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Hello,
I'm starting a SEP Ira for my dad. He's 60 years old, salary around 200k. Kids are grown and self sufficient. 150k inheritance on my moms side is really their only retirement savings at this point (I know I know, not good...but they are where they are). Both him and my mom have entrusted me to basically completely take care of their investments-they trust my judgment. I, in turn, trust the judgement of many posters on this board immensely.
For the basics lets say that Dads salary is 200k, and moms is nothing. My 2 primary questions are
1) order of contribution, what should go where, and in what order. Options off the top of my head are
- SEP Ira, which I setup for him tonight, 53k limit there
-Personal IRA's for him and my mom, thats a 6.5k per person limit, correct? Also with his salary, believe he cannot contribute to a Roth, but he can contribute to a traditional IRA. Not that it matters, because I'm certain that he's making WAY more right now then he will be in retirement.
I know he has until April to make these 2016 contributions. I prodded him for an estimate on what he thinks he can invest this year, TOTAL, and he ballpark-ed that around 25k. So lets say 25k is the number we're working with for 2016 contributions. Would you...
- put all 25k into the SEP Ira, and then allocate according?
-Max out the traditional IRA for him and my mom (about 13k I guess...unless their eligible for more with some type of catch up program)? And then put the remainder into the SEP IRA
-Is there something I'm not thinking of?

2) Asset Allocation- I'm pretty well versed in asset allocation, however I felt it would be prudent to ask this on here because I feel that my need, willingness, and ability to take risk is on such a different planet than my parents. So, focusing on my parents, here are some important factors.
-Both parents are around 60 and in relatively ok health. Dad is a little overweight, some manageable diabetes, gets physical therapy for back problems but otherwise is more-or less OK for now. The reason I provide this information is that its worth considering that a day could come when working becomes difficult for him...hes not one of those 60 year olds who hikes in the mountains and runs every day. His health is OK, at best. He says he'll probably work for the rest of his life, jokingly...but in the back of my mind this is worth considering.
-Obviously, they're retirement savings are not immense. With about 150k, plus whatever they can put together in the remainder of my dads career. I think that this probably calls into question how much risk they should be taking.
-On the plus side, I am not worried about them "panic selling" during a downturn, unless I advised them to. They understand enough about investing that they're hope is not to touch this money until retirement, and hopefully let it grow for awhile.
Is 60/40 too risky for the couple described above? Should they be more like 50/50? Again, this isn't a a concern about their reaction to market ebbs and flows...but more so perhaps it is prudent to take into account their ability to take risk being 60, having low retirement savings (I guess need is high, ability is so-so)
I know this is a personal decision,however I do request specific recommendations on the above things. Thanks in advance for any helpful replies.

How is your Mom's inheritance being held? Is that in a tax advantaged account? If not, I would recommend moving that money into the SEP IRA over 3 years (2016/2017/2018). Get it tax sheltered.

The I would use the SEP IRA first. Then I would look back-door Roths (do a search here on BH) by putting the $13K in a tIRA with non deductible contributions.

[edit] With regard to AA, 60/40 is fine if you are confident that they will not sell in the next stock market downturn. I would ask for an estimated retirement date (when funds will be needed) and move towards a 40/60 at retirement - say 5% per year.

David Jay wrote: The I would use the SEP IRA first. Then I would look back-door Roths (do a search here on BH) by putting the $13K in a tIRA with non deductible contributions.

The SEP IRA will interfere with any back door Roth strategy. Look at the prorating rule in the wiki.
What are your parents expenses? It sounds as if they need to get a handle on that in order to do proper planning.

I believe my moms inheritance is mostly being managed by a merrily lynch advisor. Having discussed things with her, she's fully on board to move things over to vanguard and have "everything in one place". My only concern about that is that should we be worried about a "taxable event" if there are gains on that account?
As to the SEP IRA interfering with a backdoor Roth Strategy, do you think that is a good reason to avoid the SEP IRA and use a different vehicle (or a different vehicle first)? As far as expenses, I'm working on getting that information from them. I think generally speaking once they are in retirement, the expenses will be relatively low. They will downsize the house they are in, neither of them live a lavish lifestyle...I think theyre ok with a fairly modest income in retirement, living in Michigan. I know thats pretty vague, but feel free to use that for what its worth. Thanks!

