One of the biggest concerns facing many Americans right now is retirement.

Looking at the damage done to retirement investment accounts, thanks to the financial crisis and the current bear market, some are looking for ways to encourage new options for retirees. Even for those with longer time frames until retirement, there is still fear. Even if retirement investment accounts recover and grow between now and retirement in 15 - 20 years, some are concerned that the next crash could pull the rug out from under them just as they retire.

Another problem revolves around the longer life expectencies that retirees are expected to have. Few people now will have enough in their retirement funds to last the 20 to 30 years that people will soon be expected to live after retiring.

Enter an ambitious new bill aimed at shoring up retirement.

In the House, the Retirement Security Needs Lifetime Pay Act (H.R. 2748) is being proposed. This bill would allow a tax break for those who take their retirement investment accounts and used them to buy a lifetime annuity. CNN Money offers a look at two of the main tax breaks offered in the bill:

1. You will be allowed to exclude 50% of annual annuity payouts from a non-qualified plan (one you invested after-tax dollars in) from taxable income. The annual maximum exclusion would be $10,000.
2. You will be allowed to exclude 25% of annual annuity payouts from a qualified plan (401(k), IRA and other tax-deferred accounts) from taxable income.

Additionally, there will also be incentives to purchase what is known as longevity insurance. This is actually another kind of annuity. You wait until you are much older — usually in your eighties — to start taking payments. As a result, the payouts are normally higher. And they would start about the time your retirement investment accounts may be running somewhat lower.

Whether or not this is the answer to the problem of investment-based retirement accounts remains to be seen. But it is clear that there are some definite concerns about the ability of Americans to have enough money throughout retirement. An annuity might be helpful. However, the downside to an annuity is that you trust the management of it someone else. I think I will need to consider the matter further (and see whether this bill makes it through and the tax breaks materialize) before deciding an annuity is right for me. So far, though, I am fairly content with my Roth IRA, which is funded largely with index funds.

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This is a guest post from TJ Valenzuela with Trust Administration Services.

Distributions taken from a Traditional IRA before the IRA holder reaches age 59½ are called early distributions. The amount included as income is subject to a 10 percent penalty under the federal tax code.  However, there are a few exceptions where the 10 percent penalty does not apply.  With many investors forced to dip into retirement savings, it is important to find out in advance if you might qualify for an exemption.  Here are a few examples to illustrate when individuals are exempt from paying the 10 percent early distribution penalty:

Beneficiary: A distribution made to a beneficiary or to the IRA holder’s estate due to the IRA holder’s death is not subject to this penalty.

Disability: A distribution made due to disability is not subject to this penalty. Someone is not considered disabled unless he or she furnishes proof of the disability in such form and manner as the Secretary may require.

Substantially Equal Payments: A scheduled series of substantially equal periodic payments is not subject to this penalty. This special exception is subject to many restrictions. Investors should consult their advisor, CPA, or attorney for more information about their specific circumstances.

Medical Expenses: A distribution made to pay for medical expenses that exceed 7.5-percent of gross income is not subject to this penalty.

Health Insurance: An IRA distribution can be taken without penalty by an unemployed individual to pay for health insurance if he or she receives unemployment compensation for 12 consecutive weeks. The amount of the qualified distribution may not exceed the amount paid for insurance protection.

Qualified Higher Education Expenses: An IRA distribution is not subject to this penalty if taken to pay for qualified higher education expenses of the IRA holder, the IRA holder’s spouse, or any child or grandchild of the IRA holder or the IRA holder’s spouse.

First-Time Home buyer Expenses: This penalty does not apply when an IRA distribution is taken from an IRA to pay for certain first-time home purchase expenses (subject to specific dollar limitations; please check with your advisor).

Conversions (Direct or Indirect): An IRA distribution from a traditional IRA that is properly converted to a Roth IRA is not subject to this penalty. IRS Levies Effective for distributions after December 31, 1999, a distribution that is made as a result of an IRS tax levy is not subject to this penalty.

