Facts about IRAs

The following article discusses what IRAs are and the difference between the different types of IRA accounts that are available to investors.

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Individual retirement accounts (IRAs) were established by the federal government and given special tax treatment primarily to encourage people to save for retirement. With an IRA, you can set aside a certain amount of money every year in a special account managed by a bank or other financial institution, or by a mutual fund, life insurance company or stockbroker. IRA accounts can be invested according to your choice of investment options. Your money grows tax-deferred, and in some cases, even tax-free. While this article explains some of the different types of IRAs, you should consult with your own tax or financial adviser to see if a particular type of IRA is right for you.

Traditional IRAs

A traditional IRA is a personal savings account that gives you tax advantages for saving for retirement. Contributions to a traditional IRA may be tax-deductible, either in whole or in part, depending on your modified adjusted gross income — a figure used by the Internal Revenue Service (IRS) that’s arrived at by first deducting some adjustments from your total income and then adding certain items back.

You can contribute to a traditional IRA for each year you receive compensation and have not reached age 70½. For any year in which you do not work, contributions cannot be made to your IRA unless you receive alimony or file a joint return with a spouse who has compensation.

There is a limit to how much you can contribute each year. For tax years 2005 through 2007, you can make contributions to a traditional IRA of up to whichever amount is smaller: (a) your taxable compensation for the year or (b) $4,000. In 2008, the $4,000 limit will be raised to $5,000. In addition, if you are 50 or over at the end of a tax year, you may contribute an extra catch-up amount — an additional $1,000 in 2006 and beyond.

You are not required to make a contribution to only one type of IRA during the year. If you qualify, you can divide your permissible contributions between a traditional IRA and Roth IRA.

There is no upper limit on how much you can earn and still contribute to a traditional IRA. But there are some rules that limit how much you can deduct. Information regarding employer retirement plans and other rules for IRAs can be found in IRS Publication 590, “Individual Retirement Arrangements (IRAs).”

The investment earnings in your IRA account won’t be taxed until you withdraw them. In most cases, IRA account holders withdraw their money upon or after retirement, when they are in a lower tax bracket than at the time the money was invested.

You can withdraw or use your traditional IRA assets at any time, but those withdrawals will be treated as income for tax purposes. Moreover, you may be subject to an additional 10 percent penalty tax if you make withdrawals prior to age 59½ unless there are special circumstances, such as death, a disability, certain higher education expenses or a qualifying first-time home purchase.

With a traditional IRA, you must start withdrawing money from your IRA by April 1 of the year following the year in which you reach age 70½, and each year you must withdraw a required minimum distribution or face a penalty. The IRS provides formulas for figuring out this required amount based on varying circumstances.

One of the benefits of IRAs is that it is easy to move retirement savings from one account to another without tax penalties. IRA funds can be moved in the following ways:

• Rollovers: With a rollover, you receive assets from your IRA (or other qualified retirement plan) and then deposit those assets in another IRA (or other qualified retirement plan). If you receive a lump sum payout from a company pension plan, perhaps because you are leaving that company, you can avoid paying taxes on the lump sum by rolling it over into an IRA — but you must do so within 60 days of receiving the funds unless you receive a waiver. A qualified employer-sponsored retirement plan may, at your request, make a “direct rollover” by distributing your plan assets directly into another plan in which you participate or another IRA you’ve set up. You may make only one rollover from any single traditional IRA to another traditional IRA in any 12-month period, but there’s no limit on your ability to roll over amounts from or to other traditional IRAs in any given time period.
• Conversions: You can move (”convert”) amounts from a traditional IRA into a Roth IRA, depending on your tax filing status and modified adjusted gross income for the year. This is discussed further under Roth IRAs below.
• Transfer from One Custodian to Another: You can transfer your IRA to another institution, perhaps to take advantage of a better deal or a promising mutual fund. To switch institutions, simply request a direct IRA-to-IRA transfer from one institution to the other. A transfer is not the same as a rollover. With a rollover, you take receipt of your funds before depositing them in another account. With a transfer, you never receive money; instead, the money goes directly from one IRA account into another. So the 60-day period doesn’t apply. Also, because this is not a rollover, it’s not subject to the 12-month waiting period required between rollovers.
• Transfers Related to a Divorce: An interest in a traditional IRA may be transferred as part of a divorce settlement. This type of transfer is generally tax-free.

Roth IRAs

A Roth IRA operates differently from a traditional IRA. Key differences include:

• Contributions to a Roth IRA Are Not Tax-Deductible: The distributions (including earnings on your contributions) are not included in income and are potentially tax-free. Because your contributions to a Roth IRA are not deductible and have already been taxed as income, you can withdraw your contributions, tax-free, at any time within certain limits — just as you can withdraw money from your bank account without paying taxes on it. The earnings on your contributions, however, are treated a little differently. Withdrawals of earnings from a Roth IRA can generally be made anytime, free of tax or penalty, if it has been five taxable years since you first opened the Roth IRA and if the withdrawals are made: After age 59½, on account of death or disability or for a qualified first-time home purchase up to $10,000 (lifetime maximum). If a withdrawal does not meet these requirements, it may be taxable and may also be subject to a 10 percent penalty if made before age 59½.
• Withdrawals Are Not Required: Unlike the traditional IRA, you may leave assets in a Roth IRA for as long as you live. You may allow your assets to continue to accumulate tax-free and/or be passed to heirs tax-free. Contributions can be made to a Roth IRA as long as you are earning income, even after you reach age 70½.

Here is more information about Roth IRAs:

A Roth IRA is generally available only if your adjusted gross income is less than $160,000 for joint filers or $110,000 for single filers. Check with your financial or tax adviser to see if you are eligible.

