Rollovers

In a recent television commercial, a man is shown enjoying his office retirement party at the end of which he is asked to say a few words to his friends and soon-to-be-former co­ workers. "You know what I'm gonna do now?" he gleefully asks. "I'm gonna cash in my 401(k), and my wife and I are taking a trip around the world—first class all the way!" The cheers he is expecting from the crowd are not forthcoming. Instead, his announcement is met with silence and he watches, dumbfounded, while co-workers stare at him shak­ing their heads in a manner that clearly suggests that his plan may not be well thought out—at the least.

Over the next few years, approximately seventy-seven million baby boomers will be faced with deciding what to do with their 401(k) and other plans savings. Loosely translated, that means over $3 trillion moving through the various financial systems!

Each company has different rules regarding their plans and it is best to consult with the administrator about the options available to you. Perhaps you love the plan and would like to keep your assets with the company. Will they let you? The company may have an option to receive lifetime pension income that may appeal to you. Will this income rise with inflation? Will your spouse receive income and at the same rate? Although the options your company may offer may be appealing, the fact that the choices available may be limited beg you to check outside investment options.

As a rule, your best bet at retirement is a direct rollover of your company-sponsored plan assets into a traditional IRA. A direct rollover, i.e., transferring the balance, untouched and in one lump sum, to an IRA allows you to avoid current taxes and penalties. It also gives you access to more investment choices because IRAs allow you to buy individual investments such as CDs, bonds and stocks as well as mutual funds that may not available in standard company retirement plans. The additional investment choices may help you to increase your income and reduce risk.

There are some pitfalls and potential problems in the rollover process. Yet a surprisingly small percentage of peo­ple, particularly those in higher income brackets, plan to engage the services of a financial planner when they get ready to rollover their plans assets at retirement.

If you are among those who will not be consulting a financial planner to guide you in the rollover process, here are some tips on how to avoid costly mistakes. (Warning: "My dog ate the paperwork" is generally not accepted by the IRS as an excuse.)

· Do your homework. Tax rules governing IRAs, Roth IRAs, etc., are complicated and vary depending on what type of account you have or wish to open. These rules do change so don’t assume you know.

· Know the applicable deadlines. You have sixty days to move (rollover) funds from one tax-deferred account to another. Many people miss this deadline. Perhaps they sent the paperwork to the bank with instructions to "put this money into an IRA" but failed to follow up to be sure the rollover was actually completed. Per­haps you made a clerical error in filling out the nec­essary forms, and no one catches the error until after the sixty-day deadline has passed.

· Make copies of all paperwork, checks, and applica­tions. Then send the original documents registered or overnight mail so that if there is a dispute, you will have records that the deposit and information was sent to the receiving firm in a timely manner.

· Make sure the company you are rolling your assets to is one you are familiar with and plan to invest through. It makes for a smoother transition.

To roll or not to roll must be well thought out prior to execution. Mistakes can be costly and may seriously alter your retirement expectations. Be careful and get help if you need it.

What will you do?

More: When (and How) to Save on Taxes by Not Rolling Over That 401(k)

Is An Annuity The Right Investment Choice For Your Retirement Savings?

The author of 13 books including most recently The Human Odyssey: Navigating the Twelve Stages of Life, Thomas Armstrong, Ph.D., has spent his life writing and speaking about human development, with a particular focus on children. He has appeared on The Today Show, CBS This Morning, CNN, and has presented more than 800 keynotes, workshops, and seminars in 42 states and 16 countries.

