What Is a Required Minimum Distribution?

A required minimum distribution (RMD) is the annual amount that must be withdrawn from a traditional IRA or a qualified retirement plan (such as a 401(k), 403(b), and self-employed plans) after the account owner reaches the age of 70½. The last date allowed for the first withdrawal is April 1 following the year in which the owner reaches age 70½. Some employer plans may allow still-employed account owners to delay distributions until they stop working, even if they are older than 70½. RMDs are designed to ensure that owners of tax-deferred retirement accounts do not defer taxes on their retirement accounts indefinitely.   

You are allowed to begin taking penalty-free distributions from tax-deferred retirement accounts after age 59½, but you must begin taking them after reaching age 70½. If you delay your first distribution to April 1 following the year in which you turn 70½, you must take another distribution that year. Annual RMDs must be taken each subsequent year prior to December 31. 

The RMD amount depends on your age, the value of the account, and your life expectancy. You can use the IRS Uniform Lifetime Table (or the Joint and Last Survivor Table, in certain circumstances) to determine your life expectancy. To calculate your RMD, divide the value of your account balance at the end of the previous year by the number of years you’re expected to live, based on the numbers in the IRS table. You must calculate RMDs for each account that you own. If you do not take RMDs, then you may be subject to a 50% federal income tax penalty on the amount that should have been withdrawn.

Remember that distributions from tax-deferred retirement plans are subject to ordinary income tax. 

Waiting until the April 1 deadline in the year after reaching age 70½ is a one-time option and requires that you take two RMDs in the same tax year. If these distributions are large, this method could push you into a higher tax bracket. It may be wise to plan ahead for RMDs to determine the best time to begin taking them.

Lets talk, about your  Naperville Asset Management Needs

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Evaluating Life Insurance Needs

Because life insurance typically becomes more expensive as we age, many people may believe they can’t afford to purchase coverage later in life. However, considering that life insurance is significantly less expensive today than it was a decade ago, you might be able to purchase new coverage and pay premiums comparable to those that were available when you were 10 years younger.

It’s a good idea to review your life insurance situation on a regular basis. Here are some reasons why your coverage may need to evolve to keep pace with your life.
Life Changes

If your income and/or net worth have increased significantly since you purchased your policy, ask yourself whether your current coverage would enable your survivors to maintain their current standard of living. Major life events such as birth, marriage, death, and divorce may also affect the amount of coverage you need.
Inflation

Because of inflation, a policy purchased years ago may no longer offer the same level of protection. For example, a 3% inflation rate can cut the purchasing power of a death benefit in half in about 24 years, based on the Rule of 72 (72 ÷ 3 = 24 years).

Estate Conservation
One popular reason for owning life insurance is to provide liquid funds to help heirs pay estate taxes and any other debts. Considering that the estate tax has changed several times over the past decade, it’s a good idea to review your coverage in light of current estate tax laws and your net worth.

As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

1) USA Today, December 3, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Financial Planning  advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Earning Income from Mutual Funds

More than half of working Americans are concerned that they may not have enough money to live comfortably during retirement. For most retirees, income will come from multiple sources. It may be helpful to consider mutual funds as a potential source of retirement income.

Mutual funds enable you to invest in a portfolio of securities that are typically assembled and managed with a particular goal. In 2010, mutual funds were the most common type of investment held in IRAs and defined-contribution plans.1 Although you might think of mutual funds as a tool to increase savings, they can also generate income.

Understanding the different types of income-producing mutual funds may help you better evaluate the role they could play in your retirement portfolio.

Bond Funds
Bond funds invest in bonds and other debt instruments. The type of debt held typically varies according to the fund’s focus and stated objectives and may include debt issued by government agencies and private entities, with maturity dates ranging from 30 days to 30 years. These funds generally use the interest payments collected from their bond holdings to generate income for shareholders. Although there is risk with all investments, bonds are usually more stable than stocks but they may offer lower potential returns.

Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance.
Equity or Stock Income Funds

Not all stock funds focus on capital appreciation. Many strive to generate income by investing in companies that have a history of issuing dividends to their common and preferred stockholders. Stock funds typically offer greater risk with greater potential return than bond funds, but income-producing stock and equity funds tend to own stable and well-established companies, such as blue chips and utilities.

The return and principal value of mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Hybrid Funds
A hybrid fund (also called a balanced fund) may invest in a combination of stocks, bonds, and cash alternatives. Hybrid funds attempt to provide a mix of income and capital appreciation, with the fund manager adjusting the fund’s holdings based on economic conditions and in keeping with the fund’s stated objectives.