In general, if you contribute only to a Roth IRA, your contribution limits are the same as for a traditional IRA. This includes “catch-up” contributions for those 50 or older. However, if your modified adjusted gross income is above a certain amount, your contribution limit is gradually reduced. The amount you can contribute each year to a Roth IRA may also be limited if you contribute to both a Roth IRA and a traditional IRA.

A traditional IRA or other retirement account can, under most circumstances, be converted, partially or entirely, to a Roth IRA, if your modified adjusted gross income is less than $100,000 in the year of conversion. If you are married, you may convert to a Roth IRA only if you file taxes jointly. The converted amount (excluding nondeductible contributions) is subject to income tax in the year of the Roth IRA conversion. You can also roll over a Roth IRA into another Roth IRA.

Choosing Between a Traditional and Roth IRA

If you are eligible for both traditional and Roth IRAs, how do you choose between the two options? Or how do you decide how to apportion your retirement savings between the two? Here are some questions to consider:

• How long do you expect to keep earning money? If you’ll be working beyond age 70½, you will have to begin withdrawing from a traditional IRA and paying tax on those withdrawals while still paying income tax on your compensation.
• What tax bracket do you expect to be in when you start withdrawing money? If you expect to be in a lower tax bracket than you are now, a traditional IRA enables you to save money up front by deducting your contributions and put off paying some taxes until later.
• Do you plan to use up your IRA assets during your lifetime or leave them to your heirs? A Roth IRA can be used for estate planning, to build up assets for those who will inherit. While a traditional IRA can be inherited, your heirs and beneficiaries would probably gain more from a Roth IRA. Without mandatory withdrawals, your account can keep accumulating income, tax-free, until your death, when it will pass to the person you’ve designated.

IRA contributions may normally be invested in mutual funds, annuities, CDs, stocks or bonds. Which investment selection is most appropriate for you depends on your personal objectives and the amount of risk you wish to take. But one certainty applies to all types of investments: The sooner you invest, the larger your IRA will grow and the sooner you’ll be on your way to a comfortable retirement. Talk with your tax or financial adviser about choosing the plan that’s right for you.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

You’ll need to ‘early-bird special’ in these expensive places

The following article discusses the Top Ten worst tax places to live during your retirement

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Some states offer attractive tax benefits for retirees, others don’t. Kiplinger runs through the worst (or “tax hells,” as the magazine bluntly states). Many are in the Northeast United States (wait, what?). If your clients are looking for a nice—cheap—place to “perform their second act,” they’d do well to avoid the following:

#1:  Vermont

The state continually re-elects the only socialist in Congress, so what did you think would happen? There are no exemptions for retirement income in the Green Mountain State, except for Railroad Retirement benefits (which are exempt in every state). The magazine reports out-of-state pensions are fully taxed. It imposes a 9% tax on prepared foods, restaurant meals and lodging, and levies a 10% sales tax on alcoholic beverages (for shame) served in restaurants.

#2: Minnesota

We were hoping to make fun of their accents, but alas, Kiplinger wisely sticks to weather. Minnesota offers retirees cold comfort on the tax front. Social Security income is taxed to the same extent it is taxed on your federal return. Pensions are taxable regardless of where your pension was earned. Income-tax rates are high, and sales taxes can reach 9.53% in some cities

# 3: Nebraska

After switching from the Big 12 to the Big 10 (those that matter will know what it means), we thought Nebraska could go no lower. We were wrong. The magazine reports there are no tax breaks for Social Security benefits and military pensions in the Cornhusker State. Real estate is assessed at 100% of fair market value. Nebraska imposes an inheritance tax on all transfers of property and annuities.

#4: Oregon

First, says Kiplinger, the upside: There’s no state sales tax in the Beaver State. But it shares the distinction with Hawaii of imposing the highest tax rate in the nation on taxable income of $250,000 or more. Oregon has an inheritance tax that applies even to intangible personal property located anywhere, such as investments and bank accounts.

#5: California

Honestly, is anyone surprised? If so, maybe dispensing financial advice isn’t the profession for you. The Golden State has lost its luster for many retirees (understatement). Although Social Security benefits are exempt from state income taxes, all other forms of retirement income are fully taxed. Californians pay some of the highest income taxes in the U.S., with the top rate of 9.55% kicking in at $46,767 of taxable.

#6: Maine

New Hampshire’s wacky libertarianism hasn’t crossed the border. Income in excess of $20,150 per year is taxed at a steep 8.5% rate. Residents of the Pine Tree State pay a 5% sales tax statewide on everything except food and prescription drugs.

#7: Iowa:

Kiplinger likes its puns. According to the mag, the Hawkeye State offers no feathered nest for retirees. Although it allows single retirees to exclude up to $6,000 of retirement-plan distributions from state income taxes, and married couples can exclude up to $12,000, the rest is taxed at rates as high as 8.98%. Iowa taxes a portion of residents’ Social Security benefits, too, although it is in the process of phasing out the Social Security tax, which is scheduled to disappear in 2014.

#8: Wisconsin

The Dairy State exempts Social Security benefits and military-related pensions from its state income taxes, but it taxes most other pension and annuity income the same way the federal government does. Out-of-state government pensions are fully taxed.

#9: New Jersey

Its nickname may be the Garden State, but New Jersey is no Eden for retirees (ugh—again, Kiplinger’s, not us). The Tax Foundation says New Jersey’s combined state and local tax burden is the highest in the nation, thanks in part to sky-high property taxes. We’re waiting on the results of the “Christie Effect.”