Guest Blogger Thomas Armstrong--

The New York Times examined more than 1200 nursing homes purchased by private investment groups in the past eight years, and discovered that, compared to national averages, these homes declined in care given, and scored lower in 12 of 14 indicators used to track ailments of long-term residents.  Homes owned by such investment firms as Warburg Pincus and the Carlyle Group (owners of Dunkin' Donuts), had greater than average incidences in residents of bedsores, easily preventable infections, and unnecessary restraints in freedom and mobility.  Investment firms move in and take over unprofitable nursing homes, fire nursing staff and cut back on other resources, begin making money, and then may sell the homes at a big profit.  While this particular strategy benefits investors, it leaves many aged nursing home residents more vulnerable to a range of age-related risks including depression, loss of mobility, and loss of the ability to dress and feed themselves.  A big problem with investor-owned nursing homes is that they often legally structure their ownership in such a way that it becomes difficult to sue them when residents become ill or die due to neglect.  Because they are privately owned, they are also immune to many of the local, state, and national regulations that apply to publicly owned nursing homes.  They are, therefore, able to function below the radar screens, and above the law.  According to the New York Times, nursing homes received $75 billion in 2006 from Medicare and Medicaid, making them a veritable cash cow for those investment groups that prey on them, cutting expenses, making huge profits, and leaving residents with sub-par living conditions.  To read the entire New York Times article, click here. 

More From Thomas Armstrong   More About HealthCare Issues

Jan Cullinane is the co-author of The New Retirement: The Ultimate Guide to the Rest of Your Life (Rodale, 2007), the Retirement Expert for the NABBW (National Association of Baby Boomer Women), and a regular contributor to Ocean Breeze and Let Life In magazine.

Guest Blogger Jan Cullinane--

Are you a “Type A” personality? A perfectionist? A workaholic? Someone who feels great during the workweek, but suffers from depression, aches, pains, fatigue, and infections – in other words, a person who gets sick when nothing is looming on the horizon? If so, you may have what is called “leisure sickness,” a term coined by Dutch psychologist Ad Vingerhoets of Tilburg University. In a study of almost 2,000 people, about three percent of high achieving respondents identified themselves as suffering from symptoms of illness when they didn’t have much to do, were on vacation, or were no longer working at high-pressure jobs.

What causes leisure sickness? Some experts feel that people who are unable to enjoy downtime suffer because they feel out of control, and this stress results in feeling sick. When negatively stressed, the body produces cortisol, which suppresses the immune system – as a result, people are more susceptible to illness. Those with little to do may become super sensitive to physiological signs, and feel every twinge, while those who are extremely busy ignore signals from their body telling them they are ill. Positive stress (such as a job one is passionate about) may result in greater resistance to disease because adrenaline, which is an immune system booster, is released.

What can you do if you’re retired and feel you suffer from leisure sickness? One solution, of course, is to return to a job you enjoy, or increase your level of involvement – have more meaningful activity and less leisure. Exercise is great for reducing negative stress, and developing a better sense of life-work balance can also be helpful. Examining your approach toward life if you’re a perfectionist or workaholic can also be beneficial.

Can a laid-back retirement make you sick? For about three percent of the population, the answer seems to be yes.

More From Jan Cullinane:  Three Questions You MUST Ask Yourself Before Retiring

For 20 years H.Craig Rappaport has been helping individuals with retirement income planning. The author of Live Long Live Rich—Creating Your Retirement Paycheck, Rappaport has appeared in the Wall Street Journal, Fox News, CNN Headline News, and The Dow Jones News Service, among other news outlets. He can be heard daily in the Northeast on KYW News Radio 1060 AM.

Guest Blogger H. Craig Rappaport--

Suppose your 401(k) retirement plan includes publicly traded company stock? You can save a great deal by paying taxes on that stock now rather than later when you take a distribution. A little known IRS regulation called net unrealized appreciation (NUA) allows you to pull out some (or all) of the shares in the company and separately roll the rest of your account balance over into an IRA. Any increase in the price of the stock (after you have withdrawn your shares and held them for one year) is subject only to long-term capital gains tax, which can be considerably less than ordinary income tax.

Put another way, you pay ordinary income taxes on regular IRA distributions assuming you have not yet paid taxes on contributions to the account. Normally, company stock rolled into an IRA is treated the same way. However, if instead of rolling company stock into an IRA, you withdraw the company stock from your 401(k) and transfer it to a tax­able brokerage account; you bypass ordinary income taxes on the NUA of the stock. What exactly is NUA? It is the difference between the value of the company stock at the time it was purchased and put into your 401(k) and the value at the time of distribution, i.e., when it is moved out of your 401(k). Thus, your income tax, in this case, is based on the value of the stock when you first acquired it—not on the current (and presumably much higher) value.

