Latest IRS focus? IRAs

Something to keep much closer tabs on, particularly if you are knowingly skirting the heretofore unaudited rules.

From the link:

After years of haphazard enforcement, the Internal Revenue Service is starting to systematically search out violations of the convoluted rules governing individual retirement accounts. There’s a lot at stake. Americans hold $4.3 trillion in IRAs, and the cost of even innocent mistakes can be steep; if you miss taking a required payout from your IRA, Uncle Sam will demand half of the amount you forgot to take as a penalty.

The IRS was prodded to act by the Treasury Inspector General for Tax Administration. In a report earlier this year it concluded that IRA violations have been growing and estimated that more than half a million taxpayers either missed required payouts or contributed more than allowed to IRAs during 2006 and 2007.

“No one was auditing this stuff. Now the IRS is cracking down,” says Seymour Goldberg, a Woodbury, N.Y. lawyer who serves on a committee of tax pros who meet with the IRS on pension issues. Here are some IRS targets and ways to keep your retirement stash out of its sights.

Happy birthday, 401(k)

The retirement savings vehicle is now thirty. (Well, technically thirty since the start of the year.)

From the link:

That’s the case with the U.S.’s main corporate pension plan, the 401(k). The Revenue Act of 1978 contained a provision that become Section 401(k) of the Internal Revenue Code and it went into effect on Jan. 1, 1980. Subsequent regulations issued by the federal government in 1981 gave benefit specialists the guidance they needed to set up the pension plans. The 401(k) has since evolved into the largest private-sector employer-sponsored retirement plan in the U.S.

White House throwing the middle class a lifeline

Here’s some of the options on the table:

The initiatives were developed by the White House Task Force on Middle Class Families, led by Vice President Joe Biden. The proposals would:

* Require companies that do not offer retirement plans to enroll their employees in direct-deposit retirement accounts unless the workers opt out.

* Increase the “Savers Credit,” a tax credit for retirement savings, for families making up to $85,000.

* Change some of the rules for 401(k) employer-sponsored retirement savings accounts to make them more transparent.

* Increase the child tax credit rate to 35 percent of qualifying expenses from the current 20 percent for families making under $85,000 a year. Families making up to $115,000 would be eligible for some increase in the tax credit.

* Increase child care funding by $1.6 billion in 2011 to serve an additional 235,000 children.

* Boost government spending by $102.5 million for programs aimed at helping families who provide home care for an aging relative.

* Ease the burden for student loans by limiting a borrower’s payments to 10 percent of his or her income above a basic living allowance.

Some thoughts on retirement investing

Retirement planning is an ongoing process, and you really can’t count on Social Security to take care of all your retirement income needs. This means a major part of any retirement income plan is retirement investing.

Retirement investing is a different animal from other financial investments. Saving money for retirement isn’t enough because inflation is going to erode the future value of your savings, and wild speculation is not the investment answer because it’s simply too risky. For retirement investing you want a return that keeps you ahead of inflation and does some work in building your nest egg, along with exposing your investment to low or moderate risk. As you get older you want to invest in less and less risky vehicles to protect your retirement fund.

Here are some retirement investment options:

• Stocks — over the long term stocks have historically performed better than savings accounts or bonds.
• Bonds — you are more likely to get your investment back with bonds compare to stocks.
• Annuities — provide a monthly income stream after a lump-sum investment.
• Mutual Funds — pool many investors and invest that money through an investment strategy devised by the fund manager
• Investment Partnerships and Hedge Funds — private investment partnerships and hedge funds are an alternative to mutual funds with a few significant differences including participating in a much wider assortment of investment vehicles and borrowing money for additional investment. Investment partnerships and hedge funds are riskier investments and typically require a sizable minimum investment to participate.
• Exchange-traded Funds — ETFs are another alternative to mutual funds and hold large “baskets” off well-defined slices of the investment universe. Two ETF advantages over mutual funds are low expenses and very high liquidity.
• Commodities — investing in commodities is investing the raw materials — metals, petroleum, agriculture, etc. — that go into production and consumption. Commodities trading is also a risky investment strategy.

Retirement planning for Baby Boomers

Early and often –it might not be a good idea at the ballot box, but it’s a great idea with retirement planning. Starting retirement plans early in a career gives you a head-start, but planning for your retirement finances often continues throughout  your career and even into retirement. For Baby Boomers there’s an online resource that provides information, resources and answers for retirement topics including lifestyle, career, personal and finances — the Baby Boomers Retirement Network (BBRN). Retirement planning is a big part of the Baby Boomers Retirement Network’s offerings.

