Retirement Column


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 Retirement 
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How are Social Security Benefits Taxed?

CalculatorIn a post about reading your Social Security statement a few weeks ago, reader J. Shoe asked the following question:

Just trying to find out if it is true that any Soc. Sec. benefits you start taking are taxed starting at 50% of the money you receive. So that if you take 5K from SS in one year, they put a tax on 2.5K of that money. Can that be real and their a link to see this horrific scam. It’s bad enough they borrow from SS without the intention of paying it back, but this crazy

I don’t see how it’s crazy but I also didn’t fully understand how Social Security benefits are taxed. For more information, I turned to Pub 915: Social Security and Equivalent Railroad Retirement Benefits, which is the IRS document that explains everything.

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 Retirement 
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How Much Do I Need to Retire?

Nest egg savingsOne of the most pressing questions many people ask is this: How much do I need to retire? This questions haunts many people. Trying to decide how much you need to retire isn’t particularly easy, since it depends on how long you will live — and no one knows the answer to that question.

The common rule of thumb is that you can withdraw 4% from your account each year if you expect the money to last indefinitely. This amount is used because it assumes that your investment portfolio will beat inflation and keep growing, and it is considered a conservative estimate. If your investment portfolio manages to return 7% annually, you are “safe” if the inflation rate is 3% annually and you are withdrawing 4%. It’s supposed to even out. (Of course, if your portfolio doesn’t return that each year, then you end up dipping into your capital.)

However, deciding how much you need annually — whether you use the 4% rule of thumb or not — depends on your individual needs. Here are two ways to look at it:

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Are You Making These 5 Common Retirement Account Mistakes?

Retirement PlanOne of the great retirement savings tools is the tax-advantaged account. Accounts like the 401(k) and the IRA can help you save for retirement, and reap tax advantages at the same time. Your tax-advantaged retirement account can provide you with a great way to save up money for retirement, putting your capital to work for you and building wealth. These accounts are easy to use, and make saving up for the future fairly simple.

However, even though tax-advantaged retirement accounts are relatively easy to manage, it is possible to make mistakes with them. As you contribute to your retirement account, here are 5 common retirement mistakes to avoid:
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What’s the Average 401(k) Balance?

If you watch as much CNBC and other financial news media as I do, you know that there are all kinds of metrics that economists and investors use to measure the strength of the economy and to be honest, most people, from the professional investors to the individual investor don’t care about most of them. The academics enjoy analyzing the numbers but they mean next to nothing for your quality of life.

But that’s not the case with one metric. Each year Fidelity releases the average 401(k) balance for all of its 11 million customers. Investors watch this number closely because Fidelity holds more 401(k) accounts than any other investing firm and their report is a direct measure of the health of the average American worker’s retirement account.

The 2012 number will likely come out in May but the 2011 report showed that the average 401(k) balance was $75,000, up 12% from the 2010 report. This is great news for investors who saw a significant portion of their balance lost in 2008 and 2009.

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Tax Diversification with Roth IRAs

When I was much younger and just started working, my dad introduced me to Roth IRAs. I was in my final year of high school (and first few years of college), working jobs where my income was reported, and he told me that we should put some money towards this retirement vehicle. As a typical high schooler, I didn’t really pay much attention but I made those contributions. It wasn’t until years later, after I graduated college and was working in the real world, that I realized the gift he had given me – I made several years of contributions at a tax rate of practically zero. The Roth IRA was very new then, it was created by the Taxpayer Relief Act of 1997, so few people knew about it. Fast forward fifteen years and while it’s more well known, it’s not well known enough.

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 Retirement 
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How to Calculate Social Security Benefits

CalculatorSocial Security can be tricky to understand, with the various retirement ages and payout amounts. What makes it even trickier is that, in an effort to save money, the Social Security Administration stopped sending paper statements that helps explain some of those calculations. Fortunately, we were able to take a look at those tables and with a little extra work, we can help explain a little bit of the strategy involved in when to start taking Social Security payments and how that decision can affect how much you ultimately receive from the program.

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 Retirement 
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How to Rollover Your 401k to an IRA

Focus on and take control of your retirementOne of the ways you can improve your retirement investing is to roll your 401k over to an IRA. A rollover, if done right, can help you put your money into an account that sometimes offers more investment options than your company 401k plan offers.

If you are leaving your current job, some kind of a rollover might be necessary. You can roll a 401k from your old job to a 401k plan at your new job. However, if you aren’t sure what your options will be with a new job, it can be worth it to consider an IRA. Unless the current 401k plan is a great plan, you are likely to find that you are better off rolling over your account. However, you should consider your individual situation, and consult a professional, before making such a weighty decision.

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 Retirement 
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Can You Still Do a Roth IRA Conversion in 2012?

nested egg wideA couple of years ago, all the talk was about how the income limit for converting your traditional IRA to a Roth IRA was disappearing. In the past, your adjusted gross income needed to be below $100,000 to make the conversion. Then, a move was made to allow anyone to convert in 2010 — regardless of income. Since then, however, the income limit to convert to a Roth IRA has been permanently lifted.

Many people are interested in Roth IRAs because of the tax benefit down the road. The money in a Roth account grows tax free, so you don’t pay taxes when you withdraw money from the account later on. If you expect taxes to rise during your retirement, or if you expect to be in a higher tax bracket, many financial professionals recommend that you use a Roth IRA.

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