 #10: Connecticut

Although some residents of the Constitution State can exclude their Social Security benefits from state income taxes, the exclusion applies only if their adjusted gross income is $50,000 or less ($60,000 or less for married couples). All out-of-state government and civil-service retirement pensions are fully taxed.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

It is the perfect time to reassess your retirement investment strategy based on your age and goals despite the the volatility we’ve seen in the stock market the past few years. The following article outlines why.

Make A Plan For The Long Haul

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Many of our parents and their parents never faced the question of how to invest their retirement savings. Dad and/or Mom might have had a secure pension, so they probably didn’t have to worry about the stock market. But pensions are fading away. Today’s workers are among the first to be forced not only to decide how much money to put away but also where to invest it.

Nor is “retirement-savings management” likely to be something you learned in school. With little financial education, the typical American worker must now make decisions that would have been left to a licensed professional just a few decades ago. Is it any wonder we are saving too little and often picking the wrong investments?

Not that the pros are infallible either. The Congressional Budget Office estimated in October that private pension funds had lost 15 percent of their value over the previous year, and even government pension plans showed signs of potentially being underfunded. But when it comes to retirement plans in which the worker controls the investment, the picture was worse. The Urban Institute found that 401(k)s and IRAs fell 40 percent in value from September 2007 to March 2009.

Stocks don’t seem like a good idea when your 401(k) statement only reminds you that you could have had one heck of a vacation if you hadn’t bothered chasing employers’ matching contributions or IRA tax deductions. But it remains more of a risk not to put at least some of your retirement money in the stock market. Stocks are pieces of ownership of a company, and compared with bonds (which are loans to a company), they have greater potential for growth. Of course, they also carry greater risk. But over time the returns on stocks tend to even out remarkably and easily surpass those of bonds, despite the latter’s greater stability.

Wharton economist Jeremy Siegel looked at all the possible stock-market returns for the two centuries ending in 2001. He found that stocks are very volatile, but only in the short term. In any one year, their returns have varied from 66 percent gains to 38.6 percent losses. But if you invested in stocks for five years at any time in the previous 200 years, the possible outcomes would have narrowed from a 26.7 percent annualized gain to an 11 percent loss.

The longer the time frame, Seigel found, the more sense stocks make. Over any 30 years, stocks always made money. It might have been as little as 2.6 percent annually or as much as 10.6 percent. But that was generally better than bonds, which gained only up to 7.4 percent in their best 30-year period and lost 2 percent in their worst.

Probably the biggest tragedy in this financial crisis is that some people in or near retirement saw a substantial chunk of their life savings vanish as the stock market sank. Of course, people at that stage of life shouldn’t have the bulk of their savings in stocks. As you get closer to retirement, it’s smart to move a greater portion of your assets into more stable investments, such as bond mutual funds, money-market funds, or life-cycle funds (sometimes called target-date retirement funds), which automatically shift assets to less risky types of investments over time.

The second-biggest tragedy involves all of the young people now terrified of stocks-just as many of their counterparts were after the Great Depression. That fear is understandable, says Zac Bissonnette, who writes for AOL Money & Finance and the Daily Beast Web site. “No matter what the statistics say about usual stock-market returns, this generation has never had them,” he observes. “If I’m 20 or 30, that hasn’t been my experience.”

What this all means is that many people are investing in a way that is exactly the opposite of what they should be doing. Some young people are being too timid, and some older folks too bold. According to the Employee Benefit Research Institute (EBRI), from January to March of this year, 401(k) retirement accounts owned by 25- to 35-year-olds lost only 4 to 5 percent, but those owned by 55- to 64-year-old workers lost between 6 and 11 percent. In other words, many young people who should have their money in risky assets are trying to play it safe. And many of those near retirement might be taking more chances than they should.

Too many investors also move their money around based on their emotions and what they predict the stock market is going to do in the short term. As a result, they often end up buying after the market has gone up and selling after it has taken a tumble. By studying when money flows in and out of mutual funds, Dalbar, a financial-research firm in Boston, has shown that investors’ best intentions often end up backfiring. In 2008 the S&P 500 lost a staggering 37.7 percent. Employing all kinds of hunches, schemes, and tips, the average stock fund investor managed to do even worse, losing 41.6 percent.

But there is hope. Dalbar found that one type of investor beat the average investor by more than 90 percent by using the familiar investing strategy called dollar-cost averaging. Here’s how it works: You put the same amount in your retirement account each month no matter what. That way if the Dow is very low, at, say, 7,000, you’ll end up with twice as many shares as when it’s very high, like 14,000. The slow and steady investor will usually beat everyone, but even that can take some nerve in times like these.

Of course, there is no cookie-cutter formula for retirement investing. How you should invest your 401(k) or IRA money depends on, among other things, how close you are to retirement.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results. 

As retirement changes, so must your investment strategy. Here’s how to get it right.

Investing strategies for retirement

by Michael Sivy, MONEY Magazine

You’ve probably given a lot of thought to what your dream retirement will look like. But here’s what you really need to think about: How are you going to pay for it?

Time for some quick math. For starters, let’s figure you’ll need annual income for basic living expenses of $45,000 or so on top of a combined Social Security and pension benefit of $25,000. And let’s plug in another $5,000 a year for the rewards you so richly deserve after a long career — you know, Europe one year, a killer home theater system the next. And oh, there’s that 1965 Corvette Sting Ray you’ve coveted since you were a teenager.

Add it all up and you need, gulp, about $1.2 million. Before you reach for the anti-anxiety pills, take a deep breath. Truth is, even as corporate and government largesse decline, you’ve got more tools at your disposal than ever to pull it off.

This story lays out a three-part strategy for getting there: You’re going to invest differently (read: more aggressively); you’re going to tap other assets, including that incredibly valuable one called your brain; and you’re going to stay flexible — cutting back when times (read: the markets) are tough, spending a bit more when they’re flush — just as you have all your adult life.

