Martha M. Hamilton
Washington Post Columnist
Thursday, May 31, 2007; 12:00 PM

Washington Post columnist Martha M. Hamilton was online Thursday, May 31 at Noon ET to answer questions about making smart retirement decisions.

She was joined by Barry Glassman, a financial adviser with Cassaday & Co.

A transcript follows.

To read past Financial Futures columns, click here.

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Martha M. Hamilton: Hi, there, and welcome to the chat. We're very fortunate to have Barry Glassman back as a guest. Barry is very knowledgeable about financial planning and one of the best at explaining the complexities clearly. So welcome to Barry.

Moving on to the department of special pleading, I have two requests: One, my colleague Nell Henderson would love to talk to an individual who invests in the commodities market for a story she is working on. If you fit that description, and you're willing to talk to her on the record, e-mail her at hendersonn@washpost.com. Two, if you're a small business owner who hasn't figured out yet how to provide retirement benefits because of the expense and complexity, and you're willing to talk to me on the record, please e-mail me at hamiltonm@washpost.com. And remember, I always love to hear from anyone who has ideas for future columns.

But enough of that....

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Washington, DC: I'm 49 and am in-between jobs so cash is a little tight right now. Can I take a loan on my IRA to make it through until I find another job?

Barry Glassman: Unfortunately, no. You aren't able to take a loan from your IRA and you aren't allowed to use your IRA as security for a loan. The entire amount will be included in taxable income on the day that you use it as security for a loan.

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Arlington, Va.: Good morning, thank you for taking my question. I'm in my late 20s but I'm trying to plan ahead so that I can retire early. I think I'm in good shape so far, I put 13 percent of my salary away each check and get 5 percent matching from my company and already have about $50,000. My question is whether there's a way to "retire" at 45 or 50 but have money set aside in a non-retirement account to live off of until you reach retirement age and then start tapping into retirement accounts. How would I go about setting some thing like that up? Legally would work to quit working at 50 but not "retire" until 57? Thank you

Barry Glassman: Times have changed. Years ago, your grandparents had pensions, then saved their own money in their own names. Today, you are saving most (or all) of your money in retirement accounts. Move forward to open an account in your personal name and start saving. Keep track of your progress to know if you're on track. Good luck!

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Rockville, Md.: So much of the retirement financial advice is geared to couples. Has anyone noticed that even if one is part of a couple now, many will not be at retirement time, either through widowhood or divorce. As a single person, I find this focus on couples mildly annoying, as if my situation is not worth consideration, but in reality, many people will be 'single' at least at some point in their retirement, and this should be addressed as a practical, financial matter.

Martha M. Hamilton: I understand your concern as someone who is divorced. In fact, one of my first discoveries in writing this column was that I could draw Social Security based on my ex's earnings when he dies if that results in a higher payment for me. It probably won't, but it might. He made way more money than I did during all those years of struggle for more pay equity in the workplace. Many of those who become single during retirement start retirement as part of a couple, and their choices as a couple make a big difference in the life of the survivor, so those decisions are important. For instance, if you take a pension with no survival benefits, it means bigger payments while you're alive but none at all for your survivor once you die. So some of that advice for couples counts heavily once your situation changes.

Barry Glassman: I agree. Thankfully, more and more estate planning attorneys are finally recognizing this and addressing these clients.

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Beltsville, Md.: I have a mortgage at 4.5 percent, should I continue making extra payments to reduce the principle or just pay the normal monthly mortgage payment ?

Martha M. Hamilton: I wrote a column about this recently that discussed ways to determine whether it makes sense to prepay a mortgage. You're interest rate is so low, I'm guessing it might not be the best bet for you, but take a look at the column which will help you analyze your own situation.

Barry Glassman: Two questions you must answer. First: after tax considerations, are you earning more than 4.5% on your other investments? Next, you should think about how would feel without a mortgage. Some of my clients celebrate the end of mortgage payments; others claim they will die with a mortgage. Decide which you are

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washingtonpost.com: Parting Gift From a Dead Ex (Oct. 8, 2006)

Homeowners' Get-Out-of-Debt Instinct (May 13, 2007)

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Georgia: Martha,

I receive a pamphlet or document from the Social Security Admin every year. It details what I will receive in benefits when I retire and gives different scenarios such as if I become disabled, what my husband will receive if I die before I retire, etc. Since I am many decades from retiring, can I trust this document?? Do you think that social security will still be around in 30-35 years?? Although our benefits will not be amazing--the money is pretty decent and will, of course, be combined with our savings and pensions.

