Top 10 Tips for a Financially Safe Retirement

A robust and predictable income is a big concern for retirees. They need to know how to generate enough cash to maintain their lifestyle without exposing their assets to too much risk. Social Security is obviously a key source of steady cash for retirees and some also have a pension, an increasingly rare employer-sponsored retirement plan that pays out like clockwork. Here are 10 other ways for folks to obtain reliable income while keeping risk in check.

1. An Immediate Fixed Annuity

If you wanted the predictability of Social Security or a pension, you might go to an insurance company for an immediate fixed annuity – a contract for a guaranteed income stream for a specified time. As “immediate” suggests, the contract starts paying you virtually right away, usually the month after purchase and monthly thereafter.

2. Systematic Withdrawals

Since you typically can’t get your money back from an annuity once it starts paying out, you might simply put the money in an investment account with a systematic withdrawal plan. Such a plan can be established in nonretirement and retirement accounts with a form instructing the investment company what sum to distribute monthly, quarterly or annually. You keep control of your money but you don’t get the guarantee of an annuity.

3. Bonds

Bonds represent debt. So if you buy a bond, it means somebody owes you money and is regularly paying you interest. When assembled into a properly diversified portfolio, the safest bonds like those issued by the federal government, government agencies, and financially sound corporations can be a crucial source of dependable retirement income.

4. Dividend-Paying Stocks

Unlike bonds, stocks represent ownership and company owners may get regularly-scheduled dividends. Not all companies pay dividends, though, and dividends can be stopped if a company gets into financial trouble. Plus, stock prices sometimes plunge. That’s why retirees who buy stocks for income should probably limit their exposure to this strategy and stick with large, very stable companies with a history of paying dividends.

5. Life Insurance

Life insurance really isn’t meant to be a retirement plan, but it can be a welcome additional income source for retirees who find they’re a bit short each month. The safest policy for the job is one like whole life or universal life that builds cash value on a schedule. People generally access the cash via loan or periodic withdrawal. The catch: loans and withdrawals reduce the policy death benefit by a like amount.

6. Home Equity

Relying too heavily on home equity to fund your retirement can be dangerous because home values could drop suddenly and reduce or wipe out your equity. Like life insurance, it might be better to think of home equity more as a backup plan. You can access it by selling your home or taking out some sort of home equity loan.

7. Income Property

Retired or not, it’s nice to get that check each month when you rent out a home or sell one to someone and hold their mortgage (just like a bank). But it’s not so fun if the renter or homeowner doesn’t pay you. And remember, if you’re a landlord, you’re on the hook for property taxes and costs for upkeep.

8. Real Estate Investment Trusts (REITs)

If you like real estate but aren’t into being a landlord or mortgage holder, consider investing in REITs – companies that buy, sell and manage commercial properties like malls and apartments. REIT shares, which are purchased directly on securities exchanges or indirectly through mutual funds, pay high monthly or quarterly dividends and are liquid. But they can be volatile like regular stocks, so it’s best not to overdo them.

9. Savings Account and CD Interest

When it comes to generating income, there’s nothing safer or more reliable. While this strategy obviously isn’t viable when CDs and savings accounts pay 2%, 1% or even less, it can be a fine option when interest rates are reasonable.

10. Part-Time Employment

Retirees often want to stay active and involved. Working part-time can be a good way to do that while earning extra income. And the only thing at risk is some time.

The Bottom Line

It is never too early or too late to save for retirement.  Call today for a complimentary retirement evaluation. (800) – PLAN (7526)

10 Reasons to Open a Roth IRA Today!

Young people and workers in low tax brackets have a lot to gain by saving for retirement in a Roth IRA. But this year, for the first time, high-income retirement savers also have access to Roth IRA accounts. And in 2010 only, investors can delay the taxes due for retirement account balances that are converted to a Roth. Here are more reasons you should consider contributing to a Roth account.

