www.youtube.com/watch?v=VkFPRAh1vOc

This is kind of a funny little question. About 329 people asked this. “I’m 57½ and I’m retiring from my company. Can I start taking money out of my 401k?”

And the answer to that is so complicated, so before you start making this decision, don’t run out there and do anything that I say without talking to a qualified financial planner.

But let me address it like this:  The IRS says that as long as you’re 55 years of age or older and you retire from the company and your money stays at that company’s 401k, then yes, you can start taking money out without the 10% penalty.

Now let’s say you’re 57½ and you take that money and you roll it over into your own individual retirement account or an IRA for short, can you start taking that money out? And the answer is, again, it’s complicated. If you take money out before you’re 59½, you’re going to be hit with a 10% Federal penalty on top of ordinary income taxes, and your state may also have a penalty on top of that. California has a 2½% penalty.

You can do something, however, called a 72t. That’s the section of the tax code that allows you to take money out of an IRA prior to age 59½ without paying the penalties. Now, in doing a 72t, you’ve got to understand that most CPAs do not understand how this things works, and I’d say even more financial planners have no clue. I’ve actually done them with clients based on their specific goals and specific needs that we needed to do with them, and they are very complex. So complex, in fact, one of my great clients we were doing a 72t with, and they took all the information to their tax planner the next year, and the tax planner said, “oh, Pete did everything wrong. You’re now going to get taxed on that money, the penalty.” And he called me up, flustered, “hey, my CPA says you did everything wrong. This is a great CPA. He knows his stuff.”

I replied, “Did you give him the letter that I gave you?” And he says, “well, no, I didn’t.”

See, one of the things we do, because we realize that most CPAs, it’s not that they don’t know this, it’s that they don’t do it like we do it, and they don’t do it as often as we do it. In fact, most CPAs, this may be the first time they’ve ever even heard of a 72t. We actually give our clients a step-by-step letter saying, give this letter, complete with all this documentation, to your CPA and it walks them through how to fill it out on the tax form so you don’t have to pay the penalty.

Are you ready for this? There’s two questions on your IRS form that allow you to avoid that 10% penalty, but you’ve got to know which two questions they are and how to mark them correctly. And quite frankly, most people just don’t know.

Now, one of the drawbacks of doing a 72t is this:  If you start a 72t, you have to do it for at least five years or until you’re 59½, whichever is later. So what that means is, let’s say you’re 57 years old. You start this 72t, you’re going to have to do that for five years. Not just until you’re 59½ but beyond that another three years, just to comply with the IRS regulations on this.

So it is very complex, how much money you actually get to pull out, because it’s not just, well, I’m going to pull out any amount I want. They’ve actually got a guideline, a formula that you have to follow that says, this is how much you get to pull out, and it’s based on many factors, including your age, how much money you have in the account on a certain date, and what the current mid-term interest rates are.

And if that wasn’t enough to throw you, that’s why I’m saying, most people don’t know how this stuff works, so before you implement that strategy, make sure you talk to a financial planner that knows exactly how it works. If you’re not working with one, feel free to give me a call. My number is 800-990-2734, or you can reach me via e-mail:  pete@petemitchellinc.com.

www.youtube.com/watch?v=Qc-J4XSBO4c

This question comes up more times than I can count. Can I roll my 401k into a Roth IRA?

And the simple answer is, not directly, but indirectly you can. And what do I mean by that?

Unless you have a Roth 401k, in which case you could roll it directly into a Roth IRA, but hardly anyone has a Roth 401k since they’re so new and there’s really not the same tax benefits to a company as a traditional 401k, which is why I don’t think you’re going to see them offered very much. But that’s a whole other topic for a whole other day.

A 401k has to be rolled first to a traditional IRA, because the IRS says you have to go from like product to like product, and what they’re talking about when they say “like” is the taxation on that product. And then you take it from the traditional IRA and you then place it into a Roth IRA.

Now know when you do that, that’s when you’re going to have this taxable event that comes up. And yes, there are ways to spread out your taxes. And yes, there are rules about being able to put money into a Roth IRA, so before you do it, make sure you talke to a qualified professional to see if it can be done in your situation, because every situation is different.

That’s the reason why the tax code is as big as it is. It’s because there’s so many stinking rules out there, and you’re left trying to go on the Internet and find the right ones. Hey, the Internet’s going to get you so far, but at some point you’re going to have to talk to someone and explain to them your situation, and they can tell you definitively what your options are. But just know that it’s got to be that indirect way. You go first to a traditional IRA and then from the traditional IRA into a Roth IRA.

That’s how you get your money from a 401k into a Roth IRA.

I’m Pete Mitchell, and I look forward to sharing more on the markets with you later.

www.youtube.com/watch?v=21SVln0mybg

Some people still want to be able to contribute to their IRA for the tax year of 2009, and they want to know, “Is it too late to put money into my IRA for the tax year 2009?”