Another advantage of the NUA tax break with regard to company stock rollover is that there is no required minimum distribution (RMD) on those assets since they are no longer a part of an IRA. For example, if you own one thousand shares of a company stock with a current value of $100,000 with a cost basis of $25,000, you would have an NUA of $75,000. Should you liquidate the stock and withdraw it, or roll it to an IRA for eventual withdrawal, the entire amount would be subject to ordinary income tax. Assuming you are in the 30 percent tax bracket, you would owe $30,000 on the $100,000 distribution if taken in a single year.

Should you choose to adopt the NUA strategy, however, your tax bill should be much less. If you were to roll the stock, in its entirety, out of your retirement plan all at once into a personal non-IRA account, your current tax liability only lies with the amount you originally invested, i.e., the $25,000. Again, if you are in the 30 percent tax bracket, the current tax due would be only $7,500 ($25,000 x .30). The remaining portion, the $75,000 net unrealized appreciation, is not taxed until you liquidate it. If you hold it for more than one year, it will be taxed at the long-term capital gains rate of 15 percent. Assuming it was sold at current market value, an additional tax of $11,250 ($75,000 x 15 percent) will be due.

The tax on the $25,000 of $7,500 together with $11,250 tax equals $19,750 in total taxes. Thus, you save $10,250 by simply doing your paperwork. Not a bad way to start your retirement, don't you think?

Yes, this is a complicated concept and process. By learning about it (and getting help from a financial advisor or accountant), you are likely to save a tremendous amount. The fact is, in the circumstances described, you cannot afford not to take advantage of the NUA.

Caveats: This is a one-time opportunity only. So before proceeding, be certain that the parties involved understand what you are doing. If, for example, your company handles the transfer incorrectly, that could spell trouble. Also, be sure to complete both transactions—withdrawing the stock and rollover to an IRA—in the same year. Otherwise, the IRS could deny you the tax break.

Do not—I repeat, DO NOT—attempt to handle this type of transaction on your own. As a rule of thumb, all company stock and option transactions should be handled through a financial advisor. The dollar amounts associated with these transactions are typically large, which means that any mis­takes can be quite costly. Please consult your accountant, HR person, or financial professional for some guidance before you do anything.

Related: Is An Annuity The Right Investment Choice For Your Retirement Savings?

Jim is frequently quoted in articles about issues affecting senior citizens and has been featured in numerous high profile publications, including Time magazine, USA Today and The New York Times. In addition, he has made multiple appearances on CNBC, CNN, Retirement Living Television and national public television.

Guest Blogger Jim Miller--

Love to travel but hate hotels and the costs that come with them? Consider house swapping! A popular new trend among retirees that offers free accommodations in a homey setting!

How it Works

In a house swapping (also known as home exchange) program, you agree to swap homes with someone who is interested in visiting the area where you live. You stay in their place; they stay in yours, and no money is exchanged – it’s purely a barter system. The payoff comes in the opportunity to live like a local, have some extra space and save money.

All you need to do is list your home (photos included) on an exchange Web site for a modest fee. Then you e-mail the owners of houses you’re interested in – or they e-mail you – and you cut a deal. Perhaps you exchange cars too or agree to take care of each other’s pets.

Who would visit here?

Finding an exchange partner can be more difficult if you live in a remote area, but it’s not impossible. Home exchange companies recommend focusing on your best assets. For example, if you live in an area that’s not an obvious tourist attraction, pitch the nearby destinations that are appealing.

Not For Everyone

While home exchanges have a great upside, they’re not for everyone. For starters, you have to feel comfortable opening your home and possessions to someone you’ve probably never met face-to-face. And keep in mind you’ll be staying in somebody else’s home, which is different from staying in an anonymous hotel room. Your fellow exchangers may have different standards of cleanliness or neatness from yours. And, there’s also the concern they might break or damage something while in your home or back out of the deal at the last minute.

Swapping Sites

While there are lots of online companies that provide home exchange services, here are some top sites that offer both U.S. and international listings:

· HomeExchange ( www.homeexchange.com ): Offers more than 20,000 listings in 100-plus countries. Listing and contact privileges cost $100 per year. Nonmembers can view listings for free.

· HomeLink International ( www.swapnow.com ): Provides about 14,000 listings in around 70 countries. Yearly membership fee and Web access are $110. Add $60 to receive their annual printed directory.

