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Drew Capital Group

Retirement Saving at Each Age

By | Retirement

While it’s true that each person is unique and every financial plan should be customized according to their situation, it is generally accepted that people should start saving for retirement early in their lives so they can take advantage of compounding returns.

Here is some general information and things to consider about saving for retirement for each age group.

Gen Z

Roth IRA accounts. As soon as children or grandchildren have earned income, either you or they can open and contribute to a Roth IRA (Individual Retirement Account) in their name. Roth IRA contributions can’t exceed the child’s earned income and the maximum amount that can be contributed for the year is $6,000 for 2021. The benefit is that Roth accounts grow tax-free as long as all IRS rules are followed. After the account has been open for five years, any amount contributed can be borrowed or taken out for any reason without any taxes or tax penalties due. (But Roth IRA account earnings—meaning returns or interest credited—can’t be taken out before age 59-1/2 without a 10% penalty.) That means your child could have a very flexible way to borrow for college, down payment on a house or any other purpose—including retirement—later on.

Permanent life insurance. Another option to help children, teens and young adults save for retirement is permanent life insurance. New types of life insurance policies can be a tax-advantaged way to save and borrow later from the policy for retirement, college or any other purpose. Often the cost of insurance is very low for healthy young people.

Gen Y

Workplace retirement plans. People in their mid-20s to 40s are often pursuing careers where their employers provide 401(k) or similar retirement plans with a “match” for contributions. One rule of thumb says to max out pre-tax contributions during these years up to the maximum match by your employer; you get the added benefit of lowering your taxable income.

Traditional IRA accounts, Roth IRAs, permanent life insurance, investment portfolios. For those who don’t have a workplace retirement plan, or for those that want to invest beyond their employer’s group retirement offering, traditional pre-tax IRAs are available depending on your income level while providing a tax write-off, while tax-advantaged Roth IRAs and permanent life insurance can offer other benefits. Once you reach the maximums on retirement savings, you may want to begin to invest in stocks and bonds, forming your first investment portfolio. If possible, hire a financial professional to help you create a complete financial plan which can be updated and reviewed every year.

Gen X

Save, invest, and save some more. People in their 40s and early 50s can be sandwiched between providing for their older children’s expensive needs—like transportation, health care and college—while caring for their parents as they get older. Yet it is incredibly important for Gen X to begin to maximize their retirement savings. All of the possibilities discussed for younger ages also apply to Gen X, and after age 50, you can contribute $7,000 per year ($1,000 extra) to an IRA or Roth IRA in 2021, depending on your income and IRS rules. Some permanent life insurance or deferred income annuity products can allow you to save for retirement while providing other optional benefits like disability, long-term care insurance or spousal protection should you need it. Find efficient ways to pay for your kids’ college, and as you make more money, use it for retirement investing while keeping your spending on housing, automobiles and similar items as low as you can. Work closely with your financial professional to make sure you are on track to achieve your retirement goals.

Baby Boomers

How much money will you need to retire? If you are 55 or older, it is probably time to get serious about what you want your retirement lifestyle to be so that you can get some idea of what kind of retirement savings you will need to support yourself after you are no longer receiving a paycheck. For instance, someone who wants to do a lot of international traveling will need a lot more saved than someone who plans to stay close to home during retirement. Retirement planning is essential, since pulling money out of your portfolio is much different than putting money in as you have been used to. Make sure your financial professional is focused on retirement; retirement planning is a distinct specialty.

Claiming Social Security. It’s time to start learning about Social Security. The Social Security Administration recently changed the design of your statement to show you how much your benefit will be at the earliest time you can file (age 62), at full retirement age (around age 66 or 67 depending on your birth year) and at age 70, when your benefit amount stops growing. You can obtain your latest statement here. Important: Remember that Medicare is not free; premiums come out of your Social Security check.

Consider taxation. Remember that if you have the majority of your retirement savings held in taxable accounts like traditional 401(k)s, you will owe income taxes on that money. Depending on your tax bracket, your savings may actually be from 22% to 35% less after you pay income taxes. As an example, someone with $500,000 saved for retirement may actually only have $385,000 if they are in the 23% tax bracket. Current tax law requires you to start withdrawing money and paying income taxes on taxable, tax-deferred retirement accounts every year beginning at age 72. Start working with your financial professional early, because there may be ways to save on taxes for the long-term using strategies over the five to 10 years preceding retirement.

Multigenerational Wealth

As part of retirement planning, it is important that each member of the family works together for tax-efficient wealth transfer in the future, minimizing the chance for strife, confusion or excess taxation during family transitions or adverse events. New legislation—the SECURE Act—changed the rules about inherited traditional IRA accounts, and potential tax impacts should be addressed now rather than later.

The family that plans together, stays happy together, hopefully for the long-term. Whenever possible, everyone should be involved in financial, retirement and estate planning matters working hand-in-hand with a trusted financial professional, tax professional and estate attorney to document inheritance matters, final wishes, health care directives, wills and trusts.

If you have any questions about this article, please call us. We’re happy to help you and your family members. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

7 Budgeting Tips For July

By | Financial Literacy, Financial Planning

Budgeting can help you achieve your goals faster.