Here we are in 2010 and the answer to that is that you’ve actually got until April 15^th of 2010 to contribute to your IRA for 2009. So if that’s something that you’ve been looking to do, you’re going to have to go ahead and take care of that really, really soon or you’re not going to be able to put money in for 2009.

If you don’t have a financial planner that you’re working with, feel free to give me a call. I’ll be more than happy to help you. Go to my web address. It’s right there at the top:  petemitchellinc.com.

I look forward to sharing more information on the markets and investments with you later.

www.youtube.com/watch?v=8AU1fVnmrn0

One of the questions that I get a lot is, “How much money can I actually contribute to my 401k?”

The answer to that is a little bit more complicated but I’m going to give you the loose guidelines, if you will. The basic guideline is this:  You can put away, as an individual, $16,500 a year into your 401k. Now, if you’re age 50 or older, you’re able to do a catch-up of an additional $5,500 per year into your 401k.

Now, where this is not going to quite fit into place is, let’s say you’re working for a smaller employer that has a 401k. If your company has failed what is called a “top-heavy test” on the 401k and you are what they define as a “highly-compensated employee”—and a highly-compensated employee is an employee who makes more than $110,000 a year from that company—then you may not be able to actually put in the maximum amount.

Now, if you fall into this category, you probably already know it because your employer has already told you, “hey, we’ve actually failed our top-heavy test. You’re not going to be able to put all of that money in each year”, or maybe each year you get a notice from your HR Department saying part of your money is being returned to you because you’re not able to put in that amount of money. You probably know if you’re in that situation.

There are actually ways to combat this situation, so if you find yourself in that situation at your company, make sure you contact a financial planner like myself who can help you with that and show you some of your alternatives. And there are even ways to restructure the 401k so you don’t have to worry about that, but not everybody’s going to want to go for some of those changes.

Again, the average employee, $16,500, and if you’re 50 or older, that catch-up provision of an additional $5,500. I hope that helps.

I’m Pete Mitchell, and I look forward to giving you more information on the markets and investing later.

What do they do? And should you have one?

www.youtube.com/watch?v=-LqDlixUWSA

What does a financial planner do? Well, that depends. Many individuals refer to themselves as “financial planners”, but not all perform true multidisciplinary financial planning. Investment, insurance and tax professionals sometimes specialize in certain areas of financial planning (such as retirement planning, estate planning, tax planning, or investment management).

In general, individuals who call themselves “financial planners” aim to help you plan for your goals and needs and improve your unique financial situation.

What doesn’t a financial planner do? A financial planner cannot make you a thriftier shopper, a better saver, or help you earn more money. Ideally, he or she will look at your financial “big picture” and help you work to enhance it via money management. Depending on their credentials, they may recommend specific investments, long-run investing strategies, insurance options, retirement planning, risk management methods and more.

Who needs a financial planner? If you have some significant assets built up (a home, a retirement fund, savings, etc.) and are wondering about how to protect and/or grow those assets, you’re probably ready for a financial planner. If you currently live paycheck to paycheck or have less than $10,000 combined in your savings and/or any retirement accounts, then you’re probably not yet in need of a financial planner. What you should do is research savings strategies and take a good look at your spending habits so you can begin to build your wealth at a faster pace.

How much does it cost? That is a tricky question to answer. The cost of hiring a financial planner can vary depending on who you hire, where they are located and what type of “fee structure” they use. A fee-only financial planner earns a flat fee, hourly or otherwise, for their services. A fee-based planner generally prefers to charge advisory fees (often .50% to 2.00% annually of the assets under management) for his or her services, rather than commissions linked to investments or product sales.

In occasional instances, charging commissions may actually be more cost-effective for you, but may not be as beneficial. A commission-based planner typically receives the total percentage of his or her income in upfront commissions and therefore some may feel they have little incentive to service you on an ongoing basis.

In most cases, your initial meeting with one of these professionals will be free of charge (be sure to ask in advance about this), and you can discuss fee schedules and compensation arrangements at that time.

How do I choose a planner? In two words … ask questions. Ask trusted friends or colleagues for referrals. Sit down with any planner you’re considering and find out how long they’ve been in business, what their credentials are, how they operate, etc. Most importantly, make sure if and when you hire a planner that your personalities will mesh. This is someone you may well be working with for the rest of your life, so you should choose someone you feel comfortable with.

Now is a good time to examine what’s in your portfolio.

www.youtube.com/watch?v=D52wT6OXgyw

The stock market is unsettled … and perhaps its fluctuations are unsettling you. It’s a stressful time for the economy and Wall Street, and you may be concerned about your portfolio given what’s going on with oil prices, the real estate market, and rising unemployment figures. It may be a good time to review how your assets are invested.