· Intervac ( www.intervacusa.com ): Lists about 10,000 homes in more than 50 countries. Fees start at $65 a year for Web only, $110 for Web plus printed directory.

· Digsville ( www.digsville.com ): Has about 10,000 homes and apartments in 55 countries. Annual fee is $45.

· Seniors Home Exchange ( www.seniorshomeexchange.com ): The only home exchange service exclusive to the over 50 age group. They offer around 3,000 home listings in more than 50 countries. Fees are $79 for three-years or $100 for a lifetime membership.

· Craigslist ( www.craigslist.org ): This isn’t a home exchange site but it does offer a house-swap section and it’s free.

House Sitting

If you don’t like the house swapping concept another option is house sitting. This is where you live in someone else’s home while they’re away. In exchange for the free accommodations, you take care of certain responsibilities such as their pets, lawn, mail, etc. To find these worldwide opportunities visit www.caretaker.org which posts more than 1,000 house-sitting openings per year, ($30 annual fee to see listings). Also check out HouseCarers.com, MindMyHouse.com and SabbaticalHomes.com.

Evergreen Club

If you like staying in bed-and-breakfasts and have a spare bedroom yourself, consider the Evergreen Club ( www.evergreenclub.com ). This is network of more than 2,000 club members (age 50 and older) who agree to play host to each other for short stays. For a modest gratuity of $15 a day for two ($10 for singles) you can stay in a host guest bedroom with breakfast. Annual club dues are $60 ($75 for married couples). Guests make arrangements directly with hosts, and you’re free to turn down inquires anytime you choose.

More Retirement Issues Covered By Jim Miller:

Funeral PrePlanning--Necessary Tips To Know

Save Money On Your Medication

When Do I Begin My Social Security Benefits?

Jim Pedigo, CLU, ChFC, CASL is the President of Financial Rate Watcher$.  His writing has been featured in Advancing Philanthropy and National Underwriter Life & Health magazines, and national newspapers. Jim is a member of the Association of Fund Raising Professionals and the Planned Giving Council of Central Florida.  His financial trade writing focuses on retirement income planning, asset protection and wealth distribution management.

Guest Blogger Jim Pedigo--

Americans are a gracious people.  Each year billions of dollars are given to charities both national and international for religious, health-related, educational, cultural, and other efforts.  Giving USA (2007) estimates that a new record of $295.02 billion was reached in 2006 giving.  How people choose to donate their assets can benefit others as well as themselves and their heirs.  One of the tools used within estate planning is the charitable gift annuity.

A charitable gift annuity enables the donor to irrevocably transfer assets comprising of cash, appreciated assets such as real-estate, or marketable securities to the non-profit organization issuing the charitable gift annuity in exchange for a current income tax deduction and the non-profit’s promise to make fixed payments to the donor for life. Payments can begin immediately or can be deferred to some future date. The charitable gift annuity may be insured by an insurance company

In contrast, the donor advised annuity is a special purpose commercial income annuity, issued by an insurance company. The donor remains in control of the annuity which is funded by cash from the donor, which may be more appealing to the donor than the current income tax deduction of a charitable gift annuity. Income tax deductions for payments made to a non-profit organization from the donor advised annuity can be taken annually instead of up-front as with a charitable gift annuity. Unlike the irrevocable nature of a charitable gift annuity, control of the principal and income of the donor advised annuity, under the terms of the annuity contract, remain with the donor, who is usually the annuitant/owner.

Income is paid to both the donor, and to a non-profit, named by the donor, based on the payment option and dollar amount selected by the donor. These income amounts can be changed by the donor, depending on future income needs. Income paid to the non-profit is deductible to the donor under standard income tax rules.

Donor Advised Annuity Summary

• The insurance company guarantees the donor advised annuity lifetime income for the donor and automatic recurring donations to the non-profit.
• Several payment options are available including single and joint life income, period certain, cash refund at death, and inflation increases.
• Donor may also qualify for higher payments for serious medical conditions.
• Donor maintains control of their principal and personal income under the terms of the immediate annuity contract.
• Donor can increase, decrease, discontinue payments, or change non-profits as future income needs dictate.
• Full or partial liquidity is available to the donor through the commutation feature of the immediate annuity contract.
• A donor advised annuity can be used to insure charitable gift annuity payments.