Once you realize that budgeting can help you achieve the goals you’ve set out for yourself, you may find the process inspiring.

  1. Think of your budget as a spending plan

Think of your budget as your “how-to” plan for spending your money rather than what you “can’t” spend. The upside is that by budgeting for short- and long-term expenditures, you can spend money without feeling guilty about it, because you’ve actually planned to spend it!

With a budget, you will simply be allocating all your expenditures with a means to an end, whether it’s getting out of debt, keeping your food bill down, having some fun in life, or saving for retirement. You may even discover that you have more money than you thought. Once you become intentional about what you’re spending, you may realize that your gym membership or all those monthly subscriptions you’re not using won’t be missed and you’ll have more cash free for other purposes, like the occasional Starbucks run or other little treat that makes you happy.

  1. Try using a zero-sum approach

A zero-sum budget means that every penny you have coming in each month gets allocated to a category. The goal is that your monthly income minus your allocations equals zero, so that you’ve put every dollar you have to use.

Start your zero-sum budget by figuring out your monthly net take-home pay or income amount, then allocate all of it to either savings, investments, bills, expenses or debt payoff. This forces you to be accountable for every penny, which puts you in control.

  1. Start with the most important categories first

Start with your true necessities, like mortgage, utilities, food and transportation. Make sure savings is a top priority. Then you can fill in the other categories that are discretionary.

  1. Strive to save 20-30% of your net for short- and long-term goals, and limit housing costs to 30%

So how does this break out? If your net income is $4,000 per month, you should strive to save $800 – $1,200 per month towards short- and long-term goals* and limit your mortgage or rent to $1,200 per month or less.

*Your short-term goals might include a vacation, wedding or down payment for a home. Long-term goals might be accumulating an emergency fund that equals six months’ expenses, getting out of debt, or saving for college or retirement.

  1. Label savings

Rather than have a lump savings account that includes everything you are saving for, try to use separate accounts or find a way to label them using a software program. That way you can see at a glance how close you are getting to each individual goal, like your vacation fund, emergency fund, etc.

Labeled savings accounts can help you keep track of progress toward your goals separately and feel a sense of accomplishment as you achieve each one.

  1. Remember each month’s varying expenses

Your spouse’s birthday, your birthday, holidays, back-to-school, annual car or home maintenance, Christmas each December—don’t forget to include varying annual expenses in each month’s budget. Not having money allocated for special occasions or annual expenses can take the joy out of life, while planning for them can do the opposite.

  1. Create a buffer, and use cash for problem areas

Create a buffer of cash that’s available; think of it as a little temporary augment to your emergency fund until you’ve been budgeting for a year or more. That way if something you forgot comes up, you’ll have the money for it—and you can put it in the regular budget for next time.

If you run into problem areas—for example, maybe you always grab extra unplanned items at the grocery store—consider using cash for problem categories rather than a credit card. Envelopes with cash can hold you more accountable because when the cash runs out, you have to stop spending.

 

If you’d like to discuss this or any other financial matter, please call us. We’re here to help. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

It’s Annuity Awareness Month. How much do you know about annuities?

By | Financial Literacy, Retirement Planning

Because June is Annuity Awareness Month, here is an overview about them.

Annuity product designs and types continue to evolve, primarily to meet the demands of people nearing retirement. In addition to their original purpose of providing retirement income, insurance companies have developed hybrid policies, adding features to address the multiple risks consumers face as they get older.

The most important thing you should know about annuities is that they are insurance policies, or contracts between you and an insurance company. Guarantees in them are backed by the financial strength and claims-paying ability of the issuing insurance company.

As with any contract, it’s important to read and understand the fine print before you sign, and you should compare policies from multiple insurance companies to find the best value. That’s where a good independent financial advisor can help.

Fixed Annuities

Fixed annuities are probably the easiest type of annuity to understand. (They are also the oldest—a simple form of the fixed annuity was originally created for Roman soldiers who grew too old to serve.) An insurance company will guarantee* a fixed interest rate on your fixed annuity contract for a selected term, usually from one to 15 years. You can usually purchase a fixed annuity with either a lump sum of money or a series of payments over time.

At the end of the contract term, you can take the money out, put it into another investment, or “annuitize,” meaning you can begin to take periodic payments over time to create income for retirement. This is called the “payout phase” of an annuity contract and it may last for a specified number of months, years, or be guaranteed* for as long as you live.

If you do choose to annuitize a fixed annuity policy, you can begin to receive periodic payments at once (called an immediate fixed) or you can wait until a certain age or time in the future to start receiving payments (called a deferred fixed).

If you purchase one of these annuities with non-qualified money (meaning you have already paid taxes on it), the interest in the annuity policy accrues on a tax-deferred basis. At the point where you take the money out of the annuity or begin taking periodic annuity payments, distributions are taxed based on an “exclusion ratio” so that you only pay taxes on the interest or gains.

If you purchase one of these annuities with qualified money, such as by rolling it over from a traditional 401(k) or IRA, distributions are 100% taxable, since you have not paid any taxes on any of the money yet. As with any qualified plan, if you take or withdraw money before age 59-1/2 you may owe additional tax penalties.

