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

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

Dec 12, 2022 320 likes •601 views

Key Personal Finance Issues for 2010-2011 Bob Carlson AAII-DC Editor, Retirement Watch October 2010 800-552-1152 www.RetirementWatch.com 1 Todays 5 Key Issues Managing IRAs The Current Investment Regime Changing Income Taxes

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Key Personal Finance Issues for 2010-2011

Bob Carlson Editor, Retirement Watch AAII-DC October 2010 800-552-1152 www.RetirementWatch.com

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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 www.RetirementWatch.com

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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 www.RetirementWatch.com

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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 www.RetirementWatch.com

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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 www.RetirementWatch.com

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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

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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

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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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 www.RetirementWatch.com

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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 www.RetirementWatch.com

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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 www.RetirementWatch.com

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Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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HOUSEHOLD DEBT AS A PERCENTAGE OF GNP

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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 www.RetirementWatch.com

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  • Risk management most important
  • Risk of the portfolio more

important than risk of assets

  • Forecasting essential to risk

reduction

  • Reduce correlations with major

indexes

Investing as Risk Management

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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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 www.RetirementWatch.com

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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 www.RetirementWatch.com

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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 www.RetirementWatch.com

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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 www.RetirementWatch.com

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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 www.RetirementWatch.com

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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
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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 www.RetirementWatch.com

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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 www.RetirementWatch.com

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Advantages of Not Deferring

 Capital gains not converted to

  • rdinary income

 Control timing of tax bills  Possibly lowest tax rates of the rest of your life

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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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 www.RetirementWatch.com

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  • 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

Financing Retirement Medical Expenses

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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  • 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

Key Elements of Reform

Bob Carlson’s RETIREMENT WATCH www.RetirementWatch.com

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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 www.RetirementWatch.com