Lock in today’s low tax rates. Traditional IRAs and 401(k)s give you a tax break during the years that you save for retirement, but you have to pay taxes upon withdrawal. With Roth IRAs and Roth 401(k)s, on the other hand, you pay the taxes upfront, and distributions that are made after age 59 1/2 from accounts that are at least five years old are tax-free. To decide whether a traditional or Roth IRA is better for you, compare your current tax rate to what you estimate you tax rate will be in retirement. Those who expect to be in a higher tax bracket in retirement have the most to gain by paying taxes up front using a Roth account. “Young people should go for a Roth IRA and allow it to grow for 30 or 40 years,” says IRA expert Ed Slott, founder of irahelp.com and author of Stay Rich for Life!: Growing & Protecting Your Money in Turbulent Times. “Generally, they are in a lower tax bracket than they will be later on and the upfront tax deduction of a traditional IRA is not worth as much because they are not earning as much.” Roth accounts may not be as good of a deal for retirement savers who are currently in their peak earnings years and need the tax break now. If your taxes are currently higher than you think they will be in retirement, consider delaying taxation this year by choosing a traditional IRA or 401(k). Investing your retirement savings in both pre- and post-tax retirement accounts allows you to hedge your bets against future tax increases.

Greater flexibility in retirement. After age 70 1/2, traditional IRA and 401(k) account owners are required to take distributions from their retirement accounts and pay the resulting income tax each year. The penalty for failing to withdraw the correct amount is 50 percent of the amount that should have been withdrawn in addition to regular income tax. Roth IRA and 401(k) owners are not required to take annual distributions, which gives them more flexibility to time withdrawals or pass on tax-free money to their heirs.

Easier access to your money before retirement. Roth IRAs give you more flexibility to make withdrawals before you reach retirement. Roth IRA withdrawals before age 59 1/2 result in a 10 percent early withdrawal penalty and regular income tax due only on the portion of the withdrawal that comes from earnings. Like traditional IRAs, penalty-free early withdrawals are also allowed for several reasons, including college costs, health insurance premiums after losing your job, significant unreimbursed medical costs, and certain first-time homeownership costs.

More money for heirs. Beneficiaries must pay taxes on the money they withdraw from traditional 401(k)s and IRAs. But your children and grandchildren may be able to receive tax-free distributions of the money you leave them in a Roth 401(k) or IRA. “If you are never going to need this money, it makes sense to consider a Roth and let the assets grow until your children’s generation,” says Beth Gamel, a certified public accountant and personal financial specialist for Pillar Financial Advisors in Waltham, Mass. “You don’t have to make any withdrawals and when your children have to make withdrawals, they will never be subject to tax.” However, charitable contributions will typically get you a bigger tax break when they’re donated from a traditional IRA. “If you are intending to leave your IRA to a charity or a nontaxable entity you ought not do a Roth,” Gamel says.

Maximize tax-sheltered assets. All of your traditional 401(k) and IRA savings isn’t available for spending in retirement. You must use some of the balance to pay income tax upon withdrawal. With Roth 401(k)s and IRAs, you pay the tax using money outside of your retirement accounts. “The advantage of paying the tax with assets that are outside of the tax-sheltered plan is that you get to increase the amount of assets you have in a tax-sheltered plan,” says Richard Kopcke, a research consultant at the Center for Retirement Research at Boston College. Your entire Roth IRA balance can be used for retirement expenses.

Delay taxes on 2010 conversions. Traditional IRA and 401(k) account balances can be converted to Roth accounts if you pay income tax on the amount converted. Those who make transfers in 2010 can choose between paying the tax this year or paying tax on half of the income in 2011 and the second half in 2012. “This gives you the ability to spread the out the payments over a couple of years versus having to pay it all in one year,” says Shelley Ferro, a certified financial planner for Ferro Financial in Metairie, La. In future years, the tax must be paid entirely in the year of the transfer.

Space out conversions. A large conversion can result in a hefty tax bill and cause a spike in income that could impact your tax bracket, Medicare premiums, or your child’s eligibility for federal financial aid for college. But you don’t have to roll over your entire IRA balance in a single year. Spacing out the amount you convert each year can keep your annual tax bill reasonable. “It could be very expensive to convert all of your traditional IRA to a Roth,” says Timothy Parker, a certified financial adviser for Hudson Capital Management in Ridgewood, N.J. “If you can convert chucks of it at a time and keep your tax rate low, that makes more sense.”

High earners are now eligible. The IRS removed the $100,000 income limit this year, which previously didn’t allow many high-income taxpayers to convert traditional IRAs to Roth IRAs. Although high earners won’t be able to make new contributions to Roth accounts each year, they can get around this restriction by doing a conversion each year. “You could make a nondeductible contribution to your IRA and then convert,” says Slott.

