With the increase in contribution limits for 2012, consumers have more options as they plan for retirement.

In working through our important documents, I took the time during this retirement category to explain the options through an overview, the types of accounts, allocating your money, designating your beneficiaries, and transferring your accounts.

In completing this category, I will share how to invest in multiple plans and list the retirement documents held within my File Box 3.

Investing in Multiple Plans

If you have money to invest for retirement, then you will want to get the most from your contributions. Remember, you will need to part with your money and not touch it until retirement.

If you think you will need that money before retirement, then consider a money market fund – which acts like a savings account with a higher return for your investment.

When you determine that you can put this money aside without touching it until retirement, then invest as follows:

1. Employer-sponsored Plan – the maximum one can contribute in 2012 is the lesser of one’s entire income or up to $50,000 which includes any matching by the employer. For 401(k) and 403(b) plans, employee contribution limits are $17,000.

2. IRA or Roth IRA – the maximum is $5,000 per person. You may split your contribution between your Traditional IRA and Roth IRA, but the total cannot exceed $5,000 in your individual retirement accounts.

3. Annuities – if you have invested in the prior two options or a self-employment option and still need a retirement account, then invest in annuities. Remember, annuities are not tax-free, so choose wisely.

Filing Retirement Documents

Within File Box 3, I have filed our social security documents in the first file opening. In the second and third slots, I have our retirement documents. The second slot holds Paul’s retirement documents while the third file opening holds my retirement documents.

Paul’s Retirement Documents

1. His employer-sponsored retirement plan documents include the summary description, quarterly statements, and beneficiary designations which are paper clipped together. If he had any withdrawals, then copies would also be kept within this bundle.

2. For his Roth IRA, the summary page, conversion documentation, quarterly statements, and beneficiary designations stay paper clipped together within this opening.

3. The final set of documents are copies of the check and account statement from the initial transfer from an employer-sponsored plan to a Traditional IRA.

These three sets of documents are housed in the second file opening of our File Box 3.

Tracy’s Retirement Documents

Behind the summary pages, I keep one set of documents for my Roth IRA. These documents include copies of the check from my employer-sponsored 401(k) plan when I rolled it over to a Traditional IRA, the quarterly statements, and beneficiary notifications.

This bundle also includes the transfer paperwork from a Traditional IRA to a Roth IRA and all the quarterly statements since the conversion. These documents remain paper clipped and housed in the third file opening of File Box 3.

Other documents you might have are correspondence, withdrawal slips, and merger documentation when one company combines with another.

Weekly Project: Separate your retirement documents by person and file them.

In using time wisely to organize your important documents, find a system that works for you. I share my documents as an example to follow. Adjust these recommendations to meet your needs.

In finishing up 2012, we have completed the second of five categories in File Box 3. Beginning in 2013, we will continue organizing the third category – our investment documents. Continue plugging along while using time wisely.

Question: What additional retirement documents do you have within your filing system?

If you established your retirement accounts when you were in your 20s, then you may need to adjust your retirement choices as you draw closer to retirement.

This category of retirement plan documents began with an overview, the types of accounts, allocating your money, and designating your beneficiaries.

In continuing this retirement category, remember these tips and tricks when transferring retirement accounts.

Transferring Retirement Accounts

Employer-sponsored plans to a Traditional IRA

If you get laid-off or leave an employer where you have a retirement account, you can choose to leave your retirement account with that employer or transfer it.

When Paul and I left Pennsylvania, we both had employer-sponsored plans. Paul had a 403(b), and I had a 401(k). We both chose to transfer our funds to a Traditional IRA.

NOTE: When transferring from an employer-sponsored plan to an individual plan, you must choose a traditional IRA. You can later convert your Traditional IRA to a Roth IRA, but you cannot transfer from an employer-sponsored plan directly to a Roth IRA. The main reasons are tax changes and moving types of plans.

Since Paul and I had to open up a Traditional IRA each for these funds, we contacted our provider – Vanguard – for the process they suggested we follow. To avoid tax penalties, we completed a custodian to custodian transfer on each account.

The employer-sponsored plans wrote checks directly to our Vanguard fund, but sent us the check. We then filled out the appropriate paperwork and sent the checks with the paperwork to Vanguard.

Our accounts were setup, and we did not incur any tax penalties since we did not take possession of the money. If we had had a Traditional IRA already setup, we still would have opened another account to keep the monies separate.

Traditional IRA to Roth IRA

Since Paul and I know not what our tax bracket will be when we retire, we wanted to convert to a Roth IRA, but the taxes on the conversion are due for that tax year. Without the money set aside for that tax bill, we waited.

Fortunately, there was a loophole in the tax system for 2010. Due to a bill passed in 2005 called the Tax Increase Prevention and Reconciliation Act (TIPRA), a Roth conversion in 2010 did not incur the taxes until 2011 and 2012. With the tax spread over 3 tax years, we jumped at the opportunity and converted both of our Traditional IRAs to Roth IRAs.

To make the conversion, we contacted Vanguard, and they handled the transfer over the phone. It was very easy as we were keeping the same allocation of our contributions. We paid half of the tax from these conversions in 2011 and will pay the remainder when we file our 2012 taxes. Then when we need the money in retirement, the taxes will have been paid.

If you transfer your individual accounts between companies, then contact the company you are transferring to for their recommendation. Sometimes, they can handle most of the conversion for you.

In using time wisely to transfer your retirement accounts contact the company who will hold your money. They can save you money, energy, and time by giving you instructions.

When you transfer, do not take possession of the money. Do a custodian to custodian transfer to prevent tax penalties. Then keep copies of all correspondence regarding the transfer.

Weekly Project: Gather all documentation resulting from transfers of your retirement accounts.