For example: Ms. Andrews, age 70, makes a premium deposit of $100,000 to the donor advised annuity. Though several single life and joint life payment options, including inflation riders, are available from the insurance company, Ms. Andrews elects to receive monthly lifetime income payments with a guarantee that her original deposit will not be lost by electing an installment refund equal to her original deposit if she passes away prematurely.

Ms. Andrews Lifetime Income Payment: $680.07 monthly, is equal to $8,160.84 annually.

Guaranteed installment refund period: 12 years and 7 months

Income payments are based on average rates in effect 12/10/2007. First payment is made 30 days after deposit. Rates are subject to change.

Ongoing Lifetime Gifts to non-profit organizations of your choice.

Ms. Andrews can now elect how much of her income she would like to gift to a non-profit of her choice. Once elected, her gift is automatically sent to the non-profit every month, year after year by the insurance company.

For Example, Ms. Andrews elects to gift 15% of her income from her donor advised annuity to her selected non-profit. $680.07 monthly X 15% is a $102.01 monthly payment gift or $1,224.12 annually.

If Ms. Andrews’s circumstances change in the future, requiring her to increase, decrease, stop gifts, or change non-profits, she can notify the insurance company in writing.

Although the donor advised annuity’s primary purpose is to provide Ms. Andrews with guaranteed income payments, while benefiting non-profits of her choice, unforeseen events may occur that require immediate cash. The commutation feature allows Ms. Andrews to commute all or part of her contract – convert the value of her future income payments into a lump sum paid to her immediately. Commutation will reduce or eliminate future income payments for both her and the non-profit organization.

In summary, the donor advised annuity by its flexible nature will provide donors with a level of comfort, knowing they can make changes as future circumstances dictate, while currently giving from their annuity income to non-profit organizations of their choice.

*Any guarantees offered within a product, including income guarantees, lifetime or otherwise, are always going to be based on the claims paying ability of the issuing insurance company.

Donor Advised Annuity® Legacy Income Annuity® and Logo®

Read More Expert Financial Opinions

Stanley A. Tomkiel, III, Esq. is a practicing attorney and a partner in the New York law firm of Tomkiel & Tomkiel. Mr. Tomkiel was formerly employed by the Social Security Administration as a claims representative in several field offices in the Northeast. He first published the Social Security Benefits Handbook in 1985 and has revised it many times since then to provide the latest information for readers. The Fifth Edition was published in 2007. An online edition ia available at http://www.socialsecuritybenefitshandbook.com/. Mr. Tomkiel has been practicing personal injury law since 1979. He handles complex serious injury cases. Mr. Tomkiel has achieved the highest rating -AV- by Martindale Hubbell, which indicates very high to preeminent legal ability and very high ethical standards as established by confidential opinions from members of the Bar. He lectures at continuing legal education seminars, and is a member of numerous professional associations.

Guest Blogger Stanley Tomkiel--

“Should I apply for reduced social security retirement benefits at 62 or wait till full retirement age at 66 so I can get the full benefit amount?”

This is one of the most the most common questions folks have when it comes time to consider getting your SS benefits.

You can start collecting benefits as early as age 62 if your annual earnings are below the yearly limit, currently $13,560 (even if above that some benefits may be paid depending on certain variables). But the benefit amount is reduced for each month under age 66. For retirement benefits on your own account, the full reduction is now 25%. Note that for people born after 1954 the reduction gets higher gradually, up to 30% for those born in 1960 and later.

So for example, putting aside future cost of living increases, if a beneficiary now has a full benefit (called a “primary insurance amount” or PIA) of $2,000, the reduced amount at age 62 would be $1,500 per month. At 66 it will be $2,000. So take the reduced benefits now or wait? To decide this, you look at what you will give up compared to how long it will take to make it back. $1,500 per month for 48 months = $72,000. That’s what you give up by waiting (not counting interest if you bank the money).

So what’s the gain? - an extra $500 per month at age 66 (not considering intervening cost of living adjustments). So we divide the loss from age 62 -66 ($72,000) by the gain ($500/mo) and see that it takes 144 months to get the loss back (again not counting interest or cost of living adjustments which come close to canceling each other out anyway).