Hit the link for a ten-minute online quiz to help you find answers for your retirement questions.

From the link:

Start your process and get your own answers…to the big questions on every Baby Boomer’s mind these days…about money, investments, health, well-being, work, lifestyle, travel, love, and much more…

Tap into an exclusive stream of benefits and discounts, find better investment options, feel better about decisions you make, and network with the best, most trustworthy individuals to help you get the job done. Your answers are confidential and are for your use exclusively.

The BBRN website includes links to news for Baby Boomers; expert resources for finance, jobs, health issues, travel and more; a forum on retirement topic for site members; and even free audio downloads on many topics.

The BBRN offers the Baby Boomers Retirement Club (BBRC) at two levels: basic and gold. A basic BBRC membership is free and comes with many membership benefits including a pharmacy discount card saving 10 percent below AARP rates. The gold membership requires a monthly fee, but comes with many more benefits, particularly relating to finance and investment.

Worried about retirement?

This CNNMoney story is for you.

From the link:

3. Worry less

What if you just can’t save that much?

If your budget is tight today and you just can’t find another dime to set aside — well, you’re not alone. But you should resist the urge to become really aggressive to make up for what you’ve lost. You probably have some other arrows in your quiver. Just one of the following can go a long way toward getting you to a comfortable retirement:

401(k) cap may drop next year

Only by $500, but it sure seems counterproductive to long-term fiscal sanity for individuals. I’m guessing Congress will pass something to prevent this forcing of the IRS’s hand on the issue.

From the link:

Low inflation has made food and gas more affordable during the recession, but there’s a downside: Social Security beneficiaries probably won’t get a raise next year, and the IRS may reduce the amount workers can contribute to their 401(k) plans.The IRS will announce 2010 contribution limits for 401(k) plans in October, based on a formula tied to the inflation rate in the third quarter vs. the year-ago quarter. For 2009, most workers can contribute up to $16,500 to their 401(k) plans, plus an additional $5,500 if they’re 50 or older. Unless inflation picks up in August and September, the IRS could be forced to reduce the cutoff to $16,000 in 2010, according to an analysis by Mercer, a human resources consultant. The threshold for catch-up contributions could be reduced to $5,000. This would mark the first time the IRS has reduced 401(k) contribution limits.

401(k) fees and small business

Fees are the silent assassins in retirement plans and often small business pays a premium with 401(k) fees. The Wall Street Journal offers a solid overview on the topic.

From the link:

But small-business 401(k) savers also labor under an additional burden: They pay substantially higher retirement-plan fees on average, which reduces their investment returns. Moreover, many small-business workers and employers are unaware of the magnitude of those charges.

That could be changing: Momentum is building in Congress to require expanded 401(k) disclosures that could be of particular benefit to small-business owners and their employees.

Under legislation approved by the House Education and Labor Committee in June, employees in 401(k) plans would get a more specific breakdown about how much they pay in fees on their quarterly statements. Other changes could assist employers when they are choosing among retirement-plan providers.

The bill would require 401(k) plan providers or administrators to thoroughly disclose, before a contract is signed, the investment-management, administrative, transaction and various other fees that employers and employees would pay in estimated total dollar amounts. The legislation would also require providers to reveal any financial relationships they have with investment advisers and others who market the plans to business owners.

Many large providers of 401(k)s for small businesses don’t give their customers a detailed breakdown of the estimated annual costs and where the fees go, making it difficult for employers to comparison shop. In some cases, the plan providers give a total dollar amount or the expense ratios of various investments in the plan, but not a complete breakdown of the various fees, such as the commissions brokers receive.

Scott Burns on retirement

If you’ve never read any of Scott Burns’ financial advice, you are in for a treat. For years I’ve read his very practical and accessible ideas on investing, retirement and other financial topics. His “couch potato portfolio” investment plan is a work of simplistic genius and is now made even easier to implement at his website AssetBuilder.com.

His latest column is on the problem of retirement income being eaten up by financial services industry fees. He offers a few novel solutions and points out the institutional hurdles any plan will face from industry lobbyists.

Financial planning and investment is not easy, but it can be made easier by leaps and bounds. Read a little more of Burns to see what I mean.

From the final link:

As I have shown in earlier columns, the high cost of some 401(k) and 403(b) plans can cut a worker’s lifetime accumulation by one-third— as much as a major market decline. Worse, when those high fees continue in retirement, the probability that workers will run out of money nearly doubles.