No false promises here: To live the dream retirement, you need to get real.

Harness the power of stocks

Your first step in turning your retirement vision into reality is to invest more aggressively. The accepted wisdom of subtracting your age from 100 and investing that percentage of your portfolio in stocks may have cut it for the “Leave It to Beaver” crowd. But in a “Desperate Housewives” world — where you could easily spend 30 years or more in retirement — you need the growth power of stocks to bulk up your savings and make sure your money lasts a lifetime.

Many investment firms have yet to factor this new reality into their investing strategies, but some are beginning to do so. In the retirement portfolios it recommends for investors in their forties, T. Rowe Price now devotes more than 80 percent of assets to stocks. And it stashes 55 percent of assets in stocks in its funds designed for people in their sixties who are retiring today.

Relying that much on stocks may seem risky. But it’s actually more prudent than a timid approach. If the market turns in just average performance over the long sweep of a career and retirement combined, a more aggressive approach not only delivers a larger retirement stash by the time you’re ready to retire but also lets you squeeze a couple of extra years of income from your portfolio. The results will be even better for the aggressive portfolio if the market performs anything like it has over the past 20 years.

Ah, but what if the markets perform poorly? Well, the more aggressive strategy comes out ahead there too. True, it falls behind slightly during the working years. But once withdrawals begin, stocks’ superior growth potential eventually wins out, with the result that the aggressive portfolio lasts five more years than its conservative counterpart.

The reason is that over the long haul, stocks provide more inflation protection than bonds, which increases the longevity of your savings and helps you maintain your standard of living. Of course, you don’t want to overdo it.  

Tap other assets

Chances are, though, smarter investing alone won’t cover the full tab. You’re going to have to turn to other assets.

One of the biggest is your earning power. Whether for enjoyment or for the cash, most people say they plan to work in some capacity after they retire. Those earnings, whether from a new retirement career, part-time work or even a new business, can add up to a sizable asset.

Let’s say, for example, a married couple both retire from their career jobs at 62 but work part time over the next 10 years, earning $25,000 a year each. That annual income would be the equivalent of having an extra $300,000 or more tucked away in savings at retirement. (Of course, working may complicate the issue of when to take Social Security.)

Taking a job after retirement has other advantages too. With a regular paycheck, you don’t have to draw as much from your investments for living expenses, which gives your savings a chance to grow and lowers the risk of your portfolio running dry. You may also be able to get employer-paid medical insurance for yourself and perhaps your spouse — an attractive perk, especially if you’re retiring early and must wait several years for Medicare to kick in.

Another major asset that can greatly improve your retirement prospects is your home. With house prices up more than 50 percent over the past five years alone, you may be sitting on a home-equity cushion worth more than $100,000.

Your home probably isn’t the first asset you’ll want to tap, but it’s good to know that reserve is there, and that you can get to it in a variety of ways: Trading down to less expensive digs, borrowing with a home-equity line of credit or taking out a reverse mortgage that will let you stay in your home even as you collect monthly payments for life.

Adopt a flexible spending plan

After you’ve gotten the most out of the assets you own, you must turn your attention to the other key tool at your disposal: managing your spending. Once you begin tapping your portfolio at retirement, keeping a flexible attitude about spending is the single most effective thing you can do to stay on track toward your retirement dream.

For example, financial advisers recommend that when you retire you limit your initial withdrawal to 4 percent of your portfolio’s value, then increase that dollar amount annually for inflation so you don’t run out of money. That 4 percent isn’t a guess; in simulations that put portfolios through thousands of different market scenarios, 4 percent is the amount that provides reasonable assurance your savings will last at least 30 years.

But this sort of analysis doesn’t account for the fact that in real life you’re not locked into a fixed withdrawal rate. You can make adjustments.

And, indeed, assuming you’re amenable to some fine-tuning — spending more when your portfolio has had a few good years and reducing your spending by 5 to 10 percent when your investments perform poorly — you may be able to increase your withdrawal rate to 4.5 percent or even 5 percent without significantly raising the risk of running out of money.

Like the rest of life, retirement doesn’t come with guarantees. But if you approach your planning with the determination to save, the discipline to stick to a sound investment strategy and the resolve to remain flexible, you’ll have given yourself a great shot at living your dream retirement.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

In today’s economy, people of all ages and walks of life are experiencing new unforeseen struggles, and retired Americans are no exception. Luckily, there are several things a retiree can do to lower their tax liability and save a little bit of cash.

Top 10 Tax Tips for Retirees

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To help some of our retired readers wanting to save, we have compiled the following list of 10 tax tips for retirees. 

1. Increased standard deduction

If you are over the age of 65, or have gone blind before the end of the year, then you are entitled to a higher standard deduction. But remember, if you take the standard deduction you will not be able to itemize your return.  

2. Social security taxes

Whether you owe taxes on your social security benefits depends entirely on your income level, and income types. If social security benefits have been your only form of income and will continue to be, you will most likely not need to pay taxes or file a Federal income tax return. However, before deciding to pay income taxes or not, it is probably a good idea to get a second opinion from a tax professional. 

3. Required minimum distribution (RMD)

Retirees who are 70 1/2 or older in 2009 get the added bonus of the new tax law which has relaxed the mandatory minimum withdrawal from IRA’s. Until now, retired individuals had no choice but to take a yearly mandatory withdrawal from their IRA, even if they did not need it. However there is a new one-time-only law that takes away this requirement for the 2009 tax year, which is expected to protect retirees from being forced to lock-in large investment losses from the past year.  