Convert your 401(k) balance to a Roth. The recently passed Small Business Jobs Act of 2010 permits employees to shift part or all of their 401(k) plan balance to a Roth 401(k) within the same plan. In 2010 only, 401(k) or 403(b) plan participants who roll over their assets to a Roth are eligible to pay the tax in 2010 or include half of the income in 2011 and half in 2012. The new law also allows government 457(b) plans to add Roth accounts beginning in 2011.

There’s still time to contribute. Retirement savers can contribute up to $5,000 to an IRA in 2010 or $6,000 if they are age 50 or over. You have until your tax filing deadline to make 2010 contributions. Roth IRA conversions must be made by Dec. 31, 2010, to count for the 2010 tax year. If you later change your mind about the 2010 Roth IRA conversion, you have until Oct. 15, 2011 to shift your assets back to a traditional IRA.

// Call me TODAY to set up a Roth IRA for yourself, your children or grandchildren!

(800) 313-PLAN (7526)

-Dave

Should You Buy Life Insurance at an Early Age?

I‘m constantly amazed at the fact of how many young people I come across that don’t have any life insurance.  While they all have there different reasons, the most common reason I hear is that it’s too early to think about life insurance.  I couldn’t disagree more.

Most Important Question:

Are you supporting individuals whose livelihood depends on your income? If the answer is yes, it’s time to look at life insurance.
Now, you may be saying: shouldn’t I wait to get a policy? Why should I pay premiums when I have so many other checks to write? Well, the reluctance is understandable: the perception is that life insurance is for old people, and when you’re 30 or 35, chances are you’ve got a long, great life ahead of you. But in financial terms, here is why this can be advantageous.

Healthy is Good

Typically, Americans shop for a life insurance policy in the middle of their life spans – when they are in their forties or fifties. At that time, they may have already fallen into the grip of bad habits (smoking, obesity, heavy drinking) and diabetes, heart disease or cancer may have entered their health picture. All these conditions can jack up premiums or make it harder to get a policy.

Term Life Insurance is Cheap

Okay, maybe you won’t have to contend with any of the above health risks at 45 or 50 – but who knows? Buying term life insurance or a cash value life insurance policy early in life, before you have to encounter any of these problems, should allow you to pay less expensive premiums. (Presuming you don’t face recurring risks to your health and safety today.)

Did you know that premiums for standard-risk term life insurance fell 50% between 1994 and 2008?

Premiums have been getting cheaper and cheaper for new term life policyholders, partly because the mortality rate has dropped over the decades. In fact, the non-profit Insurance Information Institute says term insurance premiums have fallen by more than 4% per year since 2000, and the premiums on cash value policies are averaging roughly 5% lower today compared to a decade ago.

Do young singles need life insurance?

Good question. Some financial consultants will tell you there is no pressing reason for it. Yet if you are single, buying a term life insurance policy (or even a permanent life policy) early on could bring you a better deal and potentially guarantee your insurability. 

Maybe it’s time. Time passes, things change, and so does your need for insurance. Even if you are insured, it’s important to keep up with change – as an example, the Insurance Information Institute estimates that about a third of families don’t update their life insurance coverage after a new baby comes home. 

When I discovered my wife was pregnant with our first child I drastically increased my life insurance coverage.

If you’re young and you haven’t yet talked to a qualified insurance advisor call me today at (800) 313-PLAN (7526) – you may be pleasantly surprised how affordable life insurance can be.

Top 5 Tips to Build Wealth and Success

Warren Buffett is worth $45 billion. That wealth isn’t only a factor of savvy investing and good business — the “Oracle of Omaha” is also known as a penny pincher. Buffett still lives in the same Omaha, Neb., home he bought in 1958 for $31,500.

Follow his frugal formula, and you too may wind up with a lot more money than you ever dreamed.

This week Financially Fit covers five tips to build wealth and success.

1. Live Below Your Means.
Being wealthy isn’t just a product of your salary or investment prowess; it’s learning how to save.

“We can make a lot of money, you can make a little bit of money, but the second you spend all the money is when people get into trouble. Saving is the key to preserving your wealth,” says Ed Butowsky, managing partner of Chapwood Capital Investment Management, a firm that manages money for wealthy individuals.

