Posts Tagged "IRA"
December 17, 2020
How Much Will Your Retirement Taxes Be?
Four out of five retired households will pay little or no income taxes. But the tax rates at the highest income levels are meaningful, averaging 11 percent of household income and as much as 23 percent at the very top.
These estimates come from a new analysis by the Center for Retirement Research that sheds light on a potentially important consideration that is often overlooked by people approaching retirement age.
The highest tax rates are paid by the highest-income households because they often withdraw money from 401(k)s and IRAs to supplement their Social Security benefits. They must also pay capital gains taxes when they sell stocks and bonds for a profit from their regular financial accounts.
Households with income in the top 20 percent have nearly $770,000, on average, in retirement savings and other financial assets – their taxes equal 11 percent of their total retirement income. However, limiting the households to the top 5 percent of the income distribution, the tax rate increases to 16 percent – and the top 1 percent pays 23 percent.
These estimates assume retirees start pulling money out of their taxable 401(k) and IRA accounts when the IRS’ required minimum distributions (RMDs) kick in at age 70 1/2 – this age will increase to 72 next year. The tax rates were very similar under alternate scenarios that assume retirees either start withdrawing savings prior to the RMD or buy an immediate annuity with a survivor’s benefit.
The tax estimates are based on data for older U.S. households with at least one recent retiree. The researchers first calculated their expected future lifetime income from Social Security, 401(k)s and other sources in each year. The future yearly tax payments were then estimated using a program that applies IRS rules and each state’s tax rules to the various types of retirement income.
The tax rates are their total tax bills as a percentage of their total income. …Learn More
November 17, 2020
High Fees Tied to Mutual Fund Complexity
When David Marotta is investing his clients’ money in mutual funds, he scrutinizes the fees.
To demonstrate why fees are so important, Marotta charted the fees and 10-year returns for dozens of index funds in the Standard & Poor’s 500 family. Since these funds all track the same index and their performance is roughly the same, the fees will largely determine how much of the return the investor keeps and how much goes to the mutual fund company.
“The larger the fee the less that it performs. It’s kind of a straight line,” said the Charlottesville, Virginia investment manager. “Anytime we’re picking a fund” for a client, “we’re trying to find the lowest-cost fund that we can find in that sector.”
The fees for the S&P 500 index funds he analyzed using Morningstar data ranged from one-tenth of a percent to 2.5 percent of the invested assets.
The issue of fees versus performance is more complicated for actively managed investments, which sometimes have strong returns that justify paying a higher fee. But in any investment, the true measure of how it’s doing is the after-fee return.
However, deciphering mutual fund fee disclosures can be extremely difficult for do-it-yourself 401(k) and IRA investors – and that is by design.
An analysis of S&P 500 index funds identified numerous narrative techniques in mutual fund documents that confuse investors. The researchers – from the University of Washington, MIT, and The Wharton School – evaluated each fund’s disclosures and showed that funds with more complex explanations of their investment holdings and fees also have higher fees. The researchers call this “strategic obfuscation.”
The study, which covered the period from 1994 through 2017, illustrated this complexity with two firms’ descriptions of their S&P 500 index funds. Schwab’s one-sentence summary gets right to the point: “The fund’s goal is to track the total return of the S&P 500 index.” This fund’s annual fee is 0.02 percent of the assets.
Deutsche Bank’s disclosure is more complicated for a few different reasons. First, the summary is three paragraphs and starts this way: “The fund seeks to provide investment results that, before expenses, correspond to the total return of common stocks…” …Learn More
October 27, 2020
Retirement System Urgently Needs Fixing
The state of our retirement preparedness is captured in this fact: about half of U.S. private sector workers at any given time are not enrolled in an employer retirement plan.
To be clear, they are not currently enrolled. Some of them have participated in a plan in the past or will in the future. But this inconsistency is the problem, largely because so many employers still don’t offer 401(k) savings plans to their employees.
The financial toll of not saving consistently is modest retirement account balances. Yet saving has become increasingly urgent as traditional pensions have virtually disappeared from the private sector and Social Security is replacing less of workers’ incomes over time.
In 2019 – after several years of economic growth and a surging stock market – the typical working household, ages 55 to 64, that saves in a 401(k) had only $144,000 in its 401(k)s and IRAs combined, the Center for Retirement Research found in an analysis of the Federal Reserve’s 2019 Survey of Consumer Finances.
That’s just $9,000 more than they had in the 2016 survey, and $144,000 won’t go very far.
A $144,000 account would yield $570 per month for retirement if a couple purchases an annuity that pays a guaranteed income for the rest of their lives. For most retirees, the annuity payments – totaling just under $7,000 per year – would be their only source of income outside of Social Security.
There are also enormous differences between high- and low-income households’ savings, which reflect the nation’s economic disparities and uneven employer coverage. The highest-income older households in the study had $805,500 in their combined 401(k) and IRA accounts, compared with just $32,200 for low-income households. …Learn More
August 13, 2020
Workers Lacking 401ks Need a Solution
Although COVID-19 has exposed alarming gaps in a health insurance system that revolves around the employer, the Affordable Care Act is one potential solution for workers who lack the employer coverage.
There is nothing equivalent on the retirement side, however.
