Thinking about early retirement? There are some traps to be aware of when accessing funds from a retirement account before age 59 ½. You may think that early retirement is a wonderful thing. However, the IRS doesn’t agree. The U.S. tax code generally deems age 59 ½ to be the earliest anyone should retire. You could face ugly tax bills when accessing tax-deferred retirement accounts. Most certainly you’ll pay federal income tax and you may even be subject to state income taxes in states that don’t normally tax retirement income. Most importantly there is a 10% premature-withdrawal penalty that needs to be addressed.

The standard 10% premature-withdrawal penalty applies to IRA withdrawals for those under age 59 ½. But the penalty is waived for withdrawals for company plans and 401(k)s once you reach age 55. This is an important planning consideration for an early retiree. You need to check with your employer to determine what they will allow you to do with these funds after you retire. In order to qualify for the penalty exception, you cannot separate from service until you reach age 55. The IRS recently determined that a taxpayer still owed the 10% penalty on funds she withdrew from her company plan after age 55 because she stopped working at age 53. SEP IRAs and SIMPLE IRAs never qualify for the age 55 penalty exemption.

The surest way to access your retirement funds without penalty before age 59 ½ is by taking a series of substantially equal withdrawals, called 72(t) payments. There are three methods of calculating the amount to withdraw – minimum distribution, fixed amortization, and fixed annuitization. You should consult a financial planner or accountant who is familiar with these formulas to make sure they are set up properly. You also need to familiarize yourself with the rules and make sure you follow them. Failure to set up the distributions correctly or to adhere to the rules could result in all distributions becoming subject to the penalty retroactively.

Thinking About Early Retirement? Watch Out for These Pitfalls appeared on http://rodgers-associates.com/blog/

Individuals are often called on to serve as trustee for a family member or friend. This seems like it might be an easy job, but in reality it could be a huge liability if it is not done properly.

Typically assets are held in trust with income going to a current beneficiary(s) and the principal managed for a future beneficiary(s). The biggest mistake trustees make is when they account for principal and income. Not allocating principal and income properly can create a liability for the trustee from the beneficiary that was shorted. Nearly everything earned by the principal is trust income – dividends from stocks, interest from bonds, rent from real estate, or earnings from a closely held business. These all may seem obvious. What is not obvious is the distinction of capital gains and losses. A capital gain or loss is the difference between the cost to purchase an asset and the sales proceeds. The resulting gain or loss from the transaction is considered principal.

Other items that stay on the principal side are settlements from a judgment or lawsuit, return of capital, and special or extraordinary dividends. An extraordinary dividend is considered principal because in most situations the corporation has issued a large portion of corporate profits. The payment almost always causes the share price of the stock to drop by at least the amount of the dividend.

Trust documents usually include a provision that allows the trustee to make the final determination of what’s principal and income. This provision doesn’t give you a free pass to do whatever you like. A trustee has a fiduciary responsibility to act in the best interest of current beneficiaries as well as future ones. You may want to seek professional advice from an accountant or attorney who specializes in trusts to make sure your allocations are following the guidelines.

Be Careful if You Serve as Trustee for Friends and Family! appeared on http://rodgers-associates.com/blog/

I am amazed at the number of people I have talked with recently that believe the Dow Jones Industrial Average reached a ceiling at 13,000. This apparent ceiling will somehow cause stock prices to fall. This is their justification for selling out of stocks, which is nothing more than market timing. Jonathan Clements, columnist for the Wall Street Journal, famously pointed out “Market timing is a poor substitute for a long-term investment plan.”

It seems that many investors are concerned about the risk of owning stocks with the Dow at 13,000 yet seem unconcerned about the risk of owning bonds or gold. Even at 13,000 the Dow is still over 1,000 points below its high set back in October 2007. Corporate earnings are now higher than they were in 2007. Higher earnings should justify increased stock prices since valuations are driven by earnings.