I don't know enough about your parents' situation to advise.
- You said your dad's "salary" was about 200K, but then you are talking about a self employed retirement account SEP IRA, which implies he is a small business owner. Is he a 'salary man' or does he own a business?
- you said they have a modest lifestyle, yet your dad said that he could only ballpark putting away 25k this year for retirement on a $200k salary. That just doesn't add up to a modest lifestyle for me.
- we don't know their current tax bracket to advise on Roth/Traditional retirement accounts. - We don't know what they need for retirement. We don't know what they can expect for Social Security (let's hope it's good, given their situation).
- we still don't know whether your mom's inheritance is in a tax deferred account or not.

I just think you need to plan at a more wholistic level before trying to do something like a backdoor Roth. A Roth is for money that they shouldn't need for 10 years at least, if at all, in order make a Roth worthwhile. Note there are penalties for pulling $ out of a Roth within 5 years of setting up the account. Given what you say about your dad, they might need the money unexpectedly if your dad's health deteriorates.

As for asset allocation, they don't seem to have the ability to take much risk. It feels 50:50 to me, if not even less than 50% in equities, but I'm just an anonymous poster on the internet.

I would fill the Sep to the max for tax deductions now, also your mom may be eligible for a deductible IRA.

I don't think they have the ability to risk much, so 50/50 max or 40/60 sounds good to me. Life Strategy Conservative, or a combo of conservative and Moderate for 50/50 might work.

Suggest you mom transfer funds "in-kind" to Vanguard if they are being held at ML, not ME. I would expect expensive funds and management costs there. If V will accept them (ask V to initiate the transfer) they could be sold over time. But first, find out the cost basis and/or unrealized gains to know how much CGs are in each fund. With those probably costs it may not be so much. You want a printout of this in case some info gets lost in the move.

We don't know what kind of account mom has inherited.
If it is an IRA or 401k, it doesn't matter what the basis is- she will be required to take distributions and will pay tax at your parents' tax rate.
If it is a Roth IRA, it doesn't matter what the basis is, she won't have to take distributions or pay tax.
If it is just a regular taxable account, only then does the tax basis matter. And if it is a recent bequest, it won't be bad because she gets the stepped up basis at the time of her benefactor's death.

Misenplace wrote:We don't know what kind of account mom has inherited.
If it is an IRA or 401k, it doesn't matter what the basis is- she will be required to take distributions and will pay tax at your parents' tax rate.
If it is a Roth IRA, it doesn't matter what the basis is, she won't have to take distributions or pay tax.
If it is just a regular taxable account, only then does the tax basis matter. And if it is a recent bequest, it won't be bad because she gets the stepped up basis at the time of her benefactor's death.

Yes, the cost basis is only relevant for a taxable account, not tax-advantaged retirement account.

And we know lots of folks are tax-loss harvesting bond funds and international funds, so if those things are held in a taxable account, then there might be a tax benefit to switch, too.

To provide some information about my dad, he has a job that consists of a base salary plus commission. Of the 200k, lets ballpark that somewhere between 25%-33% is in actual salary, with the majority of the income coming from the commission aspect. I forgot exactly how it works, but apparently the money he makes outside of the salary sort of goes into his own LLC like a small business, etc, while the salary money is just taxed regularly like a regular job. So I guess you could look it like...He has a job making around 65k, and he also is a business owner who makes about 135k through his business.

My input:
I think he makes too much $ for a deductible tIRA. Look up the income limits.
Before you set up an SEP IRA, make sure you are clear on his employment status. You said you "forgot exactly how it works, but apparently....". That doesn't sound definitive enough for me to make financial decisions for someone else.
If he does have 1099-MISC income that makes him an independent contractor, also look into a solo 401k, and weigh the pros/cons. The wiki is informative. Also look at the biz contribution as a percentage of the total biz income.
Finally, I will reiterate that they need to have a budget, and they also need to save as much as they possibly can while he still makes a good income. I don't think saving 25k on a 200k salary in a LCOL area is trying very hard.