4. Roth IRA benefits

Unlike taxable payouts from traditional IRAs, a Roth IRA is tax-free, making it especially useful if you have no other source of income. You can even switch a traditional IRA to a Roth IRA in what is known as a Roth conversion. You will have to pay taxes the year you convert, but it could be beneficial to you in the long run. If you are seriously considering a Roth conversion, then I highly recommend you speak with a qualified tax or accounting professional. They can help you weigh the pros and cons of the conversion. 

5. Volunteering deductions

If you do any volunteer work in your free time then you may be able to deduct any out-of-pocket expenses you incur. They must all be directly related to your volunteer activity, and the organization you volunteer for must be a qualified organization approved by the IRS. 

6. Do not forget your winnings

Some retired taxpayers get in to trouble with the IRS for having too much fun at the casino without telling Uncle Sam. Do not forget that gambling winnings are forms of taxable income. You will need to pay taxes on the winnings even if your next bet is a big loser.  

7. Reverse mortgages

Retired homeowners may consider the tax-free option of a reverse mortgage. With a reverse mortgage, your lender sends you money as a loan against the available equity in your home. The loan grows larger and larger as you keep getting cash advances. This will continue to be the case if you make no repayments, and interest is added to the loan balance. Generally, a reverse mortgage does not need to be paid back until the homeowner dies, sells the home or permanently moves out of the home, as you are only borrowing against the built-up equity. To qualify, a homeowner generally must be at least 62 years of age, own his or her home, and the home must have a very low mortgage balance or be owned free and clear. 

8. Medical expenses

If you itemize your deductions, then the IRS will allow you to deduct dozens of medical expenses. The following items are all examples of qualified expenses. 

• In-patient care at a hospital or similar institution, including meals and lodging
• Chiropractor fees
• Ambulance or other transportation service
• Laboratory fees and fees for X-rays
• Artificial limbs, eyeglasses, contacts, hearing aid (including batteries), and artificial teeth
• Prescription medicines and insulin
• Medical supplies, such as bandages and crutches
• Dental treatment, including fees for X-rays, fillings, braces, extractions, dentures, etc.
• Eye examination fees or fees paid for eye surgery to treat defective vision, such as laser eye surgery or radial keratotomy
• Cost of equipment and materials required for using contact lenses, such as saline solution and enzyme cleaner

But remember, the IRS only allows you to claim the medical expenses that exceed 7.5% of your adjusted gross income. Thus, make sure to keep track of all your expenses throughout the year to qualify for the largest deduction possible. 

9. Stock losses

Millions of people have taken losses in the stock market lately, and many retired senior citizens are having the same problem. If you claim your stock losses now, they can later be used to offset your gains. In addition to this, you can deduct up to $3,000 in capital losses a year against ordinary income. Any loss remaining can also be carried forward into future years to be used until it is depleted. 

10. Seek professional advice

With constantly changing tax codes, it can be difficult for even the most up to date professional to stay on top of every change in tax law. To be absolutely sure you are taking advantage of every deduction and credit you can, you might want to consider hiring a tax professional to help you prepare your taxes.  

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Filing for taxes during retirement may present unique challenges as a result of new income sources and special deductions.  The following article tax filing tips to help retirees overcome the most common difficulties in filing their post-retirement returns. 

Top Tax Tips For Retirees

by Steven Merkel

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There are a lot of great tax breaks for seniors so when you are filing your taxes, make sure you apply for every one you qualify for. The following may apply to you:

• Reduced Capital Gains Tax: For tax years 2011 and 2012, the long-term capital gains tax rate is 15% for taxpayers in the ordinary income tax rate of 25% or higher. If you are in the 10% or 15% ordinary income tax bracket, then your long-term capital gains tax is zero.
• Sale of Residence/Exchanges: If a married couple has owned and lived in their primary residence for two out of the last five years (ending on the date of sale), they can claim a capital gains exclusion of up to $500,000 ($250,000 if single) on their tax return. (Learn more in Capital Gains Tax Cuts For Middle Income Investors.)
• Tax-Exempt Interest/Income: Investments in state and local government securities typically provide federal income-tax-exempt interest to the investor.
• Oil & Gas Investment Deductions: Direct investments in oil and gas partnerships will provide handsome deduction opportunities for the expenses incurred for tangible and intangible drilling costs, allowing the investor a large upfront deduction; typically, the remainder is deductible according to a schedule.
• Qualified Dividends: Investments in companies that pay dividends that trade on a U.S. stock exchange could qualify for favorable tax treatment if the dividends are qualified. If the investor holds the shares for a 60-day period both before and after the ex-dividend date, they qualify for a 15% tax treatment (or )% if the taxpayer is in the 10% or 15% ordinary income tax bracket).
• One-Time Transfer from IRAs to HSAs: You’re allowed to make a one-time tax-free rollover of funds from an Individual Retirement Account (IRA) to your Health Savings Account (HSA). The contribution must be made in a direct trustee-to-trustee transfer. This type of rollover is not taxable as income or subject to any penalties for early withdrawal from the IRA. The transfer is limited to the maximum HSA contribution for the year in which the transfer is completed, and the amount contributed is not allowed as a deduction on personal income taxes like normal HSA contributions. (Find out about these deductions and how you can use them to lower your tax bill, see Increase Your Tax Refund With Above-The-Line Deductions.)

