The complexity of retirement distributions:

It won't be long before a lot of people are taking distributions from a myriad complexity of retirement plans, taxable accounts, Traditional IRAs and Roth IRAs, and they should be looking for guidance on where the money should come from first. There is little research and even less agreement on how this should be done.

We are developing a decision matrix which takes a lot of things into account before you can decide where to take your initial distributions. For example: Stocks or funds with a high tax basis might be more attractive to liquidate than IRA assets, but stocks or funds with a low tax basis might be profitably held until the first spouse dies, giving the second spouse a step-up in basis that can really enhance tax-efficiency going forward.

Tax-inefficient investments like taxable bonds are most profitably stashed in the IRA. But as you liquidate the IRA, you are also reducing your capacity to deploy those tax-inefficient investments where they belong. So you have to keep an eye on your IRA "capacity" in relation to the percentage of taxable bonds in the portfolio.

How you leave any leftover assets to heirs at death is another consideration. If the next generation of beneficiaries is quite young, then leaving a stretch-out IRA might be more efficient than leaving assets from the taxable account. However, we are not optimistic, given our current budget deficit, that Congress will maintain our current tax rates, and that money inside a retirement plan is more subject than outside money to the government's taxing whims. This would argue for taking money out of the IRA first, while the getting is good.

If there are estate tax liquidity issues, then it might be beneficial to avoid depleting the taxable accounts, since those assets would receive a step-up in basis, and no income taxes would have to be paid by the heirs to get this money. Withdrawing money from a traditional IRA to pay estate taxes would trigger additional income tax payments.

We look at distributing (rather than reinvesting) dividends and capital gains distributions from the taxable accounts, and considers whether clients have capital loss carry-forwards and/or realized capital losses for the current year (which would suggest taking capital gains from the taxable account sufficient to offset the losses). Beyond that, how important is creditor protection? (IRA assets are less vulnerable.) And are the heirs capable of managing a stretch IRA? Is there a high possibility that they would liquidate it in a few years, rather than stretching out the distributions and taking full advantage of the deferral?

There are two points here: First, that the source and sequence of retirement income distributions is a seriously complex planning issue, with too many variables to yield a pat, simple, one-sentence rule-of-thumb answer. Second: we may not have yet defined all the variables or outlined how they interact with each other.

Ted Feight, CFP®

April 2006

The media is touting the first quarter of 2006 as the great quarter in this decade. It was a good quarter with the DJIA up 5.77%, S&P 500 up 9.68% and the NASDAQ up 17.03%. But what makes it seem so good is that there has not been a first quarter in any year since 1998 that all three of these stock market indexes were positive.

So should you get excited and run out and put all your money into the stock market. Probably not, according to the following:

1. Have you ever heard the saying buy low and sell high? Well the stock market indexes are currently at all time highs.
2. If you look you can find a chart called the Average Presidential Cycle. The one I have takes each week of the DJIA, for each week in every United States President’s four-year term since 1897 and averages them together in a four year chart. That chart clearly shows that during the second year in a presidential cycle the DJIA starts out up, then goes flat to down until the last part of the year. Then the DJIA goes up for some time. This chart does not give guarantees, so don’t take it as one.
3. The two year and ten year interest rates have been inverted for 34 days this year. “So what?” you say. An inverted yield curve is when short-term interest rates are higher than long-term interest rates. This is usually measured by using the 2-year treasury rates in comparison with the 10-year treasury rates and/or the 3-month treasury rates in comparison to the 10-year treasury rates. When the short-term rates are higher than the long-term rates, it is called an inverted yield curve. This usually means that the country will go into a recession within the next two to four quarters. The yield curve has predicted essentially every U.S. recession since 1950 (1969, 1973 - 1974, 1980, 1981 - 1982, 1990, 2001 - 2002) with only one false signal, which preceded the credit crunch and slowdown in production in 1967. To be a credible signal, the curve must stay inverted for 30 days and the 3-month and 10-year treasury rates do the best job of predicting this.

So what do you do? Find your self a good Certified Financial Planner™ to help you answer that question. Ad lives are for aminitures and your monitory future is too important to play around with.