Help Maximizing Retirement Accounts

Ann Tergesen for the Wall St Journal writes:  Services that aim to help investors turn retirement savings into a steady income stream are coming to 401(k) plans and individual retirement accounts—and they may help retirees stick to a plan that will keep them from outliving their savings.

But anyone considering such services needs to understand how they generate a monthly paycheck and what the costs might be.

Currently, 28% of 401(k) plans feature at least one product or service designed to help participants convert their savings into retirement income, according to Aon Hewitt, a record keeper for 401(k) plans. The most popular option is a managed account that includes a retirement income service. With this, 401(k) participants hire professionals to advise them on how to invest their assets and withdraw a sustainable income.
With the oldest baby boomers turning 67 this year and defined-benefit pension plans falling by the wayside, there is "growing recognition that 401(k) plans need to do a better job of delivering income in retirement," says Alison Borland, vice president of retirement solutions and strategies at Aon Hewitt.

Managed-account providers have introduced an array of retirement-income services in recent weeks. Financial Engines FNGN -1.84% of Sunnyvale, Calif., and San Diego-based GuidedChoice now offer income-planning and investment management services—previously available only in 401(k) plans—to those who open IRAs at a handful of specific companies.
Morningstar MORN -0.13% recently introduced its own income-planning service, Retirement Manager With Income Secure, to 401(k) participants who use its managed accounts.
Each company takes a different approach to creating a retirement income stream.
Take a 65-year-old man with $250,000 in assets in a 401(k) and IRAs. Assuming he needs all $250,000 to cover essential expenses in retirement, Financial Engines would put 80%—or $200,000—in a portfolio of bond funds, with the remaining $50,000 in stock funds. Over time, it would move the $50,000 into bonds as well.

Assuming the stock market delivers average annual returns of 5.5% above the one-year Treasury bond rate, he will be able to withdraw $9,375 the first year and then increase that amount by 2.5% to 3% in each subsequent year. If all goes according to plan, enough money will remain at age 84 to finance a fixed immediate annuity that locks in a comparable income for life. 

GuidedChoice and Morningstar, in contrast, recommend a mix of stocks, bonds, cash and any annuities available in a client's 401(k) plan, tailored to the individual's financial situation. GuidedChoice also provides a strategy to maximize Social Security, a service Financial Engines plans to add later this year.

Financial Engines and GuidedChoice both can provide regular paychecks from the 401(k) and IRA assets they manage. All three companies advise clients on how much they should draw from each of their accounts annually and aim to minimize taxes. 

All this service comes at a cost. Financial Engines and Morningstar offer free income-planning advice to clients with managed accounts, who typically pay from 0.15% to 0.7% of assets a year, in addition to the fees of the mutual funds they invest in. GuidedChoice charges up to 0.25% of assets for a managed account, plus $250 a year for an income plan.

How corporate executives can navigate the 2013 tax minefield

Geoffrey Zimmerman for Smart Business Insight & Strategy writes:    There’s a popular metaphor referred to as “the boiled frog.” Simply put, it says if you drop a frog in boiling water it will quickly try to escape. But if you place a frog in tepid water that’s slowly heated to a boil, the frog will “unresistingly allow itself to be boiled to death.”

With the 2013 tax changes, this metaphor may apply to taxpayers, married and filing jointly, with wages of taxable income of $223,000 to $450,000, says Geoffrey M. Zimmerman, CFP®, Senior Client Advisor at Mosaic Financial Partners, Inc. These households could see their federal marginal tax rate go from 28 to 45.5 percent.

“Executives in this income range may soon find that they are in hot water with the heat on as the marginal tax rates ramp up fairly quickly,” Zimmerman says.
Smart Business spoke with Zimmerman about key tax changes as well as possible planning and investment strategies.

Why are $223,000 to $450,000 income earners unaware of the danger?

The increases come from moving up tax brackets, new Medicare taxes of 0.9 percent on payroll and 3.8 percent on unearned income, and the phase-out of itemized deductions. People earning more than $450,000 have a good idea of what’s coming, but others aren’t as prepared for 1 to 2 percent increases that can add up. For example, if each spouse earns less than $200,000, their employers aren’t required to withhold additional taxes from their paychecks for the 0.9 percent increase in Medicare. But, if their combined income pushes them over the $250,000 threshold in household wages, they may be surprised by an unexpected tax bill.
Additionally, if you live in a state like California where state income taxes have gone up, combined federal and state income tax rates can exceed 50 percent, with capital gains rates reaching 33 percent or more.

What should these taxpayers be doing?

First and foremost, don’t let the tax tail wag the dog. Tax strategies that look great in a silo may actually be detrimental to the big picture. If your strategy puts you in a concentrated position or triggers undue risk, then a sudden bad market movement can be worse than paying the taxes.
This is an opportunity for people to update their financial plan and review how the tax changes affect their goals. Make sure your advisers are talking with one another and coordinating their work and advice.

How can some key planning strategies mitigate these increases?