As many Americans realized during the booming real estate market, just because you think you can afford something doesn’t mean you should buy it. Keeping an eye on your bottom line will pay dividends over the long term.

2. Bounce Back From Defeat
With nearly 15 million workers unemployed right now in the U.S., it’s easy to get discouraged. Don’t! Most successful and wealthy people have overcome obstacles and failure along the way. Steve Jobs was ousted from Apple when he was 30. Today, he’s a billionaire and a legend. Plus, after getting fired, he created another billion-dollar media company, Pixar.

“Bouncing back from defeat is something all great achievers have. They have this undying belief good things will happen and will continue to happen,” says Butowsky.

Take Michael Jordan. “His airness” was cut from his high school basketball team. Motivated by the rejection, Jordan became a star the next season. The rest is history.

3. Self-Promote
Regardless of the profession, the rich and successful tend to have a strong sense of self-worth — key to skillfully navigating an upward career path. Mark Hurd, who was ousted as CEO of Hewlett-Packard in August, couldn’t be kept down for long. Using his business skills and connections, in September, Hurd was named president of Oracle. (Hurd and Oracle founder Larry Ellison are known to be close friends.)

4. Have Street Smarts
Bernie Madoff lived the high life for decades, scamming unsuspecting clients, with a money-making formula that proved too good to be true. Only afterward did we learn that with a little due diligence, most clients could have easily uncovered the fraud.

But it’s not only the swindlers and the con men you have to watch out for. Many times, friends and family take advantage of the rich. Whether it’s a handout or an investment idea, Butowsky advises his high net worth clients that in most cases, it’s wisest to just say “no.” The best way to do that: have someone else do it for you.

“You need to really set up a wall between you and your family,” he advises. “If you don’t want to give them (family or friends) money … saying no is probably a good idea.”

5. Buy Cheap
The rich can afford to splurge, but that doesn’t mean they do.

John Paulson, a billionaire hedge fund manager, bought his Hamptons “dream house at a bargain basement price,” according to Greg Zuckerman, author of the Paulson-based book, “The Greatest Trade Ever.” The story has it that Paulson eyed the home while it was in foreclosure. Finally, on a rain-soaked day, he purchased the home on the Southampton town hall steps. He was the only bidder.

On New York City’s Upper East Side, Michael’s— The Consignment Shop for Women— has been a bargain-hunting destination for more than 60 years. “We have a good percentage of women who can afford to shop on Madison Avenue but really like the idea of saving that money,” says proprietor Tammy Gates.

From Chanel to Gucci and Louis Vuitton, the store specializes in high-end designer merchandise for a reasonable price. Speaking of her clientele, Gates says, “they’re wealthy for a reason. They recognize that bargains keep people wealthy. Paying top dollar when you don’t have to doesn’t make sense.”

The End of Stepped-Up Basis

In 2010, when the estate tax is scheduled to “go away” at least for one year, it is replaced with an insidious carry-over basis system. Tracking tax-basis information for clients will require careful record keeping and revisions in estate-planning documents. Despite the overall negative impact of the changes, clients can still benefit with proper record keeping.

If a client dies before 2010, the basis of his assets for income tax purposes is stepped up to their value for federal estate tax purposes. These values are usually determined as of the date of your customer’s death, but with an option to value assets six months after death. (The six-month option can be used only if it reduces both the gross estate value and estate taxes.)

So if your customer has an account with an aggregate, adjusted cost basis of $100,000, but a federal estate tax value of $1 million, the basis of the assets for heirs becomes $1 million. Heirs like this because their capital gains tax is lessened when they sell the property, and the person from whom they received the property never paid the capital gains tax ahead of death. (But dying is quite a price to pay to avoid capital gains taxes!)

All this changes in 2010. Heirs lose the advantageous step up in cost basis. In the above example, the heirs’ cost basis will also be $100,000 — a horrific result.

We had this same system in 1976, and it was repealed in 1978 because it was too complex and unworkable. People died without basis information.

Those negatives aside, here’s one benefit to the changes. For certain estates that qualify, the basis of assets passed to a nonspouse can be increased by the executor of an estate by up to $1.3 million (and that number is adjusted for inflation).

