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Social Security, Lies and Videotape – a Massachusetts Consumer Lawyer’s Perspective

This note is not intended as a primer on Social Security, but a brief essay, by a Boston bankruptcy attorney who regularly receives a host of questions from clients on where its going, where it came from, and what is does now. From its inception during the Great Depression in 1935, the Social Security Act was expected to “To provide for the general welfare by establishing a system of federal old-age benefits and by enabling the several states to make more adequate provision…” Essentially, the federal Act was intended to provide economic security for all; a matter too critical to be left to the several states and their various laws.
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Protecting Retirement Accounts in Massachusetts Personal Bankruptcy

Massachusetts consumers who file for personal bankruptcy protection are fortunate when it comes to protecting retirement accounts. This is because whether they use the bankruptcy state exemptions (generally used when protecting a home with equity) or the federal exemptions (more generous for other assets), retirement assets can be protected if the Bankruptcy Petition and Schedules are properly prepared and filed.
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Taxes, 401(k) allocations a Massachusetts Consumer Update

Our clients often ask for personal investment advice regarding the assets they can protect in filing a Chapter 7 personal bankruptcy. Massachusetts investors need to know that they can exempt their qualified retirement accounts. In our September 1, 2009 blog article, we discussed asset allocation for our Boston, Massachusetts clients’ qualified accounts. This article is merely an update; a reminder to check that you are making the most of your retirement, or other long term savings, investments. The US Securities and Exchange Commission offers a primer as well!
 
In a survey undertaken by Barrons, the 2010 recommendations of the 20 top money managers revealed some interesting trends. They recommended between 37% and 67% in equity (stock) investments; 15% to 45% in fixed income (bond); 8% to 33% in alternative (commodity etc.) investments; and 0% to 15% in cash. Of particular note was the renewed focus on non United States equity and debt. Barclays and Deutcsche Bank recommend that 22% of equity be invested oversees. Morgan Stanley puts the percentage at 24%
 
There are many other websites out there that will help you get started with investing.

IRA Retirement Options for Massachusetts Clients

Our Massachusetts clients who are not covered by retirement plans (such as 401k’s or 403b’s) often request clarity regarding retirement account options. With April 15 just around the corner, we are glad to provide an update. First, we need to identify the various “vehicles” available. The basic plan is the Individual Retirement Account, or IRA. An IRA allows you to deposit up to $5,000 (or $6,000 if you are over 50) into a tax deferred account each year provided you meet certain criterion. The good news is that this reduces your taxable income by the amount you put in. Further, if you can pay the tax on the income, you can do a ROTH IRA, which has an income restriction for qualifying, however, has the added benefit of allowing tax free withdrawals – by you or your heirs. The monies can be invested in stocks, bonds, mutual funds, commodities, certificates of deposit or otherwise, so long as they stay within the host company’s IRA account.

You are allowed to convert IRA investments into ROTH IRA investments, however, there are income restrictions for 2009. This changes in 2010. See our prior blog articles on Roth IRA conversions and Roth IRA planning for more details.
 
You can also open a ROLLOVER IRA, which is simply converting qualified retirement monies in a 401k, 403b or other retirement account, into an IRA that you now can control the investments in.

There are also SEP IRAs and SIMPLE IRA’s for folks with their own businesses. They have various requirements, however, the SEP IRA allows up a contribution up to $49,000 and the SIMPLE IRA allows contributions up to $11,500 ($14,000 if over 50) The requirements and restrictions can seem daunting, however, T. Rowe Price, whose useful website I have included above, provides details for opening and funding each IRA. There are other helpful websites too: Charles Schwab and Company is excellent. Many of our clients’ companies use Fidelity for their 401k or 403b plans. They have individual account services too. The lowest cost fund family is generally Vanguard. And, as we discussed in our earlier blog article on long term investment strategies, costs are critical because they create a drag on monies that are invested for the long term.
 