But that dismal reality has a big upside. If worker retirement incomes are reduced by as much as one-third by excessive fees, reducing those fees means retirement incomes could be increased by as much as 50 percent. Similarly, reducing fees could also mean that the risk of running out of money could be cut in half.

That makes investment fee reduction a high-stakes opportunity.

So how can government make it happen?

One notion is very simple: Open enrollment in the federal Thrift Savings Plan to all workers anywhere. This program has annual costs of only 0.03 percent. It provides workers with simple choices of ultra-low-cost index funds or portfolios of same. Workers could then choose between the plan, if any, offered by their employer and the low-cost plan offered by the federal government.

A 30-year-old worker could choose between accumulating as many as 11.5 years of final wages in the Thrift Savings Plan or as few as 7.7 years of final wages in his or her employer’s plan. I doubt that it would be a difficult choice.

Better still, employers could save money. Rather than wasting up to 3 percent of payroll to provide matching contributions that are consumed by fees, employers could create efficient plans. Or they could encourage workers to join the federal Thrift Savings Plan. Either way, employers could save up to 3 percent of payroll.

Think about this a bit and you see that workers and employers would both benefit. Only the financial services industry would be unhappy. But, as they say, “Two out of three ain’t bad.”

Could something this simple actually get done, since it would benefit millions of workers?

Get real. This is America, the land of the lobbyist and home of the vested interest. A proposal this simple would be attacked as anti-free enterprise by the Investment Company Institute, the entire insurance industry, the Employee Benefit Research Institute (EBRI), and benefit consultants of all shapes and sizes who make their livings off the complexity and expense of the current system. Some would say such a change would be ruinous to an already damaged financial services industry— the same industry that workers are supporting with hundreds of billions of taxpayer dollars.

Self-directed IRAs

Self-directed IRAs (individual retirement accounts) are great ways to invest in a variety of areas, and of course serve as a retirement planning vehicle.

I’ve written about self-directed IRAs for GMAC in the specific area of second homes.

Here’s a sample from the link:

Did you know you can use an Individual Retirement Account (IRA) to buy investment real estate? A retirement account variation known as a self-directed IRA allows the IRA holder to put their money in a wide variety of investments such as stocks, mutual funds, bonds, T-bills and others. Real estate is included in allowable investments with a self-directed IRA. The self-directed IRA market is just getting rolling, and many banks won’t deal with a real estate IRA. If you are looking to buy a second home, it’s worth finding a bank that will accommodate a real estate IRA.

But self-directed IRAs aren’t limited to real estate. During these strange economic times, it might be worth looking into a self-directed IRA if you want to regain some control over your retirement savings.

From the second link:

Investors with self-directed IRAs go out and find the asset to invest in rather than relying on the universe of mutual funds and other investments available through companies such as Charles Schwab or T. Rowe Price.

Like traditional individual retirement accounts, self-directed IRAs have the same contribution limits and rules for withdrawing money. The difference is what’s inside these accounts — real estate, gold or shares of a privately held business, to name some examples. Grill tells clients they can be like Buffett. “Warren Buffett invests in private companies. Warren Buffett invests in real estate. Warren Buffett invests in precious metals. Warren Buffett does foreign currency trading. Now you can do exactly that same thing, but on a smaller scale.”

In a nutshell, here’s how a self-directed IRA works. You open an IRA through a company such as Entrust, Equity Trust, Guidant Financial or Pensco Trust. The company then acts as the trustee of your account and facilitates investments on your behalf. But you find the investment opportunity and do the due diligence.

IRA news from 2008

It’s more important than ever to keep up with retirement planning and IRAs saw some changes last year.

Check ’em out to make sure there’s no new harm, or benefit, you don’t know about. Hit the link for the full listing.

From the link:

Here’s a snapshot of the top IRA changes in 2008.

By far, the biggest changes came as part of the Worker, Retiree, and Employer Recovery Act of 2008, or WRERA (which might be an acronym for “we’re in big trouble”).

Under that law, required minimum distributions for IRA owners, plan participants and beneficiaries are waived for 2009. Of note, you are still required to take your RMD if you turned 701/2 in 2008 but decided to wait until this year to take that distribution.

Another provision of WRERA: Starting in 2010, non-spouse beneficiaries aren’t allowed to leave retirement plans with the former IRA owner’s employer. They will have to transfer those plans to an IRA at a bank, brokerage or mutual-fund firm.

