Q: During the past several years, I have become a mutual fund junkie. I am
59 and plan to retire at 62. My problem is that I currently have 24 funds, mostly
aggressive growth. I don't know how to consolidate these down to income producing for when
I retire. Do you > have any advice on what type of funds I should have now and at
retirement?
A (Richard): Being an
aggressive growth mutual fund junkie over the last several years could have served you
well if you picked funds wisely. However you now have a couple of issues that could effect
any repositioning that you do. Namely: taxation if these funds are outside of a qualified
plan and assuming that you have inherent gains in these funds and choosing suitable income
producing funds to meet your retirement cash flow needs. Since you are retiring in three
years, this allows you time to reallocate your holdings.
The 24 aggressive growth funds that make up your total investment
portfolio is risky due to the fact that markets change and a portfolio solely made up of
aggressive growth could be out of favor just when you might have to depend on these funds
for cash flow retirement needs. The general rule of thumb is to reduce your exposure in
equity holdings as you get closer to retirement and hold more income producing funds to
protect yourself from a volatile market situation.
Since I have little financial information about you it would be
difficult to advise you as to what your allocation should be. I recommend that you find a
good financial planner who would evaluate your cash flow needs in designing a
well-balanced portfolio. Other areas the planner should evaluate are your marginal tax
bracket, your total inevitable assets, your goals and objectives as well as your risk
tolerance. All are considered important before making any investment decisions.
A (Frank): Because
you are already covered by a qualified retirement plan, you may qualify to make a full
$2000 deductible IRA if your income does not exceed the following limits:
Single: $30,000*
Joint: $50,000*
There is a phase out region between $30,000 to $40,000 for single,
and $50,000 to $60,000 for joint taxpayers where a reduced deduction is available. If your
spouse is "non-working" s/he may be able to contribute to a deductible IRA if
your combined adjusted gross income falls below $150,000 with a phase out to $160,000.
*These limits are increased by $1000 per year till 2007.
Anyone can contribute to a traditional non-deductible IRA, and there
are no employment or income limits.
Roth IRA's are limited by income as follows:
Single: $95,000 with phase out to $110,000
Joint: $150,001 with phase out to $160,000
It sounds like you have a pretty generous pension plan. I wouldn't
be too concerned about your boss investing the plan assets. For one thing, your boss is
personally liable if your plan investments do not meet the "expanded federal prudent
man rule" as defined in the Employee Retirement Income Security Act (ERISA). So, most
employers diversify the investments and act responsibly. You do have rights as an employee
to obtain plan information and investment results at least annually. If you are
uncomfortable with the plan investments or policy, you might bring it up privately with
him/her as you would bring up any other work related condition or compensation issue.
Q: Thanks for the info - here is what I am
currently planning - since I only qualify for the Roth IRA I am going set up an account
(before April 15) with $2000 for 1998 and get a weekly check deduction to keep putting
$2000 per year into it, and place the IRA in some kind of high growth tech fund (maybe
split between a tech,electronic, or health once its big enough). I have quite a few years
before I retire. I am also planning to start some kind of stock portfolio picking two or
three stocks and putting a $1000 in each. Hopefully I'll be able to pick two or three more
stocks each year. Being involved in the electronics field, I like the position of
companies like Texas Instruments, Microchip, Hewlett Packard and Analog Devices but
eventually spread out into others. I think this along with my company pension plan should
put me in pretty good shape in 15-20 years.
I have another question on my company pension plan: Are those
locked up until you're 65 ? What kind of penalties does one occur if you wanted to take
them out early?
A: If you leave your firm, you can typically
rollover the funds into an IRA without any penalty, or perhaps roll them directly into
your new employer's plan. If you roll them into your own IRA, then you can take over
management of the funds.
However, if you take them out of your company's retirement plan
prior to age 59 1/2 without rolling them over, then you are faced with a steep mandatory
federal withholding tax. Eventually you will get to pay the ordinary income tax and a10%
penalty tax due. The mandatory withholding was adopted to "encourage" employees
changing jobs to keep the funds at work for the purpose intended: retirement. The penalty
tax is waived for death, disability, some medical expenses, level payments spread out over
your projected lifetime, first time home purchase and qualifying education expenses.
The various restrictions act as a stick to balance the carrot of tax
deferral that comes with qualified retirement savings plans. The government is happy to
give you the tax advantage now so that we all don't have to support you later on welfare.
It is intended that these funds be "locked up" until you actually reach a
retirement age.
As always if the funds involved exceed the price of a good lunch,
you are strongly advised to seek competent tax counsel. The actual regulations are
reasonably complex, and I don't know very much about your personal situation. I am not
either a CPA, or Tax Attorney, and my comments are for general information purposes only.
A (Richard): If you are
transferring your IRA account from one brokerage service to another, and you are
establishing the same type of IRA, simply complete the new account application and account
transfer form for the firm you want to receive the funds. Once the paperwork has been
completed and submitted to the new brokerage firm, they will do everything else. Just make
sure that the check is made payable to the new brokerage service rather than you, to avoid
a 20% withholding. This type of transfer is not subject to tax and there are no special
year-end considerations.
If you are transferring a traditional IRA account from one brokerage
service to another, and the new account is a Roth IRA, there are special rules that apply,
along with tax consequence. Under this scenario, there is a maximum annual income
restriction in order to open the Roth IRA. Also there will be taxes due as if the funds
were distributed, but the transfer is not subject to the 10% early withdrawal penalty. For
1998 only, a special rule allowed the option of paying any taxes due on the transfer over
four years. This provision was no longer available after January 1, 1999
Comments? Criticism?
Suggestions?