One common pearl of financial wisdom is that socking away money in a tax-deferred qualified retirement plan like a 401(k) or an IRA is always a good idea — because your income in retirement will be lower than it is today. Another is that annuities are expensive and should be completely avoided. But since preparation for retirement varies with each individual and family, nothing holds across the board.
#b#Fred Busler#/b#, a certified public accountant and vice president of financial services at Magyar Financial, suggests that before making any decisions, everyone needs to understand the difference between putting money in a qualified plan, where you save money without paying taxes in the present, and depositing after-tax money in your bank account or in a mutual fund, where only growth is taxable.
Sometimes people make the mistake, for example, of assuming they have more money than they do, only to be surprised when they retire. “If you have a $1 million account balance, is that all yours?” asks Busler. “No, it is not; the IRS is partnered with you and may get 30 to 35 percent when you pull out.”
Busler discussed retirement income planning as part of “New Year, New Objectives” panel discussion on Wednesday, January 13, at Raritan Valley Community College. Other issues addressed by Busler and his fellow presenters — #b#Christine Pronek#/b#, senior manager of the trust and estate group at Amper Politziner & Mattia, and #b#Joan D’Uva#/b# partner in litigation and valuation support at Amper Politziner & Mattia — were retirement leveraging strategies, estate tax considerations, and business valuations.
Busler grew up in New Jersey. His father spent his 35-year career at Xerox as a services manager and his mother was director of customer service at the American Society of Mechanical Engineers. Busler earned an accounting degree at Union County College and received a bachelor’s in business administration from Mansfield University of Pennsylvania in 1987.
In the earlier part of his career Busler worked his way up from accountant to comptroller. He spent five years at Naporano Iron and Metal in Newark, leaving as an accounting supervisor. Then he moved to Bartlo Packaging in Passaic, where he was comptroller. In 2002 he got into financial planning, working with Guardian Life Insurance Company, and in 2008 he joined Magyar Financial, a subsidiary of Magyar Bank, where he assists bank clients in selecting investments and insurance products.
Busler emphasizes the importance of allocating assets among different investment products, each with its pluses and minuses. “People want liquidity, low risk, and a high rate of return, but you can’t have all three,” he says, advising that people think carefully about their options.
#b#Are tax-deferred plans a good choice#/b#? The answer is: it depends on what your taxes are now and what they are likely to be when you retire. Given the current tax structure, a person with a high net worth who makes half a million dollars is in the highest tax bracket now and probably will remain in that bracket after retirement. On the other hand, for the majority of people who have earned an average income and saved 15 percent of each paycheck, their taxes may well be lower after retirement. But a wealthy individual who is also a big spender and has done a bad job of saving could also be in a lower bracket after retiring.
Another unknown is whether in the future taxes will be higher, lower, or the same. Decisions about whether to defer taxes depend on your guesstimate about what the government will do about taxes in the future. Even if your future earnings are unknown, says Busler, “if you expect taxes to be going up in the future, why defer taxes to pay at a higher tax bracket later in life?”
#b#When does a Roth IRA make sense#/b#? In a traditional IRA taxes are deferred until the person takes a distribution, which can happen starting at age 59 and must begin by age 70 and a half. A Roth is different. “In a Roth, the seed money that goes in is already after-tax money and will grow tax-free forever, including distributions,” says Busler.
If people know that their tax bracket in retirement will be higher than it is now, then a Roth makes sense. For example, suppose a young person is paying income taxes of 20 percent today but is eventually expecting a $5 million inheritance from parents; it would make sense for him to put his retirement savings into a Roth, pay the taxes now, and receive that portion of his income tax free. Or suppose a young person recently started her first job, but because she is college-educated and upwardly mobile, her current salary probably places her in the lowest tax bracket she will ever be in; in this case, says Busler, it would make sense to pay the taxes now on retirement savings and, as her income and tax rate rises later on, defer taxes later.
Until this year Roths generally had income limits that make them unavailable to relatively wealthy people; however, those restrictions have been lifted. “If you’re wealthy and have a lot of your money in qualified or IRA accounts, you can convert them to Roth accounts and receive future income tax-free,” Busler says. “If you expect the IRS to raise tax rates in the future, this is a way to convert taxable into tax-free income. You pay the tax now at a defined tax rate.”
#b#Does it make sense to buy annuities#/b#? Annuities, says Busler, can provide a guaranteed income stream and may make sense as a part of your investments to provide peace of mind in a down market. But he adds the caveat that because all annuities are tax deferred, make sure not to open one with qualified money that is already tax deferred, because you won’t be gaining any additional tax benefits. He describes four types of annuities:
#b#Immediate annuities#/b#: These start paying an income stream right away. You can choose the length of time the income will be paid up to and including the rest of your life.
#b#Fixed annuities#/b#: These are very similar to certificates of deposit; they are issued by insurance companies at a fixed percentage rate and any growth is tax deferred.
#b#Indexed annuity#/b#: This annuity is tied to a stock index, for example, the S&P 500, and usually includes guarantees against downside exposure. It protects you from market risk and market fluctuation. But there is also a cap on how much the account can grow, which historically has been between 0 and 15 percent.
#b#Variable annuity#/b#: The value of a variable annuity is based on the value of the mutual funds you select for your account. These annuities, however, can offer some protection against downside risk — at a price. The protection is in the form of death benefits and income riders that guarantee some level of growth in your account in exchange for an annual percentage-point fee. Without an income rider, if your variable annuity falls from $100,000 to $50,000, it’s gone — you have the same risk in a down market as with a 401 (k).
With the rider your account will be compounded by the agreed percentage for a period of time as if the account actually held that compounded amount, even if the market plummets. You can also add lifetime income riders to an indexed annuity.
Although this kind of product has additional costs, says Busler, “if you had $500,000 and it is now $350,000, you would have loved to have had a variable annuity as protection against a down market.”#/b#