Variable Annuities

Variable annuities were developed in the 1950s. The best way to explain variable annuities is to compare them to fixed annuities. First of all, most variable annuities require a prospectus since part of your money will actually be invested in the stock market, called “sub-account investments.” That means that there is market risk involved with variable annuities, because you can either make money on the amount invested in sub-accounts, or you can lose it depending on market performance.

Variable annuities are usually purchased with the expectation that at some point the contract owner will annuitize or begin taking periodic payments. These are called deferred variable annuity contracts. (You can also purchase an immediate variable annuity contract.)

The important thing to understand about the variable annuity contract is that your periodic annuity payments may fluctuate based on stock market performance, depending on policy terms. And it’s possible that some variable annuity policies can lose principal due to stock market losses.

Variable annuities often come with a death benefit for your beneficiaries based on the contract terms, but some specify that there must be enough money left in the policy after annuitization payments have been taken out and/or will pay the death benefit as long as the sub-accounts have not lost too much money.

Fixed Indexed Annuities

Fixed indexed annuities were first designed in 1995. The biggest difference between them and variable annuities is that fixed indexed annuities are not actually invested in the stock market so they are not subject to market risk. With fixed indexed annuities, after you have owned the policy for a specified number of years your principal is guaranteed*.

With fixed indexed annuities, any policy gains are credited and then locked in annually, bi-annually or at specified points in time. The gains credited to the policy are determined by the insurance company based on the performance of a selected index (for instance, the S&P 500) or multiple indexes. Some fixed indexed annuity gains are capped relative to index performance, meaning you can only be credited a certain percentage, but some are uncapped.

Index performance is used as a benchmark for policy gains or periodic crediting and lock-in. With fixed indexed annuities, you have the potential to participate in market gains. And if the benchmark index loses money, your policy is credited with 0%, keeping the most current locked-in principal value in place.

Fixed indexed annuities can be purchased on an immediate or deferred basis. They can be purchased with qualified or non-qualified money. And they can offer a lifetime income option and/or a death benefit.

Other Things to Know About Annuities

*The guarantees provided by annuities rely on the claims-paying ability and financial strength of the issuing insurance company.

Annuities must be considered carefully based on your particular situation because they are not liquid. Almost all annuities are subject to early withdrawal penalties. Make sure you understand the contract terms and the type of annuity you are purchasing. Your financial advisor can help you compare and analyze policies.

This article is provided for information purposes only and is accurate to the best of our knowledge. This article is not to be relied on or considered as investment or tax advice.

Have questions about annuities? Please call us! You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

 

5 Highlights of the New Stimulus Package

By | Legislation

What the latest round of funding may mean for you.

 

The $900 billion Consolidated Appropriations Act of 2021 (2021 CAA) was signed into law by President Trump on December 28th as the COVID-19 pandemic continues to impact employers and employees. The new package resembles March’s $2.2 trillion CARES Act, but will only be $920 billion, with roughly half of that—$429 billion—being paid for with unspent CARES funds.

 

Here’s a quick recap of five key highlights:

 

  1. Stimulus Checks

The new law authorized a second round of $600 checks for people with income that meets the criteria. The checks start to phase out for individuals who earned at least $75,000 in 2019 and $150,000 for married, joint filers.

Each dependent child under age 17 is also eligible for the $600 stimulus payment to the taxpayer claiming them on their taxes. But just like the CARES Act, adult dependents are left out—such as college students and disabled adults—amounting to an estimated 15 million people.

 

  1. Unemployment Benefits

The law provides up to $300 per week in federal benefits on top of state benefits through March 2021. The enhanced benefits also extend to self-employed individuals and gig workers.

An additional $13 billion has been put into SNAP benefits and food banks, among other programs, during one of the biggest hunger crises the U.S. has seen in years.

 

  1. Student Loan Repayment

The 2021 CAA extends the CARES Act provision that allows employers to repay up to $5,250 annually towards an employee’s student loan payments. The payments are tax-free to the employee. There is no data yet about how many employers have actually implemented this benefit.

 

  1. Small Businesses

The 50% limit on the deduction for business meals has been lifted. Business meal expenses after December 31, 2020, and before January 1, 2023, may now be fully deductible. Please consult your tax, legal, or accounting professional for more specific information regarding this provision.

 

  1. PPP Loans

The new law contains $284 billion in relief for a second round of Payment Protection Program loan funding, with some loans eligible for forgiveness. Businesses with 300 or fewer employees may be eligible for a second loan. “Second-draw” loans are available through March 31, 2021.

The bill also includes $20 billion in grants for companies in low-income areas and money set aside for loans from community-based and minority-owned lenders.

 

 

 

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This article is as accurate as our research sources (below), but it is to be used for informational purposes only and is not intended as financial advice. Consult with your tax, legal and accounting professionals before taking any action based on this information.

Like with any new legislation, as 2021 gets underway expect additional guidance from regulators on 2021 CAA. Our office will keep an eye out for updates and pass information as it becomes available.