It should be noted that this article is not inclusive of all retirement plans. Many of our clients have Keough profit sharing plans, for example. This article is simply a reminder of the basic retirement vehicles out there for clients who don’t have retirement plans at work. Nor is this article investment advice. We are simply reminding our clients to review their options with their tax investment professionals before April 15.

2010 Retirement News for Massachusetts Clients

Many of our clients are worried about their retirement, their 401k accounts, and, of course, what to do about future investing. They are not alone. In a study undertaken by Wells Fargo, it was shown that workers are not saving sufficiently. Notwithstanding the significant loss of value of retirement accounts following the “crash” in 2008, according to their survey, only 23% of workers are saving more than they were a year ago, 57% are saving the same amount and 20% are saving less. On the other hand, 56% of pre-retirees are planning to work more years.

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Do I Need A Will?

When clients call and ask us if they need a will, we almost always reply in the affirmative. Why? Because without a will, your assets will not necessarily go to whom who wish. Further, the Court will appoint an “administrator” and this may not be the person you wanted to carry out your wishes. Finally, tax planning for your assets will be up to the state and the federal government for those without a will.
 
Some clients report that their assets are minimal. Nevertheless, they often fail to remember life insurance (which can pass outside the will, but should be factored into the plan) and personal injury and wrongful death actions. Some folks report that they have only two children and the Court would split their assets equally anyway. They fail to realize that there could be a fight about who should be the executor and how much that executor should get paid.
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Roth IRA Conversions for 2010 Planning

Increasingly, our Massachusetts clients have been asking about conversion strategies between the traditional IRA and the Roth IRA. All monies invested in a traditional IRA are taxable upon distribution to you. That is, whatever you take out of the IRA will be a taxable event and a 1099 will be issued. On the other hand, whatever you withdraw from a Roth IRA is not taxable; this is because you already paid taxes on the amount deposited in the year you made the contribution.
 
Now, however, there is a planning opportunity for folks with monies in a traditional IRA. If the “modified adjusted gross income” on your 2009 tax return will be less than $100,000, you can “convert” an unlimited amount of your investments in your traditional IRA to a Roth IRA. You will have to pay taxes on the “distribution” and most tax advisors recommend using separate funds to pay those taxes. Nevertheless, the monies can now be invested to grow, tax free to you and your heirs. Thus, as a tax planning mechanism, you can take distributions from the Roth IRA when the tax on traditional IRA would be prohibitive.
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Massachusetts 2009 Rules Changes for Investors; Model Portfolios Update

The “crash” in 2008 has brought fundamental changes to the ways our Massachusetts clients see long term investing in their retirement accounts. Notwithstanding the notion that most of our clients remain invested with a long term plan, there is new evidence that a fundamental shift away from equity (stocks) and toward bonds and cash has occurred. And no wonder; in 2008, the safest asset class of all, U.S. Treasury Bonds, outperformed every other category of assets.
The good news is that US investors are saving more. From the post World War II period to the 1980’s, the US savings rate fluctuated between 8%-10%. Then the savings rate fell dramatically to around 1% in 2005. Recent evidence shows that following the 2008 crash, the savings rate is up to over 5% in the second quarter of 2009.

But what is actually happening now?

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Long Term Investment Strategies for Retirement or other Monies

Many of our clients have retirement accounts: 401k’s, 403b’s, IRA’s, Roth IRA’s, or some other type of long term investment account. Under the Bankruptcy Code, we can usually construct the exemptions so that these assets are excluded from the Creditors.
 
Too many of our clients do not get proper guidance for investing these long term monies. Furthermore, we have many clients, especially children, who need a trustee for long term monies. I have managed children’s trusts and special needs trusts for decades for many clients.
 
This article is intended as a primer for folks who need to begin to understand, or who need a refresher on understanding, how to handle long term money. What do we mean by long term money? I mean money that is really not needed for years; more than 10 years. Money that is put away for retirement, for example, that will not be touched for painting the house, sending junior to college next year, or buying a car.

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