Keep working on getting your documents organized. Next week, I will share the documents I keep within this retirement category of my file box 3. Until then . . . keep organizing!

Question: If you have transferred accounts, what tips can you share to save money, energy, and time?

This series has been filled with lots of information. Hopefully, the information has been helpful and not confusing.

With so many options, one can get lost and lose hope. My goal is to present the material as thoroughly as possible without overwhelming you with information. 😉

We began this retirement category with an overview, the types of accounts, and allocating your money.

Once you have your retirement plan and diversified your contributions, the next step is designating your beneficiaries.

Selecting Beneficiary Designations

Beneficiary Defined

In the event of your death, your beneficiaries are the people, trusts, or estates to whom you leave your benefits. You will need to designate at least one beneficiary for each retirement account.

Beneficiary Types

There are two types of beneficiaries: primary and contingent.

Primary

A primary beneficiary inherits the retirement benefits immediately upon the death of the account holder without going through probate and without consulting the will. Even if the account holder’s will gifts the retirement account to another, the benefits fall to the primary beneficiary.

One can name more than one beneficiary giving each a percentage of the benefits, but the total percentage must equal 100%. For example, Uncle Bob – 50%, Aunt Mary – 30%, and Cousin Joe – 20% = 100%.

If an account holder names someone other than a spouse as a primary beneficiary, most providers will require written permission from the spouse before accepting the beneficiary.

Contingent

The contingent beneficiary will receive the benefits if the primary beneficiary is unavailable or unwilling to do so. You may name more than one contingent beneficiary, but you must select the percentage per beneficiary. In some cases, you may name a second contingent beneficiary in the event the primary and the first contingent cannot accept the benefits.

Beneficiary Selection

If you are married and have an established trust, make your spouse your primary beneficiary and the trust your contingent beneficiary. If you have children, you might consider making your spouse your primary beneficiary, your children by percentages your first contingent beneficiaries, and then your trust your second contingent beneficiary.

If you have a trust, then contact the attorney who established it to ask for guidance regarding naming your beneficiaries. Each state or commonwealth handles probate, wills, and beneficiaries differently. Your attorney can advise accordingly.

Beneficiary Update

In the event of a birth, death, or divorce, you may need to update your beneficiary designations. As a general rule, check your beneficiary designations annually.

In using time wisely, check your retirement accounts for your beneficiary designations. If needed, make any necessary changes and keep copies or e-mails of all correspondence.

Weekly Project: Update your retirement beneficiaries.

As we continue organizing our important documents, designating and updating our beneficiaries guarantees our primary beneficiaries the benefits of our accounts. You have worked so hard to choose the right investment and allocated your contributions. Take time to designate your beneficiaries to guarantee those benefits to those you love. Happy designating!

Question: How often do you check your beneficiary designations? 

In working through our important documents, I am taking a bit more time on the retirement category to explain some very confusing aspects of investing.

Though I am not a financial adviser, I have been through this process. I know how confusing it is, and how much easier it is when you know your options.

Though I cannot choose for you, I can point you in the right direction and offer encouraging words along the way. 🙂

As we continue organizing our important documents, we are working on the second category of retirement plan documents in File Box 3. After the overview, we looked at the different types of retirement accounts. Today, we will consider how to allocate your money in those accounts.

Allocating your Money

Employer-sponsored Plans

When we signed up for our employer-sponsored plan, we had to choose how to diversify or invest our contributions. Honestly, this was the hardest part for me. I researched and found a breakdown I felt comfortable doing. Then I consulted my uncle to confirm my choices before forging ahead. This table from  Personal Finance for Dummies by Eric Tyson provided the guidance I needed: 

At the time we setup our accounts, we chose the 25-year-old allotment recommendations. In the next few years, we will adjust to the 45-year-old recommendations.

We looked among the available funds offered through our employer-sponsored plan and found a reliable balanced fund, larger company stock fund, smaller company stock fund, and international stock fund. By going a quick search on Swag Bucks, we found options we liked. The chart guided us to our choices.

Individual Retirement Accounts

Unlike the employer-sponsored plan, the individual retirement accounts can be setup at any financial institution. Though having so many options, making this choice was actually less complicated for me.

I knew from all the reading I had done that we wanted to invest in mutual funds. A mutual fund is run by a fund manager. Many investors pool their money together to purchase the securities and each owns a part of the whole. So, with a small investment, you can own shares of a fund that your one investment would never have been able to purchase alone.

Knowing we wanted mutual funds, we just looked for no-load options. This means that there is no commission charged. We chose Vanguard which is the largest no-load fund company and consistently has the lowest operating expenses in the business. By going with Vanguard, we keep more of our investment rather than paying high fees and expenses.

The recommendations from Eric Tyson we used to decide were the conservative portfolio and aggressive portfolio:

Conservative Portfolio – 50% stocks and 50% bonds

For example: Vanguard Total Bond Market Index – 25%, Vanguard Star – 55%, and Vanguard International Growth or Vanguard Total International Stock Index – 20%

Aggressive Portfolio – 80% stocks and 20% bonds

For example: Vanguard Star – 50%, Vanguard Total Stock Market Index – 10 to 20%, and Vanguard International Growth – 30 to 40%  OR Vanguard LifeStrategy Growth – 100%

Making these decisions is a prediction. We do not know what the market will do, but we chose based on the recommendation we had. Thus far, these investments have done well. We have seen the market drop and rise, but overall our investment continues to grow.

By researching and using guidelines, you can make informed decisions in allocating your money. With your plan in place and your money diversified among the funds, your retirement savings can grow to meet your future needs.

Weekly Project: Review your asset allocation within your retirement accounts.

In using time wisely to file your important documents, continue making progress. Next week, we will look at selecting your beneficiary designations. In the meantime, happy organizing!

Question: How often do you change your investments? 

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