October 2009

Dear Clients and Friends:

 

Have you already taken your 2009 Required Minimum Distribution?

The IRS has issued a notice that provides some relief.  For 2009, there is no Required Minimum Distribution from IRAs. If you already took your distribution, you now have until November 30, 2009 to put the funds back into an IRA.  It will be treated as a roll over distribution, and will not be taxable to you.

 

This relief is limited to the first 2009 distribution from eac h of your IRA accounts. If you took more than one distribution (such as monthly payments) from eac h of your accounts, you can only return the first of the withdrawals for the year. Of course, you cannot return more than what would have been your 2009 Required Minimum Distribution. 

 

Retirement versus college education funding

Obviously, if you can provide for both, you should.  If you can’t do both, consider the following:

 

Your most compelling task is to provide for your retirement.  That should be the focus of your savings strategy.  Asking your well educated children to support you in old age is not a perfect solution.

 

Your children can get loans for college.  You can help them pay off those loans should your ship come in.  If it doesn’t, then you will at least be self-supporting in retirement.

 

How much do you need to accumulate?

A quick answer would be to figure out how much you will be spending, subtract retirement income (such as social security and company pension plans) and multiply the balance by “X”. “X” would have to be large enough to cover your future withdrawals and to pay income taxes on those withdrawals (assuming you are saving in a tax deferred pension account which will be taxable upon distribution).  

 

Here is a table for the computation of “X” assuming your average tax rate in retirement would be 25% and you would start your withdrawals at 6% of the balance.

 

 

Years until retirement	Average inflation	Multiplier (X)
20	4%	45
20	5%	55
10	4%	31
10	5%	34

 

 

The longer you have until retirement, the greater the impact of inflation.  Of course you also will have more time to accumulate the balance.

 

In the above calculation we assumed that the distribution would be 6% of the account balance.  A recent study revealed that this is probably too high.

 

The study concluded that the greatest variable for which you have control regarding the health of your retirement funds is the amount of your withdrawals. It is about two times as significant as the asset allocation model you use. 

 

The reason that the amount of the withdrawal is so significant is that if you have large withdrawals during periods of declining asset values (we had such a year recently), you may never be able to recover from the dual hit to the balance of your accounts.  Ways to reduce the amount of cash you will need to withdraw during retirement include considering long term health insurance, life insurance and making sure your mortgage is paid off before you retire.

 

The study concluded that a starting withdrawal of 4 percent or less was likely to be safe and a starting withdrawal of 6 percent or more was likely to be risky. Notice that we said “likely” for both since 4 percent could be too much and 6 percent may be OK.

 

Year end planning

The “trick” to paying fewer taxes is to even out your income tax brackets from year to year.  Perhaps 2009 has not been a stellar year for you financially. That fact does not mean that you should not do any year end planning.  If 2010 will be a better year, then it would be wise to try to accelerate some income into 2009 from 2010 (or postpone deductions from 2009 to 2010). 

 

Remember that the planning coupon we sent to our clients expires October 31, 2009.

 

 

~Your partners in financial success~

~Visit our website at www.morrecpa.com~

 

 

 

 

Morre & Company, LLP

Certified Public Accountants
1682 Novato Blvd, Suite 300
Novato, CA, 94947
Phone: (415)382-5600

Toll Free: (888) 414-7104 Your Partners in Financial Success!