Key Personal Finance Issues for 2010-2011 Bob Carlson AAII-DC - PowerPoint PPT Presentation

Key Personal Finance Issues for 2010-2011 Bob Carlson AAII-DC Editor, Retirement Watch October 2010 800-552-1152 www.RetirementWatch.com 1

Today’s 5 Key Issues • Managing IRAs • The Current Investment Regime • Changing Income Taxes • Financing Retiree Medical Care • Estate Taxes in Limbo Bob Carlson’s RETIREMENT WATCH 2 www.RetirementWatch.com

Benefits of Roth IRAs • Qualified distributions are tax free • Returns of principal are tax free • No required minimum distributions • Heirs can continue tax-free lifetime distributions • Excellent estate planning vehicle • Conversion can be reversed Bob Carlson’s RETIREMENT WATCH 3 www.RetirementWatch.com

Conversion Basics • Any traditional IRA, many employer plans can be converted • Pay tax on conversion • Can defer taxes on 2010 conversions Bob Carlson’s RETIREMENT WATCH 4 www.RetirementWatch.com

Basic Factors to Consider • Rate of return • Effective tax rates before and after conversion • Source of money to pay the conversion taxes • Compounding period/Other sources of income • State income taxes • Current value versus past and future values Bob Carlson’s RETIREMENT WATCH 5 www.RetirementWatch.com

Less-Known/Overlooked Factors • Income taxes on Social Security benefits • Medicare premium surtax • Phaseout of income tax breaks • Alternative minimum tax • Earlier in the year is best • Will the law change?/Tax diversification • Convert in stages • Convert each investment in own Roth • After-tax contributions Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com 6

Converting Employer Plans • Most types of employer plans can be directly converted to Roths; same basic terms • Most likely: • Left 401(k) at former employer • Allowed an “in-service distribution” • Major difference is after-tax contributions • Might be able to convert only after-tax contributions • Don’t convert employer stock 7 Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

Should You Defer Conversion Taxes?  Spouses can decide separately  Individual can’t decide separately for each account  Will pay at 2011 and 2012 tax rates  Tax deferral does not change reversal deadline Bob Carlson’s RETIREMENT WATCH 8 www.RetirementWatch.com

Changing Your Mind  Recharacterizations are allowed  Deadline: due date for return, including extensions  Main Reasons:  IRA’s value declines  Your situation changes/aware of new facts  Reconvert: Later of 30 days and next calendar year Bob Carlson’s RETIREMENT WATCH 9 www.RetirementWatch.com

Understanding the Investment Climate • Not the typical post-WWII decline/recovery • Deleveraging/deflation or Balance Sheet Recession Or New Normal • Public stimulus vs. private contraction • Developed vs. Developing World Bob Carlson’s RETIREMENT WATCH 10 www.RetirementWatch.com

120% HOUSEHOLD DEBT AS A 100% PERCENTAGE OF GNP 80% 60% 40% 20% 0% 2 3 6 9 5 8 1 4 7 0 3 6 9 2 5 8 1 4 7 0 5 5 5 6 6 6 7 7 7 8 8 8 8 9 9 9 0 0 0 1 - - - - - - - - - - - - - - - - - - - - n n n n n n n n n n n n n n n n n n n n a a a a a a a a a a a a a a a a a a a a J J J J J J J J J J J J J J J J J J J J Bob Carlson’s RETIREMENT WATCH 11 www.RetirementWatch.com

Characteristics of the Climate • Little private sector credit growth • Slow economic growth in developed world • Low inflation or deflation • Low interest rates, investment returns • Will continue until debt reduced Bob Carlson’s RETIREMENT WATCH 12 www.RetirementWatch.com

Investing as Risk Management • Risk management most important • Risk of the portfolio more important than risk of assets • Forecasting essential to risk reduction • Reduce correlations with major indexes Bob Carlson’s RETIREMENT WATCH 13 www.RetirementWatch.com

4 Strategies that Work  True diversification in portfolio  Active management, tactical allocation  Add a “tail risk” hedge  Retirement “buckets” strategy  TIPS-plus strategy Bob Carlson’s RETIREMENT WATCH 14 www.RetirementWatch.com

True Diversification • Investments with low correlations • Low correlations with major indexes • Add more asset classes • Add different strategies • Change asset allocation based on prospects — forecasting Bob Carlson’s RETIREMENT WATCH 15 www.RetirementWatch.com

TIPS-Plus Strategy  Money for expenses invested for safety  10% or so in growth  Can use leverage for growth  Means need to save more  At retirement, inflation-indexed annuities Bob Carlson’s RETIREMENT WATCH 16 www.RetirementWatch.com

Retirement “Buckets” Strategy  Also known as liability-driven investing  Safe fund for 2-5 years of expenses  Longer-term, diversified fund  Can break down further  Much like saving for college Bob Carlson’s RETIREMENT WATCH 17 www.RetirementWatch.com

To Boost Retirement Income  Maximize Social Security  Delay receiving benefits  Use benefits strategies  Immediate Annuities  Annuities with inflation indexing  Higher yield = higher volatility Bob Carlson’s RETIREMENT WATCH 18 www.RetirementWatch.com

Why Disasters Don’t Happen • Diverse, service-oriented economy • Regulators, investors aware of problem • Globalization, with weak linkages • Sectors not as correlated • Wealth effects are lagged 19

The End of Tax Deferral? • Classic advice: Don’t pay taxes until have to. Reasons: • Pay in cheaper dollars • Earn a return while holding dollars • Look for opportunities to reduce future taxes Bob Carlson’s RETIREMENT WATCH 20 www.RetirementWatch.com

What’s Different • Tax increases already enacted • Income tax increases scheduled • More tax increases likely • Fewer tax brackets • Hard to figure current and future tax rates Bob Carlson’s RETIREMENT WATCH 21 www.RetirementWatch.com

Advantages of Not Deferring  Capital gains not converted to ordinary income  Control timing of tax bills  Possibly lowest tax rates of the rest of your life Bob Carlson’s RETIREMENT WATCH 22 www.RetirementWatch.com

Tax Strategies for Today  Take capital gains before 2011?  Conversions to Roth IRAs  Investing in taxable accounts  Tax diversification  Continue re-evaluating annually Bob Carlson’s RETIREMENT WATCH 23 www.RetirementWatch.com

Financing Retirement Medical Expenses • Medicare Advantage likely to shrink • Traditional Medicare expands • Still need coverage for Medicare gaps • Prescription drug coverage • Long-term care a private expense • New CLASS program Bob Carlson’s RETIREMENT WATCH 24 www.RetirementWatch.com

Key Elements of Reform • Expanded Part D drug coverage • Reduced subsidy for higher income Part D members • More people pay premium surtax • Various pilot programs attempt to improve care, cut costs • More preventive care • Higher taxes, fewer tax breaks Bob Carlson’s RETIREMENT WATCH 25 www.RetirementWatch.com

Uncertainty & Estate Taxes • Estate planning is more than taxes • Flexibility in estate plan • Educate heirs on IRAs, other choices • Use of trusts is increasing • Focus on protection, probate, management Bob Carlson’s RETIREMENT WATCH 26 www.RetirementWatch.com