Income-producing mutual funds tend to be more appealing to investors with a conservative outlook and moderate to low risk tolerances. As you look to generate retirement income, consider mutual funds in the mix.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Investment Company Institute, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Wealth Manager. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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What is the Capital Gains Tax?

   Capital gains are the profits realized from the sale of capital assets, such as stocks, bonds, and property. The capital gains tax is triggered only when an asset is sold, not while the asset is held by an investor. However, mutual fund investors could be charged capital gains on investments in the fund that are sold by the fund during the year. 

There are two types of capital gains: long term and short term; each has different tax rates. Long-term gains are profits on assets held longer than 12 months before they are sold. As a result of the 2003 tax law, the long-term capital gains tax was reduced from 20% to 15% (0% for individuals in the 10% and 15% tax brackets) through 2010; the 2010 Tax Relief Act extends the reduced tax rate through 2012. Short-term gains (on assets held for 12 months or less), on the other hand, are taxed as ordinary income at the seller’s marginal income tax rate. 

The taxable amount of each gain is determined by a “cost basis”— in other words, the original purchase price adjusted for additional improvements or investments, taxes paid on dividends, certain fees, and any depreciation of the assets. In addition, any capital losses incurred in the current tax year or previous years can be used to offset taxes on current-year capital gains. Losses of up to $3,000 a year may be claimed as a tax deduction. 

If you have been purchasing shares in a mutual fund over several years and want to sell some holdings, instruct your financial professional to sell shares that you purchased for the highest amount of money, because this will reduce your capital gains. Also, be sure to specify which shares you are selling so that you can take advantage of the lower rate on long-term gains. The IRS may assume that you are selling shares you have held for a shorter time and tax you using short-term rates. 

Capital gains distributions for the prior year are reported to you by January 31, and any taxes that must be paid on gains are due on the date of your tax return. The reduced rates on long-term capital gains taxes may not be around much longer if Congress doesn’t extend the 15% reduced rate beyond 2012, so it may be wise to take advantage of the lower rates before they are scheduled to expire.


The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek legal or tax advice from an accountant in naperville.

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Rising Popularity of Roth IRA as Retirement Vehicle

Roth IRAs are quickly catching up to their older counterpart, the traditional IRA. About 19.5 million U.S. households owned Roth IRAs in 2010, compared with 38.5 million households who owned traditional IRAs. But the Roth IRA has been in existence only since 1998, while the traditional IRA has been around since 1974.1

What’s fueling the growth of this retirement vehicle? Americans may be attracted not only by the tax advantages offered by the Roth IRA, but by the flexibility it may offer.

Consider the Trade-Offs

Taxes. The main difference between a Roth IRA and a traditional IRA is that Roth IRA contributions are made with after-tax dollars, whereas contributions to a traditional IRA may be tax deductible. The difference when you withdraw your money, however, is that qualified distributions from a Roth IRA are free of federal income tax if you’ve satisfied the requirements. By contrast, distributions from a traditional IRA are taxed as ordinary income. (Roth IRA distributions may be subject to state income taxes.)

Eligibility. Anyone under the age of 70½ with earned income is eligible to contribute to a traditional IRA. There are no age limitations associated with a Roth IRA, although you must have earned income in order to contribute.

Income eligibility restrictions are associated with both types of IRAs. Eligibility to contribute to a Roth IRA phases out at higher modified adjusted gross income levels: $107,000 to $122,000 for single filers and $169,000 to $179,000 for married couples filing jointly in 2011. Although there are no income limits to contribute to a traditional IRA, investors who are active participants in employer-sponsored retirement plans cannot deduct their contributions if th

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eir modified AGIs exceed $66,000 for single filers or $110,000 for joint filers.

Contribution limits. There is a $5,000 annual contribution limit to all IRAs combined in 2011. Investors age 50 and older may make an additional $1,000 catch-up contribution.

RMDs. Traditional IRAs are subject to annual required minimum distributions (RMDs) that must begin after you’ve reached age 70½ (the first distribution must be taken no later than April 1 of the year after you turn 70½). However, no RMD rules apply to Roth IRAs. Thus, if you don’t need the money, you can leave Roth IRA assets to your heirs, who can also benefit from tax-free distributions. Failing to take an RMD may result in a 50% tax penalty on the required amount that was not withdrawn. Beneficiaries of either type of IRA are required to take RMDs (based on their own life expectancies).

Withdrawal considerations. Withdrawals from either type of IRA prior to age 59½ may be subject to a 10% federal income tax penalty. Exceptions to the penalty include the owner’s death, disability, and a qualified first-time home purchase ($10,000 lifetime maximum). Regular Roth IRA contributions (not earnings) can be withdrawn at any time for any reason without any tax liability or penalty. For a tax-free and penalty-free withdrawal of earnings, qualified Roth IRA distributions must meet the five-year holding requirement and take place after age 59½.

