Chat about retirement planning with Brenda McFadden

September 18, 2007

This chat has already taken place. Read the transcript below.

Brenda McFadden, of The McFadden Group LLC, joins us to discuss financial advantages of planning for retirement.

Moderator:

Hello. This is Mark Fagan, business editor for the Journal-World and 6News. Brenda McFadden has arrived here at The News Center, and soon we'll begin our chat about financial planning for retirement. If you have a question, go ahead and submit one -- or just follow along...

Moderator:

We're settled in and it's time now to welcome Brenda McFadden, a certified public accountant with her own firm, The McFadden Group LLC, in downtown Lawrence. She has agreed to take questions about financial planning for retirement. We thanks Brenda for joining us, and with that we'll post our first question...

JayhawkAlum03:

I am a young professional who recently finished my master's and am trying to prioritize. While I do have a small IRA started, I also have a substantial amount of college loan debt at various interest rates. After making the max IRA deposit for the year, where else should I be looking since I'm not yet eligible for 401K through work? Is there is another retirement investment I should focus on or should pay down the student loans despite this reducing the interest deduction on my taxes?

I read an article in today's USAToday about those individuals who've worked to retire early and would like to be one of them.

JayhawkAlum03:

Oops- the article I was referencing was actually on MSN.com

Brenda McFadden:

Its great to be here, Mark, thanks for inviting me.

Pay down your debt. Any tax advantage that you enjoy from deducting the student loan interest every year does not outweigh the drag on your cash flow from just making the payments every month. In addition, a Roth IRA is a good tool for someone of your age in lieu of the traditional IRA because a Roth IRA grows tax free and distributions beyond age 59 1/2 are tax free. In essence, operating in a truly tax free environment that a Roth IRA allows outweighs the deductibility of the traditional IRA...(contributions to Roth's are not deductible).

Brenda McFadden:

Saving certainly IS essential, if you ever do want to stop working. Starting early with a monthly amount that is achievable and not 'painful' is the easiest way to get into the habit of saving. A great way to make saving very easy is to set up an automatic or electronic transfer from your main account to a savings account so that even if you forget to save in a particular month, the transfer will be made into an interest bearing account and out of your reach for spending.

Moderator:

When it comes to retirement, how early is too early to be saving? Is it possible to convince young children that they need to be putting money away (in their piggy banks, even) so that they have money to buy toys for their own grandkids 60 years from now?

Brenda McFadden:

Its absolutely never too early to save. Teaching our children about saving and the benefits of it are part of our responsibility as parents so that at some point, they'll be able to take care of themselves. Getting kids to think past immediate gratification is difficult, but a good lesson for becoming responsible adults.

jaimecole:

If I participate in an employer plan already through my full-time job but I also have a side business that is a s-corporation, can I set up and participate in a retirement plan within my own s-corp?

Brenda McFadden:

Great question! In general, yes, but you must be taking W-2 wages out of your corporation, since all retirement plans are based on earned income. Depending on how much you would be able to stash away each year and if you have employees or not, consider a solo 401(k) or what's sometimes called a UniK plan or SIMPLE plan. Different plans have different contribution limits and administrative costs, so finding the right fit for your situation is the first important step.

Moderator:

And we have a follow up from jaimecole...

jaimecole:

In your opinion, which is better, Roth IRA or Traditional IRA?

Brenda McFadden:

In a very general sense, a traditional IRA has required minimum distributions, is taxed when distributed, lower adjusted gross income limits if you're eligible to participate in an employer sponsored plan, and additionally, depending on your age, for certain sized estates (at death) you/your estate gets taxed twice on those funds. Conversely, the Roth IRA does not have required minimum distributions, is not taxed when distributed, the adjusted gross income limits are higher and Roth accounts will not be taxed twice in your estate. In general, I like the Roth.

motiv8d:

I have a 401(K) plan from my employer, but I need some cash for school. Is there any penalty for early withdrawal? If so, how much?

Brenda McFadden:

The first place to start is whether or not your employer's plan allows in-service distributions - that is, early distributions while you're still employed. And if it does, for what ages. Once you've determined that your plan allows early distributions (and you don't have to quit to get them!) then the question is what is the tax affect on you. If you're under age 55, in addition to the income tax that you will owe on the amount distributed, you will also be subject to a 10% tax penalty on your federal return. Don't forget about the state income tax liability. Some plans allow loans and if your plan does allow loans, those would be limited to $50,000 or 50% of your vested account balance.

sleepylady:

If I was ready to downsize and sold my house for $250,000 (which is paid for) and bought a new one for $125,000, would I be better off to pay cash or take out a mortgage loan?

Brenda McFadden:

It all depends. Things that drive the decision would be your age, other assets, other sources of income, other debts, lifestyle, etc. Its difficult to give you a definitive answer without information concerning the other variables. This sort of decision should not and cannot be made in a vacuum and those other relevant facts and circumstances need to be considered.

Moderator:

I think sleepylady raises an interesting issue, as it pertains to retirement. How much should people (or should they not) rely on any single investment -- in this case, perhaps, real estate -- for retirement income? You often hear the "don't put all your eggs in one basket" line, but how realistic is that?

Brenda McFadden:

For people who are dependent on their own money to retire (excluding inheritance or the lottery), in a perfect world, we like to have people 3 to 4 different asset classes or 'buckets'. The first would be taxable liquid investment for emergencies or opportunities (like a savings or money market account, mutual funds, etc.), the second bucket would be your qualified plan assets (like 401(k), IRA's, etc.) and the third would be a tax-free bucket, such as Roth IRA's and Roth 401(k)'s and cash value insurances. Depending upon cash flow and cash needs, fill the buckets up in that order and if you are lucky, do all three and maximize all three. When it comes to distributions upon retirement, take the money out in that same order. Taking the money out of the taxable bucket first allows the qualified retirement bucket to continue to grow tax free until such time that you need it and the same with the tax-free bucket. The fourth asset class is real estate, which requires a different level of expertise or effort - and is not for everyone.

Moderator:

That's about all the time we have for today's chat. We thank Brenda McFadden for taking time today to answer questions and share her insights about saving and planning for retirement.

Brenda McFadden:

It was my pleasure, Mark.

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