Author: simonpayn13

It’s always a good idea to keep your Individual Retirement Account (IRA) assets untouched until you can withdraw them penalty-free at age 59½, but you may need to make an exception in this economy.

How can you avoid the tax implications?

In most cases, all or part of any early withdrawal from a traditional IRA will be considered taxable income.

The taxable percentage of the withdrawal depends on whether you’ve made any nondeductible contributions over the years.

Additionally, you may get hit with a 10% penalty tax.

It’s likely impossible to avoid the income tax.

However, you might be able to avoid the 10% penalty tax by taking advantage of the following exceptions to the rule:

•    Withdrawals to cover higher education expenses for you or your spouse, child or stepchild or your or spouse’s adopted child are penalty-free.

•    Withdrawals to cover unreimbursed medical expenses that exceed 7.5% of your adjusted gross income for any tax year are penalty-free.

•    Withdrawals to cover health insurance premiums are penalty-free when they’re used to pay the premiums for you, your spouse or your dependents while you are unemployed.

Many of these techniques are complicated, however.

For example, in regard to health insurance premiums, you must receive unemployment compensation for 12 consecutive weeks under any federal or state unemployment program during the current or preceding year.

Thus, you should seek advice from a tax professional or financial advisor before using any of these strategies.

They can tell you which strategies work best, given your individual financial situation.

Choosing a financial advisor is only half the battle in ensuring that your investments are properly looked after. Finding a good one is also important.

Following are some tips to help ensure that your experience is a good one:

First, it’s a good idea to set up some ground rules. For example, you may want to ask how often you can expect to hear from your financial advisor. You’ll also want to know whether you’ll hear directly from your advisor or from a staff member. Not knowing this can lead to frustration.

Second, you’ll want to keep your financial advisor informed of your fiscal situation and goals. You likely did that when you first met with the advisor, but finances and goals can change. You may have received an inheritance, made a large purchase such as a car or a house, started caring for an elderly relative, decided to send your children to a more expensive college, or opted to retire earlier than you had originally planned. These are all situations you would want to mention to your financial advisor, as they could necessitate a change in your plan.

Third, keep in mind that your financial advisor may be available to help you with concerns other than those that were part of your original consultations. Perhaps you originally began working with a financial advisor on a single issue, such as portfolio management or retirement planning. It’s likely, however, that your financial advisor can help you with many more issues, from wealth transfer to taxation. Don’t hesitate to ask.

Many of today’s retirees are facing an unfortunate scenario. To retire on time, they’ll need to turn their depreciated savings into extra income – at a time when the bond market could start faltering.

Over the past year, bonds have been a haven for many investors seeking alternatives to the low rates available in bank deposits and money market funds.

The result was appreciation in the asset classes that have performed well since the market’s rally began. Those include corporate bonds, high-yield bonds and emerging-market debt.

But the rapid appreciation of these sectors may be behind us because they tend to underperform in rising interest rate environments. That’s because when interest rates rise, the prices of existing bonds fall as newer bonds with higher rates are issued.

Although the U.S. Federal Reserve Board may still be months away from its first interest rate increase, fixed-income investors may want to start considering their options.

One option is investing a portion of one’s portfolio in dividend-paying stocks, which can provide a dependable income stream.

When a company earns profits, it often pays a share of those profits to its shareholders. These profits – called dividends – are typically paid by large, well-established companies that generate profits regularly but are too mature to grow significantly.

Granted, the recession was hard on dividend yields because it was hard on corporate profits. Companies cut payments, driving the average yield of stocks in the S&P 500 down to 2% in March 2001. That’s far below the historical average of 3.8%. But the trend may be turning as companies see their profits improve.

Dividend-paying stocks can be found in many sectors, such as utilities and consumer staples. You can also leave the hunt for dividends to mutual fund managers who specialize in that field, by purchasing shares of a dividend-focused mutual fund.

It’s not a well-known fact, but younger retirees face a harsh penalty for working part-time. If you retire younger than normal retirement age, there’s a limit to how much you can earn and still receive full Social Security benefit payments.