But what about gold? CNBC’s Jim Cramer is saying that gold should break through $2,000 per ounce in 2012. Is gold more valuable than it was last year? I am surprised it is still trading at $1,750 per ounce. I think Warren Buffett did a great job of explaining the rise in gold prices in his February shareholder letter Why Stocks Beat Gold and Bonds: “What motivates most gold purchasers is their belief that the ranks of the fearful will grow.” There certainly is no shortage of fear in the economy today. Speculating on whether the ranks of the fearful grow enough to drive the price of gold higher is anybody’s guess. However, once the ranks of the fearful stop swelling, it is unlikely the normal demand for gold will be able to support the price.

This all amounts to market timing, which is speculating. Jim Cramer’s call on gold is a short-term prediction that may or may not be right. A long-term investment plan should avoid speculating. Instead, it should be based on asset allocation with periodic rebalancing to take advantage of the ups and downs in the market that no one can predict.

Are You Still Timing the Market? appeared on http://rodgers-associates.com/blog/

Have you ever thought of starting your own foundation? Start-up costs and annual administrative duties and expenses can make running a private foundation daunting. You should be considering a significant initial contribution to make a private foundation a viable option. You can achieve similar objectives with minimal expenses and smaller contributions through a donor-advised fund (DAF).

A DAF is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called the sponsoring organization. This organization has been created for the purpose of managing charitable donations on behalf of an organization, family, or individual. A DAF provides an easy-to-establish, low cost, flexible vehicle for charitable giving. In exchange, the donor enjoys a convenient, cost-effective, and tax-advantaged way to make charitable gifts through the DAF.

The donor has their own account composed of their personal contributions. The donor may receive a federal income tax deduction up to 50% of adjusted gross income (AGI) for cash contributions and up to 30% of AGI for appreciated securities. Contributions to private foundations are capped at 30% of AGI for cash contributions and 20% of AGI for appreciated securities. The donor instructs the DAF on which charities will ultimately receive their gifts through grant making out of the account.

One of the overlooked advantages of using a DAF is the ability to manage your capital gains. Suppose you have a large capital gain in gold and you want to avoid paying the higher tax rate on collectibles if you sold some of it. You can move some of the position to your DAF until you determine what charity will ultimately receive the proceeds.

There are other considerations when choosing the best vehicle for your charitable giving. A private foundation gives much more control than a DAF. There are no rules of thumb to determine when a foundation is more cost-effective. You may want to talk with a financial adviser that is familiar with these issues before you make a final decision.

Private Foundation or Donor Advised Fund? appeared on http://rodgers-associates.com/blog/

Kudos to Consumer Reports for their recent article “Avoid Costly Retirement Mistakes” and for hitting on one of the biggest mistakes people make when planning for retirement. The financial press spends a lot of time discussing accumulating a nest egg and often neglects the importance of getting your expenses under control. The Associated Press published an article in February titled “For boomers, it’s a new era of ‘work til you drop’,” lamenting the problems facing 78 million baby boomers that will not be able to retire at age 65. The article cites the stock market crash in 2008, employers eliminating pensions, and downsizing as the reasons boomers will be putting off retirement. Unfortunately, over-spending and under-saving were not even mentioned as a reason some are not prepared.

Life expectancy tables tell us that a healthy 65-year old couple has a high probability that one of them will live for another 30 years. Fifty years ago, life expectancy for that same couple was less than half that amount of time. Thirty years of retirement is expensive, which is why Social Security is in trouble and employers are changing their pension plans to 401(k) plans. It takes a lot of money to fund 30 years of retirement.

Those that want to retire at age 65 can still do so, but it will take careful planning that starts with disciplined spending. Saving a minimum of 10% each year is just the beginning. A person entering the workforce that saves 10% each year should be able to replace their earned income after 35 years of savings and investing. Anyone that waited until age 50 to start savings will need to save a lot more than 10%. They won’t have years of compounding to work for them. It can still be done by emphasizing spending control and asset accumulation. The less you spend, the smaller the nest egg needs to be to fund your spending.

What Is the Biggest Threat to Many Retirement Plans? appeared on http://rodgers-associates.com/blog/