Qualified Reservist Distribution: An IRA distribution taken by a qualified

U.S. military reservist (including National Guardsmen) who is called to active duty after September 11, 2001, is not subject to this penalty.

Additional situations in which the 10-percent early distribution penalty does not apply include the following:

Rollover: A proper direct rollover, indirect rollover, or transfer is not subject to this penalty.

Non-deductibles: The portion of a distribution representing a return of nondeductible IRA contributions is not subject to this penalty.

T.J. Valenzuela is with TAS (Trust Administration Services), a leading personal management provider of self-directed IRA retirement accounts, retirement planning services, and custody accounts at www.trustlynk.com.

image source: Dmytro Sergiyenko via Wikimedia Commons

Right now, the so-called “three-legged stool” of retirement income is rapidly losing its legs. Social Security was never a program designed to provide an adequate retirement income — it has always been considered supplemental. By the time I retire, Social Security may not even be a contender. Few companies offer pensions anymore, and if you are close to retirement right now, your tax-advantaged retirement account may be losing value. Which means you need something else to help keep you going. Here are 3 ideas for additional retirement income:

1. Reverse mortgage. If you have equity in your home, especially if you have your home paid off, you can get a reverse mortgage. The bank gives you a chunk of money (or makes payments to you). The loan is usually paid back when the house is sold. No credit or income requirements are imposed for a reverse mortgage. However, you should be careful. Reverse mortgages come with high fees and high interest. They are not for everyone.
2. Part-time employment. Few people like the idea of part-time employment after they “retire”. However, it is not always a bad option. You can find a job that you can do for 20 hours a week. It keeps you busy and it can help supplement your income. It means that you have something coming in. You can even turn your hobby into a part-time job in some cases. It is something you can do while you hold off taking your RMDs and wait for the stock market (and your retirement account) to recover.
3. Lifetime income annuity. This is another option. But watch out! Scams abound, and different annuities come with different hazards. In this scenario, you buy an annuity with a rather large chunk of cash. You are paid an annual income for the rest of your life — no matter how long you live. With the stock market in disarray, many people are taking a second look at lifetime income annuities because they remain steady, while retirement account portfolios lose their value in down times.

There are other options as well. You can rent out real estate or sell your home and downsize to something else. You can purchase long-term care insurance and move into a retirement or assisted living community. If you are younger, though, the best option is to start saving immediately, building a diverse portfolio that is likely to withstand the test of time.

Can you think of other ideas for additional retirement income?

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Times are tough-there is no doubt about that. If you have a retirement account that you are able to “borrow” from you may find yourself tempted to do just that to make it through a financial hardship. Unlike a savings account you are required to repay your 401(k) or face stiff penalties. Many people can and do borrow and repay retirement loans yet here are a few reasons why “borrowing” from your retirement should be your last resort.

• You will still have debt. There are many reasons why borrowing from one place to pay off debt in another is not successful. Granted in some instances -if you can grossly lower your interest rates AND you actually pay off the debt you may come out ahead, but that is not often the case. If you borrow from your 401(k) you may be able to reduce high interest debt but you must still pay back the borrowed money. The only thing you change is the interest rate and who you owe. Since there are other negatives to borrowing from your 401(k), reducing debt is likely not strong enough to offset these negatives.

• Your will put your retirement account on hold. Until you repay the amount you have borrowed you will not be able to contribute to your retirement account. If your regular contribution is $400 per month and it takes you two years to repay your loan, you have missed out on $9,600 of retirement contributions in addition to the interest you would have earned.

• Leaving your job will cost you. And it will cost you big time! If you leave your current job you will be required to repay the amount you borrowed in full within 60 days or pay the taxes and penalties of an early distribution.

• You could end up in a higher tax bracket. Many people take advantage of being in a lower tax bracket due to their retirement contributions. If you take out a 401(k) loan your payments are taken out post-tax and cannot be claimed as a tax deduction.

