Retirees Should Reconsider Strategies on IRA, 401K Withdrawals, Financial Advisor Says

A government rule on retirement savings may be tricking retirees into looking at their financial situations all wrong, says a financial advisor who specializes in retirement planning.

The rule says retirees can't leave money in their IRA or 401k accounts forever. At age 70½ they must begin making minimum withdrawals, even if they prefer to leave the accounts untouched.

"You are forced to take money out whether you want to or not," says Dave Lopez, a mathematics and computer science major who applies his analytical mind to solving retirement challenges.

And in reality, Lopez says, you should want to take out as much as possible. That's why he likens the rule to a head fake because it causes retirees to look at the situation from the wrong perspective.

"They get fixated on that minimum amount they must withdraw, so that's how much they end up withdrawing, leaving the bulk of their savings right there in the 401k or IRA," he says.

That's a mistake, he says, especially for people who hope to leave a healthy inheritance to heirs.

"If you keep taking out the minimum amount each year, it will just about guarantee you have a large amount in there at your death," Lopez says. "Under the current tax law, if you die and your IRA or 401k is left to your heirs, they are taxed on it at a high rate. With state taxes added in, it could be 40 to 45 percent."

The percentage could end up being even more, depending when you retire and whether tax laws change, he says.

If Congress and the president raise taxes, the government's share of your retirement savings would go up and the amount left to heirs would go down.

That's where it would be good for the middle class to take a lesson from wealthy retirees, who are less likely to fall for that head fake, Lopez says. They understand that they need to withdraw greater chunks from their IRA and 401k accounts, placing the money in tax-friendlier accounts.

"While people in the middle class take out the minimum-required amount, the rich do the exact opposite," he says.

Lopez says a few strategies exist that retirees can take advantage of to make sure taxes don't deplete their legacy to their children. "You have to put these strategies into place early, though," Lopez says. "The later you wait, the less effective they are and the less your savings will be."

• Explore tax-free options. Move the money into a tax-free vehicle, such as a Roth IRA or a specially designed life insurance plan that would allow the dollars to flow tax free to heirs. Lopez says one additional advantage with the life insurance option is that, historically, when laws are changed related to life insurance the old policies are grandfathered in and not affected. "It's a top estate planning trick for the rich," he says. "The challenge is the middle class doesn't know it exists."

• Stretch out inherited IRA withdrawals. Under tax law, when your heirs inherit an IRA they don't have to take money as a lump sum. They can have it paid out over their lifetime, which could keep them in a lower tax bracket, Lopez says. They pay taxes only on what they take out, he says. "There is gamble involved with this plan," Lopez says. "You are gambling that the law that allows heirs to do this will still be in effect when you die. Many people think this law is one of the easiest ones to change because the government could just claim this is a tax loophole and they are closing the loophole."

Ultimately, he says, it will pay off to sit down ahead of time to review options with a financial advisor who understands the intricacies of retirement planning.

"You don't want to be taken in by that head fake," Lopez says. "You want to make sure you and your family get as much benefit as possible from all those years you were saving your hard-earned money."

About Dave Lopez

Dave Lopez is the founder of ILG Financial, LLC (www.ILGFinancial.com) and has been working with individuals and businesses in the Northern Virginia area since 1986. He specializes in strategies that enable his clients to potentially build a retirement nest egg that they can rely on and can never outlive. Lopez has his Bachelors of Science degree from James Madison University with a major in mathematics and computer science. He is an investment advisor representative of AlphaStar Capital Management, LLC, a registered investment advisor.

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By Jason Alderman

For many teens, there's nothing more exciting than receiving the first paycheck from a summer job - a sure-fire ticket to fun and freedom. It's also a great opportunity for parents to encourage proper money management.

Parents or guardians need to do some necessary paperwork first. Working teens will need his or her own Social Security Number (SSN) to legally apply for a job. They will also need a SSN to open a bank account to deposit their paychecks. Depending on state law, children under 18 may have to open bank accounts in their custodial name with their parents or guardians. It is also important for parents to check in with qualified tax or financial advisors about their teen's earned income, particularly if it may affect any investments under the child's name.

After that, it's about encouraging teens to get a jump on their job search. The recent job market for American teens has been tough and investigating particular kinds of openings should start months in advance of summer hire. Networking is also important - teens can reach out to friends, neighbors and other trusted adults about potential jobs in the community. Also, it is never too early for teens to learn resume writing and job interviewing skills. The Practical Money Skills website's Landing a Job (http://www.practicalmoneyskills.com/personalfinance/lifeevents/work/landingjob.php) page offers useful background to help teens get started.

Parents can also assist by monitoring job categories their kids are interested in, encouraging them to meet application deadlines and being aware of federal, state and local child labor laws (http://www.youthrules.dol.gov/know-the-limits/index.htm) to steer them from unscrupulous employers.