Effective Withdrawal Strategies
When it comes to retirement income, how you withdraw funds during retirement from various savings vehicles can directly impact your taxes. Here are a few pointers to save on taxes:

• Only take the required minimum distribution (RMD) from your Traditional IRA if possible.
• Use taxable accounts (individual, joint, trust) for withdrawing retirement funds.
• Make quarterly tax payments to the IRS to avoid underpayment penalties.
• Be cautious of taking funds from your pension, 401(k) and annuity accounts as this is typically taxed as ordinary income.
• Selecting Social Security early or at normal retirement age will likely effect your taxable income in a given year.
• Direct transfers from your IRA to a qualified charity can help avoid income tax on the IRA distribution - and the withdrawal counts toward satisfying your RMD requirement. (Being generous has never been more (financially) rewarding! See Give To Charity; Slash Your Tax Payment.)

Standard Deduction vs. Itemizing
When you stop working, you’ll have to take a serious look at your situation to determine if you should itemize your deductions or simply take the standard deduction. Upon reaching age 65 or older, you’ll receive an additional standard deduction allowance (on top of the regular standard deduction amount) if you elect not to itemize your deductions. For 2010, the additional amounts are $1,400 for a single filer and $1,100 for a married or qualifying widow(er) filer. In addition, if you or your spouse is legally blind, you’ll each receive another $1,100 allowance ($1,400 for single filer).

Some deductions such as medical expenses, long-term care premiums, mortgage interest, investment and property losses, and charitable contributions might be higher or the same during retirement. Therefore, you might want to continue to itemize your deductions on your federal tax return if your specific deductions exceed the standard deduction limits. (The receipts you cram into your wallet could be replaced with cash come tax season. Check out 10 Most Overlooked Tax Deductions.)

Credit for the Elderly or Disabled
You might be able to reduce your federal income tax by claiming the Credit for the Elderly or Disabled. The primary qualifications include the following:

• You’ve reached age 65 or have suffered a permanent and total disability prior to age 65 while collecting taxable disability income.
• You’re a U.S citizen, resident alien or a non-resident alien who is married to a U.S citizen.
• Your adjusted gross income (AGI) is below $25,000 (married filing jointly) or $17,500 (single filer).

The actual computation of the credit is a pretty simple five-step process. However, it goes beyond the scope of this article and requires the use of an IRS filing status table to determine the starting amount used in the calculation. (Also check out Give Your Taxes Some Credit.)

Taxation of Social Security
While it’s nice to have some additional supplemental income during retirement, it’s important that you fully understand how earned income and tax-exempt interest can affect your Social Security benefits. If you’re married filing jointly and your provisional income exceeds $32,000 ($25,000 for single filers), then a portion of your Social Security benefits will be subject to federal tax.

Provisional income is the total income shown on your return (earnings from a job, interest, dividends, etc.) plus 50% of your net Social Security benefits, plus tax-exempt interest or certain tax-exempt fringe benefits or exclusions.

The Bottom Line
Filing your taxes during retirement can be just as time consuming as when you were employed, so you’ll still need to keep an organized filing system for all of your tax documents to help you better determine whether to itemize your deduction or take the standard return. Preparing for your tax filing can be simple if you work to stay organized throughout the year, and keep abreast of changes to tax laws that could affect your deductions and credits.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

It is more difficult today than ever before to be prepared for a comfortable retirement.  The following article gives some insight on the differences for those getting started with retirement planning today, and what to focus on for your future.

It’s Harder to Get Started Today

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Over the past weekend, I had a long conversation with a man in our community who was nearing retirement age. He felt comfortable about his own coming retirement, but he seemed very pessimistic that his children would ever be ready to retire. “They just don’t know how to save money,” he told me.

I told him that, although I agreed with him that young people should save more, there is also a strong case that it is much more difficult today for a young person to establish themselves financially as he did when he was a young adult.

He looked at me strangely. “What do you mean?” he asked.

So, I laid it out for him, piece by piece. Afterward, it occurred to me that the entire discussion might make for a good post here, particularly with some specific research to back it up.

Real wages Let’s start with income. In 1970, the average wage earner took home $312 per week (in 1982 dollars). In 2004, the average wage earner brought home $277 per week (in 1982 dollars) - and it’s still falling. That means that, once you factor out inflation, the average wage earner in 1970 brought home about 18% more than the average wage earner today.

Home prices Even if you adjust for inflation - and even if you take into account the crash of the housing bubble from 2007 to today - the median price for a home in the United States has gone up more than 50% since 1970. Remember, that number accounts for inflation, so what that number actually means is that the cost of a home requires 50% more of a person’s paycheck than it did in 1970.

Education prices The cost index of an average undergraduate education since 1970 drastically outpaces the growth of the Consumer Price Index. In short, disregarding inflation, the cost of an undergraduate degree today is roughly 30% higher than it was in 1970.

Other essentials In order to compete in today’s workforce, a young person often must have items - paid for out of their own pocket - that weren’t needed in 1970, including a cell phone, a computer, and home internet access. Often, when searching for work, it becomes very difficult for a young person to compete without these extra expenses.

So, to summarize, in order to have housing and an education comparable to what a young person had in 1970, they must spend 50% more on housing, spend 30% more on education, and do it all while earning about 18% less money. That doesn’t even include the extra expenses needed to compete.

I look at my own parents for an example. My parents purchased the house I grew up in for $20,000 - and that included seven acres of land. At the time, that was approximately what my father earned in a year. Today, if I were to purchase a similarly-sized house with seven acres of land, I would be spending well over $100,000 - significantly more than an annual salary.

My parents were also able to find good work without the cost of a college education. Today, the jobs they both had would be completely unavailable to someone if they did not have a college education, putting significantly more expense on the back of a young person today.

“Get tough!” This isn’t meant to be an excuse for people of my generation not living up to their potential. Instead, it’s an encouragement for everyone to not obsess over comparing the success of young people today to the things that young people in the past had at a similar age.

Simply put, things that were quite possible for a 25 year old in 1970 - owning their own home, having a fully-paid-for education, having a high-paying job - are much more difficult for a 25 year old today.

