put the principle to work, we need to remember specific instances of thievery, write them down, and present our case to God, our Judge, with Jesus as our advocate, through pray. We should ask for specific restitution, based on a specific incident, invoking a specific amount, and do this by basing our claim on Prov. 6:31.

    If we believe God’s work is true, we can then wait for and expect restitution with the same certainly we would wait for a refund check from the government, if we are owed a tax refund. This does require great faith and a clear belief in God’s Word. This is a great test to find out who you trust more: the government or the Word of God?

    If you have thought or comments, please respond. We welcome your comments, whether you agree or disagree.

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    Retirement Investing - 401(a) Plans

    November 15th, 2006 by Papabear

    Much has been written about 401(k) retirement plans because they are available to so many people. However, there are other “numbered” retirement plans, although they are restricted to special groups.

    401(a) plans, also called Teacher Incentive and Teacher Matching plans, are designed specifically for school employees.

    The rules covering 401(a) plans vary from state to state and can vary within a school district so that, say, teachers get one benefit while custodians or paraprofessionals can get quite a different one. Distributions can take several forms, including lump sum, rollover or an annuity type payment.

    If you change jobs, you have the flexibility to consolidate your savings in another public sector employer’s 401(a) plan or 401(k) plan, a tax-sheltered 403(b) annuity plan, a 457 plan, or a traditional Individual Retirement Account or IRA.

    Probably the 401(a) most people are familiar with is from TIAA-CREF. Fidelity is another major player.

    403(b) plans are very similar to a 401(k) plan. The biggest difference is who is eligible to participate. While a 401(k) plan covers private-sector workers, only employees of public schools and 501(c)(3) tax-exempt organizations can participate in a 403(b) plan.

    Also, unlike the 401(k), 403(b) plan members can’t invest in individual stocks. They have money taken out of their paychecks on a pretax basis, which is then handled by a financial institution chosen by their employer. Like in a 401(k) plan, the money grows tax-deferred until retirement and is then taxed as ordinary income when withdrawn.

    Generally, the maximum contribution is $10,500 or 20% of salary, whichever is less, but they do allow for a catch-up in contributions. If you did not max out your contributions in previous years, you can contribute more than the maximum with certain annual and total restrictions.

    You may have heard 403(b) plans referred to as Tax Deferred Annuities or Tax-Sheltered Annuities. Those names come from back when the only investment options offered were for annuities, but investment options have been expanded for decades to include mutual funds.

    If you’re eligible, all these plans can make a worthwhile addition to your retirement investing options.

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    Retirement Investing - Invest In Your Health

    November 14th, 2006 by Papabear

    Let’s take a break today from talking about investing money and talk about investing in your health. After all, what good is the best retirement investment plan if you’re not healthy enough to enjoy it when the time comes.

    One of the most important things we can do to stay healthy, as we get older, is to control our weight. Most of us know that, but most of us also fall victim to “middle-age creep”, as the pounds creep on a pound or two every year, after we reach middle age.

    Now a recent study from the University of Pittsburgh says that walking can go a long way in helping to control that extra weight. Researchers studied 3 groups of people. The first group was given general guidelines for exercise, which included moderate daily activity for 30 minutes a day. The second group was told to be active for about 30 minutes a day, plus they were given weekly classes on the importance of exercising. The third group was told to exercise 45 to 60 minutes a day, and they were given behavior modifications classes.

    All of the study participants were told to eat a healthy diet but not to restrict the number of calories they ate. About 75% of all the participants chose to use walking for their exercise.

    The results after 18 months? Averaged over the 3 groups, 40% of the folks in the study gained weight, about 7 pounds on average. These were primarily those people who did not exercise regularly. 60% lost weight, once again about 7 pounds. These were exclusively those who engaged in physical activity for about 40 minutes 5 to 7 days a week. That’s a 14 pound difference between the two groups, almost all attributable to exercise, primarily walking.

    In another study, researchers at the University of North Carolina analyzed data on about 5,000 young adults over 15 years. They found that those who walked at least 2 hours each week gained about 9 pounds less than those who did not.

    The results of these two studies are very clear. Time spent walking, or any other aerobic physical activity, is a very good retirement investment. It’s also a good investment of our time before we retirement so that we can stay healthy going into the retirement years.

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    Retirement Investing - Savings Bonds and Inflation

    November 13th, 2006 by Papabear

    Most of us have bought some of US Savings Bonds at one time or another.  They’ve been around in one form or another since 1776.  Many of us still do.  If you work for a major company, it’s a very easy and painless way to sock away a few dollars every payday.

    The biggest downside to savings bonds has been that the interest rate has always been very low.  Often it’s not even kept us with inflation.  That’s why the Government introduced the Series I (for inflation) savings bond.

    The interest on a Series I bond is divided into 2 parts.  There is a fixed rate that remains the same for the life of the bond.  In addition, there is an inflation-adjusted adder rate that changes every 6 months, based on the Consumer Price Index.

    The US Treasury changes the fixed rate periodically, but once you’ve bought your Series I bond, it’s locked in.  Over the last 5 years, the fixed rate component has ranged from a high of 3.6% in 2000 to a low of 1% in 2004.

    Series I bonds are worth taking a look at as part of your overall retirement savings plan, but you should also consider other alternatives.  The average rate for an insured 6-month CD is 4.69% when this is written.  You can check the current rate at Bankrate.com.  Since this is the average, some banks are obviously offering more and some less.  Our local bank is currently paying 4.4%.  Online, E-Loan’s bank is currently offering 5.5%. You can check out what they are currently offering here.  E-Loan

    Series I bonds have some advantages.  They are exempt from state and local taxes, and you don’t have to pay federal taxes on the earnings until you cash in the bond.  On the other hand, unlike a 6-month CD, you must keep a Series I bond at least a year before you can cash it in.  Also if you cash in a Series I bond before you’ve had it at least 5 years, you won’t get the last 3 months interest.

    You may be able to do better on interest at your local bank or online, but those rates aren’t guaranteed to adjust with inflation.  Check it out and compare.  In addition to federal tax deferred interest, there may be other things to consider.  Where you live and whether you must pay state and local income taxes can make a big difference.  So check with you tax advisor to see if adding Series I bonds to your retirement investments makes sense for you.

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