The reality is, this isn t your parents or grandparents retirement, and people are behind and concerned for very real reasons

Transcription

1 You were invited to this presentation in part because you ve shown the discipline and foresight to have already begun investing for retirement. We re learning a lot about the importance of the accumulation phase from the experience of the Baby Boomers. If you re part of that generation those born between 1946 and 1964 you know you re the first to face funding retirement largely on your own. According to a recent Forbes article: The transition of responsibility for retirement savings that took place in the 1980 s was a monumental shift that no one could have anticipated or appropriately planned for The reality is, this isn t your parents or grandparents retirement, and people are behind and concerned for very real reasons Boomers are re-writing the manual on what works best in each phase of retirement. So far, one of the clear takeaways is this: You should take every opportunity to gather assets, particularly taking advantage of tax-deferred options. Source: Forbes, The Real Reason Why Baby Boomers Are So Far Behind In Retirement Savings, September 30, Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

2 The second insight is that time really IS your ally. As someone who has built an investment portfolio, you re no doubt aware of this already. Still, it s so important that it bears a brief reminder. The sooner you begin accumulating assets for retirement, the larger your retirement fund may be. Only a few years can make a big difference in how much you accumulate. For example, assume you invest $5,500 every year from age 20 through age 65. You would invest $247,500 and have accumulated more than $1.2 million (assuming a 6% annual growth rate, no withdrawals and no federal or state taxes on the annual earnings). That s a potential five-fold increase in your investment. If you wait until age 35 and start investing $5,500 annually, you d invest $165,000 and accumulate close to $461,000 not bad, but less than a three-fold increase in your investment. Wait until age 45 to start investing and you d invest a total of $110,000 but accumulate a little over $214,000 by age 65. The bottom line is, regardless of your age, saving and investing as soon as possible is one of the best ways to prepare for retirement. I should point out that this example assumes investment in a federal tax-deferred account and doesn t show the impact of federal or state taxes. In a tax-deferred account, the earnings are not subject to taxes while they remain in the account. Withdrawals from a taxdeferred account could be fully or partially taxable and, if made before a specific age stipulated in the tax laws, subject to a 10% federal tax penalty Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

3 You re probably aware that making use of tax deferral is a smart way to accumulate a larger retirement fund, and that tax deferral is the common denominator in most retirement investment options. I d like to take a moment to review how tax deferral works, just to be sure we re all on the same page. As I just mentioned, the earnings in a tax-deferred account are not subject to current income tax. The chart here illustrates why that s a benefit. The lower line shows $10,000 invested in a taxable account that earns 6% per year. A portion of the earnings is withdrawn each year and used to pay taxes on the account s annual growth; the rest of the earnings remain in the account. If you re in the 28% federal income tax bracket, after 30 years of paying taxes annually on the account s earnings, your account would be worth about $35,500. Because you paid taxes along the way, you could withdraw all of the final balance without owing additional tax. So the final value of the taxable account is $35,565. The upper line illustrates a tax-deductible $10,000 investment in a tax-deferred account that also earns 6% per year. No earnings need to be withdrawn each year to pay taxes. Because all earnings remain in the account, at year 30 it is worth more than $57,000 before taxes. However, if you were to withdraw that $57,000-plus, some or all of it would be taxable. Let s assume the worst case that it is fully taxable at a 28% federal income tax rate. The federal tax obligation would be $16,082, leaving $41,323 after taxes. You see that on the gold line, which shows the after-value of the tax-deferred account from years 1 through Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

4 Now I d like to share with you an overview of some tax-advantaged retirement savings options. While all the options afford tax advantages, they differ in regard to the tax treatment of contributions and withdrawals. Let s start at the top left, with 401(k)s, 403(b)s, etc., which may be offered by your employer. These options permit pretax contributions; with these, you make your contribution by choosing to defer a portion of your current salary by investing in the retirement plan. This salary deferral is deducted from your compensation before taxes are withheld. So, if your compensation is $1,000 and you elect a salary deferral of $100, you are taxed on only $900. Pretax-contribution or salary-deferral plans also include SIMPLE plans for small business owners. Another option with a tax-advantaged contribution is a deductible Traditional IRA. The amount you contribute to this option may be deductible from your current-year federal income tax, provided you meet certain criteria. In contrast, contributions to nondeductible Traditional IRAs, Roth IRAs and Roth 401(k)s do not qualify for a current federal tax deduction. When it comes to withdrawals, there are three possibilities as well. Starting again with 401(k)s, etc., withdrawals from these are fully taxable. The same is true for distributions from a deductible IRA. However, a distribution from a Traditional nondeductible IRA would be partially taxable. And distributions from a Roth account can be tax-free if you meet all the requirements. Keep in mind, however, that early withdrawals, which are defined differently for each type of account, may be taxable, subject to a federal tax penalty or both Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