It’s not so much a matter of getting tough. It’s more of a matter of recognizing that comparing the way things were when you were younger to the way things are now for a younger person isn’t really a valid comparison.

Rather than focusing on results, look for signs of progress and for the status of the journey as a whole. It’s not even remotely fair to compare results - the income you have, the house you have, the education you’ve paid for - between eras, so instead focus on positive steps in the right direction.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

The following are a few sound strategies for catching up on your retirement savings.

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Retirement Savings: Five Tips to Catch Up

1. Boost your savings to the max

For once, the taxman is willing to give you a big break. You’d be foolish not to take advantage of that, right? Retirement savings accounts such as 401(k)s and IRAs allow workers to sock their hard-earned money away on a tax-deferred basis. In a 401(k), employers will typically match your contribution, too.

Make sure to contribute as much as you can to these accounts-at least up to the company match in your 401(k). The limit for contribution to an IRA this year is $5,000. Depending on annual income, IRA contributions may be tax deductible. You can still contribute through Apr. 15 to take deductions for the 2006 tax year.

Better still, investors 50 and over are allowed to make “catch-up” contributions to their tax-advantaged retirement accounts. These investors can add another $5,000 to their 401(k) in 2007, and an extra $1,000 to their IRA. Many investors may also want to consider a Roth 401(k) or IRA instead. Contributions to Roth accounts aren’t tax-free, but withdrawals are.

2. Get your assets into alignment

A well-diversified portfolio can increase the chances your assets will participate in market booms and help insulate your savings against the inevitable busts. Check your asset allocation and make sure it’s right for you. A smart portfolio might have exposure to a variety of asset classes, including domestic stocks, international stocks, bonds, and more.

3. Cut costs on investments, too

Just as proper diet and exercise are good for your health, reducing expenses is one obvious way to save more for retirement. People looking for bargains can find them in all sorts of places-even within their own investment portfolios.

4. Embrace automation

Now that you’ve got your retirement plan back on the right track, make it last. Your employer probably already makes 401(k) deductions automatically. You can also sign up with your financial institution to have money transferred electronically each month from your checking account into an IRA or taxable account.

5. Rethink your mortgage

Your house could help you save a little extra for retirement, too. If you have substantial home equity, you might want to look into refinancing your house and investing the difference in stocks and bonds, recommends Ed Fulbright, a Durham (N.C.) financial planner. Over a 15-year time frame, investors would have a good chance of boosting their investment returns, Fulbright says.

In fact, paying off your mortgage before retirement might be an outmoded ideal, as long as you get a fixed interest rate. Keeping a mortgage into retirement can help protect against inflation, says John Scherer, principal of Trinity Financial Planning in Madison, Wis. “If you’re 50 years old and get locked in, and inflation goes up over time, you’re paying off that mortgage with cheaper and cheaper dollars,” Scherer explains.

There’s no magic solution for workers who have fallen behind in their retirement savings, experts say. But the sooner you can start the “catch-up” game, the better off you’ll be.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

No matter what stage of life you are in it is important to start saving and investing early. Even those who started saving in their 40s had, on average, $230,000 more than those who started saving in their 50s or later. The following steps are geared towards people who are still working but are close to retirement, but the advice makes sense for people of all ages.

A Happy Retirment: 6 Steps That Work

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Six Steps

Live modestly: This was the top “best step” listed by retirees who said they were highly satisfied with their lives; 39 percent said they did not spend beyond their means. One way to rein in spending is to create a budget using store-bought software such as Quicken or a free online service such as Yodlee MoneyCenter (www.yodlee.com). Those programs help you track your spending and your progress toward meeting saving goals by consolidating your financial data from banks, credit-card companies, and brokerages.

Maximize your savings: Even if you don’t have a defined-benefit plan, regularly contributing to a 401(k), 403(b), IRA, or other investment vehicle pays off, our satisfied retirees told us. (Saving too little was a regret of 27 percent of dissatisfied retirees.) At 50 and older, you can put as much as $22,000 into a tax-deferred, traditional 401(k) plan or after-tax Roth 401(k) or their 403(b) equivalents in 2010.

Reduce debt: Thirty-eight percent of retirees owed $25,000 or more on their mortgages. But 74 percent of retired respondents who were free of major debt reported being highly satisfied with their retirement. For greater peace of mind, pay off your debts before retiring. Even a low-rate mortgage can be a burden if other expenses rise and your income-producing assets falter. Notably, debt-free retirees had a higher median net worth than those with debt: $843,000 compared with $717,000.

In the current economic environment, accelerating payment of your mortgage can be a wise investment. Most certificates of deposit, bank accounts, and other safe savings vehicles are paying less than 2 percent, so putting your money into additional payments on a 5 percent mortgage instead offers a better return (though you’ll give up some tax deductions on mortgage interest). By making extra principal payments, you can whittle down your loan’s interest cost and term handsomely. For example, adding $100 per month to payments on a 30-year, $150,000 mortgage with a fixed rate of 5 percent reduces the total interest by almost $35,000 and cuts the loan’s term by 6 1/2 years.

Don’t invest too conservatively: Taking on even a moderate amount of risk pays off. Median net worth for retirees who said they took a middle-of-the-road approach was $836,000 vs. $671,000 for conservative investors. Notably, the difference in net worth between self-described moderate and aggressive investors was relatively small: a $57,000 advantage for the more aggressive. The lesson: You don’t have to go out on a limb to get the best return. Diversification will help reduce your risk.

Study your options: When you design your dream retirement, also devise a Plan B in case you’re forced to retire early or can’t sell your home (a predicament of 8 percent of surveyed retirees). Your alternative plan might include a more restrictive budget or a different retirement location. To determine your Social Security benefits at different ages, go to www.ssa.gov.