Technology changes quickly, so tech-savvy teens may be ahead of the game when it comes to searching for work online. Leading job search engines are a destination for seasonal job openings, and many allow users to customize searches for specific positions and employers. However, teens may need to be reminded about their social media activity before they begin any job search - anything a teen posts publicly on the Internet may be seen by a potential employer.

Banking is another major step in the life of the working teen, though they don't need to wait for that first job to get started.

Many parents open bank accounts for their children as early as their first allowance - after all, digital banking makes it easier to monitor and transfer money without a trip to the branch or ATM. Paychecks - on paper or via digital deposit - make familiarity with the banking system an even greater necessity. Check with their bank to see what types of accounts are offered for children and teens - some banks offer a wide variety of custodial accounts where parents can track and assist their child's spending and saving activity.

A teen's first job is a great opportunity to introduce budgeting, saving and long-term investment skills. Your child may be working over the summer to save for a particular desired item - a cellphone or a trip - or more extensive goals like future college expenses. The Practical Money Skills site offers a budgeting tutorial (http://www.practicalmoneyskills.com/personalfinance/savingspending/budgeting/) and budgeting calculators (http://www.practicalmoneyskills.com/calculators/budgetGoals.php?calcCategory=budget) for a range of purposes.

When the job offer comes, there's one more thing parents can do. Getting hired means a flurry of paperwork that can be confusing; parents can help their children review those documents before signature. Most will apply to tax withholding, but such documents might also include special workplace agreements that might not always be clear to young workers. When that first paycheck arrives, consider sitting down to inspect a teen's first paper or electronic pay stub. Many people don't understand their withholding even as adults, so children can benefit greatly from this lesson at the start of their working lives.

Bottom line: A teen's first summer job is a great way for parents and children to collaborate on job-hunting and money management skills that will produce benefits for a lifetime.

Help Your Family Or Community By Helping Yourself First

At some point during their lifetime, most people wonder whether they've done enough - if they've made a positive impact, says Jeff Bucher, a financial advisor who helps working-class Americans plan their golden years.

"For most people, I think that concern increases as they get closer to retirement - they wonder what their earning years have bought for themselves and the people they care about, which may extend to their greater community," says Bucher, who, through his firm, Citizen Advisory Group, (www.citizenadvisory.com), has contributed to the local Boys & Girls Club, the Make-A-Wish Foundation and to development of an Olympic training center for wrestling at Ohio State University, his alma mater, where he earned a wrestling scholarship.

"You don't have to be super-wealthy to make a significant contribution to others. The smarter you are with the wealth you do have, however, the more of an impact you'll be able to have."

If you want to make a difference with your money, you're better off having your financial affairs in order. Bucher offers a few suggestions.

• Now is the time to design a lifetime income plan. Simply attaining a minimum figure in savings probably won't work; such figures do not account for family emergencies, inflation, etc. Social Security does not cover what it used to, and its future is uncertain at best. You need to establish a laddered, inflation-adjusted income using safe and dependable accounts that will provide a check every month. This should be informed by a plan that maps out your lifetime income needs to ensure that you do not outlive your money. For example, if you need $3,000 a month now, at a 4 percent inflation rate you will need $3,649.96 in five years. In 10 years you will need almost $4,500 per month.

• Consider holding off on retirement. Many people are understandably eager to retire as early as possible; others fear Social Security benefits will vanish, so they want to get what they can as quickly as possible - at age 62. But if you're counting on those benefits as part of your income, you should wait until you're eligible for the full amount. That's age 66 if you were born from 1943 to 1954, and age 67 if you were born in 1960 and later. If you're in the older group, retiring at 62 cuts your benefits by a quarter; for the younger group it's nearly a third. "Chances are, you'll be better off mentally and physically if you wait anyway," Bucher says. "Many studies show that people live longer and are more vital the longer they remain employed."

• Know when to transfer investments out of tax-deferred plans. If you're working for a company that provides a match for 401k contributions, by all means, contribute up to the maximum match. "That's free money - you'd be crazy not to take advantage," Bucher says. But anything beyond that should be invested in something that's more tax efficient: Roth IRA, municipal bonds, life insurance or real estate. No one expects taxes will go down - they'll be going up. Uncle Sam already has a lien on your IRA or 401(k); don't let his lien, the taxes you'll owe, continue to grow. Go ahead and pay now. Your future retired self will be glad you did.

About Jeff Bucher

Jeff Bucher is president of Citizen Advisory Group (www.citizenadvisory.com), and is an Investment Advisor Representative of AlphaStar Capital Management, an SEC Registered Investment Advisor. He has a life and health insurance license with the state of Ohio. His membership affiliations include the exclusive Ed Slott's Master Elite IRA Advisor Group™, National Association of Insurance and Financial Advisors (NAIFA), the National Association of Fixed Annuities (NAFA) and the Forum 400. He has earned Top of the Table honors through the Million Dollar Round Table (MDRT). Bucher is a former standout wrestler at The Ohio State University, where he earned an athletic scholarship and honed his leadership skills en route to earning four varsity letters.