• You might end up worse than you started. If you are experiencing a true financial hardship, perhaps risk losing your home or your job you do not want to throw good money after bad. Unless you can truly see the end of the hardship in the near future you are better off leaving your retirement money where it is and exhausting any other options available to you. If you try to save your home and fail, you have not only lost your home but also any money saved for retirement. If you withdrawal money to repay debt yet end up filing bankruptcy you have again lost money that otherwise could have remained safe for retirement.

If you find yourself considering withdrawing money from your retirement account it would be wise to thoroughly investigate your options, research the penalties and consider any other available remedies before you risk losing your hard earned money.

Trisha Wagner is a freelance writer for DepositAccounts.com where you can compare rates of deposit accounts from dozens of banks in one place. Trisha writes regularly on the topics of personal finance and savings accounts.

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Not too long ago, I was introduced to Lending Club. I find it an intriguing way to invest, and have enjoyed buying a few notes. While P2P lending isn’t for everyone, I think that there are benefits to the process for those who are interested in helping others while making a return — as long as they can stomach the risk that comes with such an investment.

Funding an IRA through Lending Club

I was interested, therefore, to learn that Lending Club now offers an IRA option. You can fund a retirement account through Lending Club. Here is something from an email I received, announcing the IRA option:

You can now put Lending Club notes to work in a tax-free or tax-deferred Self-Directed IRA account through EntrustCAMA, a leader in self-directed retirement plans. A full range of accounts are available, including Traditional and Roth.

I am happy with my current Roth IRA, but my husband and I are looking for a place to open his Roth IRA. I don’t really know whether we’ll actually do it through Lending Club, since I am inordinately fond of Vanguard. However, it is an option that we can consider.

What do you think? Do you think it’s a good idea to fund an IRA with Lending Club notes?

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One of the best things you can do is look ahead, planning for the future. When considering tax planning and retirement, the year 2010 is something to keep in mind. I recently received this helpful information from James Wagner at Trust Administration Services:

The year 2010 presents a wonderful opportunity for many individuals to convert to investments in traditional IRAs to a Roth IRA. Investors that are interested in taking advantage of growing money tax-free for retirement should check in with their advisor. Resulting from the Tax Increase Prevention and Reconciliation Act of 2005 the $100,000 modified gross adjusted income ceiling in converting a traditional IRA to a Roth goes away in 2010. Investors can spread the tax impact over a 2 year period for 2011 and 2012. But the benefits will not be available forever. Plans that are converted to Roth IRAs for clients in 2011 or 2012, or any time in the future after 2010, will get taxed on everything all in that one year.

I already have a Roth IRA — I never opened a traditional IRA. But this is good information. If you have a traditional IRA that you have been meaning to convert to a Roth, it might be worth waiting until tax year 2010 to reduce the tax hit.

A tax professional or a fee-based financial planner might be able to tell you more.

I’ve been getting emails filled with concern about retirement accounts. With all the economic trouble happening — especially with regard to the stock market — it is no surprise that many are concerned about whether or not their nest eggs will be there in the future. While there is cause for concern for the short-term and those nearing retirement right now, for the long term, there is a better chance that you will see a recovery of the economy, the financial markets and your retirement account. Even if you can hold out for a few extra years, you might find things improved.

If you are just starting out, though, there are some things you can do to help your retirement account grow better. Here are the top 5 tips for your retirement account:

1. Start investing in a retirement account early. It’s never too early to open a retirement account. Teenagers can have a Roth IRA and get in the habit. Even if you’re older, the best time to open a retirement account and start preparing for the future is now.
2. Use tax advantaged retirement accounts. There are tax deferred and tax free retirement accounts set up especially to encourage retirement saving. (Jim at Bargaineering has a great post about retirement investing.) Take full advantage of the tax benefits that can come with retirement accounts. If you can set them up for your spouse as well.
3. Avoid early retirement account withdrawals.There are a few exceptions, but in most cases, you will be hit with penalties and taxes when you withdraw early from a retirement account. Not to mention that your capital will be reduced, so you won’t be earning as much.
4. If you can, avoid leaving your employer until your employer match earnings are vested. In this economy, that can be hard to do. But with most employer match programs, the money they put in isn’t actually yours until after a certain amount of time. You want to make sure you are vested before you change jobs if at all possible.
5. Invest in your retirement account regularly. Have your retirement account money taken out of your paycheck directly. We have automatic withdrawal every month from our checking account (I’m self-employed). Regular investing in your retirement account is key to helping it grow. Even in times like these. As long as you have fundamentally sound investments, and your account is sufficiently diversified, now can actually be a good time to invest in your retirement account. You’re getting great bargains that are likely to yield great results down the road.