Martha M. Hamilton: I think Social Security will be here for the long run, although people may have to wait longer to tap benefits in the future. Too many people depend on it for 90 percent or more of their income--about 40 percent of all retirees, if I'm remembering correctly. It's been a success in reducing the number of elderly living in poverty, and it would be a social disaster for it to disappear. There are many ways to make it sustainable, all with pros and cons. But it can be done.

Barry Glassman: I receive similar statements every year and I have yet to see the word "guaranteed" on them. Social Security dollars should help in some form, but if you are young, plan to save for your own retirement and Social Security will be a bonus. Keep in mind that social security income used to be tax free and retirement age was 65. Now, part of it is taxable if you earn over a certain dollar amount, and your retirement age will probably be 67 or higher.

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Alexandria, Va.: How can I trace the benefits due to me from a retirement account from an employer that has gone bankrupt. Specifically, I worked for Montgomery Ward for 23 years but left their employ 19 years ago. I know when they filed for bankruptcy they did have a trustee appointed for their retirement plan. Unfortunately, I am unable to remember who was appointed. I did receive some communication from them 8 or so years ago, but I'm now unable to locate it and have moved since that date so they may not have been able to locate me if there was any further communication. Now that I'm about 1 year from retirement from my current position, this matter has tasken on new importance. Please help to point me in the right direction. Thank You

Martha M. Hamilton: Go to the Pension Benefits Guaranty Corp.'s website and look at their publication: Finding a lost pension. there are regional pension assistance centers funded by the U.S. Administration on Aging, but the Mid-Atlantic doesn't have one. PBGC has a Missing Participants Program, though, that should be able to help.

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Gainesville, Fla.: I've heard that I can withdraw money from my IRA before age 59 1/2 without penalty. Can you explain how this works?

Barry Glassman: To access your individual account plans including IRAs before age 59 ¿ without incurring a 10% penalty, you can elect to receive substantially equal periodic payments. (Fancy code for this is 72(t)). 72(t) allows you to choose one of three methods to calculate an amount that you will receive from your individual account, typically annually. However, there are certain restrictions. If you want to stop taking payments, you will have to wait five years or until you reach age 59 ¿, whichever comes last. Both the amortization and annuitization methods of payment are fixed amounts and are substantially higher than the required minimum distribution method. The IRS does allow an individual to change from the fixed methods to the required minimum distribution method, but once the change is made that method of payment must be followed in subsequent years. Definitely talk to your accountant before implementing a strategy like this.

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Arlington, Va.: I'm having serious medical issues and have had to quit working to take care of my health. My sister told me that I can withdraw funds from my IRA without penalty or taxes to help pay for my medical expenses. Is this true?

Barry Glassman: The IRS does not apply the 10% penalty tax to distributions made for medical care. However, it is only to the extent that the amount exceeds 7.5% of your adjusted gross income.

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Vienna, Va.: I recently lost my job, but want to maintain my health insurance under COBRA. The premium payments are high and difficult to pay with no income. I was told that I can use IRA money to pay for the health insurance premiums without a penalty. Can you give me the details for this?

Barry Glassman: You can use an IRA withdrawal to the extent that the withdrawals do not exceed the amount paid for medical insurance premiums for yourself, your spouse and your dependents. To qualify, you must have received at least 12 consecutive weeks of unemployment compensation during the current or prior tax year. Talk to your accountant before withdrawing the funds.

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Chicago, Ill.: If I withdraw a partial amount from my 401K this year, say $100K, is the penalty amount approximately 10K or is it 10 percent of my entire 401(k)?

Barry Glassman: The penalty is on the amount you withdraw.

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Washington, D.C.: Borrowed $50k from 401K in '06 and eight months later was unemployed. Unable to repay loan, therefore defaulted. In '07, I will have unemployment income, self-employment income. I am currently working for a temp agency, which, fortunately, I am contributing 20% to 401k. My hope is to contribute $11k by year-end. Had plans to contribute $4k to an IRA but have learned that my AGI must be below $52K...which it will not be with all my income sources for '07. The defaulted loan is considered income? Yes? What other options do I have?

Thank you!

Barry Glassman: Thanks for the background. It looks like you are doing a lot of the right things to save for your future. Unfortunately the defaulted loan will be taxed and, if you're under 59 ¿ probably penalized. Good time to talk to a CPA.

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Columbia, Md.: I have been maxing out on my 401(k) for 20 years and hit the annual limit every year. I have a 13 yo, 10 yo and 8 yo children who I have yet to start saving for college. While maxing out my 401(k) and the cost of living in this part of the country--we moved here from TX during the housing frenzy 3 yrs ago, so our mortgage is outrageous. Is there any way to use money from my 401k to pay for college without getting penalized. Also note: my husband has also been maxing out his TSP for 21 years, so I think we're covered for retirement. Thanks!