5 In my view, retirement plans that allow pre-tax contributions, also known as salary deferrals, are powerful tools. If you earn $100,000 but defer $15,000 in one of these plans, you pay current income tax on only $85,000. You re probably familiar with 401(k) plans. Other salary deferral plans include 403(b)s for employees of non-profit organizations and SIMPLE plans, which are plans available to smaller companies and have similarities to 401(k) plans. For now, I ll focus on the more widely used 401(k) plans and ask that you contact me after the presentation if you d like to discuss another salary deferral option. If your employer offers a 401(k) plan, the maximum annual contribution for individuals age 50 or older is $17,500 and the catch-up contribution is $5,500 for 2013 and 2014 for a total maximum contribution of $23,000 for each year. Your employer may match a portion of your contributions, making a 401(k) an even better deal. This is effectively free money, and I hope you will take full advantage of it. There are few disadvantages to contributing to a 401(k) plan. You are generally limited to the investment options offered by the plan, and access to your funds is generally restricted while you re still employed by the employer offering the plan. Distributions made from a 401(k) plan prior to age 59½ (age 55 in some cases) are subject to a 10% premature penalty tax, although a number of exceptions apply Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

6 Now let s look more closely at the Traditional IRA. The only requirements to contribute to an IRA are that you have taxable compensation and are under age 70½. For 2013 and 2014, you can contribute up to the lesser of your total compensation or $5,500. If you are age 50 and older, you can contribute an additional $1,000 in catch-up contributions (a total of $6,500). You may be able to deduct some, all or none of your contribution from your taxable income. It will depend upon whether you or your spouse is covered by a 401(k) or other type of employer-sponsored retirement plan, your modified adjusted gross income and your federal income tax filing status. Deductible or not, your contribution and earnings grow tax deferred until you withdraw them. Then, they may be fully or partially taxable. What makes the difference? It has to do with whether or not you took a tax deduction on the amounts you contributed to the IRA. Withdrawals from a Traditional IRA are considered to be part principal, and part interest or earnings. The earnings portion is always subject to tax so is any portion of a distribution that is attributable to contributions you deducted previously. On the other hand, the part of your distribution that is related to non-deductible contributions will be considered a tax-free return of principal. Withdrawals before age 59½ generally entail a 10% premature distribution tax. Also, you must begin making withdrawals from Traditional IRAs once you reach age 70½, whether or not you need the current income Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

7 In the past few years, I ve seen a growing interest in the Roth IRA, though most people still aren t that familiar with these. Essentially, they differ from Traditional IRAs in three ways. Contributions to Roth accounts are always made with after-tax dollars you don t get a deduction for your contributions. There are also income restrictions for contributing to a Roth IRA, which I ll cover later, but not for a Roth 401(k)s. Withdrawals from your Roth account will qualify as completely free from federal income tax. You have to satisfy a five-year holding requirement, and you generally have to reach age 59½ before making the withdrawal. Your withdrawal will also be tax free if you meet the five-year holding requirement and meet certain conditions, such as making the withdrawal due to an exception such as disability, or to pay certain first-time homebuyer expenses. Even taxable distributions from a Roth IRA get special tax treatment: distributions are considered to come from contributions first, then from Traditional IRAs that you converted to the Roth IRA and, finally, from earnings. I ll explain Traditional-to-Roth IRA conversions in a minute. Distributions that represent a return of your Roth IRA contributions are free from federal income tax. After you ve received all of your contributions back, any further distribution will represent earnings, subject to income tax. If you re under age 59½, a 10% premature distribution tax applies as well, unless you qualify for an exception Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

