RISMEDIA, January 12, 2011—(MCT)—Many Americans go off the grid in the final weeks of the year, but now that 2010 year-end statements are arriving in the mail, it’s time to get back on the grid—and to make sure you start 2011 on the right foot, especially with your retirement accounts.
1. Rebalance with an eye toward your job and tax efficiency. For starters, analyze your holdings to determine whether your assets earmarked for retirement are allocated appropriately. Also, assess how the mix of your contributions to various plans—your 401k, for instance—might affect the overall pie.
Also, look at all of your assets, including your human capital—your job—when evaluating your overall portfolio. For instance, you might invest more in stocks if you have a job with steady income and great benefits, according to Moshe Milevsky, author of Are You a Stock or a Bond? and a professor at York University. Conversely, you might invest more in bonds if you’re an entrepreneur with not-so-steady income. The reason: A steady job with dependable income means that your human capital is more like a bond than a stock, while a job with not-so-dependable income is more like a stock than a bond.
Another point to consider: Generate the most after-tax wealth by putting assets into the right types of accounts. That might mean putting your stocks (assets taxed as dividend income or as capital gains) in taxable accounts and putting your bonds (assets taxed as ordinary income) into your retirement accounts.
Your rebalancing exercise should also include revisiting your target retirement date, according to Mary Kay Foss, a certified public accountant and a director at Sweeney Kovar LLP. “When is a realistic time to retire?” she said. “If it will be sooner or later than originally contemplated, it could indicate that the asset allocation within the plan should be changed.”
2. Consider a Roth IRA conversion. Now is a good time to evaluate whether you want to do a Roth IRA conversion in 2011, and if so, how much money you want to convert, said Bruce Steiner, an attorney at Kleinberg, Kaplan, Wolff & Cohen. Make sure you run plenty of what-if analyses, including assessing the effect the conversion would have on your taxable income.
Others agreed. “While a Roth account is not suitable for everyone, you want to know if it could be suitable for you,” said Denise Appleby, the chief executive of Appleby Retirement Consulting Inc., and editor of the just-launched The IRA Authority Newsletter. “Your financial or tax professional can review your ‘Roth profile,’ and should be able to make an educated decision based on reasonable assumptions and projections,” she said.
For her part, Foss said a Roth can be a good choice for many people. “I usually recommend that you don’t plan to convert your entire IRA or qualified plan. Convert an amount each year to fill up your tax brackets rather than converting a large amount that could put you in a higher tax bracket than you will reach in retirement.”
3. What type of accounts do you have? Foss also said the start of a New Year is a good time to take stock of your retirement accounts, including their maximum contribution amounts. What type of retirement accounts do you have? If you’re participating in a 401k plan, are you contributing the $16,500 maximum, if possible? If you’re over 50, are you taking advantage of the $5,500 “catch-up” deferral available? Does the plan have a Roth 401k provision? “I moved 25 percent of ongoing deferrals to the Roth portion of the plan when my employer added that feature,” Foss said.
4. Installment saving. If you plan to contribute to an IRA this year, consider making installment payments during the year, instead of waiting until the end of the year or until April 15, said Appleby. “This makes it easier to manage from a financial perspective. For instance, if you plan to contribute $5,000 to your IRA, consider contributing $416 each month.”
5. Keep track of all those accounts. You can start the New Year off on the right foot by keeping track of your retirement accounts using either a journal, spreadsheet or an online tool, Appleby said. “As we move or change jobs, and financial institutions merge or go out of business, an increasing number of individuals are losing track of their retirement accounts,” she said. “In many cases, these amounts are eventually escheated to the state, if the holder is unable to locate the owner. Keeping track of your accounts and contacting the custodian or trustee at least once per year regarding the account will help to ensure they know where to contact you if necessary,” she said.
Also, consider consolidating your accounts with one custodian or trustee to reduce the number of accounts you have to keep track of—and the headaches associated with that.
6. Review your Summary Plan Description. Look at the paperwork for your retirement plans. Do you have the latest Summary Plan Description for your employer plan? What types of income are subject to deferral? Can you put away a percentage of bonuses, overtime or severance pay? “A refresher on the plan provisions is a good thing to do this time of year,” Foss said.
7. Can you do in-service distributions? You might also check whether your employer’s plan will let you take what’s called an “in-service” distribution. “If so, consider taking such a distribution and putting it into an IRA where you may have a larger array of investment choices,” Foss said. “Most 401k plans limit investments to mutual funds that might not have the depth of choices that are available in the IRA universe.”
Also, Foss said, two exceptions to the 10% penalty for early distributions from retirement plans apply only to IRAs: the first-time home buyer exception and the exception for funds used for higher education. By the way, Foss said an in-service distribution can also be converted to a Roth IRA. “The $100,000 adjusted gross income limit on Roth conversions is gone forever,” she said. “Many people forget that a conversion can be made directly from a retirement plan.”
8. Check your beneficiary designations. It’s well-worn advice to be sure, but can’t go without saying. “You may need to make changes if you or one of your beneficiaries experienced any recent life-changing events such as a birth, marriage or even death,” Appleby said. “While most people will update their will, many fail to update their beneficiary designations, and that can result in unintended parties inheriting your retirement savings.”
Checking your beneficiary designation is especially important if you did or plan to do a Roth IRA conversion, Steiner said. Why’s that? First, your beneficiary designation for your traditional IRA may not carry over to the Roth, and second, you may want to name different beneficiaries for your Roth IRA, said Steiner.
Heed these eight tips to keep your retirement plan on track for the year ahead. And if you’re in an employer-sponsored plan, stay informed. “Anyone participating in an employer’s plan should take advantage of any investment information provided for the plan—investment seminars or just information sessions,” said Foss. “You can’t have too much information about how your retirement assets are invested.”
(c) 2011, MarketWatch.com Inc.
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