Barry Glassman: If you are "covered" for retirement, then consider making your contributions to the extent they are matched by your employer. After that, save funds in plans for your children's education. Other than that, you could borrow up to $50,000 from your 401k, but there are restrictions.

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NYC and Philadelphia: I'm 4 years away from retirement, don't particularly want to retire. I do want a less hectic schedule of days and hours

(I work in Long Term Health Care). What are statistics showing for re-employment of retirees (in recreation therapy)on a part-time two and one half day work week, what about benefits in the NYC, Phila areas?

Barry Glassman: While I don't know specifics of re-employment in New York or Phili areas, I know that many of my clients are finding themselves working part-time after retirement and loving it. Professionals such as yourself have the ability to work part-time and earn proportionate income. Start investigating it now.

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Boston, Mass.: My son will have income this year at the end of his summer job. Can I help him contribute money to a Roth IRA?

Barry Glassman: Most teenagers won't save their summer earnings. But parents can help by contributing the funds for them, as long as the Roth IRA contribution does not exceed his ordinary income or $4,000. For teenagers and twenty-somethings, or those people in extremely low tax brackets, using after-tax earned income to kick start their retirement is a great idea.

Martha M. Hamilton: I just wrote a column on this subject May 20, which we'll attach.

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Elizabeth City, N.C.: I'm 57. Should I take early retirement from my current employer and get another job to gain a second retirement check or is this too risky a strategy for someone my age and income (over $120K per yr)? My concern is finding a job at my age, especially one that pays me what I currently make.

Martha M. Hamilton: One question I would have is how much you'd lose by taking early retirement? If you're in a defined benefit pension plan, there's usually a substantial loss for taking the pension before the full retirement age which is usually 65. Then it's which adds up to more: the two checks or the one. The other consideration is how long you plan to work in the second job.

Barry Glassman: This strategy can be risky. I have seen retirees in their late 50's struggle to find a position that rivals their own job. If you can, start your search now. If you find something, then consider the ramifications.

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washingtonpost.com: Savings That Start With The First Paycheck (May 20, 2007)

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Bethesda, Md.: My son is a junior at the University of Maryland. I've been helping him with his college tuition and related expenses, but I recently lost my job. I don't have any income coming in right now and I don't have much in savings. Can I use my IRA to help him with his education expenses?

Barry Glassman: The IRS allows distributions from an IRA for "qualified higher education expenses" for you, your spouse, your child or grandchild. "Qualified higher education expense" means tuition, fees, books, supplies, and equipment required for the enrollment or attendance of the student at any "eligible educational institution." You will avoid the penalty, but still pay tax on the distribution. Talk with your accountant before implementing this.

Martha M. Hamilton: I think you should leave the IRA alone. It may mean that you're son has to cut back on his course load and take on a part-time job, but he'll be happy when you're retired and don't have to turn to him for help with your expenses.

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Arlington, Va.: Hi Martha and Barry,

Question about retirement planning: both of us in late 30's, have over $250k saved up in tsp/401/ira's (15k per year for retirement); the question is about balancing kids education and retirement? I think we should save for retirement first, then the kids, wife wants to set aside 529 $, reduce retirement saving...

Barry Glassman: Keep maxing out the retirement plans.

In additional, why not combine your two goals and consider saving additional money in your own name in a taxable account? The money can be used for either college or retirement. You will lose the advantage of tax deferral, but offers the greatest flexibility. Lastly you will ease the lively money discussions at the dinner table.

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Alexandria, Va.: I'm in between jobs and looking for a source of income to tide me over for a month or so until I start my new job. Is there any way to utilize my IRA savings without incurring penalties or taxes?

Barry Glassman: Yes. The IRS allows you to withdraw from an IRA without taxes or penalties provided that the exact amount is rolled back into the an IRA within 60 days of the original distribution. This is only allowed once per year. Also, make sure you do not have taxes withheld from this distribution, as you will need to make up the difference when you redeposit the funds. Talk to your accountant before taking your withdrawal.

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Minneapolis, Minn.: I am in my 50's, single, and have no children. What I am most concerned with is living into my 90's and needing assisted care. What advice do you give about how to plan while your healthy for the years when you may not be? I see plans for long term insurance but am not sure they really work.

Thanks,

Martha M. Hamilton: Great question.