Getting back to the calculator, we divide 144 months by 12 to see that it will take 12 years beginning at age 66 to get back what could have been received from age 62-66. No longer needing the calculator, we add 12 to 66 and see that it will take till age 78 to recover the deferred benefits. Only then will there be an advantage, at the rate of $500 month. Is it worth it? That 78 age sounds pretty close to the average life expectancy!

But actually, the life expectancy if you are already age 65 varies depending on race and sex from 15.2 years (to age 80 for black males) to 20 years (to age 85 for white females) [source – CDC data Table 27 - http://www.cdc.gov/nchs/data/hus/hus07.pdf#027]

So if you are in good health and feel lucky enough to dodge the Grim Reaper until at least age 78 to see any gain on deferring your benefits, then by all means, let the government hold your money for you and give it back to you monthly.

But there are other important considerations about early retirement, especially health insurance. Medicare does not begin until age 65, so you don’t want to lose any employment-related insurance before then.

But for me, if I’m not working, I’d rather take the money if I’m eligible and if it’s not needed, bank it. It’s available, it’s mine and if I don’t need it, I’ll manage it instead of the government. And if I die, it will be left to my heirs, not the government.

More Financial Experts

Jim Miller is the creator of Savvy Senior, a syndicated information column for older Americans and their families that is published in more than 400 newspapers and magazines nationwide. Jim is also a regular contributor on NBC’s “Today” show, and is the author of The Savvy Senior, The Ultimate Guide to Health, Family and Finances for Senior Citizens, (Hyperion, 2004).

Jim is frequently quoted in articles about issues affecting senior citizens and has been featured in numerous high profile publications, including Time magazine, USA Today and The New York Times. In addition, he has made multiple appearances on CNBC, CNN, Retirement Living Television and national public television.

Guest Blogger Jim Miller--

While most people avoid it, planning your funeral in advance is a smart thing to do. Not only does it give you time to make a thoughtful decision on the type of service you want, it also allows you to shop around to find a good funeral provider, and will spare your family the stress of making these decisions at an emotional time. Here are some tips and suggestions to help you get started.

Compare Providers

Choosing a quality funeral provider is your first step and most important decision in preplanning your funeral. No matter what type of funeral or memorial service you envision for yourself, it’s wise to talk with several funeral homes so you can adequately compare the different services and prices.

Funeral Rule

Are you aware of the “funeral rule,” a Federal law that requires funeral directors to provide you with an itemized price list of their products and services? Be sure to ask for it and review it carefully. The price list lets you choose only the products and services you want. (Note: If state or local law requires you to buy a particular service, the funeral provider must disclose it on the price list, along with a reference to the law.)

Casket Shopping

You can save big – at least 50 percent – by purchasing a casket from a casket store versus the funeral home, and the funeral home providing your service must accept it (it’s the law). To locate casket stores and online stores visit www.casketstores.com and click on “Store Directory” or see www.funerals.org/caskets.htm . Another good shopping resource is Costco ( www.costco.com ), who offers its members a large variety of caskets and urns at discounted prices.

Savvy Fact: According to the National Funeral Directors Association the average cost of a funeral today is around $6,500, not including cemetery charges.

Should You Prepay?

Preplanning your funeral doesn’t mean you have to prepay too, but if you are considering paying in advance, be cautious. Prepaid plans are not regulated by Federal law and state regulation is uneven. Before you sign anything, here are some areas you need to be very clear on:

· Be sure you know exactly what you’re paying for. Get a detailed itemized price list and compare with other funeral providers before committing.

· Are the prices “locked in” or will an additional payment be required at the time of death?

· What happens if you move to a different area or die while away from home? Some prepaid funeral plans can be transferred, but often at an added cost.

· Are you protected if the funeral home goes out of business or if it’s bought out by another company?

· Can you cancel the contract and get a full refund if you change your mind?

· If you do decide to prepay, get all the details of the agreement in writing, have the funeral director sign it, and give copies to your family so they know what’s expected.

