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Should You Contribute to a Retirement Plan or IRA? Or Both?
I f you’re eligible to contribute toan employer-sponsored retire-ment plan, should you? Should
you contribute to an individualretirement account (IRA)? Howabout contributing to both? Theanswers are: Yes, yes, and yes. Ifthis comes as a surprise, it’s proba-bly because there are so many rulesabout eligibility for contributing toIRAs and workplace retirementplans that it’s easy to become con-fused about what is allowed andwhat isn’t.
One thing is never ruled out:you can always contribute to both aworkplace retirement plan and anIRA, as long as you have earnedincome. What’s open to question are how much you can contribute,to which type of account, andwhether your contributions are tax deductible. Keep these threeimportant points in mind:
Point 1: There are limits to
your annual contributions. Everyyear, the IRS sets limits on howmuch you can contribute to retire-ment plans, and the amounts aredifferent for various types of plans.The one rule common to them all isthis: you can’t contribute more thanyour earned income (except for con-tributions to a spousal IRA for aspouse who does not work).
Let’s say your employer spon-sors a 401(k) plan. If you participatein the plan by a) making contribu-tions of your own, b) your employer
Changing Life Insurance Needs
Y our life insurance needs will typically change over the years, based onchanging individual circumstances:Just starting out— Young, single adults may have little need for life insur-
ance with no major debts and no one else counting on their income.Married with no children — You may think you don’t need insurance if
both spouses work. However, if it takes both salaries just to make ends meet,you may want to purchase insurance to replace your income.
Two incomes with children— This is typically the time when your insur-ance needs are the greatest, since several family members are depending onyour income. The death of either spouse can create a hardship.
Middle age with children— You should reassess your insurance again asyour children approach college age, since you may need to increase coverageto fund their educations.
Children out of college— Your need for life insurance may decrease whenyour children become independent. On the other hand, you may find you nowhave different needs for insurance.
Since your life insurance needs can change drastically over the years, youshould periodically assess that coverage. mmm
U C C E S S
makes contributions for you, or c)you and your employer both con-tribute to your account, then youcan still contribute to your own IRAoutside the workplace. If you’re 49or younger, in 2016, you can con-tribute $18,000 to the 401(k) planand another $5,500 to an IRA, for atotal of $23,500 in retirement plancontributions. If you’re 50 or older,those numbers are $24,000 for theworkplace plan and $6,500 for anIRA, for a total of $30,500.
Continued on page 2
Copyright © 2017. Integrated Concepts. This newsletter intends to offer factual and up-to-date information on the subjects discussed, butshould not be regarded as a complete analysis of these subjects. Professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.
Joanne RiccoClient [email protected]
Gerald P. Jarzabek, CFP®, CPWA®
Senior Vice [email protected]
The BCJC GroupRobert W. Baird & Co. Inc.200 Public Square, Suite 1650Cleveland, OH 44114216-737-7330 888-792-9821216-737-7370 Fax
WINTER 2017
Michael Bongers, CFP®, CRPC®
Senior Investment [email protected]
Christine BennerFinancial [email protected]
Douglas M. CrandallSenior Vice President
Ryan W. CoxVice President
Beth HallClient Specialist
Amanda ZuhseClient Assistant
FR2016-0720-0088
Point 2: Your income can affectthe tax treatment of IRA contribu-tions. Originally, there was only onekind of IRA: the kind that enabledyou to reduce your taxable incomeby the amount of your contributionswhen you file your income taxreturn. Today, it’s referred to as atraditional IRA to distinguish itfrom a Roth IRA, to which you canonly contribute after-tax money.
There are good reasons tochoose either the traditional or RothIRA, but if you participate in aworkplace retirement plan and haveincome above the IRS limits, yourability to take the tax deduction fora contribution to a traditional IRA is limited. In 2016, tax deductibilitybegins to phase out if you are a single filer and earn more than$61,000, and disappears altogetherat $71,000. For joint filers, the rangeis higher: $98,000 to $118,000.
Take note, however: if you maketoo much to be eligible for the up-front income tax benefit in the yearyou contribute to a traditional IRA,you can still make contributions to it and to your workplace retirementplan. In this case, you might want to consider contributing to a RothIRA instead. Here as well, youmight be limited by income: for2016, eligibility to contribute to aRoth IRA phases out for single filers above $117,000 and joint filersabove $184,000 and disappears com-pletely for those earning more than$132,000 and $194,000, respectively.
Step 3: Doing either can buildassets faster — both, faster yet. Thecomplexity of the rules regardingwhether IRA contributions are tax-deductible has obscured the mostimportant benefit of qualified retire-ment plans: they compound free ofannual taxes. This gives them a dis-tinct advantage over taxable savingsaccounts, because at the same rate ofreturn, assets grow faster whenreturns are not taxed.