Is your portfolio balanced? A balanced portfolio may help you ride out stock market turbulence. Stocks and mutual funds aren’t the only asset allocation choices you have, and you won’t be alone this winter if you decide to examine other investment options.

Fixed annuities and Treasuries become attractive to investors when the market turns volatile. Bonds tend to maintain their strength when stocks perform poorly; fixed annuities are simply contracts with insurance firms, not correlated to stock market performance (though certain types of annuities may enable you to take advantage of stock market gains while maintaining your principal). Fixed-income mutual funds, dividend income funds and bond funds also have their adherents.

Last but not least, you have cash, though cash holdings haven’t traditionally performed anywhere near the level of the stock markets.

Are you retired, or retiring? If you are, this is all the more reason to review and possibly even revise your portfolio. Frequently, people approach or enter retirement with portfolios that haven’t been reviewed in years. The asset allocation that seemed wise ten years ago may seem foolhardy today.

Often, people in their fifties and sixties feel they need to accumulate more money for retirement, and that feeling leads them to accept more risk in their portfolio than they should. In the absence of a salary, however, you’ll likely want consistent income and growth, and therein lies the appeal of a balanced investment approach designed to manage risk while encouraging an adequate return.

Why not take a look into your portfolio? Ask your financial advisor to assist you. You may find that you have a mix of investments that matches your risk tolerance. Or, your portfolio may need minor or major adjustments. The right balance may help you insulate your assets to a greater degree against financial ups and downs.

www.youtube.com/watch?v=oSeAfqm6sac

If you’re laid off, what happens to your retirement money? Well, you have three basic choices with your 401(k). One gives you more freedom and control than the other two.

You could just leave your 401(k) alone. The money will remain invested, and the financial firm handling your 401(k) will keep mailing you quarterly statements telling you how it is doing. Any future growth will be tax-deferred.¹

But this passive choice comes with an opportunity cost. If you just leave the 401(k) assets in the plan, you’re giving up control and flexibility. Your investment choices may be limited, the plan fees may be high, and you may not be able to quickly access your money or do what you want with it. If you have a trail of old 401(k)s left with a bunch of former employers, things can get really complicated when you retire – especially when you have to take Required Minimum Distributions (RMDs). Leaving the money in the plan may not be the wisest choice.

You could withdraw the money. This is a terrible choice – a last resort. It comes with a severe financial penalty. You will not get all the money you have invested back – far from it. You will lose 20% of your 401(k) assets to withholding taxes, and if you are under 55, the IRS will levy an additional 10% penalty for early withdrawal of the assets. By the way, distributions from a 401(k) are considered taxable income – so expect a big tax bill in the year you cash out.¹ The federal government does not want to see you wipe out your retirement savings. Neither does your financial advisor. (If you really need money, you could consider borrowing from your 401(k). The problem here is that most companies want the loan balance paid off when you leave – whether you leave work by choice or not.)

You could roll it over into an IRA. This is the choice that usually makes the most sense. You can move the money into an IRA through a rollover or trustee-to-trustee transfer. Or, you could direct the money into a so-called “conduit IRA,” a traditional IRA created to hold your old 401(k) assets until you move the money into another qualified retirement plan. (You can’t contribute to a conduit IRA.)² There’s no tax penalty when you do an IRA rollover or trustee-to-trustee transfer. After you do it, you have total control of the money, continued tax-deferred growth, expanded investment choices, and possibly lower management fees.¹

Rolling over the money into a Roth IRA might be a great move, provided you can meet two conditions. First, your adjusted gross income has to be less than $100,000 for the year in which you make the rollover. Second, you’ll have to pay taxes on the assets you convert.¹ The upside is considerable: you get tax-free compounding, tax-free withdrawals if you are older than age 59½ and have owned your account for at least five years, and the potential to make contributions to your IRA after age 70½ without having to take RMDs. Contributions to a Roth IRA are not tax-deductible, but there are fewer restrictions on withdrawals.^3,4

In 2009, you can fund a Roth IRA with after-tax contributions to a 401(k), 403(b) or 457 retirement savings plan – you can take those contributions and convert them to a Roth IRA tax-free, provided your AGI is $100,000 or lower. There is no limit on the conversion amount. Incidentally, in 2010, anyone can convert a traditional IRA to a Roth IRA – the AGI restriction on such conversions disappears.⁵

What if you have to shiver through a 401(k) freeze? A “freeze” is when your employer reduces or suspends matching contributions to your retirement plan. FedEx, General Motors and Motorola have all recently chosen to do this.⁶ The answer: don’t let up on your personal contributions. If you can manage it, adjust your 401(k) contribution to a level where you effectively replace what your employer contributed. Saving for retirement should remain one of your highest priorities.

How is your money positioned? How are you invested today? Are you doing things designed to preserve and enhance your retirement money? You may want to talk with me about your options. If you’d like to, call me at 800-990-2734 or email me at Pete@PeteMitchellinc.com.