8 No required minimum distributions. As an account owner, you aren t required to take minimum distributions from a Roth IRA as an account holder. This can be a real benefit if you think you might not need the income in retirement or want to leave the money, tax free, to a beneficiary. (Keep in mind that distributions are required to be made to the beneficiaries upon the Roth IRA owner s death.) Depending upon whom you choose as your beneficiary, you may be able to extend the life of your Traditional or Roth IRA so that it benefits not just one but two generations. This is known as stretching the IRA. (Note: A stretch IRA strategy should only be considered when an IRA owner does not need the income from the IRA during his or her lifetime.) For example, say you named your daughter as the beneficiary of your Traditional IRA. She has the option of taking the IRA distribution all at once, which will be taxed at her federal income tax rate. If she decides she doesn t need to take the entire amount, nonspouse beneficiaries must take RMDs each year from a Traditional or Roth IRA. Since the RMDs are based on the life expectancy of the beneficiary, younger beneficiaries have a longer payout period, which results in lower payout amounts, allowing the balance to continue to grow tax deferred. These distributions from Traditional IRAs are taxed as ordinary income at the beneficiary s federal income tax rate; however, distributions from Roth IRAs are generally not. Now imagine she has no need for the money and names her son as the successor beneficiary. She will still be required to take RMDs throughout her lifetime, but the remainder of the assets would continue to grow tax deferred until her death, at which point her son would begin making required minimum distributions based on his life expectancy. In either case, the IRA continues to have the potential for tax-deferred growth well after the original owner is gone Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

9 So which should you contribute to a Traditional or Roth IRA? The first answer is that, unfortunately, you may not be able to contribute to a Roth IRA, since contributions are phased out for individuals with higher incomes. For 2014, the MAGI limits for Roth IRA contribution thresholds are: $181,000 for married persons who file jointly, and $114,000 for single taxpayers. In order to contribute to a Traditional IRA, you must have earned income and be less than age 70 ½. In addition, contributions may be partially, fully or non-tax deductible based on an individual s MAGI, federal tax filing status and whether they participate in a retirement plan at work. Here you can see the tax deductibility MAGI phaseout range for Traditional IRAs for 2013 and 2014, to the right of the Roth IRA numbers. In the end, it may come down to eligibility, based on the MAGI limitations. Assuming you could contribute to either, which is better? It will depend on you. I would be happy to meet with you about this at a later date. We can review your personal circumstances and savings goals in order to find the better choice for you Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

10 Roth IRAs are growing in popularity in recent years due to their ability to provide both tax-free retirement income when specific conditions are met and tax-risk diversification for retirees, as well as their ability to provide a potentially greater financial legacy for beneficiaries due to the fact that required minimum distributions are not required from Roth IRAs during the life of the IRA holder. While there are income restrictions that may prevent you from contributing directly to a Roth IRA, there are no income restrictions to convert from a Traditional IRA to a Roth IRA. The amount converted will be included in current income and subject to tax at ordinary federal income tax rates in the year of conversion, but all earnings after the conversion will be potentially tax-free. A common mistake many investors make is looking at the Roth IRA conversion option as an all-or-nothing proposition, but they may want to consider converting a portion of their IRA assets to a Roth IRA. Most investors understand that an investment portfolio should be diversified across asset classes, like stocks and bonds. While this conventional approach to diversification is important, by considering one or more partial Roth IRA conversions, you can add a new dimension to your diversification strategy that of tax-risk diversification. This allows you to pick the tax treatment of distributions that may be required during retirement and may be particularly important for Social Security tax implications as well as Medicare Part B premium rate determination Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

11 2014 Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.

12 Before concluding this discussion of the accumulation phase, I want to talk about assets you may still have in your former employers retirement plans. Americans have $5.6 trillion dollars invested in company-sponsored retirement plans like 401(k)s, and much of it is invested with their FORMER employers. * You can leave the assets in a company-sponsored retirement plan especially if you find the investment options attractive and the fees reasonable. Another option is rolling over the assets to an IRA, which can be a tax-free transaction if done properly and the assets can continue to grow tax-deferred. Some investors roll over into an IRA because they want to expand their investment options or to consolidate their retirement assets to make it easier to calculate required minimum distributions when they are closer to retirement. Of course, these are general rules, as are most of the points I ve made today. I d be happy to talk with you individually about your situation, and how to most effectively use the various tax-advantaged tools available to you. As always, you should also talk to your tax or legal advisor before taking any kind of distribution from a retirement plan. * Source: ICI, The U.S. Retirement Market, Third Quarter Pershing LLC. Pershing LLC, member FINRA, NYSE, SIPC, is a wholly owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). Trademark(s) belong to their respective owners.