Under the Emergency Economic Stabilization Act of 2008, sometimes called the bailout bill, IRA owners who are 701/2 can transfer up to $100,000 to a charity in 2009 without having the amount included in their gross income.

If an IRA owner dies and has designated a revocable trust as the beneficiary, the expectation is that the money in the IRA would be exempt from claims by creditors of the decedent, as they say in estate planning circles.

Not so, according to Seymour Goldberg, author of J.K. Lasser’s “Inherited IRAs” and contributor to Slott’s newsletter.

In a recent Kansas court case, creditors were able to get at the money in an IRA that named a revocable trust as the beneficiary. According to Goldberg, the lesson learned is this: Don’t designate a revocable trust as the IRA beneficiary. Instead, name an irrevocable discretionary trust with spendthrift language as the beneficiary, he said.

Uncle Sam cleared up a big issue with IRS Notice 2008-30: A non-spouse beneficiary of a qualified retirement plan can transfer the account to an inherited Roth IRA so long as the transfer is allowed by the plan and the beneficiary meets the Roth conversion eligibility requirements, according to Slott’s newsletter. Starting in 2010, plans must allow such transfers.

In its private letter rulings (PLRs), the IRS responds to a specific taxpayer’s request for relief. But sometimes these rulings can help other IRA owners who might need guidance with similar problems. Take, for instance, PLRs 200840054 and 200835033, both of which deal with substantially equal periodic payments or 72(t) payment plans.

Some IRA owners who are under age 591/2 can avoid having to pay the 10% penalty on IRA distributions by taking money out in substantially equal periodic payments or SEPP.

Worried about retirement funds?

Unless you’re going pretty exotic with your investments, there shouldn’t be much concern.

Hedge funds are basically the casino of investment vehicles — you only play with money you can afford to lose. At least that’s the theory. Mutual funds? I suggest just sitting tight and don’t even think about that money right now. The markets will improve eventually.

From the link:

REVELATIONS that hedge fund investors lost millions of dollars in the Bernard L. Madoff scandal have made many people nervous about their own money, even when it is held in plain-vanilla instruments like mutual funds.

Do mutual fund investors actually have cause to worry that their nest eggs could disappear?

 

There are no guarantees, of course, and there are plenty of ways to lose money in mutual funds. But compared with investors in hedge funds or other alternative instruments, mutual fund investors have less cause for concern about outright fraud, according to Russel Kinnel, director of research at Morningstar.

”Mutual funds are pretty well protected from fraud,” Mr. Kinnel said. ”There is much greater transparency in reporting and oversight. They don’t hold their own securities, and they don’t ask you to take it on faith.”

That may not have provided much comfort in the declining market of the last year, in which most mutual funds fell sharply. Aside from the direction of the overall market, poor investment decisions and high fees can eviscerate fund performance.

Can you guard against huge losses under these circumstances? Not entirely. Many mutual funds had miserable returns last year. Mr. Kinnel cites as an example the horrendous performance of several former Regions Morgan Keegan funds. The Select High Income fund, for example, fell 75.8 percent last year, while Select Intermediate Bond was down 84.5 percent. (Since August, the funds have been managed by Hyperion Brookfield Asset Management and have been renamed Helios Select High Income and Helios Select Intermediate Bond.)

401(K) debit card — a bad, bad idea

This article is the first I’ve ever heard of the concept of a 401(K) debit card, but man the idea is stupid. The penalties are so high for tapping into 401(K) money early, that “nuclear option” should be reserved for financial relief of the last resort.

I can’t believe Congress is even debating this idea. Guess the bank lobby is flexing some muscle. Banking has such a great track record over the last fifteen years or so for looking out for the best interests of its customers …

From the link:

It’s bad enough that 40% of workers in their 20s and 30s cash out their 401(k)s when they switch jobs, even though taxes and penalties decimate the balances to almost half, according to a CMI survey of 1,200 people in January commissioned by Fidelity.

Worse, even, a small percentage of 401(k) participants take out loans or hardship withdrawals from their retirement savings, which average only $122,000 in the first place, with a national median balance of $66,000, data from the Investment Company Institute and the Employee Benefit Research Institute shows.

Now Congress is debating the pros and cons of supplying people with 401(k) debit cards.

Are they serious? Putting this piece of plastic in investors’ hands would be akin to telling them to live for today and go out and spend whatever money they’ve saved for retirement.