Other Options

There are other ways to set aside money for your funeral, rather than giving it to a funeral home. You can set up a payable-on-death, or POD account at your bank, naming the person you want to handle your arrangements as the beneficiary. With this type of account, you maintain control of your money, so if you need funds for medical expenses or something else, you can withdraw it at any time. This type of fund is also available immediately at the time of your death without the delay of probate. And if you’re concerned about Medicaid eligibility, check the laws of your state. Some states will exempt POD accounts if they’re set up as irrevocable trusts.

Savvy Tip: The Funeral Consumer Alliance is a good resource that provides a variety of free online funeral planning publications ( www.funerals.org ) that are very helpful. They also offer an end-of-life planning kit called “Before I Go You Should Know” for $10. To order a kit, call 800-765-0107.

Related: Should You Purchase Longevity Insurance?

              The Necessary Older Parent--Adult Child Financial Talk

Robert Pagliarini has a Master's Degree in Financial Services and is a Certified Financial Planner. and has been featured on ABC's 20/20 and appeared in The Wall Street Journal, Money Magazine, Newsweek, BusinessWeek, the Chicago Tribune, the Los Angeles Times, NPR's Marketplace. In addition, he writes a monthly column in Affluent magazine and is the founder of Pacific Wealth Advisors.

Robert Pagliarini's remarkable #1 Bestselling Personal Finance book, The Six-Day Financial Makeover: Transform Your Financial Life in Less Than a Week! gives people the motivation and tools they need to make profound and lasting changes in the way they deal with money—in a matter of days.

Guest Blogger Robert Pagliarini--

Do you have an IRA or a 401(k) retirement plan? If so, this tip could put a lot more money in your pocket tomorrow, next week, and well into retirement. It’s not a get-rich-quick strategy or even remotely aggressive. In fact, it’s quite conservative and it takes advantage of the power of qualified plans such as IRAs and 401(k)s.

The tip is not “asset allocation,” but instead “asset location.” To give you some foundation for asset location, you first must understand asset allocation. Here’s a one paragraph primer . . . the goal of asset allocation is diversification. Even if you’ve never heard of asset allocation, if you’ve played Roulette, you are already an expert. Would you put your entire stack of chips on just one number? Probably not. Since it is impossible to predict which number will win, you would most likely go bankrupt with this strategy. To avoid this, we spread our chips around. We may place a few chips on the month of our birthday, our anniversary date, and our “lucky” number. We try to increase our chances of winning and decrease the chances of losing by placing bets across several numbers. At the same time though, we decrease the potential payoff. It is a juggle between risk and reward. It is no different with investing. Asset allocation is simply spreading your dollars across several assets since you can’t know which one will perform the best.

While there is much talk in books and articles about “asset allocation,” there is little discussion about asset location. Again, asset allocation is the division of a portfolio among various asset classes (such as stocks and bonds). Asset location, on the other hand, is where you put the assets in which you are investing. That is, what investments should you put in your tax-deferred accounts versus your taxable accounts? The objective of asset location can be summarized with the following statement: “It’s not how much you make, it’s how much you keep.” Your pre-tax return means very little—the only useful calculation is your after-tax return.

When you construct your portfolio, it is important to focus on generating the best after-tax return possible. Through asset location, place highly tax-inefficient investments such as high yield bonds, international bonds, hedge funds, and other investments that produce a significant amount of taxable income and/or those investments with high turnover (i.e., high amount of short-term gains), in your IRA and 401(k) because these accounts are tax-deferred. In other words, you don’t pay tax on the income your investments generate each year.

Let’s use a real-world example. You have two accounts that both have $100,000. One account is an IRA and the other is a regular taxable investment account. Based on your age, risk tolerance, and goals, you’ve determined that an optimum asset allocation for you calls for 50% stocks and 50% bonds (remember, that’s asset allocation!). The stocks are expected to grow at 10% per year and the bonds pay 6% in interest per year. Lastly, you pay 35% in income tax. Now let’s look at two different approaches to asset location:

Version 1

Version 2

(1) Assumes reinvestment

By overweighting tax-deferred accounts with tax-inefficient investments and by overweighting taxable accounts with more growth oriented investments (since growth investments are typically only taxed when sold—and even then at lower capital gains rates), Version 2 pro