A major issue will be health-care coverage. You can move to your spouse’s insurance plan, find a new job with health benefits, extend your own employee coverage under the COBRA law (go to www.dol.gov and type “cobra” in the search box for details), or look for private health insurance. If you go that last route, try to get group coverage through professional or other membership associations.

Take the intangibles seriously: Stress affected overall satisfaction in retirement even more directly than net worth, our survey found. A quarter of retirees cited non-monetary stresses such as family relations, poor health, a loss of identity, and boredom. So before you retire, develop hobbies and line up volunteer work, trips, or part-time jobs. Strengthen your personal connections outside the workplace. And, of course, do what you can to maintain good health.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.

Planning for retirement can be a daunting task in the face of economic uncertainty.  The following tips can help you put things in order to protect your nest egg. 

Last Minute Retirement Tips

By Stacey L. Bradford
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1. Adjust Your Asset Allocation

Whether retirement is six months away or three years down the road, prospective retirees need to take a good hard look at their portfolio in order to determine if it consists of the right investment mix. Keep in mind that a retirement stash may have to last 30 years. So it’s important that the portfolio’s asset allocation isn’t too conservative.

In fact, the biggest mistake retirees make, especially during a bear market, is to sell all of their stocks in favor of more conservative bonds. According to a recent study by investment management firm T. Rowe Price, those who do so are virtually guaranteed to run out of money during their lifetime since the portfolio won’t be able to keep up with inflation.

In fact, according to T. Rowe, a typical retiree should shoot for a mix of 55% stocks and 45% bonds. Of course, everyone’s risk tolerance is different and other factors, such as pension distributions and the equity stake they have in their home, also need to be taken into consideration.

2. Plot Your Distributions

Before you stop working, plot out how much money you’ll take each year from both your retirement account and Social Security. However tempting it may be to tap into these funds as soon as retirement hits, there are huge financial advantages to holding off for as long as you can, says Daniel Thomas, a CPA from Newport Beach, Calif.

T. Rowe’s study shows that a recent retiree who withdraws 4% from a 401(k) or IRA during the first five years of retirement (and increases his withdrawal amount by 3% each year to keep up with inflation) while his portfolio has an average return of less than 5%, has just a 43% chance of his money lasting for the next 25 years. In a nutshell, if one takes the recommended distributions during a bear market, the chances of his money lasting during retirement are greatly reduced. Should he put off tapping into his investments until the market recovers, or reduce his withdrawals significantly, he can expect to more than double his chances of affording retirement.

As for Social Security, Uncle Sam allows you to start receiving benefits at age 62. But if a retiree can afford to wait until full retirement age (for those born between 1939 and 1942, it falls during your 65th year; for those born between 1943 and 1954, age 66), the government will reward them with a “delayed retirement credit” that adds 8% to his or her benefits each year until age 70. Use the Social Security Administration’s retirement planner here to help you figure out when to start receiving your benefits.

3. Scale Down Your Lifestyle

One of the best ways to make money last during retirement is to scale back on expenses and stick to a budget. In the past, one of the easiest ways to achieve significant cost savings was to trade in a large home for a smaller one. Given the housing slump, that may not seem possible these days since homeowners can’t count on fetching the rich prices they had hoped for just a year or two ago. Not to worry, says Bill Losey, author of “Retire in a Weekend.” Most retirees have been in their homes long enough that they can afford to sell their properties for a bit less and still realize healthy profits. And if they buy a place in a more affordable part of the country, they’ll certainly come out ahead. “By downsizing, my clients save between $750 to $1,000 a month,” Losey says.

If moving isn’t an option, then retirees will need to cut back on spending elsewhere. Losey recommends trading in large expensive cars for more economical ones. Another cost-saver: Postpone a pricey vacation until the stock market recovers.

4. Sign Up for Medicare

Health care is one of the biggest expenses retirees face. The first thing a prospective retiree should do is check if his employer offers retiree health benefits or if supplemental insurance will be necessary. The next thing: Get a handle on the registration rules for Medicare. While the government’s health insurance for seniors has many attractive features - including its relatively inexpensive premiums - it also has very strict rules and will penalize people by adding an additional 10% to premiums for every year they don’t sign up on time.

Here’s what you need to know: The Medicare open enrollment period starts three months before a senior turns 65 and end three months after his 65th birthday. Miss the six-month window and retirees will go without coverage until the following general enrollment period, which is Jan 1 through March 31 of the next year. The only exception is for folks who are working full time and are on their employer’s health plan. Their open enrollment period starts as soon as they officially leave the work force. Also, be aware that Medicare doesn’t cover dental expenses. That’s why Sal Cocivera, a financial advisor with Lincoln Financial Advisors recommends that clients get a thorough checkup and take care of any costly procedures, including root canal and crowns, while their employer’s insurance still covers them.

5. Buy Long-Term-Care Insurance

Finally, the biggest threat to one’s nest egg isn’t a bear market but an extended stay in a long-term-care facility. The average nursing home costs more than $74,000 a year, according to life insurance provider Metlife. To make sure an accident or just deteriorating health doesn’t wipe out your savings, consider buying long-term-care insurance.

Be warned, however, that purchasing a long-term-care policy in one’s 60s will be expensive. Those high premiums will be worth it, though. Should you fall ill, for example, your spouse will still have assets to live on, says Lincoln Financial Advisors’ Cocivera. While prices vary quite a bit, this is one area where one shouldn’t skimp. Some of the least expensive policies may leave out important benefits, including inflation protection and the freedom to hire any home health-care aide you want.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.