When you're shopping for long-term-care insurance, look for:

* Whether the policy is adjusted for inflation;

* Flexibility about where services are delivered;

* What happens if you miss a premium;

* The provider's credit rating, which indicates how sound the company is and how likely it will be around when it's time to draw benefits.

You might also want to think about whether a reverse mortgage might be right for you in the future. You could use the proceeds to pay for help and for equipping your home in a way that allows you to stay put.

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Rockville, Md.: My husband and I are purchasing our first home, but we don't have as much money saved as we'd like for the down payment. Can we use money from our IRAs to put toward a down payment?

Barry Glassman: Yes, the IRS allows a penalty and tax free distribution of $10,000 for a "qualified first-time homebuyer distribution." However, the distribution must be used within 120 days after it was received to pay the "qualified acquisition costs" of a principal residence of a first-time homebuyer. You can use the funds for you, your child, or grandchild. A first-time homebuyer is actually defined as someone who has had no present ownership interest in a principal residence during the two-year period ending on the date of acquisition of the residence for which the distribution is being made.

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Chattanooga, Tenn.: I'm anxious to pay off the $75,000 credit card expenses I've accumulated. I can borrow some from my 401K and pay it back over time. Since I'm paying myself back, with a much lower interest rate than my cards, why is that a bad idea. I'm 48, with a mortgage. Thanks for your time!

Barry Glassman: I thought you were off base when I first read this, but it could work, assuming the 401k interest rate was less than the credit card rate and you could afford to pay off the entire 401(k) loan within 5 years. It's risky in that if you continue to run up credit card debt the strategy could backfire. And if you leave your company, you would need to pay back the loan.

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Re: Arlington's early retirement: To me, it seemed like he/she was asking what sort of account to set up that can be tapped before the legal retirement age. If you're already maxing out your 401k and IRA every year, then just open a money market account until you have enough to open an investment account with a financial planner. You can access that money at any time, but treat it as your "early retirement" account.

My investment account is money that I won't touch until retirement (whenever that ends up being, whether before or at the legal age), and I have a separate money market account that is just for short-term savings - car, vacation, etc., in addition to maxing out my 401k and TSP.

It seems like people either save for retirement only and don't have much other savings OR they don't save for retirement at all. We need to do both.

Martha M. Hamilton: Thanks for the additional advice.

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Washington, DC--Tuition Question: I live in D.C.. I am 41, self-employed, make around $350K/year, and save around 60K, mostly in tax-deferred accounts like 401(k), etc. Mortgage around $550K. I pay a fortune in taxes (around 100K/year), health insurance, etc. I have 3 kids and would like to send them to private school, but on my budget, I cannot afford the tuition (around $25K/year per kid). Yet, all around me, I see neighbors who almost certainly make less than I do, and are sending their kids to private school. How do they do it? Thanks.

Barry Glassman: Living beyond their means and acquiring debt. Don't get sucked into the Jones' lives.

Martha M. Hamilton: You'll teach more to your kids by living within your means than by sending them to private school. And there are good public schools in D.C., including some terrific magnet high schools. (department of full disclosure, I am on the community board of Bell Multicultural High School.)

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Roth IRA: Hello,

Is it true that you can take out (up to the amount you contributed) money from your Roth IRA before age 59 1/2 and not pay penalties?

Thank you

Barry Glassman: Yes, but only five years after your first conribution.

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Orlando (area), Fla.: How can we avoid the AMT (alternative minimum tax) when selling appreciated investments?

Barry Glassman: I would call your congressman or senator and talk to them about changing the AMT tax code.

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Wilmington, N.C.: What's your take on the new Kiddie Tax rules?

Barry Glassman: Now that there are no longer tax advantages to the UTMA accounts, those with large holdings may want to start to spend them down. The question becomes how much money you want your 21-year-old (or in some states, 18) child to have access to.

The only advantage I can think of is the fact the funds are outside of your estate.

Make sure you talk to your accountant before you make any changes.

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Bloomington, Ill.: Can "net unrealized appreciation" concept be used with any 401k plan, or does it have to be with stock that in your employers owned company only?

Barry Glassman: Only with company stock.

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Burke, Va.: Should I contribute to a Roth 401(k) or a Roth IRA?

Barry Glassman: The Roth 401(k) will allow a higher contribution amount per year than the Roth IRA ($15,500 vs $4,000 for 2007). Also, the eligibility for the Roth IRA begins to phase out at $156,000 of adjusted gross income for married couples and $99,000 for singles. Like traditional 401(k)'s the Roth 401(k) provides additional protection against bankruptcy creditors. On the flip side, Roth 401(k) contributions are subject to the same age 70 ¿ minimum required distributions rules that apply to pre-tax elective contributions. In contrast, Roth IRA contributions are not subject to this requirement.