Applying this principle to our example would mean the executor could potentially adjust the basis by $1.3 million, so the heir’s cost basis of $100,000 can be stepped up to $1 million. You cannot adjust cost basis higher than the value of the assets on the date of death, so there will be circumstances in which the $1.3 million cannot be fully utilized. Conversely, there will be cases in which the $1.3 million will not be enough to avoid the negative impact of the tax law because the value of the assets on the date of death is much higher than $1.3 million.

There is another wrinkle to this. Property left to a surviving spouse in a manner that qualifies (and there are very strict rules) gets a basis adjustment of up to $3 million (separate from the $1.3 million). This means the total adjustments can be $4.3 million. Under the right circumstances, the spouse could be allocated the entire $4.3 million basis adjustment, drastically reducing capital gains taxes.

However, qualifying for this significant basis adjustment could be negated because of current language contained in many estate plans. This can happen especially when gifts are made in trust for spouses, as opposed to outright gifts. In order to secure these increases to cost basis, estate-planning documents must be updated. This is something you can encourage clients to do now with the help of their estate-planning experts. Meanwhile, secure accurate cost-basis information on all your clients’ assets. They may need it come 2010.

3 Things You Must Know About Inheriting an IRA

With the exception of financial experts, deciphering the rules of individual retirement accounts can often leave a person confused and frustrated. While the gist of most IRAs is relatively easy to comprehend, once a person begins investigating the rules, requirements and exclusions, things tend to get a bit tricky. This becomes even more apparent when you find yourself named as a beneficiary of an IRA from a friend or family member who has passed.

Inherited IRAs constitute some of the largest assets left in an estate. For this reason any heirs who find themselves in a position of deciding what to do with an inherited IRA should think carefully about all the options before making their final decision. Since this decision can have a huge impact on your own personal finances (in both positive and negative ways) most beneficiaries will benefit by consulting with a tax professional or financial advisor experienced in this area.

The following information is provided to help you understand what options are available to you regarding inherited IRA rules. Distribution of assets for some IRAs must begin at age 70 1/2 (April 1 of the year following this birthday), therefore some of the options are based on whether the owner of the IRA died before or after that cut off date.

Five year rule of Inheriting an IRA
When the owner of the IRA does not specify a beneficiary or simply names the estate as the beneficiary, the rules for withdrawal or distribution of assets state the entire amount of the IRA must be distributed by December 31st of the fifth year following the death of the owner. This five year rule applies if the owner of the IRA passed away before mandatory distributions began. If the owner of the IRA had already passed the mandatory distribution age, the distribution of the IRA must follow the terms elected by the owner.

Non-spousal beneficiaries
For non-spouse beneficiaries who inherit an IRA after the minimum distribution date has passed, options are fairly limited. In most cases you would have to follow the same distribution schedule set forth by the owner of the IRA, this includes collective life expectancies or recalculating life expectancies. If the owner of the IRA passes away prior to the mandatory distribution date, you may elect to have the entire balance distributed within five years or over a period not to exceed your life expectancy. This is what is referred to as a stretch IRA.

Inheriting an IRA from a Spouse
If the owner of the IRA was your spouse, you have the same options available to you as that of a non-spouse beneficiary. In addition, you may opt to treat the inherited IRA as your own which would eliminate the minimum distribution rules that normally apply after the owner of the IRA has passed. If this option is taken, the surviving spouse then becomes the owner of the IRA and the benefits and rules apply to the surviving spouse not the decedent.

As you can see there are many rules and restrictions that apply to the distribution of IRAs after the owner has passed. As the beneficiary of an inherited IRA, it is imperative that you research and understand all of the rules and restrictions to avoid making decisions that will cost you money down the road, either in the form of lost earnings or paying too much to the government. By handling the inherited IRA in the best possible manner, you have the opportunity to benefit from the inheritance as the owner surely intended when they named you as a beneficiary.

The Millionaire’s Retirement Plan

If you’re just entering the workforce, retirement probably seems like a lifetime away. A million dollars by retirement? That’s someone else’s dream, right? It doesn’t have to be. Here is the millionaire’s retirement plan. For these calculations, assume an average annual return of 8%, adjusted for inflation at 3% – a reasonable estimate of average market returns.

Age 25: A Good Beginning

You’re 25 and landed that first job on your career ladder – congratulations! Before you start living to your new paycheck’s standards, budget your retirement savings. If you have a 401(k) plan that matches your contributions, use it! These matching dollars are like a guaranteed return on investment. If you don’t have a matching 401(k), look for a mutual fund through an investment firm with low fees; many now offer target funds, which allocate your investment risk with your targeted retirement year in mind – great for a beginning investor.