Call us if you have any questions. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

 

 

 

 

Sources:

https://www.usatoday.com/in-depth/news/2020/12/31/covid-stimulus-how-compares-other-coronavirus-aid/3922144001/

https://www.forbes.com/advisor/personal-finance/do-adult-dependents-get-the-second-stimulus-check

https://www.cnbc.com/2020/12/21/stimulus-checks-unemployment-aid-and-more-in-900-billion-coronavirus-relief-plan.html

Podcast 01-04-2021

By | Financial Planning

In this unique podcast, Chris is interviewed on the Foreign & International Medical Graduate Show. The podcast was created to help inspire physicians who are in the process of immigration to the United States. The host admits doctors spend an incredible amount of time studying science. Like many other professions, they spend little or no time learning about money and finances. In this conversation Chris discusses how physicians can be better prepared financially in running their practices by developing sound financial and retirement plans.

Podcast January 04 2021
Podcast January 04 2021

Your Annual Financial To-Do List

By | Financial Planning

Things you can do for your future as the year unfolds.

What financial, business, or life priorities do you need to address for the coming year? Now is an excellent time to think about the investing, saving, or budgeting methods you could employ toward specific objectives, from building your retirement fund to managing your taxes. You have plenty of choices. Here are a few ideas to consider:

 

Can you contribute more to your retirement plans this year? In 2021, the contribution limit for a Roth or traditional individual retirement account (IRA) is expected to remain at $6,000 ($7,000 for those making “catch-up” contributions). Your modified adjusted gross income (MAGI) may affect how much you can put into a Roth IRA. With a traditional IRA, you can contribute if you (or your spouse if filing jointly) have taxable compensation, but income limits are one factor in determining whether the contribution is tax-deductible.

Remember, withdrawals from traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty starting again in 2021 because the CARES Act ends December 31, 2020. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for tax-exempt and penalty-free withdrawal. Tax-free and penalty-free withdrawals from Roth IRAs can also be taken under certain other circumstances, such as a result of the owner’s death.

Keep in mind, this article is for informational purposes only, and not a replacement for real-life advice. Also, tax rules are constantly changing, and there is no guarantee that the tax landscape will remain the same in years ahead.

 

Make a charitable gift. You can claim the deduction on your tax return, provided you follow the Internal Review Service (I.R.S.) guidelines and itemize your deductions with Schedule A. The paper trail is important here. If you give cash, you should consider documenting it. Some contributions can be demonstrated by a bank record, payroll deduction record, credit card statement, or written communication from the charity with the date and amount. Incidentally, the I.R.S. does not equate a pledge with a donation. If you pledge $2,000 to a charity this year but only end up gifting $500, you can only deduct $500.  You must write the check or make the gift using a credit card by the end of December.

These are hypothetical examples and are not a replacement for real-life advice. Make certain to consult your tax, legal, or accounting professional before modifying your record-keeping approach or your strategy for making charitable gifts.

 

See if you can take a home office deduction for your small business. If you are a small-business owner, you may want to investigate this. You may be able to write off expenses linked to the portion of your home used to conduct your business. Using your home office as a business expense involves a complex set of tax rules and regulations. Before moving forward, consider working with a professional who is familiar with home-based businesses.

  

Open an HSA. A Health Savings Account (HSA) works a bit like your workplace retirement account. There are also some HSA rules and limitations to consider. You are limited to a $3,600 contribution for 2021 if you are single; $7,200 if you have a spouse or family. Those limits jump by a $1,000 “catch-up” limit for each person in the household over age 55.

If you spend your HSA funds for non-medical expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, you may be required to pay ordinary income taxes on HSA funds used for nonmedical expenses. HSA contributions are exempt from federal income tax; however, they are not exempt from state taxes in certain states.

 

Review your withholding status. Should it be adjusted due to any of the following factors?

* You tend to pay the federal or state government at the end of each year.

* You tend to get a federal tax refund each year.

* You recently married or divorced.

* You have a new job, and your earnings have been adjusted.

These are general guidelines and are not a replacement for real-life advice. Make certain to consult your tax, human resources, or accounting professional before modifying your withholding status.

 

Did you get married in 2020? If so, it may be an excellent time to consider reviewing the beneficiaries of your retirement accounts and other assets. The same goes for your insurance coverage. If you are preparing to have a new last name in 2021, you may want to get a new Social Security card. Additionally, retirement accounts may need to be revised or adjusted?

 

Consider the tax impact of any upcoming transactions. Are you planning to sell any real estate this year? Are you starting a business? Might any commissions or bonuses come your way in 2021? Do you anticipate selling an investment that is held outside of a tax-deferred account?

 

If you are retired and in your 70s, remember your RMDs. In other words, Required Minimum Distributions (RMDs) from retirement accounts. Under the SECURE ACT, in most circumstances, once you reach age 72, you must begin taking RMDs from most types of these accounts.