If you are looking for a way to help manage your income tax liability in retirement and possibly leave a tax-free legacy to your heirs, you may want to consider a Roth IRA.

Call us today, we are your Naperville Retirement professionals.

1) Investment Company Institute, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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What Kind of Investor Are You?

  Most Americans seem to understand that to pursue financial gains through investing, they typically must assume some level of risk. For example, one survey of investors with household incomes above $150,000 found that 98% were willing to assume at least some risk in pursuit of investment gains.

When you assume investment risk, it means you should be willing to lose money in pursuit of investment gains. Although losing money is exactly the opposite outcome you hope to achieve through investing, risk is an inherent aspect of investing. Broadly speaking, the more risk you are willing to assume, the greater your potential for investment returns.

Understanding your risk tolerance is an important part of determining what kind of investor you are. At one end of the risk spectrum is the conservative investor, who is usually interested in preserving principal and earning a steady income. At the other end is the aggressive investor, who is typically more concerned with growing principal, even if it means sustaining some investment losses along the way. Not sure where you fit? These factors may help you decide.

Comfort Level
Everyone has a different comfort level when it comes to the potential for losing money on an investment. Although feelings are important and should be taken into consideration, making major decisions based on emotion could cause you to miss opportunities or take on too much risk. Remember that even the most conservative investments can lose value over time if they don’t keep pace with inflation.

Time Horizon
Your proximity to your financial goals can have a significant influence on your risk tolerance. In general, the more time you have to reach your goal, the more risk you may be able to assume. An individual who is 15 to 20 years from a major goal, such as retirement or sending a child to college, is typically in a better position to recover from investment losses than someone who is five years from a major goal. As you approach the date when you will need the money in your portfolio, it may be a good idea to begin shifting assets to more conservative vehicles to help avoid losses from which you may not have time to recover.

Net Worth
The size of your portfolio could also affect your risk tolerance. Consider two hypothetical investors: One has a $5 million portfolio and the other has $100,000 in a retirement account. Each makes a $50,000 investment in the same security. The millionaire is assuming far less risk because $50,000 represents only 1% of his portfolio. The other investor is facing a much larger risk by exposing half of his portfolio to the fate of a single security.

All investments are subject to market fluctuations, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.

Determining how much risk may be appropriate for your portfolio typically requires you to consider more than just your feelings. Examining your overall situation may help you determine how much risk you want to assume to meet your long-term financial goals.




Allow us to help you meet your financial goals, we are your neighborhood Naperville Investment Advisor.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Managing Cash When Interest Rates Are Low

The economy may be improving, but high unemployment and low inflation indicate that the Federal Reserve may keep interest rates low at least until 2012.1  It’s generally a good idea to keep three to six months of income in an emergency fund to help cover unexpected expenses or a sudden loss of income. But when interest rates are low, where should you keep your cash?

Savings Accounts
Perhaps the most appealing aspect of savings accounts is that they are insured and highly liquid. The Federal Deposit Insurance Corporation insures deposits up to $250,000 per depositor, per institution, in principal and interest. You can generally withdraw your money at any time, although you could be subject to a fee if you exceed the financial institution’s monthly limit on withdrawals or transfers.

One disadvantage is that savings accounts may offer lower interest rates compared with other cash alternatives. Although you are unlikely to lose money deposited in a savings account, you could lose purchasing power over the long run if the interest rate does not keep pace with inflation.

Certificates of Deposit
CDs may offer slightly higher interest rates than savings accounts, but you generally must commit your principal for a period of months or years. Early-withdrawal penalties vary by institution and may range from several days’ worth of interest to the loss of some principal.

Typically, the interest rate paid by a CD depends on the maturity date. The longer you are willing to commit your money, the higher the interest rate you may be able to earn. Some CDs also offer higher rates for larger deposits. However, if your principal is locked into a CD when interest rates increase, you may not be able to take advantage of the higher rates until your CD matures, and the early-withdrawal penalty may offset any gains from reinvesting at a higher rate. The FDIC also insures CDs (up to $250,000 per depositor, per institution), which generally provide a fixed rate of return.

Money Market Funds
Money market funds are mutual funds that invest in short-term debt. These funds typically pay dividends, which may be greater than the interest paid by a savings account or CD. Generally, there are no limits or penalties for redeeming shares from a money market fund.

Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.  1) MoneyRates.com, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from a  Naperville Wealth Management advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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