Choose a Roth IRA if you can; you don’t get to deduct your contributions from your taxes, but you’ll enjoy tax-free withdrawals at 65. Plan to start by saving about $200 a month to reach your millionaire goal; increasing this monthly amount by $10 annually as you get a raise or promotion will only speed up your saving.

Age 35: Rolling Along

By now you have saved about $45,000 and you’ve grown in your career with a bigger paycheck, but often, family commitments like children and a mortgage will seem more pressing than saving for your golden years. Don’t make the mistake of slowing down your retirement savings. By now, you should ramp up your contributions to about $400 a month – remember that a matching 401(k) will help you in attaining this amount.

If you have kids and worry about saving for their college, look at it this way: the best way to help them in the future is by ensuring you’re financially sound in retirement. Make saving for retirement a priority.

Age 45: Holding Steady

You’re mid-career, and things are looking good in your retirement portfolio. Your savings have grown to about $160,000 – not bad, but it still isn’t quite time to slow down. Increase your retirement contributions to about $450 a month or more, and you’ll be rolling your way to millionaire status by 65.

Age 55: Close to the Finish Line

By age 55, your retirement portfolio should be at $400,000 or so. You can start to see the finish line, but begin to wonder about risk. If you’ve been investing in a target fund, your portfolio has been adjusting its allocation for you; otherwise, look at adjusting some of your investments to reflect a lower risk tolerance. And remember: your income at, say, age 70 won’t be withdrawn for another 15 years – plenty of time to ride out market fluctuations.

At age 55, expect to really ramp up your retirement contributions, to roughly $600 a month, and more if you can manage it. The more you save, the sooner you can leave the nine-to-five behind.

Age 65: Prudent Asset Management

You’re at the finish line: a millionaire at 65! Since you have no way to add to your savings now that you’re out of the workplace, prudent asset management is vital. Keep a close eye on your portfolio so you can make your nest egg last. Protect yourself against inflation as well as market risk, and you’ll be enjoying your golden years without financial worries.

The Bottom Line

With steady savings and smart financial habits, you can retire a millionaire – maybe even before you’re 65.

Our New Commercial

The Roth Individual Retirement Account

The Roth Individual Retirement Account

The Roth IRA, available since 1998, presents a potentially attractive alternative to the regular IRA long favored by many Americans as a cornerstone in their retirement planning efforts. That’s because a Roth IRA may allow you to avoid future taxation of your retirement funds by making nondeductible contributions now.

Rules of the Roth IRA

Following is a summary of the rules for Roth IRAs:

Unlike the traditional IRA, contributions to a Roth IRA are nondeductible regardless of your income level or participation in a company-sponsored retirement plan.

Your contributions are limited to $4,000 a year ($8,000 for couples) in 2006. The contribution limit begins to decline or “phase out” for single taxpayers with adjusted gross incomes (AGIs) of more than $95,000 and for married couples filing jointly with AGIs of more than $150,000. Individuals with AGIs in excess of $110,000 ($160,000 for married couples filing jointly) are not eligible for a Roth IRA. Married taxpayers filing separately are not allowed to contribute to a Roth IRA. An individual’s total contributions to all IRAs, traditional and Roth, may not exceed the annual contribution limit ($4,000 in 2006).

Contribution limits will increase in the years ahead. The annual contribution limit for a Roth IRA is $4,000 in 2006. It will increase to $5,000 in 2008. Then, the annual contribution limit will be adjusted for inflation. Older Americans are also able to make so-called “catch-up” contributions to a Roth IRA. The allowable catch-up contribution is $1,000 per year but is not adjusted for inflation.

Your contributions to a Roth IRA may continue beyond age 70 1/2. You are not required to start taking distributions from a Roth IRA at age 70 1/2, as you are with a traditional IRA, and you can continue to contribute as long as you have earned income. When a Roth IRA owner dies, however, his or her heirs must adhere to the same minimum-distribution rules that apply to regular IRAs.

The taxable portion of a nonqualified distribution is subject to a 10% tax penalty. If you make withdrawals that do not meet the rules for a qualified distribution, you’ll owe taxes on all or a portion of the withdrawal. You must also pay a 10% penalty tax on the taxable portion of the withdrawal.