The Social Security administration specifies that “normal” retirement age can vary from age 65 (if you were born in 1937 or prior) to 67 (if you were born in 1960 or later).

Whatever your normal retirement age is, after you reach it you can earn an unlimited amount of money and still qualify for full Social Security benefits.

But if you retire younger than normal retirement age, you are limited as to how much you can earn if you want to still receive full Social Security benefits. For example, before you reach normal retirement age, for every $2 you earn over $14,160, you lose $1 in Social Security benefits. It gets a little better in the actual year you reach normal retirement age, when your benefits will be reduced only when earnings exceed $37,680.

The good news is that these rules apply only apply to earned income. You can have unearned income without losing any Social Security benefits. Unearned income includes income that comes from investments such as retirement plans, pensions, annuities, interest, dividends and capital gains.

So, if you’re planning to retire early but still work, don’t worry. With some advance planning, you might be able to reduce your earned income and make up the shortfall with unearned income.

Should you invest with a pro – or is it better to try it yourself?

It’s a perennial question for individual investors.

Should you make a go of it alone or consult a professional when it comes to managing your investments?

Ultimately, the answer depends on a number of factors, ranging from how knowledgeable you are as an investor to how much money is involved.

Following are a few questions that can help you make a decision:

1. How Comfortable Are You With Financial Matters?

If you’re not confident in your knowledge of investing, you may want to pay for a pro’s services, whether it’s just for help with investing or for broader assistance with financial planning.

2. What Kind of Help Do You Need?

Initially, you’ll want to determine the correct asset allocation for your goals.

Once you’ve settled on this, you’ll need to choose specific stocks and bonds.

You’ll then need to re-evaluate and rebalance your portfolio on a regular basis. Do you need help with all tasks or just one or two?

3. Are you Willing to Put in Some Time and Effort?

You don’t have to spend all your time following the markets to be a successful investor, but if you’re going to invest on your own you should be willing to spend some time putting together an asset allocation and researching investments.

You’ll also want to spend a few hours each month monitoring your holdings just to ensure that they’re still on track. If you don’t think you can do this, you might want to consider hiring a pro.

4. Do You Panic When Things Go Badly?

Ups and downs are part of investing. If you can’t handle the downs without panicking, you might want to consider hiring a pro who can reassure you when the markets falter.

If you’re nearing or in retirement and worried you won’t have enough income to support the lifestyle you want, you’re not alone – and there’s still hope.

According to the Employee Benefit Research Institute’s March 2010 annual retirement survey, 29% of retirees have saved nothing to support themselves, while only a third have saved at least $50,000. And the situation is no better for those who are still working.

Following are some steps you can take to save for your retirement:

1. Delay your retirement or get a part-time job if you’re retired: This gives you extra years of income to save, gives your savings extra time to grow, and reduces the time your savings will need to last you in retirement.

2. Consider more aggressive options: If you’re invested in bonds, you may want to allocate some of your assets to stocks.

3. Delay taking Social Security payments: The longer you delay, the more you’ll collect.

4. Cut your costs: It’s possible to enjoy a great retirement without spending a fortune. Consider moving to a low-cost city or the suburbs of a higher-cost city.

5. Leave nothing behind: Consider converting your retirement assets into an immediate annuity that generates a monthly income until you die but leaves nothing for your survivors.

6. Consider a reverse mortgage: A reverse mortgage turns the equity in your home into a type of annuity.

If you’re looking to invest in an index fund because of its broad exposure to one area of the market and its low fees, you may want to consider an exchange-traded fund (ETF) as well.

ETFs are essentially index funds.

They’re portfolios of stocks, bonds or other securities that can be bought and sold just as investments are.

However, unlike index funds, they trade on a stock exchange in the same way as a stock.

The first ETFs hit the stock market in 1993.

They were originally called SPDRs, or spiders.

Still available today, they track the Standard and Poor’s 500 Index.

After the SPDRs came QQQQs, or qubes. The QQQQs track the 100 largest nonfinancial companies on the Nasdaq.

