Wealth Management Group Newsletter – Spring 2015
Adam J. Pechin

Boosting Retirement Savings with Catch-Up Contributions


If you are in your 50s or 60s, you may be hoping to retire soon. But what if you are not on track to achieve your retirement savings goals? Maybe you got a late start saving or suffered a financial setback. Or perhaps you were not able to contribute as much to retirement accounts as you would have liked because of mortgage payments and college costs, but these expenses are now behind you — so you can afford to start saving more.

The good news is that you can make “catch-up” contributions. These are additional amounts beyond the regular annual limits that workers age 50 or older can contribute to certain retirement accounts, such as 401(k) plans and IRAs. By taking advantage of this opportunity, you can help make up for lost time and bring yourself closer to achieving your retirement savings goals.

Max Out Contributions to Max Out Tax Advantages

Catch-up contributions give you the chance to take maximum advantage of the potential for tax-deferred or, in the case of Roth accounts, tax-free growth.

At 2015 401(k) limits, if you are age 50 or older, after you have reached the $18,000 maximum limit, you can contribute an extra $6,000, for a total of $24,000. If your employer offers a Savings Incentive Match Plan for Employees(SIMPLE) instead, your regular contribution maxes out at $12,500 in 2015. If you are 50 or older, you are allowed to contribute an additional $3,000 — or $15,500 in total for the year.

But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.

Another way to save more after age 50 is through a traditional IRA or a Roth IRA. With either plan, those 50 or older generally can contribute another $1,000 above the limit (which is$5,500 for 2015). However, be aware that the ability to contribute to a Roth IRA is phased out based on income level.

The benefits of making the additional contribution differ depending on which account you are considering. With a traditional IRA, contributions may be tax-deductible, providing you with immediate tax savings. (The deductibility phases out at higher income levels if you are covered by an employer retirement plan.)

Roth contributions are made with after-tax dollars, but qualified withdrawals are tax-free. By contributing to a Roth IRA and taking the tax hit up front, you will not lose any of the income to taxes at withdrawal, provided you are at least 59½ and have held the account at least five years. Another option if you would like to enjoy tax-free withdrawals is to convert some or all of your traditional IRA to a Roth IRA — but you will also take an up-front tax hit.

The Self-Employed Can Catch Up, Too

If you are self-employed, retirement plans such as an individual 401(k) or solo 401(k) also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. To catch up, you can add $6,000 to the regular yearly limit of $18,000 in 2015. But that is just the employee salary deferral portion of the contribution.

You can also make an “employer” contribution. The total combined employee-employer contribution is limited to 25% of compensation, up to $53,000, plus the $6,000 catch-up contribution.

Later is Better Than Never

At first glance, catch-up contributions may not seem like much. But do not underestimate the impact these additional contributions can have when compounded over time. They may make it possible to achieve financial goals that might otherwise be out of reach. Work with your financial advisor to assess your individual situation and take advantage of this opportunity within your overall wealth management strategy. For questions, contact Adam Pechin at [email protected] or call him at 312.670.7444. Visit orba.com to learn more about our Wealth Management Group.

Alternative Investments Seek to Balance Portfolio Risk and Return

Alternative investments (or “alternatives”) have gone mainstream in recent years, with an explosion of assets going into asset class. Nontraditional asset types such as real estate and commodities have long been a part of individual portfolios. Hedge funds and hedging strategies, have been increasingly becoming popular with investors seeking better diversification and risk-adjusted returns. That said, alternatives involve unique risks and are not appropriate for every investor.

Sometimes Misunderstood

There is a misperception that alternatives are high-risk, high-return investment vehicles, that is true for some.   For example, global macro strategies can take long or short positions in stocks, bonds, commodities and currencies and such derivatives as futures and options.

However, many alternatives are designed primarily to lower a portfolio’s volatility, such as absolute return strategies, which underperform during strongly rising equity markets. The upside is that these particular strategies are expected to hold up better when markets are falling sharply.

Typically, you might use alternatives as a way to seek returns that have low correlations with stock and bond markets — meaning they are expected to move out of sync with each other. Certain alternative investments may be able to profit from both up and down markets or they can help hedge against specific risks. This makes them a valuable diversifier alongside traditional, long-only investments.

Investment Types

The alternative asset class includes many different “nontraditional” asset types, such as real estate, leveraged loans, private equity and commodities. Alternative investments come in a variety of product “packages,” all of which can vary greatly because of their different investment minimums, liquidity constraints, regulatory oversight, tax considerations and other features.

Hedge funds and hedge-fund-like strategies have grown in popularity in recent years, particularly with affluent investors. Here are some of the ways you might gain exposure to this asset class:

Hedge Funds
Like a mutual fund, a hedge fund is a managed portfolio of securities. Unlike mutual funds, however, hedge funds are not publicly traded — they are generally structured as limited partnerships and are available only to high-net-worth and institutional investors.

There are other important differences: Hedge funds are not regulated, are relatively illiquid, have high investment minimums (typically $1 million) and usually charge much higher fees.

Funds of Hedge Funds
These are a collection of multiple hedge funds that focus on a single strategy or, instead, allocate among multiple hedge fund strategies in pursuit of an investment objective. These are a way of getting access to hedge funds if you do not meet the accreditation standards to buy into an individual hedge fund or do not have enough funds to invest to meet the minimum requirement.

Mutual Funds
Traditional mutual funds primarily are “long,” meaning that their managers buy and hold securities expecting their value to rise. In contrast, alternative or hedged mutual funds use nontraditional investment strategies to mimic hedge fund exposure.

Because mutual funds are highly regulated, they have greater transparency and limitations on how aggressively they can pursue these sophisticated trading strategies. While these constraints mitigate some of the risk, they may also dampen returns compared to a hedge fund with a similar strategy. At the same time, mutual funds are priced daily and offer excellent liquidity, providing you with more flexibility to sell your investment if needed.

Exchange-Traded Funds (ETFs)
ETFs, which are designed to track underlying indexes, are similar to index mutual funds. It is possible to buy alternative-based ETFs, such as those that follow commodities or currency indexes, as well as those that employ shorting (inverse ETFs). ETFs also offer greater transparency, daily liquidity and lower costs than hedge funds.

You will need to weigh these factors in addition to your investment objectives and risk tolerance when evaluating alternative investments.

Are Alternatives Right for You?

The alternative investment category is larger and more diverse and accessible than ever, providing opportunities to meet a range of needs. However, alternative investments may not be right for every investor. They require more scrutiny and research because of their sophisticated investment strategies and higher fees. They also use greater amounts of leverage and may invest in asset types that are more volatile than stocks or bonds.

As with any investment, you should understand the risks of alternatives prior to investing. Depending on your situation, the long-term benefits of lower volatility and higher risk-adjusted returns may outweigh the short-term risks of alternatives. Your financial advisor can help you figure out whether alternatives fit in your diversified portfolio and which ones best meet your needs. For questions, contact Renee Andrews-Tushinski at 312.670.7444. Visit orba.com to learn more about our Wealth Management Group.

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