Retirement plan “rollovers” are permitted, but only from Roth-style plans. If you are changing jobs or retiring, you can roll over funds from an employer retirement plan such as a 401(k) account directly to a Roth IRA, but only if it is a Roth-style plan. Beginning in 2008, however, direct rollovers from a non-Roth plan will be allowed. The rollover will be treated as a conversion, with income taxes due on all proceeds.

The Traditional IRA vs. the Roth IRA

When deciding whether a regular IRA or a Roth IRA is best for you, you’ll want to compare the after-tax dollars that would be available to you under each option. This will depend on many factors, including your tax bracket, how many years you have until retirement, and when you wish to begin making withdrawals. For many people, a Roth IRA will result in more after-tax income during retirement because qualified withdrawals from a Roth IRA are tax free, while withdrawals from a regular IRA will be taxed.

For those whose contributions to a regular IRA are tax deductible and who are in a higher tax bracket today than they will be in during retirement, a regular IRA may be the smart choice.

If you are not eligible to participate in a company-sponsored retirement plan, you can make deductible contributions to a regular IRA regardless of your income level, up to $4,000 in 2006. Deductible contributions may be reduced or eliminated for individuals who participate in a company-sponsored retirement plan, based on their incomes.

Conversion of a Regular IRA to a Roth IRA

In creating the Roth IRA, Congress included provisions for converting a regular IRA to a Roth IRA. You must have an AGI of $100,000 or less to qualify for a conversion to a Roth IRA (this limit is scheduled to be eliminated in 2010). Since the investment earnings and capital gains in your regular IRA have not been taxed yet, the government will take its share at the time of the conversion. If you have a nondeductible, regular IRA, its earnings will be taxed but the amount of your contributions will not. The withdrawal from your regular IRA will count as income but will not affect your eligibility for a Roth IRA (or the $100,000 income limit) or trigger the 10% penalty usually imposed on early withdrawals.

Which Is Right for You?

If you have a regular IRA and are considering converting to a Roth IRA, here are a few factors to consider:

• A Roth IRA may be more attractive the further you are from retirement. Why? Because the longer your earnings can grow, the more income you may have that is never taxed. On the other hand, if you convert to a Roth IRA close to retirement, your investments may not have much time to compensate for the associated tax bill.
• If your regular IRA contributions are nondeductible, you may be better off with a Roth IRA. That’s because the distributions of earnings from your regular, nondeductible IRA will eventually be taxed. The qualified distributions from a Roth IRA will not.
• Your current and future tax brackets will affect which IRA is best for you. For example, if you are currently in a high tax bracket and expect to be in a much lower tax bracket during retirement, a regular IRA could be the best option. Why? Because you may be able to claim a deduction on your contributions now and then pay taxes on future distributions at the lower rate later. Keep in mind that some experts say you could still come out ahead with a Roth IRA if you can fund it for at least 12 or 15 years before retirement.

SUMMARY

• Roth IRA contributions are nondeductible, but qualified withdrawals are tax free.
• Individual contributions to all IRAs are limited to $4,000 in 2006. Note that this amount will increase in the years ahead.
• You may continue contributions to a Roth IRA after age 70 1/2, and there are no mandatory withdrawals.
• You can make penalty-free withdrawals from a Roth IRA before age 59 1/2 for a first-time home purchase or if you die or become permanently disabled.

Locking In Income for a Lifetime

As more workers enter retirement relying on cash from a 401(k) plan or similar account instead of a company pension, fears are growing that some could mismanage their money and outlive their savings.

To reduce that risk, the Obama administration wants to prod workers into investing in lifetime-income products such as annuities, insurance contracts that function like pensions by paying a guaranteed monthly income in return for a big chunk of cash upfront.

This year, the Labor and Treasury departments asked for comments on steps the government could take to steer workers into annuities. One suggestion would require that part of an employee’s 401(k) plan contributions be placed in an annuity that would automatically start providing income at retirement, unless the worker opts out.

Treasury and Labor plan to hold a hearing on the proposals beginning Sept. 14. Among the topics to be discussed, according to the hearing announcement, are the concerns expressed by some about the choice of annuities over other investments and strategies that also aim to provide lifetime income. Individuals who submitted comments during the public-comment period overwhelmingly rejected the idea of mandatory annuities, and few retirees choose to buy annuities when they cash out their defined-contribution plans.

