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Retirement Planning

      To do retirement planning you need to analyze the cash flows for many years, both during the accumulation phase and the retirement phase. You must use the correct withdrawal rate or you may run out of money.  Retirement Planning requires integrating the various aspects of financial planning such as investing, taxes, insurance, estate planning into one plan. (Investment advice engagement is a separate engagement from financial planning engagement). This should be done every few years starting many decades before retirement, instead of waiting until you have reached retirement age.
    Reviewing 401k or 403b rollover strategies is an important part of retirement planning. 401k qualified retirement plans can be rolled over to an IRA when someone changes jobs or retires. In some cases employers permit a 401k to be rolled over to an IRA while you are still employed with that employer. That is called an in-service distribution. Generally speaking it is better to rollover a 401k to an IRA because you have more freedom to invest and you have more control and better service in terms of estate planning details. Also, if you keep several 401k's this can get confusing because each employer has different rules and different investment choices.
     However, there are reasons to keep a 401k. You can borrow from a 401k, but not from an IRA. 401k plans at large employers can sometimes access low cost "I" class mutual funds that are not available to retail consumers. If you terminate employment after the year you turn age 55 you can get a distribution (not a loan) from a 401k with no early penalty, but for IRA's you must wait till age 59.5. So if you turn 55 in December, 2010, and then in January, 2010, when you are 54.1 years old, if your employment ends then 401k distributions are penalty free. Of course, you still pay the regular income tax. 401K rollovers can not be reversed back out of an IRA and into the 401k, unless someone becomes re-employed at their old job, and not all employers allow rolling of an IRA into a 401k. This means you should get careful tax planning and retirement planning to see what is the best strategy. Tax and retirement planning needs to be integrated with investment planning. For example, the investments in the 401k need to be coordinated with those in the IRA and in the taxable account, plus cash flow needs for retirement need to be planned for and cash for emergencies need to be set aside.
    Whenever you transfer money from a 401k to an IRA or vice versa always tell the Custodian to do a "Custodian-to-Custodian" transfer. Tell the old Custodian to be sure to structure the transfer as one that will have no tax withholding. Make sure the new Custodian puts the funds into a tax qualified retirement account such as an IRA or 401k.
    Beware of a tax trap: when rolling a 401k to an IRA, before doing so check to see if you have an Net Unrealized Appreciation (NUA). Special rules apply that, if not followed, create an irreversible tax trap. This is why it is important to get retirement planning as part of integrated financial planning.

    
Employee benefit retirement and distribution planning is in regards to Qualified Retirement Plans such as 401k or 403b, 457, Roth 401k, Roth 403b, and how they interact with IRA's. It is easy to get into a tax trap with these. For example, if you borrow from a 401k you must pay your account interest which is usually not tax deductible, yet when you retire and get a distribution then you are taxed on the interest that you paid to yourself. Thus 401k's used improperly can create a tax trap. Also, using a 401k loan stops you from contributing, thus your true cost of a 401k loan would include loss of the company match and loss of the use of a safe haven to have long term tax deferral. There are tax rules that restrict above average earners from contributing to an IRA if they also are deemed to be a participant in a 401k, even though it may appear they are not a participant, there are subtle reasons that one can be "deemed" by IRS to be a participant. Another tax surprise is that the highest paid employees are not allowed to contribute the full amount of the 401k contribution amount if the low income employees fail to participate in the 401k.
      Special rules apply for 403b participants with over 15 years on the job or for 403 participants who have a pre-1987 balanced and who seek to defer RMD's until age 75. Careful financial planning needs to be done to integrate the client's needs for liquidity kept outside of a Qualified retirement account (for emergency spending, etc.) while still following a goal of building up a tax-deferred retirement account.
      For clients with a significant net worth, it may be a mistake to build up a 401k or IRA because the combination of estate tax and income on those is about 75%. If you are retired and have a net worth large enough to be concerned with estate tax then you may not want your heirs to inherit an IRA or a 401k; instead you may want to explore charitable giving or simply spend down the proceeds while you are alive so that your estate will pay less estate tax. This is an example of how financial planning must be custom tailored for each client and the various topics of financial planning must be integrated with each other.
      401k qualified retirement plans can be rolled over to an IRA when someone changes jobs or retires. In some cases employers permit a 401k to be rolled over to an IRA while you are still employed with that employer. That is called an in-service distribution. Generally speaking it is better to rollover a 401k to an IRA because you have more freedom to invest and you have more control and better service in terms of estate planning details. Also, if you keep several 401k's this can get confusing because each employer has different rules and different investment choices.
     However, there are reasons to keep a 401k. You can borrow from a 401k, but not from an IRA. 401k plans at large employers can sometimes access low cost "I" class mutual funds that are not available to retail consumers. If you terminate employment after the year you turn age 55 you can get a distribution (not a loan) from a 401k with no early penalty, but for IRA's you must wait till age 59
½. So if you turn 55 in December, 2010, and then in January, 2010, when you are 54.1 years old, if your employment ends then 401k distributions are penalty free. Of course, you still pay the regular income tax. 401K rollovers can not be reversed back out of an IRA and into the 401k, unless someone becomes re-employed at their old job, and not all employers allow rolling of an IRA into a 401k. This means you should get careful tax planning and retirement planning to see what is the best strategy. Tax and retirement planning needs to be integrated with investment planning. For example, the investments in the 401k need to be coordinated with those in the IRA and in the taxable account, plus cash flow needs for retirement need to be planned for and cash for emergencies need to be set aside.
    Whenever you transfer money from a 401k to an IRA or vice versa always tell the Custodian to do a "Custodian-to-Custodian" transfer. Tell the old Custodian to be sure to structure the transfer as one that will have no tax withholding. Make sure the new Custodian puts the funds into a tax qualified retirement account such as an IRA or 401k.
    Beware of a tax trap: when rolling a 401k to an IRA, before doing so check to see if you have an Net Unrealized Appreciation (NUA). Special rules apply that, if not followed, create an irreversible tax trap. This is why it is important to get integrated financial planning.


Mayflower Capital