 

Vow to focus on your overall health and practice sound financial habits in 2021. And don’t be afraid to ask for help from professionals who understand your individual situation. Give us a call if you would like to discuss. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

 

Sources:

https://thefinancebuff.com/401k-403b-ira-contribution-limits.html

https://money.usnews.com/money/retirement/iras/articles/what-is-the-secure-act

https://www.irs.gov/publications/p590b

https://www.azcentral.com/story/money/business/consumers/2020/11/22/these-tax-laws-charitable-donations-were-changed-help-pandemic/6295115002/

https://www.investopedia.com/articles/tax/09/self-employed-tax-deductions.asp

https://www.investopedia.com/articles/personal-finance/082914/rules-having-health-savings-account-hsa.asp#:~:text=You%20can%20only%20open%20and,as%20a%20catch%2Dup%20contribution.

https://www.thinkadvisor.com/2020/11/29/10-tax-tips-to-take-by-year-end/

10 Reasons You Need a Financial Plan

By | Financial Planning

October is Financial Planning Month which serves as a useful, annual checkpoint to make sure you are on track to meet your financial goals. A written, up-to-date financial plan encompasses not only investments, but risk management solutions, tax reduction strategies and estate planning.

10 Reasons You Need a Financial Plan

  1. To have one comprehensive document to address your finances.

Financial planning provides one summary location for everything related to your family’s financial life. From your budget, to your savings, to your investments, to your retirement, a financial plan helps you consider your finances in a holistic manner, and gives you one central place to see everything at a glance.

  1. To ensure your investments are in line with your current short- and long-term goals.

A financial plan includes short-term goals like buying a house and long-term goals like saving for retirement, as well as everything in between. As your goals change through time, your financial plan is a living document that should get updated with your advisor on at least an annual basis.

  1. To ensure you’re not spending too much money each month—to have adequate cash flow.

A realistic budget is very important to keeping you on track with your goals. This doesn’t mean you have to deprive yourself of little luxuries—it just means that those are already built into the plan so you don’t overspend.

  1. To ensure you’re saving enough money, in the right places, including adequate reserves.

As many of us have learned during the pandemic, having adequate emergency funds is important. That amount varies from person to person, and your advisor can help you define the amount you have saved for emergencies, and help you find the right strategies to use so that your savings are liquid and accessible when you need funds.

  1. To ensure your retirement is on track.

Making sure your retirement funds are invested for best performance while matching your risk tolerance and time horizon to retirement is one part of making sure your retirement is on track. Another part is making decisions about your desired retirement lifestyle and the corresponding monthly budget you will need later. These retirement lifestyle decisions can change throughout your working career, but should get more solid as you get from five to 10 years away from retiring.

  1. To put and keep adequate protection in place against risks—like health, disability, accidental death and liability.

Providing for your family’s financial security is an important part of the financial planning process, as is assessing other risks you may face such as liability from lawsuits. Having the proper insurance coverage in place can protect your whole family. And today’s policy designs mean you may be able to cover multiple risks with fewer policies—and may even be able to enjoy “living benefits” while providing death benefit protection for your family members.

  1. To address and have a plan in place for your estate.

Everyone needs an estate plan. A will allows you to spell out your final wishes, such as listing recipients of each of your possessions and designating minor children’s guardians. A trust can bypass probate court, saving money and keeping things private while easily transferring wealth. Health care directives and powers of attorney are critical should you become incapacitated. When creating your estate plan, your ideal team should include an estate attorney, your financial advisor and your tax professional.

  1. To help you manage changes.

A financial plan includes all its various parts and pieces so that you can quickly see what needs updating when life changes happen. Remember, the beneficiaries you list on your individual insurance policies and your retirement accounts (like 401(k)s) take precedence over what is in your estate planning documents. Too many people have had their ex-spouses receive money because they forgot to update all documents properly.

  1. To help you mitigate taxes.

It’s truly not how much you have; it’s how much you get to keep. Tax reduction strategies can help you annually, but your advisor can also help you look further ahead to reduce taxes later, such as during retirement. Remember, all the money you have saved in accounts like traditional 401(k)s are pre-tax dollars—you will have to pay ordinary income tax on that money when you withdraw it, which you have to do starting at age 72. Making a plan for taxation can help.

  1. To help enhance your peace of mind.

Reducing stress and sleeping more soundly may be the best reason of all to have a financial plan in place.

 

If you would like to create, update or review your financial plan, please call us. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

What is a Roth Conversion?

By | Retirement, Tax Planning

To understand what a Roth conversion is, you must first understand some of the basics about the different types of retirement accounts, called “qualified accounts.”

  • Pensions

Also called defined-benefit plans, pensions are paid for by employers. They have largely gone away for Americans in the private sector starting with the passage of three laws during the Reagan administration, the Tax Equity and Fiscal Responsibility Act passed in 1982, The Retirement Equity Act of 1984, and The Tax Reform Act and Single Employer Pension Plan enacted in 1986.

The lack of pensions is one reason why it’s important for people to create their own retirement income plans.

  • 401(k) Accounts

Defined-contribution plans, including 401(k)s and similar plans, rely on an employee to elect to contribute a percentage of their salary in order to save for retirement. Contribution amounts are usually taken out of an employee’s check on a “pre-tax” basis, and sometimes a company will add a “matching” amount based on the percentage the employee contributes, often based on an employee’s length of service.

