Financial Planning for Women November 11, 2009 Jean Lown Ph.D. & Diana Burk, M.S. student

New FPW Survey has been approved by USU IRB You will receive an inviting you to respond Incentives: drawing for free consultation with Suzanne Dalebout at Polaris Financial Planning in SLC Thanks to Diana FPW newsletter has a new look FPW has a blog! Find us on Facebook: Become a fan of FPW 2

Overview 3 Why you may need to invest more IRA overview Traditional vs. Roth Should you convert a traditional IRA or a workplace plan to a Roth?

Life expectancy in the West U.S. Census Bureau, Steve Baker The Salt Lake Tribune August 3, 2006 A6 Calculate your longevity: Module 1B

Source: National Center for Health Statistics, Vital Statistics of the United States, Decennial Life Tables; Governor’s Office of Planning and Budget, Steve Baker/ The Salt Lake Tribune, August 3, 2006 A6

National Retirement Risk Index Center for Retirement Boston College NRRI measures % of households who are ‘at risk’ of being unable to maintain pre- retirement level of living in retirement 2004 NRRI: 43% at risk After crash: households ‘at risk’ rose to 51% 6

Health Expenses have risen faster than inflation for > 20 years Medicare will not cover all costs 2009 Medicare part B $96.40/mo. will continue to rise a women retiring at age 65 in 2009 will need $98,000– $242,000 in savings to cover health insurance premiums & out-of-pocket expenses in retirement for a 50–50 chance of having enough money. $164,000–$450,000 for a 90% chance Source: Employee Benefit Research Institute 7

Long Term Care Expenses Home health care aides $21/hour x 24 hours = $504/day x 365 = $183,960 Assisted living $37,572 annually 40% of today’s seniors will spend time in nursing home $79,935 /yr. for private room $72,270 for semi-private The 2009 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, October survey-nursing-home-assisted-living.pdf 8

Will you have enough $? to increase likelihood you won’t outlive your $ to supplement Social Security & any workplace plan Contribute to an Individual Retirement Account 9

Investing in an IRA is the first step to reaching your retirement dreams!

What is an IRA? an individual, tax-sheltered account for retirement not an investment, but an account to hold investments like a cookie jar or a candy wrapper 11

IRA Investments almost any investment, from CDs to stocks Good choice is a target date retirement mutual fund Recommendations at: 12

Individual Retirement Accounts 13 Tax-advantaged investing account is not taxed while it is growing When $ is withdrawn in retirement Traditional IRA withdrawals are taxed R oth IRA withdrawals are tax-free Because you paid taxes before funding the Roth IRA

Why Contribute? How long do you expect to live in retirement? Do you participate in an employer plan? Will you have enough money from Social Security & employer plan to last for 3+ decades in retirement? 14

Who Can Contribute? Any worker with earned income (no age limit) Spousal IRA for worker's non-earning spouse 15

How Much Can You Contribute? Up to $5000 annually Start with as little as $100 in Schwab index mutual fund $50/month in T. Rowe Price mutual funds Age 50 or older: $6000/year 16

Traditional IRA Individual account You or spouse must be earning taxable income Contributions are tax deductible Growth is taxed when you withdraw Required Minimum Distributions after 70 ½

Roth IRA Eligibility to contribute in 2009 Earn <$116,000/year if single $169,000 for joint filers Contributions are not tax deductible Withdrawals are tax-free after age 59 ½ No Minimum Distribution Requirements No mandatory withdrawals Great tax break for wealthy to pass $ to heirs

Traditional vs. Roth IRA Contributions may be tax-deductible Depends on income & employer plan $ is taxed when withdrawn at retirement Must start withdrawals at 70 ½ Contributions are not tax-deductible $ is not taxed when withdrawn at retirement No mandatory withdrawals at 70 ½ Can bequeath $ to heirs 19

Questions on IRAs? It’s not magic!