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Minneapolis, Minn.: My husband is retired I am going to retire by next July. Our portfolio today is valued at $1.5 million. I have $45,000 credit card debt that is giving me sleepless nights. And by the way the debt was not acccumulated pleasuring myself.Nontheless,I can take a hardship loan against my 401K and get rid of the debt or we could sell some shares for cash to pay it off. Isn't it just best to get it simply paid off and move on?? I am concerne dof course abt the tax implications. Ginny

Barry Glassman: If you are losing sleep, sell shares in a taxable account and pay it off; especially if you are paying a high rate of interest.

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Ashland, Mo.: Do you have a hierarchy of when various investments should be used? For example, should you use IRAs before deferred compensation before Roth IRAs before capital gains or some other combination?

Martha M. Hamilton: Roth IRAs absolutely last because you want to keep that amount that will not be taxed working for you as long as possible. Beyond that, I defer to Barry.

Barry Glassman: I like the question, but the answer really depends upon your personal circumstances. Your age, income, tax bracket, risk tolerance, goals will all play a role in the decision. I have clients with each of these particular strategies at the top of their lists. Pardon the standard response: It depends.

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Washington, DC--Tuition Question: Thanks a lot for responding to my question! I often post to chats like this, but almost never get a response. I appreciate it.

Martha M. Hamilton: We try to get to as many questions as we can each time we do this. But it's usually impossible to answer them all. I'm glad we were able to take yours.

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Darien, Ct.: I started consulting a year ago and would like to save more for retirement. What is the best way to do this?

Barry Glassman: If you are the sole owner and either the sole employee or your spouse is the only other employee, an Individual 401k account may be your best option. It may allow you to put away more for retirement, up to $45,000 a year in 2007. The reporting for this type of plan just got easier because you won't have to file Form 5500 with the IRS until your account balance reaches $250,000. Talk to your financial professional to see whether this type of plan is more advantageous than a SEP.

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Washington, D.C.: Hi,

Very basic question--how does one figure out how much one needs to retire (barring major catastrophes)? I know I'm a long way off by gov't standards.

Thanks a lot!

Martha M. Hamilton: You start by figuring out how much you'll need to live on, which isn't as easy as it sounds unless you're one of those people who keeps a notebook of every dime spent. (I don't) Look at your basic expenses including mortgage payments, health care costs, insurance, property taxes, debt service, utilities to start with. Think about costs you may have to bear in retirement that you don't now, including more health care costs. Think about how and where you want to live. then add up your sources of retirement income (pensions, Social Security, savings) and see where you are.

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Washington, D.C.: Are there stats on avg retirement savings in this area? It freaked me out when a couple in their 30s already have 250K saved. We're in our 30s and have about 30K in 401k. I'm sure that couple own a home while we rent.

This is so stressful.

Martha M. Hamilton: I don't know of any, but I'm guessing you're closer to the norm than a couple in their 30s with $250,000 saved. It's not a competitive sport. You're saving early, which is good, and your savings can grow as your income does. And if you're renting, at least you didn't buy when prices were out of sight.

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In Limbo: Martha and Barry,

I need some good advice. My husband and I are in our mid thirties. We both have 401k's from a major company. We both left the company and I am not working but husband is working. Because we are frugal and have significant cash in the bank--my lack of employment is not an issue--but we are not saving as much as we used to. Husband does not want to fund his new 401k with much more than about 5 percent of his income until I get a good job (we relocated).

We have been in limbo like this for about 9 months. Is it a bad idea to sort of idle for a few months? Yes, we can put 10K in a mutual fund tomorrow but we are concerned that we may need that money near term. Actually, we dont really think that--we just feel weird investing while I am not working.

What do you recommend when a couple is just sort of in limbo?

Barry Glassman: Keep in mind that there are three stages of cash flow. First is the one you have been in for a while, which is savings mode. The stage we ultimately plan for is the retirment income stage. It's absolutely OK to be in limbo for a period of time and not save or spend from your investments, especially since you are still living within your means.

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Martha M. Hamilton: Thanks for being with us today. You may have noticed we had a computer glitch that delayed the chat's appearance, though we were chatting away. Thanks to our producer Alicia Cypress and others who got it straightened out. We love hearing your questions. And I'm always happy to hear from you about ideas for columns at hamiltonm@washpost.com. Many thanks to the redoubtable Barry Glassman for his expertise today.

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