A 401(k) plan generally has a limited list of fund choices. The maximum an individual can contribute to a 401(k) in 2020 is $19,500 per year, or $1,625 per month, not including the employer’s matching amount.

For traditional 401(k)s, no taxes are due on 401(k) accounts until the money is withdrawn. Ordinary income taxes are due upon withdrawal at the account owner’s current tax bracket rate, and withdrawals are mandatory starting at age 72. NOTE: Roth 401(k)s are available at some companies, and contributions for those are made on an after-tax basis.

  • Traditional IRA Accounts

An IRA—Individual Retirement Account—is a type of account which acts as a shell or holder. Within the IRA, you can invest in many different types of assets. You can choose between CDs, government bonds, mutual funds, ETFs, stocks, annuities—almost any type of investment available. You can open an IRA account at a bank, brokerage, mutual fund company, insurance company, or some may be opened directly online.

For 2020, you can contribute up to $6,000 to an IRA, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year. Traditional IRA contributions are typically made with pre-tax dollars, which gets accounted for on your tax return in the year you choose to make the contribution. Depending on your income level, sometimes traditional IRA contributions can also be tax-deductible. Traditional IRA withdrawals are treated as ordinary income and taxed accordingly, and withdrawals are mandatory starting at age 72.

  • Roth IRA Accounts

Like a traditional IRA, a Roth IRA is a type of account which acts as a shell or holder for any number of different types of assets. The difference is that Roth IRA contributions are made with after-tax dollars.

Withdrawals are not mandatory for Roth IRAs, but you can withdraw funds tax-free as long as you follow all rules, which include having the account in place for at least five years. Those age 59-1/2 or older can withdraw any amount—including gains—at any time for any reason, and can also leave Roth IRA accounts to their heirs tax-free—beneficiaries just have to withdraw all the money within 10 years of the account holder’s death.

For people under age 59-1/2, as long as they have had their Roth IRA account in place for five years or longer, they can withdraw any amount they have invested at any time—but not the gains or earnings. If they withdraw the gains or earnings, they may have to pay ordinary income taxes plus a 10% penalty on those, with some exceptions, such as first-time homebuyer expenses up to $10,000, qualified education and hardship withdrawals, which may avoid the penalty but still require tax be paid on any amount attributed to earnings.

Roth IRAs offer the potential for tax-free retirement income as well as tax-free wealth transfer to heirs. Essentially, with a Roth IRA, your interest, dividends and capital gains which accumulate inside it are tax-free as long as you follow all Roth IRA withdrawal rules.

For 2020, you can contribute up to $6,000 depending on your income, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year. However, Roth IRAs have income restrictions that may disqualify higher-income people from participating. The income restrictions on Roth IRA accounts are not always a barrier to conversions—a perfectly legal tax strategy called a “backdoor Roth IRA conversion” can be accomplished as long as all IRS rules are followed.

Roth Conversions

Because of the many Roth IRA tax advantages, some people may benefit from converting some of the money in their taxable 401(k) and/or traditional IRA accounts into tax-free Roth IRAs. Conversions are a taxable event in the year they are done, and they cannot be undone, so it is important to work with a qualified advisor to run anticipated tax savings calculations to see if they make sense. Additionally, there are complex tax rules which must be adhered to in regard to the ratio of taxable to non-taxable amounts held in IRAs.

If you have a low-income year due to a job loss or cutback, or you are five to 10 years away from retirement, you may benefit from a Roth conversion, or a series of them at today’s lower tax bracket rates, set to revert back up to 2017 levels for the 2026 tax year.

There are basically three ways to do Roth conversions according to Investopedia:

1) A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days.

2) A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution.

3) A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution.

Whatever method you use, you will need to report the conversion to the IRS using Form 8606 when you file your income taxes for the year and follow all rules. Roth conversions are complex and you should seek expert tax guidance.

 

Let’s talk. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

 

This article is for informational purposes only and should not be used for financial or tax advice. Future tax law changes are always possible. Be sure to consult a tax professional before making any decisions regarding your traditional IRA or Roth IRA.

Sources:

https://protectpensions.org/2016/08/04/happened-private-sector-pensions/)

https://blog.turbotax.intuit.com/tax-deductions-and-credits-2/can-you-deduct-401k-savings-from-your-taxes-7169/.

https://www.nerdwallet.com/blog/investing/how-much-should-i-contribute-to-a-401k/.

https://www.debt.org/tax/brackets/

https://www.investopedia.com/terms/b/backdoor-roth-ira.asp#

https://www.investopedia.com/roth-ira-conversion-rules-4770480

https://www.kitces.com/blog/roth-ira-conversions-isolate-basis-rollover-pro-rate-rule-employer-plan-qcd/

How Rich Do You Have to Be in Order to Retire?

By | Health Care Expenses, Retirement, Tax Planning

Even though perceptions have changed during the pandemic with more Americans now saying they need less money to feel rich1, when it comes to retirement, most people are still unclear about how much they will need to have saved before they can quit their jobs.

The answer to that question is different for every person.