Do you have any other tips for your retirement account?

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Disclaimer: I am not a financial professional. Any information you get from this site is not intended as advice. It is likely to be incomplete, and it may not apply to your individual circumstance. Do your own research, consider your situation and/or consult a professional before making money decisions.

Right now, many people are thinking about their finances and trying to figure out how they can improve upon the situation they find themselves in. At the very least, the current economy has many wondering how they can prepare for the future — just in case.

Happily, there are a number of online financial planning tools that can help you figure out what you need to do to move forward on the path to financial freedom. Here are some of my favorite places to go when I need help making a personal finance plan:

• Bankrate.com calculators: If you are looking for calculators, this is the place to go. You can find out whether it is worth it to refinance, how long it will take to pay down debt and figure out how you can save more money.
• DebtGoal personalized debt reduction: I really like how this site helps you figure out a way to pay down debt. Create a personalized debt reduction plan, and see how quickly you can pay off debt in different scenarios.
• Instant Budget Make at CNN Money: This is a great way to figure out how you stack up with others in similar categories, and help you analyze your spending. I also really like the budget planning tools available at Mint.com.
• Vanguard financial planning tools: If you want help with creating an investing plan, or if you are trying to create a retirement plan or prepare for college, there are some great tools at Vanguard. I also really like this handy investment risk tolerance quiz that you can take at Rutgers. A must if you are planning to put together an investment portfolio that works for you.
• Life Happens insurance calculator: Figure out how much life insurance you are likely to need with this handy calculator. It comes from a non-profit together by a number of life insurance organizations.
• CreditKarma.com: Keep track of your credit score for free with help from Credit Karma. Also includes a neat Credit Card Simulator that can help you determine how certain financial decisions can affect your credit score.

Do you have any favorite online financial planning tools?

This video takes a situation faced by many (foreclosure + decimation of retirement investments) and makes it funny.

Happy Friday!

Right now, there is a battle heating up over your retirement account. It has to do with tax breaks on your contributions, and whether your earnings are tax deferred. The new proposals regarding contributions don’t really affect me, since my husband and I are all about the Roth IRA, and we don’t have an employer-sponsored plan. But I know that there are plenty of other folks out there whom this would affect. Jeremy at Gen X Finance offers this:

If you currently save in an employee-sponsored retirement plan, how would you feel if you stopped getting a tax break on your contributions? What if your employer stopped matching because they lost their tax break to do so? On top of that, what if you were forced to contribute 5% of your pay into government bonds regardless of age?

These are very interesting “home” questions.  The meager savings rate we have in this country is due in large part to the tax benefits of a retirement account. If those are taken away, that could pose very real problems. Of course, the solution to the fact that people would inevitably stop saving in the small ways they are right now is to force retirement savings. I have to agree with Jeremy when he points this out:

In addition to the elimination of tax breaks, the plan calls to make contributions mandatory. Now, I’m all for encouraging people to save money, but making 5% mandatory doesn’t sit well. We already have a mandatory retirement contribution that we all make, and it’s called Social Security.

The good news is that few lawmakers are consideringthis seriously. But the fact that it is “out there” is worrying. And with concerns about the deficit, a plan like this would be a convenient way to force a little more money into federal coffers. And who knows? If the idea does gain traction, it could be slipped into a bill aimed at a retirement account plan pushed by President John McCain or President Barack Obama. (See more on their economic proposals here.)

Now is not the time to relax our vigilance. Indeed, the sheer amount of stupidity coming out of both parties with regard to economic issues that affect personal finance requires that we start paying attention.

image source: sxc.hu