Rethink Your Retirement Plan

What you can learn from expert makeovers of real-life retirement savings strategies

Jeremiah is a corporate account manager with Office Revolution, a commercial office furniture dealership that does not offer a 401(k). Moreover, the couple also owns a health club franchise, and most of their spare cash has been going into the business. As a result, they say, they haven’t been able to build up a cash reserve or fund a retirement plan for Jeremiah.

The Makeover: “Tamara’s asset allocation is reasonable for someone who is willing to take some risk in order to aim for above-average returns,” says Safran. “However, I assume the target-date funds are duplicating her stock market allocations. I suggest she reallocate her portfolio to 60% in the common stock fund, 10% to 15% in small caps, and 25% to 30% in the international fund. Then she can eliminate the target-date funds.”

As for Jeremiah, although he doesn’t have a company retirement plan, he can contribute up to $5,000 per year to an IRA (those 50 and older can contribute up to $6,000). Jeremiah should consider a Roth IRA. Although contributions to a Roth IRA are not tax-deductible, they will grow tax-free. After age 59½, he can take tax-free withdrawals, which will complement Tamara’s taxable distributions from her retirement account notes Safran.

Married investors who file a joint tax return cannot contribute to a Roth IRA if their modified adjusted gross income is more than $176,000 in 2009. If their income is between $166,000 and $176,000, married individuals can make a smaller Roth IRA contribution.

All taxpayers have until April 15, 2010, to make IRA contributions for 2009. The Dervins can wait until next year to decide whether an IRA is right for them. If their income is midway through the $166,000 to $176,000 phase-out range, for example, Jeremiah can contribute $2,500 (half the maximum) to a Roth IRA. “Rather than make non-deductible contributions to a traditional IRA,” says Safran, “Tamara might increase her contribution to her retirement account. They would receive a tax deduction for her contribution as well as tax-deferred growth.

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