Here are some of the things you need to think about in order to get a realistic retirement number in mind.

 

What do you want to do during retirement? Where will you live?

Different people have different retirement goals and visions. You may not realize that you need to answer lifestyle questions before you can answer the “how much do I need” question.

Think about it this way. A single woman downsizing into a tiny home in a rural community to enjoy hiking in nature is going to need to have saved up a lot less money than a couple who wants to buy a big yacht, hire a crew and travel around the world docking at various international ports. A man who wants to spend all his time woodworking in his garage in the Midwest will need a smaller nest egg than a power couple collecting art and living in a penthouse in New York.

Most people are somewhere in the middle of these extremes. Yet answering these questions for yourself is very important both financially and emotionally for everyone entering retirement. You don’t want to end up feeling lost or bored not working—you want to feel that you are moving forward into a phase of life that is rewarding to you. And you certainly don’t want to run out of money because you miscalculated.

Take some time to get specific about your needs and desires. Will you want to spend holidays with family or friends? Start an expensive new hobby like golf? Take a big vacation every year? (The pandemic will end eventually!) Visit your grandchildren who live across the country multiple times? Go out to eat every day?

Based on your goals and objectives for your retirement lifestyle, your financial advisor will help you prepare a realistic monthly budget, adding in calculations for inflation through the years.

Once you’ve developed your monthly budget, it can be compared against your Social Security benefit to give you a good idea of how much additional monthly retirement income you will need to generate from your savings. From there, your advisor can come up with strategies to help you create income from savings, and then give you a realistic figure that you will need to have saved up before you retire.

But in addition to your retirement lifestyle, there are a couple of other things that need to be considered.

 

How is your health?

Nearly every retiree looks forward to the day they can sign up for Medicare. But Medicare is not free; the standard Part B premium for 2020 is $144.60 per month2 for each person. Your premiums for Medicare are usually deducted right from your Social Security check.

If you elect to purchase additional coverage through Medicare Advantage, Medigap and/or prescription drug plans, your premiums will cost more. And there will still be deductibles to meet and co-pays you will owe.

Some estimates for health care expenses throughout retirement are as high as $295,000 for a couple both turning 65 in 2020!3

Even worse, keep in mind that this figure does not include long-term care expenses—Medicare doesn’t cover those after 100 days.4

 

Have you planned for taxes?

It’s not how much money you have saved, it’s how much you get to keep net of taxes.

When designing your retirement plan and helping you calculate how much you need to save, your advisor will take into consideration an important piece of the puzzle—taxes. Tax planning is often different than the type of advice you get from your CPA or tax professional when you do your tax returns each year. Tax planning involves looking far into the future at what you may owe later, and finding ways to minimize your tax burden so you will have more money to spend on things you enjoy doing in retirement.

Different types of accounts are subject to different types of taxation. “After-tax” money that you invest in the stock market can be subject to short- or long-term capital gains taxes. Gains accrued on “after-tax” money that you have invested in a Roth IRA account are not taxed due to their favorable tax rules. Interest paid on “after-tax” money in savings, CDs or money market accounts is taxed as ordinary income, although this usually doesn’t amount to much especially with today’s low interest rates.

What your financial advisor will be most concerned about is your “before-tax” money held in accounts like traditional IRAs or 401(k)s which are subject to ordinary income taxes when you take the money out, which you have to do each year starting at age 72 per the IRS. (These mandatory withdrawals are called required minimum distributions.)

If “before-tax” money like 401(k)s are where the bulk of your savings is held, you will want to run projections to calculate how much of a bite income taxes will take out of your retirement, especially since tax brackets will go back up to 2017 levels5 beginning in January of 2026. There may be steps you can take now to help you lower your taxes in the future.

 

Please contact us if you have any questions about your retirement. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

 

 

Sources:

1 https://www.financial-planning.com/articles/americans-now-say-they-need-less-money-to-feel-rich

2 https://www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance#

3 https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

4 https://longtermcare.acl.gov/medicare-medicaid-more/medicare.html

5 https://taxfoundation.org/2017-tax-brackets/

How a Furlough (or Layoff) Affects Your Finances…and Retirement

By | 401k Plans, Financial Planning

Here are six things you need to know if you or a family member has been furloughed—or laid off—from their job

 

A furlough is an unpaid leave of absence. You don’t report to work, you don’t get paid, and you may lose some of your benefits. Getting fired or laid off is different because it is permanent; whereas, being furloughed means your employer wants you back as soon as things get back to normal, typically at the same position and income level as before the furlough. Here are six things you should know:

 

  1. Filing for unemployment

Whether furloughed or laid off, you should file for unemployment as soon as possible because the CARES Act adds to the amount your state provides weekly, but only through July 31. For instance, the average benefit among the 50 states is $215 per week—the CARES Act adds an additional $600 per week through the end of July. Self-employed, independent contractors and gig economy workers, who typically are not allowed to file for unemployment, can also apply. Learn more here.