Today, you can find ETFs that track everything from the entire U.S. stock market to various slices of it, such as large-cap stocks, utilities and real estate investment trusts.

You can even find ETFs that track foreign markets.

ETFs differ from index funds in a crucial way.

When you invest in an index fund, the manager takes your cash and buys more stocks.

When you sell an index fund, the manager sells shares of the fund to pay you.

That type of trading can boost transaction costs and hurt performance.

Because ETFs trade on an exchange just like stocks, when you buy or sell an ETF you’re buying or selling shares from another investor, not a manager.

That can keep fees down.

If you want to learn more about ETFs, your financial advisor – who is familiar with your individual financial circumstances and goals – should be able to help.

Cash may be king when markets are volatile, but that doesn’t mean it’s without risks.

In troubled times, financial advisors may recommend that investors raise their allocations to cash equivalents, which include vehicles such as Treasury bills, insured fixed-rate certificates of deposit and savings accounts.

There are good reasons for doing so.

Cash, which is presumably risk-free, protects your portfolio from losses.

It also builds reserves you can use to buy riskier assets once the market recovers.

But cash really isn’t risk-free. Investors who are uncomfortable with market volatility and therefore decide to invest solely in cash equivalents must accept the fact that inflation could potentially eat away most of their return.

That’s because the rate of inflation – which in February was at 2.6% annually, according to the Consumer Price Index – may be more than the rate of return offered by these investment vehicles. So, too much reliance on cash may result in a portfolio that cannot keep up with rising prices.

As you approach retirement, and even when you’re in retirement, it may be important to consider keeping some money in growth investments such as stocks and mutual funds.

Your financial advisor, who is familiar with your individual circumstances and goals, can provide you with more information as to what might be suitable for you.

Many people with Medicare believed that their 2010 premium would be frozen at 2009 levels, but it’s jumped by 15%.

The reason?

It’s because of an unusual meeting of the rules governing Medicare and Social Security.

Each year, the Department of Health and Human Services sets the premium for Medicare Part B, which covers physician visits and outpatient treatment.

Usually there is an increase in that premium.

However, Medicare is legally prohibited from passing along to Social Security recipients a premium hike that’s higher than Social Security’s annual cost-of-living adjustment (COLA).

Since no COLA increase is expected for 2010, Medicare can’t charge members who are also Social Security recipients any extra premium.

And that’s the majority of Americans.

Of the 42.3 million Americans covered by Medicare Part B, around 73% also receive Social Security benefits.

If you’re one of those Americans, it’s great that your premiums didn’t rise this year.

But if you’re in the remaining 27% that receives Medicare benefits but not Social Security benefits, you’re going to make up Medicare’s loss by paying higher premiums.

In other words, according to a Kaiser Family Foundation report, “The Part B premium increase is higher than it would otherwise be because the costs are spread across a smaller share of beneficiaries.”

Who’s in that other 27%?

Those affected include Medicare Part B recipients who are celebrating their 65th birthday this year, as well as those who haven’t started collecting Social Security because they haven’t reached their full retirement age, which is 66 for people turning 65 in 2008 through 2019, or because they’re delaying benefits.

The U.S. federal estate tax has been repealed.

This came about under a 10-year bill that steadily increased exclusions from the tax before fully repealing it in 2010.

That’s obviously good news for most Americans.

However, there is one issue that many people might not know about.

The negative consequence is that Americans who don’t update their wills could leave nothing to their spouses.

Wills typically use formulas designed to send the maximum amount of assets that are not subject to the estate tax into a trust.

The trust is usually for the decedent’s children.

Remaining assets are then left to the surviving spouse.

Under the new law, there is now no limit on the amount of assets people can pass on without being subject to federal estate tax.

Therefore, all the assets could go into a trust – leaving the surviving spouse with nothing.

However, there is a way around this.

Most states will let a surviving spouse claim part of the estate in such a situation. But the process can be costly, so it makes more sense for people to revise their wills.

The key to success is using dollar amounts instead of formulas to designate where assets should go.