Should You?Continued from page 1
FR2016-0720-0088
For someone with an effectivefederal tax rate of 25%, an annualcontribution of $5,500 to a taxableaccount that returns 6% a yeargrows to almost $226,000 in 25years. But that same contribution toan IRA, at the same rate of return,grows to more than $301,000 — adifference of more than $75,000,regardless of whether the contribu-tions were tax deductible. Increasethe contribution to $20,000 a year,and your retirement fund grows tonearly $1.1 million after 25 years —and the advantage over a taxableaccount exceeds $200,000. These
examples are provided for illustrativepurposes only and are not intended toproject the performance of a specificinvestment vehicle.
The bottom line: you shouldcontribute as much as possible totax-advantaged retirement plans.For many people who work, thereare multiple retirement savingsoptions available. There are evenIRA options open for nonworkingspouses. To make sure you’re takingfull advantage of the options opento you, please call. mmm
Keeping Score of Financial Progress
K eeping score is important infinances. You only know ifyou’re making progress
toward your goals if you’ve creat-ed a plan that tells you where youneed to be and when.
Essentially, there are two num-bers to focus on: your total networth and your liquid net worth.The distinction comes chiefly fromthe fact that most of the averageAmerican’s net worth rests in theirhome. If you own it, under normalcircumstances, you can’t readilysell it to raise money.
Liquid net worth, on the otherhand, refers to the assets ownedthat can readily be converted intocash to meet expenses. These arethe kinds of assets people normallydraw upon to meet their monthlyexpenses, both anticipated and sur-prise, in retirement.
In both cases, the basic formulais the same: Net Worth = Assetsminus Liabilities
Assets are what you own, andliabilities are what you owe —essentially debt of any and allkinds. Again, your liquid networth is a more accurate measureof how much you can spend with-out altering your lifestyle, especial-ly in retirement.
A sound financial plan defines
several important data points.These include the date you need tofund a future expense or expenses,how much cash you will need togenerate to meet them, and by howmuch your current resources needto grow each year to meet thatprincipal value. It’s from thisinformation that you can generatea series of annual interim goals.These are the scores you’ll need to meet or beat to achieve yourgoals.
To do this annual review prop-erly, you need to determine thecurrent value of your assets. Insome cases, such as the value ofyour savings and investmentaccounts and cash-value life insur-ance policies, this is relatively easyto do. In the case of less-liquidassets (and sometimes this caneven refer to some assets in yourinvestment accounts), establishingthe current market value can bedifficult. Things like collectibles, abusiness you intend to sell, orvacant land fall into this category.To the extent that you are relyingon these to meet your long-termgoals, it’s worth securing profes-sional appraisals every few yearsand then more frequently as youapproach the date you’ll need toconvert them into cash. mmm
FR2016-0720-0088
but at age 50, those limits increaseto $6,500 and $24,000, respectively.
It takes in-depth calculations todetermine how much your retire-ment portfolio should be andwhether you’re on track to meet the accumulated value of the nestegg you’ll need to retire.
That said, it’s not unusual forpeople who are in their fifties tohave accumulated only about halfof what they’ll need by age 65, yetstill be on track for a well-fundedretirement. (If your account bal-ances are considerably less thanhalf of what you’ll need, you mighthave some catching up to do, or itmight be necessary to considerretiring at an older age.)
In your sixties. This is thehome stretch of the period duringwhich you acquire assets for retire-ment. As you enter this decade ofyour life, you should still be con-tributing more than you ever haveto your retirement accounts.
With less than five years beforeyou retire, you should considerreshaping your portfolio to includegreater percentages of lower-riskinvestments.
It’s never too early to create orupdate your financial plan, soplease feel free to call. mmm
Saving and Life Planning
W e are all unique, so there’sno one financial plan thatwill suit everyone. But
that doesn’t mean there aren’t somebroad guidelines to fit common situations.
So when it comes to your sav-ings, here are some benchmarks toindicate whether you’re followingthe right priorities and are on trackfor meeting your financial goals:
In your twenties. Typically,this is the age when you’re likely tohave the lowest income in yourworking life, but also the fewestdependent-related expenses. At thisstage, you should have two top pri-orities: First, you should concen-trate on building an emergencyfund equal to three to six months ofliving expenses held in short-termsavings vehicles.
Second, you should beginputting money into an individualretirement account (IRA) or 401(k)retirement plan. The advantage of beginning to save for retirement at this age is time: in a tax-deferredaccount, even relatively smallamounts can grow into significantassets when you have 35 to 40 years to harness the power of compounding.
For example, if you contributejust $2,000 a year to an IRA and itgrows by 8% a year, after 30 years,it could be nearly $227,000 andmore than $518,000 after 40 years.This example is provided for illustrativepurposes only and is not meant to project the performance of an actualinvestment.
You may have a third priority:saving for a down payment on ahouse. It’s best if you can accumu-late 20% of the price of the house to avoid having to pay privatemortgage insurance, but whateveryou can accumulate will help keepyour mortgage payments lower.
