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Year-End Portfolio Planning Tips for Retirees

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

With the holiday season closing in fast, don't forget to take some time to think about your year-end portfolio planning. A couple of months ago Morningstar's Christine Benz outlined some general year-end portfolio planning tips, but she is here today to talk about some year end tips specifically for retirees.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So the first thing that we want to talk about today are what's known as Required Minimum Distributions. You have some tips for retired investors regarding these RMDs.

Benz: Right. So, Jason, these are the distributions that a retired person must take from retirement accounts, including 401(k)s and IRAs. You have to start taking these once you hit age 70 1/2.

So, the first thing is to mind this deadline date because you will pay an onerous penalty if you don't take RMDs that you were supposed to have taken. So just keep your eye on this deadline.

And the other thing to do is make sure that you have ready cash in your accounts that you can draw from. So you don't want your investment firm to have to decide which of your assets to sell for you. Make sure that you've got that cash carved out for RMDs to come out of your accounts.

Stipp: It's quite possible that you might have a number of traditional IRA accounts. Is there a way that you can be strategic about how much you take from those or are you forced to take a certain amount out of each one?

Benz: Well, it's interesting. All you have to do is, say, you have multiple IRAs, you have to calculate the total amount across all of the IRAs, but then you calculate the distribution that needs to come out of those IRAs, and that distribution can come out of a single account.

So you can be very strategic, and I do think it makes sense to, to the extent that you can, stitch this process together with a rebalancing process. So if you've gone through and done the work and determined that, "Oh, I need to lighten up on emerging market stocks," for example--that might be a logical place to take your distribution from.

Stipp: So basically something that you might think about selling anyway?

Benz: Exactly.

Stipp: So, you had mentioned that there is a penalty. Is there a way that you can make sure that you can avoid this penalty? What's a good process to put in place to make sure that you are taking what you need to take and then you don't get socked for something and have to pay the government when you wouldn't have to otherwise?

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Benz: Right. That's a great point, Jason. That's why I always tell retirees to set up an automatic RMD account. Most of the big firms will let you do this. So they'll automatically spit out that RMD whether you decide to tell them to do so or not. So that's a good safeguard to put in place.

Stipp: Second point, Christine, that you had mentioned to me that retirees should keep in mind is gifting. So this is something that you might already be thinking about in your retirement years--gifting to your children and your grandchildren. What things should I think about on that front for 2010?

Benz: The amount that you can pass to any individual in the form of a gift without paying gift tax is $13,000 for 2010. Married couples can do $26,000 per individuals. So that's a pretty generous gift right there.

But if you are in a position to gift even larger amounts, 2010 appears to be a fairly good year to do that because of relatively low gift tax rates. So if you are sending out a gift that's larger than that $13,000 threshold, the gift tax rate that you'll pay will be lower. And also, it appears to be a pretty good year to gift to grandchildren if you are making very large gifts.

So, before you do any of this, my advice is to check in with an estate planning attorney just to corroborate that, make sure that you are free and clear to give those gifts and make sure that it's a good idea, and you are thinking through all the things that you should be.

Stipp: Another thing, Christine, that you had mentioned to me that sort of raised my eyebrows a little bit at first is contributions to a Roth IRA. Normally you don't think about continuing to make contributions to retirement accounts [in retirement], but the Roth does offer some more flexibility.

Benz: It does and it offers the ability to stretch out those tax savings, so you do not have to take the RMDs from the Roth accounts, which can be a very valuable thing for seniors who don't need that money. They can allow that money to compound and grow over a period of years.

So, the trick, though, with making additional contributions or making contributions to a Roth once you've exceeded age 70 1/2 is that you have to have earned income. So I got a question earlier this year from a reader saying, "Can I use my RMD to fund a Roth?" No, you can't, because that's not earned income. But it is a nice way to, if you are working part time, to maybe tuck an additional $6,000 into a Roth IRA for 2010.

Stipp: So take advantage of that flexibility, if you can.

Benz: Right.

Stipp: The last thing, Christine, and I know this is on a lot of retirees' minds are the health-care costs. The end of the year can be a good time to assess what your health-care costs are. What are your tips on that front?

Benz: So, total up what you've spent for the year-to-date; it's a good idea if you can keep those receipts and see how much you've spent on out-of-pocket health-care costs. See if you are getting close to that IRS threshold of 7.5% of adjusted gross income in terms of your total health-care outlay. If you are, it may make sense to schedule some of those tests or prepay prescriptions so that you can hit that threshold and take advantage of that nice tax deduction.

Stipp: Christine, it sounds like these tips could make for a happy holidays for your portfolio. Thanks for sharing them today.

Benz: Thank you, Jason.

Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.