  1. Healthcare insurance

If you are furloughed, you may still be able to keep your healthcare insurance. Be sure to check with your employer about how to arrange to pay your contribution amount, if any. If you are laid off, you can continue benefits through COBRA, or you may find a cheaper option through the exchange http://healthcare.gov website—if your state has chosen to open up enrollment due to the pandemic.

  1. Bills and debts

There is a provision for mortgage forbearance if you have a single-family residence mortgage loan backed by the federal government, and renters can avoid eviction for more than 120 days if their landlord has a government loan on the property rented. Learn more here. Student loans held by the federal government will not require payment and will not accrue interest through September 30.

In any case, it is recommended that you call creditors to discuss your situation. Ask them what they have to offer people who are experiencing a temporary reduction in income, and take notes and ask about any fees, additional interest, and whether they report any postponed payments to credit bureaus.

  1. 401(k) or similar retirement plan – contributions

If you are furloughed, your 401(k) accounts should remain in place, but your contributions and matching contributions won’t happen during the furlough unless your employer chooses to make a discretionary contribution. If you are not yet fully vested, there is a scenario that could happen if you are furloughed for an extended amount of time or ultimately laid off. If an employer terminates 20% or more of its workforce, a “partial plan termination” could be triggered, in which case the IRS could decide that all affected employees would become 100% vested.

If you are let go, you can leave your money in the company’s 401(k) plan if you have more than $5,000 in it, although you can’t add additional money to the account. If you have $5,000 or less, your employer has the option of removing you and distributing the funds, so be sure to ask what they intend to do. See some of your other options below.

  1. 401(k) – loans

If you are furloughed, or laid off but leaving your 401(k) with the company, you may be able to take a loan or withdrawal from your 401(k) due to the coronavirus outbreak, depending upon your company plan rules—be sure to check with your plan administrator.

If so, the CARES Act allows up to $100,000 to be taken without penalty, although you will have to either repay the money or pay taxes on the amount withdrawn over the next three years. NOTE: You can do this even if you are under the age of 59-1/2, there will be no 10% penalty, and there will be no mandated 20% withheld by the 401(k) administrator for taxes. In order to meet the eligibility provisions of the CARES Act, you, your spouse or dependent/s must have contracted COVID-19, or must have experienced adverse financial consequences as a result of quarantine, furlough, lack of childcare or closed or reduced hours of business.

If you already have an outstanding 401(k) loan, your repayments will stop while you are furloughed, since those are typically held out from your paycheck. Ask your employer about how you can make repayments or get the loan repayments suspended temporarily.

Taking 401(k) loans or cashing out should be a last option for most people since it can jeopardize your retirement nest egg and your future. After the 2008 financial crisis, most people who stayed in the market experienced financial recovery from their losses.

  1. 401(k) – rollovers

If you are laid off, you do have the option of rolling over your 401(k) money into your own self-directed IRA account. This offers many options, since an IRA can be a mutual fund, annuity, ETF, CD or almost any other type of financial instrument.

You need to choose between a tax-deferred traditional IRA, or pay taxes on the money you roll over and start a Roth IRA. With a traditional IRA, you will have to begin withdrawing a certain amount out every year starting at age 72 and pay ordinary income taxes on the money withdrawn. (These are called Required Minimum Distributions (RMDs)—which are not due in 2020 per the CARES Act.)

With a Roth IRA, you pay taxes up front. You don’t have to withdraw money during retirement, but if you do, it is usually tax- and penalty-free after you’ve owned the account for five years. Your kids can inherit the money tax-free as well.

It’s usually best to work with a financial advisor who can outline some of the tax ramifications, rules and timing requirements so you don’t miss any rollover deadlines or get hit with any penalties or taxes you weren’t expecting. They can fill you in on other options, such as, if you are age 59-1/2 and still working, you may be able to do an “in-service rollover” with part of your 401(k), moving that portion into your own IRA, potentially helping you avoid market risk as you get closer to retirement.

 

If you have any questions, please call us. You can reach Drew Financial Private Capital in Florida by calling (813) 820-0069.

 

This article is provided for informational purposes only, and is not intended to provide any financial, legal or tax advice. Before making any financial decisions, you are strongly advised to consult with proper legal or tax professionals to determine any tax or other potential consequences you might encounter related to your specific situation.

 

Sources:

https://www.fool.com/investing/2020/04/23/how-a-furlough-affects-your-401k.aspx

https://www.immediateannuities.com/roll-over-ira-or-401k/

https://www.washingtonpost.com/business/2020/04/03/unemployed-coronavirus-faq/?arc404=true

https://www.cbsnews.com/news/furlough-versus-layoff-unemployment-aid-coronavirus/

https://money.usnews.com/money/retirement/401ks/articles/what-to-do-with-your-401-k-if-you-get-laid-off

https://www.businessinsider.com/what-you-need-from-your-job-get-laid-off-furloughed-2020-4#if-you-have-no-other-choice-but-to-withdraw-from-your-retirement-funds-know-the-new-cares-act-updates-8

https://www.thestreet.com/how-to/how-to-roll-your-401k-into-an-ira-while-you-re-still-working-14379206

https://www.investopedia.com/articles/personal-finance/092214/guide-401k-and-ira-rollovers.asp