Many workers between ages 50 and 64 are in jobs that provide neither health insurance nor a retirement savings plan. But, in contrast to the health insurance options available to them, “no retirement saving vehicle appears effective in helping older workers in nontraditional jobs set aside money for retirement,” concluded a new analysis of workers in these nontraditional jobs.
Nontraditional workers who want to save for retirement are left with two options: their spouse’s 401(k) savings plan or an IRA operated by a bank, broker or financial firm.
A spouse’s 401(k) hasn’t been an effective fallback for a couple of reasons. First, a substantial number of the workers who lack their own 401(k)s are not married. And second, if they are married to someone with a 401(k), they’re not any better off. The researcher found that married people currently contributing to 401(k)s do not save more to compensate for the spouse without a 401(k), reinforcing other research showing these couples don’t save enough for two.
The other option – an IRA – is open to everyone. But only a small fraction of Americans currently are saving money in IRAs, and most of them already have a 401(k). So IRAs, in practice, aren’t doing much for the people who need the help: workers who lack employer benefits. … Learn More
July 30, 2020
Pension, 401k Registry Bill Resurfaces
When COVID-19 throws people out of work, their chances of retiring comfortably can deteriorate rapidly. What better time to find a new way to help?
A perennial proposal just reintroduced in Congress would do some good: establish an online database of employer retirement plans so workers and retirees can locate old pensions and 401(k) accounts.
Workers are increasingly responsible for making sure they have enough money to retire. But moving from job to job is now the norm – the one-employer career is a distant memory – and pensions get left behind and 401(k)s fall by the wayside. People who try to find old plans often can’t locate employers that have changed names, merged, relocated, or terminated a plan.
The primary way to find retirement plans now is through the lost property records kept by each state. But Anna-Marie Tabor, director of the Pension Action Center in Boston, which recovers lost pensions and 401(k)s for the center’s clients, said billions more in unclaimed funds can’t be located in the state records, because employers are not required to turn over plan information to the states. Also, 401(k)s are hard to find since many employers transfer small accounts to third-party IRAs without the account owner’s awareness.
Tabor argues in the Journal of Aging and Social Policy that the COVID-19 recession brings new urgency to passing the proposed Retirement Savings Lost and Found Act of 2020, especially for low-income workers hit hardest by layoffs and older workers who are running out of time to repair their finances prior to retiring.
“Connecting people with money they’ve already earned is an easy and inexpensive way to support the economic recovery,” she said. …Learn More
February 25, 2020
Have You Misplaced a Retirement Plan?
Wouldn’t it be nice to find some money sitting in a long-forgotten retirement account somewhere?
It’s not hard for workers to lose track of an old account as they move from employer to employer, often across state lines. Each state government keeps a repository of unclaimed property – most have been doing this since the 1980s – and residents and former residents can check online through a simple name search in the state’s unclaimed-accounts database.
But not everyone takes the trouble to search for the money or is even aware it exists. So billions of dollars have accumulated nationwide in various types of unclaimed accounts, including retirement plans, insurance policies, trusts, and brokerage and bank accounts – so much so that firms have sprung up that will do the legwork required for individuals to claim their money. But little has been known about how much sits idle in unclaimed retirement accounts.
A new study estimates conservatively that about $38 million, accumulated over many years in some 70,000 retirement savings plans nationwide, had not yet been claimed in the states’ property accounts as of 2016. Most of these are 401(k)-style plans but they also include IRAs and pension checks.
The average account value is only about $550. But the largest ones are anywhere from $5,000 to $13,000, which could be meaningful to retirees who are struggling financially. …Learn More
January 14, 2020
Oddly, the Educated Pay Higher Fees
It’s smart to invest retirement savings in mutual funds that charge very low fees for one simple reason: the worker keeps more of his money and hands over less to Wall Street.
But in a study of people in their 50s and 60s who have retired or otherwise left federal employment, the people with the most education and the best scores on a standardized test were more likely to make what seems to be the wrong decision. Rather than keep their retirement funds in the government’s Thrift Savings Plan (TSP), which has extremely low fees, they transferred the money to much higher-fee IRAs operated by financial companies.
The $500 billion TSP – the world’s largest defined contribution retirement plan – is inexpensive in large part because it invests only in index mutual funds, which automatically track a variety of stock and bond market indexes and avoid the need to pay money managers to pick the investments. The annual fees for TSP’s index funds – known as expense ratios – are under 0.04 percent of the investor’s assets.
But over a 10-year period, about one fourth of the former federal employees rolled over the money saved during their careers into IRAs that typically had much higher expense ratios: 0.57 percent. On top of that, IRAs often charge additional fees for investment advice, pushing the potential total annual fees to well in excess of 1.5 percent. It’s possible that investing in an IRA could generate enough returns to make the extra fees worthwhile, but research has shown this is not the norm.
What explains the rollover decision? More educated people tend to have larger retirement account balances, raising the possibility that they were either seeking out financial advice or were targeted by advisors’ sales pitches. However, even among people with similar balances, those with more education were still more likely to roll over to IRAs.
It’s possible that they “perceive that they know what they’re doing” and want to take control of their investments “even when higher fees result,” the researchers said. …Learn More