In your thirties and forties. Ifyou have children, it’s a good idea
to be saving for their educations.Consider a tax-advantaged 529 college savings plan that you caninvest in the stock market. The prin-ciple here is that if you have morethan five years before college billsstart coming due, you can afford totake some risk to potentially achievea higher rate of return than youmight from bonds or other saferinvestments.
Now you should begin toincrease contributions to your retire-ment accounts. The more you canput aside now the better, as you still have 25 to 30 years of compounding. Your emphasisshould still be on the stock market;although by your late forties, youmight consider increasing yourbond investments to guard againstlosses due to market shocks.
In your fifties. This is normallythe time when people make theirlargest contributions to their retire-ment accounts because theirincomes are close to the highest of their careers; and if they have any children, they’re typically out of college and on their own.
Federal limits on annual contri-butions to retirement plans are moregenerous at this age, too. For exam-ple, as of 2016, below age 50 there’sa ceiling of $5,500 for contributionsto IRAs and $18,000 to 401(k) plans;
Your BondAllocation
Financial Thoughts
Overcoming 5 Retirement Fears
FR2016-0720-0088
Y our asset allocation mix repre-sents your personal decisions
about how much of your portfolioto allocate to various investmentcategories. How much you allocateto each category depends on yourfinancial objectives and personal cir-cumstances. However, it is a per-centage that is likely to change overtime. As your needs for safety ofprincipal and a steady incomestream become more important, the percentage of bonds you own is likely to increase.
Once you decide how much toallocate to bonds, you need toensure that you diversify within the bond category. There are manyways to diversify, including:
4By maturity dates. You canpurchase bonds with short
(three years or less), intermediate(three to 10 years), or long (10 yearsor longer) terms.
4By issuer. You can purchasebonds issued by the federal
government and its agencies,municipalities, corporations, orinternational issuers.
4By type. There are numeroustypes of bonds, including
callable, zero coupon, inflation protected, and high yield. mmm
W e’ve all heard storiesabout people losing all oftheir retirement money in
a stock market crash, outliving theirmoney, or incurring unexpectedmedical expenses. Are these fearslikely to become realities? Probablynot, but here’s how to prepare.
1. Outliving your money —There’s a rule of thumb to decreasethe odds of outliving your moneyover a 25-year retirement: by thetime you’re ready to retire, youshould have saved eight times yourannual salary. Of course, theamount of money you need to havesaved by the time you’re ready toretire depends on a huge range ofvery individual factors. So to trulydecrease the odds that you’ll outliveyour money, work with a financialadvisor to develop a plan.
2. High inflation —What ifinflation went up to 12–14% as itdid in the 1970s? It’s probably notlikely inflation would spike likethat again. However, because it hashappened before, you’ll want to beprepared. This is where an annualreview of your investments can bewise. That is the point of diversifi-cation: if you are properly diversi-fied, your portfolio should includeinvestments that move opposite ofeach other — so when one asset
class is down, another is up. 3. Unexpected medical expens-
es before retirement— Unexpectedmedical expenses that you mayincur while you are still workingcould totally derail your retirement.It’s important to have insurance inplace, such as disability and lifeinsurance. Disability insurance willensure that if you do lose yourincome due to a disability. Lifeinsurance will protect your family inthe event of your death.
4. Unexpected medical expens-es during retirement — There are afew ways to prepare for medicalemergencies: private health insur-ance to fill the gaps in Medicare,long-term-care insurance, and rainyday savings. For today’s retirees,Medicare takes care of most medicalexpenses, however, you need sav-ings to cover copays and expensesexceeding your insurance limit.
5. Market crash— As with highinflation, the key to surviving amarket crash is diversification.(There is no way to insulate yourselfcompletely from the effects of eco-nomic turmoil. But you can takesteps to ensure it doesn’t completelyruin your retirement plans.) As youget closer to retirement, you shouldbe invested less in equities andmore in bonds. mmm
A lmost 90% of full-time collegefreshmen received some kind
of discount on tuition last year,and the average aid package atprivate colleges took care of 55%of tuition and fees. That 55% dis-count is up from 26% in the early1990s (Source: National Associa-tion of College and UniversityBusiness Officers, 2016).
Among healthy retirees, aone-year postponement in retire-
ment from the average age of 64.9 decreased the risk of dyingby 11%. When early retirees(those retiring before age 62) werecompared to those who retiredclose to the average age, mortalityrisk was significantly higher. Con-versely, when late retirees (thoseretiring after the age of 68) werecompared to on-time retirees,mortality risk was significantlylower (Source: AAII Journal, June2016).
According to the Bureau ofLabor Statistics, total annualexpenditures averaged $56,267 forhouseholds in the 55–64 agegroup, $48,885 for households inthe 65–74 age group, and $36,673for those in the 75 and older agegroup. For all three groups, hous-ing was the biggest expense,accounting for a third of totalspending regardless of age(Source: 2016). mmm
