Q: I have a 457 tax-deferred government retirement plan. I have 25 percent in a 60/40 balanced fund, 25 percent in an extended market fund, 25 percent in an EAFE (foreign stock index) fund and 25 percent in a stock index fund. I’m down about 34 percent year-to-date. Do you recommend I change these allocations? I’m 56 years old and plan to fully retire by age 66, although I may partially retire at 60…and do some part-time work. – F.M., via the Internet

A: Your current allocation isn’t bad, according to Robert C. Henderson, a financial advisor with Edward Jones Investments in Mystic, Conn. But Henderson does worry that the overall portfolio may be too aggressive, “based on age and the potential need to draw from this account within four years. I’d recommend introducing some safer fixed income into the portfolio, since you currently have just 10 percent of the overall portfolio committed to fixed income (40 percent of the Balanced Fund).

“I’d also recommend scaling back on the small/mid cap allocation (extended market) to about 20 percent and reinvesting that money into the large-cap (stock) index fund. After retirement, if you roll your balance over to a self-directed IRA, you’ll have more choices and can further diversify small pieces of the portfolio into non-correlated asset classes such as real estate, commodities, emerging markets, and gold.”

Q: The amount received in my Social Security check was reduced considerably as a result of an inordinately high gross income declared for 2006 as a result of the sale of a rental property. How high can one’s gross income amount be before this S.S. deduction is affected? -J.B., via the Internet

A: The Medicare Modernization Act of 2003 required higher Medicare Part B premiums based on Modified Adjusted Income (MAGI). MAGI included adjusted gross income plus tax-exempt income. The increased premium begins with individuals whose MAGI is greater than $85,000 and couples with MAGI greater than $170,000.

The National Committee to Preserve Social Security explains that, for purposes of taxing Social Security, IRS uses the same MAGI–that is, taxable income plus tax-exempt interest income, and then adds half of Social Security benefits. At the lower thresholds of taxation, up to half of Social Security can be taxed. At the higher thresholds, up to 85 percent of Social Security can be taxed.

Q: Should I move the funds in my traditional IRA–currently about $150,000–to a Roth IRA? I already have converted $100,000 this year to an existing Roth account. I also have about $500,000 in various stock accounts. I have no debt except for $100,000 on my house. I am single, retired, 63 and I have no income and expect small dividends. I do not plan to take Social Security until I am 70. I need about $45,000 a year to live on and Social Security will take care of about 40 percent. –W.B., Port St. Lucie, Florida

A: Since you’ve already converted $100,000 to a Roth this year, you’re probably in a higher tax bracket than you will be after age 70, so it may not be advantageous to convert any more this year. Fidelity Investment’s IRA team suggests that you also consider the following factors:

–Basis: If there’s a non-zero tax basis in your IRA (i.e., if you’ve made non-deductible contributions), conversion to a Roth IRA may be more attractive. The higher the basis, the cheaper it is to convert.

–State of Residence: If you’re planning to move from a state that has no income tax (e.g., Texas) to one with high income taxes (e.g., California), conversion before the move may be more attractive, and vice versa.

–Taxable Account: Your tax bracket after age 70 is important: the higher the bracket then, the more attractive it may be to convert now. Changes in your taxable account could also be relevant.

Related posts:

1. Reader mailbag: Taxes vs. fees on a Roth IRA conversion
2. Reader mailbag: Roth IRAs, Social Security and IRA withdrawals
3. Reader mailbag: Rules for Roth IRAs, minimum withdrawals
4. Reader mailbag: Social Security, rollovers and encore careers
5. Reader mailbag: Reverse mortgages, retirement income and Social Security

Tags | IRA, Q&A, Roth IRA, Social Security, taxes