Still, many financial pros say annuities and related products can help reduce the risk you’ll outlive your savings. For people interested in securing an income stream for life, here’s a look at some available offerings:

Immediate Annuities
With an immediate fixed annuity, you make a lump-sum payment to an insurer that promises to pay you a specified sum each month, or at other regular intervals, for as long as you live.

For example, a 66-year-old man who invests $50,000 in an immediate fixed annuity could get monthly income for life of about $324, according to annuity shopping site Immediateannuities.com. Adding a 64-year-old spouse to the contract, with payments continuing until the death of the second person, would cut the monthly check to $253.

One approach is to lock in enough annuity income to cover the gap between your Social Security check (and any pensions) and your minimum income needs. Very conservative investors may decide to annuitize a larger share of their savings, but financial advisers generally say investors shouldn’t put all of their money into an annuity.

Consumers often worry that if they die young, they will have thrown their retirement savings away buying annuities. In the case of the couple above, adding a guarantee that payments will continue for at least 20 years—with the money going to beneficiaries if both spouses die—would bring the payment down to $247, according to Immediateannuities.com.

One drawback of most immediate annuities is that rising consumer prices over time will erode the purchasing power of the fixed monthly payment. Some insurers offer inflation-indexed annuities, but the trade-off is that the initial payment is considerably smaller than on a conventional immediate annuity.

The appeal of annuities depends in part on your health and your desire to leave a financial legacy, experts say. Those in poor health, or who want to leave the largest possible inheritance, might decide not to put a big amount into an annuity.

Investors should check the A.M. Best Co. rating of the insurer and choose one with a strong rating. Investors also should check the limits of their state’s guarantee fund, which helps pay claims of insurers that become insolvent. While coverage limits vary by state, most guarantee an individual at least $100,000 in annuity benefits per insurer, which is why some investors diversify annuity purchases among insurers.

In the current environment of low interest rates, investors may want to spread annuity purchases over several years, says David Macchia, founder of Wealth2k Inc., which develops annuity “laddering” strategies. That way, you can lock in higher payments on annuities purchased in years when interest rates are higher, he says.

Longevity Insurance
If you decide against an immediate annuity and choose instead to take systematic withdrawals from your retirement savings, you may want to consider longevity insurance, another type of annuity offered by some insurers.

Longevity insurance is generally purchased before or at retirement and guarantees an income that begins paying at a set age, usually 75 and up. Some advisers suggest pairing longevity insurance with another type of investment or withdrawal plan designed to last until the longevity checks start arriving. Longevity insurance also can be used to boost income in later retirement, when many people need more income for health care or assisted-living costs.

A 65-year old man who invests $50,000 in a longevity annuity offered by MetLife Inc. will get an estimated $1,000 a month if he begins taking income at 75, or $1,580 if he waits until 80. The younger you are when you buy the policy, the larger the payments will be, partly because of the increased time for investing. A 60-year-old investing the same amount would get about $1,300 monthly at age 75, or about $2,040 at 80, according to MetLife’s figures.

As with immediate annuities, the monthly payment is reduced if you include a second person or add a guaranteed payment period. If the investor dies before his target age, some policies, including the one from MetLife, will return the original investment along with interest.

Managed-Payout Funds
Mutual-fund companies, seeking to hold on to customer assets that might otherwise flow to annuities, in recent years have rolled out mutual funds designed to provide monthly income to investors such as retirees.

But income from these so-called managed-payout funds isn’t guaranteed. And with these funds debuting in a hostile stock-market environment, early investors have seen their monthly payments shrink.

One type of payout fund generates monthly payments with the goal of liquidating its assets by a target date—usually 10, 20, or 30 years later. A second type is based on the idea of a college endowment. It aims to produce regular payments, while preserving at least some of the original investment. Vanguard Group Inc., Fidelity Investments and Charles Schwab Corp. are among the firms that have launched managed-payout funds.

So far, the funds have highlighted the trade-off that comes with an investment linked to the market. The payouts on Vanguard’s three managed-payout funds, for example, have fallen about 25% since their launch in May 2008. A Vanguard spokeswoman said the funds are intended to meet their objectives over long periods.