Look for opportunities related to the timing of cash flows. If you have a big income year where up to 80 percent of your itemized deductions might be lost, defer some itemized deductions to the following year where the income might be lower. In a low income year, look at doing IRA to Roth conversions, realizing capital gains and/or accelerating income.
Take the initiative to engage in tax loss harvesting in taxable accounts, which means you sell a security, harvest the loss and then use that loss to offset a gain in either the current year or carry forward for use in future years. This can be attractive, particularly for investing styles that offer similar but not identical alternatives. One example might be to sell an S&P 500-index fund and reinvesting with a Russell 1000-index exchange traded fund to capture the loss while remaining invested.

Review the use of asset location strategies to improve tax efficiency. Strategically place securities that produce ordinary income or that generally don’t receive favorable tax treatment into a tax-deferred account, while putting tax-efficient investments that generate long-term capital gains or qualified dividends in taxable accounts.

Municipal bonds/bond funds in taxable accounts now may be more attractive, and you also can review opportunities to take advantage of ‘above the bar’ deductions, such as contributions to qualified plans like your pension, 401(k), etc. For senior executives, contribution to nonqualified deferred compensation arrangements may be more attractive, particularly if a transition, such as retirement, is on the horizon.

With the help of good advisers who understand these moving parts and how they fit together, executives can use these strategies and others to make better decisions to move toward the things that are really important to them.

Making High-Deductible Health Savings Accounts Work

DONALD JAY KORN, FOR INVESTOR'S BUSINESS DAILY writes:    Health savings accounts are tax-efficient tools that can help with retirement planning. Like 401(k) accounts and Roth IRAs, investment income inside an HSA is not taxed.

And HSAs offer some tax advantages that other plans don't. For one, contributions to HSAs are tax-deductible. That's not the case with Roth IRAs.

Also, HSA withdrawals can be tax-free. Withdrawals from traditional 401(k)s aren't.
The average retired couple will need about $220,000 to cover health costs, says a Fidelity study.

To benefit from all HSA tax breaks, money must be spent on qualified health care. "Given the high projected costs of health care in retirement, the vast majority of retirees should have plenty of eligible costs to cover," said William Applegate, a Fidelity vice president.
In 2012, the number of HSAs rose almost 22% to 8.2 million, reported Devenir, a consulting firm.

To have an HSA, you need a qualified high-deductible health insurance plan. Such HD plans can come through your job or be purchased on your own.

Qualifying plans have an annual deductible not less than $1,250 for individual coverage in 2013. For family coverage, the minimum deductible is $2,500. Annual out-of-pocket expenses can't top $6,250, or $12,500 for families. Those limits apply to deductibles and co-payments but not to premiums.

Once your own and any company contributions are in an HSA, you can withdraw funds tax-free for eligible expenses. Generally, that means costs that qualify as itemized medical or dental deductions.

So HSA owners can use their HSA to cover costs now, or they can let their money grow to cover health bills when they're in retirement.

Create A Strategy
One strategy is to put your first retirement dollars into your 401(k) if your employer offers a match. Contribute enough to get the maximum match.  Dollars above that amount can go to an HSA, before making an unmatched 401(k) contribution.
 
Suppose a hypothetical Ed Hill wants to put away $15,000 for retirement this year. Hill, age 56, has family coverage in the company health plan and an HSA.

In his 401(k), his employer offers a 100% 401(k) match, up to 6% of pay.
If Hill's salary is $100,000, 6% is $6,000. So Hill's first $6,000 goes to the 401(k), to get a $6,000 match. That's a 100% immediate return, with no investment risk.
Then Hill kicks in $7,450 to his HSA this year. That's the $6,450 max for family contributions plus the $1,000 age-55-plus catch-up.

Deducting Losses Due to Disasters

Tom Herman for the Wall St Journal writes:   Q: How do the tax rules work on deducting personal losses due to storms and other natural disasters?
—N.H., Brooklyn, N.Y.

A: Our reader is asking about the rules for what tax experts refer to as "casualty and theft losses." If you're a storm victim, don't be surprised if you wind up being able to deduct little or none of your losses, thanks mainly to two high hurdles in the law.
First, you have to reduce each casualty or theft loss by $100.
After that, you can deduct your losses only to the extent they exceed 10% of your adjusted gross income. That's the hurdle that trips up many victims.
If you collect insurance proceeds or other types of reimbursements (such as an employer's emergency disaster fund), you have to subtract those when calculating your loss. "You do not have a casualty or theft loss to the extent you are reimbursed," the Internal Revenue Service says in Publication 547 (available at www.irs.gov).
Despite all this, don't give up hope. Generally, you have to deduct casualty losses only for the year in which they actually happened. But there is a big exception to this rule that might help some victims of recent disasters—such as the extraordinary tornadoes and storms that ripped through Oklahoma or severe storms in Illinois.
If you have a casualty loss in a place designated as a federal disaster area, you can deduct your losses on your federal income-tax return for the year the loss occurred—or on your return for the prior year.
Most taxpayers already filed their returns for 2012. But they can take advantage of this provision by filing an "amended" return. Use IRS Form 1040X.
For a list of federal disaster areas, go to the website of the Federal Emergency Management Agency, or FEMA.