"Set it and forget it," infomercial marketer extraordinaire Ron Popeil used to say.
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That might have worked for Ron's easy-to-use chicken rotisserie -- but it's not a good approach for your retirement portfolio. Even the best-built retirement plan needs a periodic check-up, so here's a list of seven tips, tweaks and reminders for the year ahead.
1. Adjust your 401(k) contribution.
The maximum employee contribution allowable by the IRS rises by $500 in 2012, to $17,000; workers over age 50 can contribute another $5,500 in catch-up contributions. If you're already maxing out, adjust your contribution rate for 2012 accordingly. Deductible contribution maximums for traditional IRAs and Roth IRAs are unchanged for 2012 - you can sock away $5,000 (or $6,000 if you are over age 50).
Make sure your equity and fixed income allocations are on target by buying or selling assets as needed to make sure you're not taking more risk than desired. Adds Jessica Ness, director of financial planning at Glassman Wealth Services: "Rebalancing puts an automatic buy-low and sell-high methodology to work because you trim asset classes that have grown in size and you contribute to asset classes that have shrunk." Ideally, you should rebalance quarterly.
3. Consider Roth IRA options.
A Roth isn't always the best investment option for available pre-tax dollars because it's a bet on future tax rates, and what you expect your personal tax rate will be in retirement. But a Roth is a slam-dunk option if you're investing after-tax dollars because everything in the account grows tax-free.
Income eligibility limits to qualify for a Roth IRA contribution will increase in 2012. Single income tax return filers with modified adjusted gross income (AGI) less than $110,000 will be eligible to make the maximum contribution to a Roth; for joint filers, the income limit will be $173,000.
If you don't meet the income qualifications, there's another option: the so-called "back-door Roth." It's a two-step process; first, you make a contribution to a non-deductible traditional IRA; then immediately convert that IRA to a Roth. "The key is to do the conversion right after you make the contribution, so the account doesn't have time to accrue taxable earnings," says Maria Bruno, a senior investment analyst at Vanguard Investments.
A caveat: This strategy works best if you don't have other traditional IRA assets, because federal law requires you to aggregate all your IRA assets for tax purposes. So, if you have significant IRA assets that were funded with pre-tax contributions, you'll need to weigh the potential tax bite.
4. Don't forget to take required distributions.
Retirement investors over age 70 1/2 must take the required minimum distribution (RMD) from most types of retirement accounts (except Roths). But some retirees seem to be forgetting this; Fidelity Investments reports that two-thirds of its IRA customers haven't taken RMDs as of early November.
RMDs are calculated for each account you own by dividing the prior December 31 balance by a life expectancy factor that you can find in IRS Publication 590. Often, account providers will calculate RMDs for you -- but the final responsibility is yours. Any RMD amounts that you don't withdraw on time will be taxed at 50%.
5. Top off liquid assets.
A great strategy for extending portfolio life in retirement is to make sure you have sufficient cash on hand to meet expenses without being forced to sell equities when the market is down. Yearend is a good time to refill your "liquid asset pool," that may have been depleted this year, notes Christine Benz, director of personal finance at Morningstar. When considering what to sell, think about your overall portfolio asset allocation, investment strategies and taxes, she says.
"A positive side effect of ensuring that you have adequate cash reserves is that you can keep a cool head during volatile markets, knowing that your near-term living expenses are covered," Benz adds.
6. Give away your IRA.
The law allowing donors over 70 1/2 to make charitable contributions from an IRA is set to expire at the end of this year, unless Congress acts. The Qualified Charitable Contribution provision allows contributions up to $100,000 to be made direct to a single or multiple charities. The gifts aren't deductible, but they are excluded from your income -- and that can help you avoid triggering high income premium surcharges on Medicare or Social Security taxes. The gifts also can be counted toward your RMD.
7. Evaluate your draw-down strategy.
Most Americans don't have a "decumulation" plan -- that is, how much to draw down from savings and when. The trick here is finding a balanced approach that meets income needs while avoiding the risk of running out of money especially in difficult market conditions.
"Ensure that you know how much you have withdrawn over the past year and the amount you may need to withdraw next year," says Ness. "Portfolio values may be down, so withdrawing the same amount in 2012 that you did in 2011 could have a greater negative impact on your portfolio. Knowing how much you need to withdraw for next year and understanding the impact that could have on your portfolio will allow you to make any adjustments necessary, before it is too late."
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