Compiled from: It’s Your Turn CFP Board eNewsletter, November

January 1, 2010 Prior to 1/1/10 only individuals with a modified adjusted gross income of <$100,000 could convert a traditional IRA to a Roth As of 1/1/10 anyone with a Traditional IRA can convert to a Roth IRA Whenever you convert from traditional to Roth you owe taxes If you convert in 2010 you can spread the tax burden over 2 tax years: 2011 and 2012 Future years: pay all tax in one year

Convert IRA & Workplace Assets Starting in 2010, you can convert Traditional IRAs and eligible workplace plan account assets to Roth IRAs, and for 2010 conversions only, spread the tax cost of the conversion over two years.” Traditional IRAs (including Rollover IRAs), SEP-IRAs, SAR-SEP IRAs, and SIMPLE IRAs are all eligible to be converted to a Roth IRA 23

Convert workplace plan, cont. Employer-sponsored plans, i.e., 401(k) or 403(b) plan that are eligible for distribution and rollover may be converted for example, when you are no longer working for the company sponsoring the plan 24

To Switch or Not To Switch? 3 Factors to Consider 1. Marginal tax rate: highest rate at which your income is taxed 2. Life expectancy 3. Can I afford to pay the taxes on amount converted from non-IRA funds? 25

Taxes in Retirement All your 401(k), 403(b), 457 defined contribution plan funds will be taxable when you withdraw $ Defined benefit pensions will be taxable Up to ½ of Social Security benefits will be taxable if Married, joint, income of $32,000 or more Single w/ income of $25,000+ These $ amounts of SS are NOT indexed to inflation Most middle & all upper income retirees will owe income taxes on SS benefits 26

Future Tax Rates? How many think tax rates will be lower in future? Massive federal deficits = higher taxes What is your Marginal Tax Bracket? Highest rate at which your income is taxed 10%, 15%, 25%, 28%, 33%, or 35% axbrackets2009.asp axbrackets2009.asp 27

Marginal Tax Rates Married filing jointly Taxable income $16,701 to $67,900 15% marginal tax rate Owe $15 on every $100 in this range Income of $67,901 to $137,050 25% MTR Owe $25 on every $100 If you need $75,000 to live on… wouldn’t it be nice to take the $7,100 from your Roth & pay $0 tax rather than pay.25 x $7,100 = $1,775 in federal income taxes? 28

Should I Convert? Paying Uncle Sam If you decide to convert a traditional (untaxed) IRA to a Roth IRA, whatever funds you convert will be taxed at your MTR If you have “other money” to pay the tax bill, then all of your IRA funds will continue to grow. If you’re under 59 ½, you can’t use the money in your Traditional IRA without incurring a penalty in addition to paying the conversion taxes Don’t use IRA $ to pay conversion taxes!

Example 1 $10,000 in a traditional (untaxed) IRA If marginal tax rate is 15% owe $1,500 in federal income taxes You can spread the tax over 2 years Pay ½ in 2011; ½ in 2012 Aren’t you glad the value of your IRA shrunk with the market crash? Convert in January 2010 before market rebounds further If you wait, the value will increase & you’ll owe more taxes 30

Example 2 Your traditional IRA is worth $50,000 You can’t afford to pay all those taxes, even spread over 2 years OR, if you convert a large amount, the additional taxable income will push you into a higher tax bracket i.e. from 15% to 25% Convert a portion of your traditional IRA to a Roth It’s not an all or nothing deal 31

Why convert in 2010? Spread tax payment over two years rather than one year Only in 2010 Conversions after 2010 Pay all tax due in one year Value of traditional IRA may rebound Convert while value is low 32

Questions? For more details on tax implications of a Roth conversion, consult your financial advisor or accountant Mutual fund websites Fidelity, Vanguard, T. Rowe Price, TIAA-CREF

34 Financial Planning for Women Please respond to FPW survey! December- No program HAPPY HOLIDAYS!!! January 13, 2010 Bring a friend