Ah, mid-February- that time of year when my postman provides a daily barrage of tax documents, and scolds me for not retrieving them quickly enough. When it finally becomes apparent that he can no longer jam another rumpled envelope into my overflowing mail slot I know it’s time to file my taxes. While this annual ritual often yields a financial reward in the form of a tax refund, there is clearly a higher purpose for the enormous pile of paper. Note to self: my inner guilt will be quelled; this year I will make better use of tax time, and so can you. Continue reading
The Roth IRA has become a popular planning tool since it was established by the Taxpayer Relief Act of 1997. Originally envisioned as a way for Americans of more modest means to efficiently transfer wealth to the next generation, the Roth IRA offers a number of potential advantages over a Traditional IRA that are particularly attractive to those that are more affluent. While there are many variables to consider when determining which type of IRA is best suited to an individual’s needs, the removal of income limits on Roth IRA conversions has made this tool available to wealthier individuals that would otherwise not qualify to make a Roth IRA contribution because of income-based restrictions. Continue reading
Ask a financial planner whether to save for retirement using a Traditional IRA or a Roth IRA and you may receive an unsatisfying answer: it depends. While the Roth IRA is a much-loved planning tool, whether it’s the best option for you will depend on several factors, but math is not one of them. Continue reading
In our most recent blog post, we discussed the import role that Social Security benefits play in the retirement income plan of most Americans, and provided a framework for understanding the various types of benefits. While sometimes dismissed as inconsequential, Social Security benefits provide a critical source of guaranteed income for most retirees. To wit, Social Security benefits comprise over fifty percent of the retirement income for two-thirds of current retirees and, critically, allow many seniors to live independently. In this blog post, we review how Social Security benefits are taxed and provide guidance on how and when to claim benefits. We encourage readers to review our previous blog post, A Primer on Social Security Benefits, as it provides important information that will aid in your understanding of the strategies outlined below. You can find that blog entry by clicking here.
To begin, an understanding of Social Security retirement benefits requires reviewing a few common terms that are key to making informed claiming decisions.
Anyone that has run a marathon knows that it can be a long and punishing journey to the finish line, filled with a slew of physical and mental obstacles along the way. Yet, despite the challenges, or for many of us because of them, participants line up year after year to collect another finisher’s medal.
Sound a little like working as a tax accountant during tax season, or, for that matter, planning for retirement? Well, aside from the finisher’s medal, blood blisters and aching quadriceps. To be successful, all three require endurance, a little luck and the execution of a thoughtful strategy.
With Tax Day in 2 weeks, you might be wondering whether there are any last minute things you can do to save on taxes from last year’s income. Good news: if you’re an entrepreneur, there is!
Did you know that if you’re self-employed or a small business owner there is a special type of pension plan available for you (and your employees)? Available for businesses of any size, a simplified employee pension plan (SEP-IRA)is a written arrangement that allows a self-employed individual or a business owner to contribute to a pension plan with significantly higher limits than a traditional IRA.
A self-employed individual can contribute (pre-tax!) between 0-25% of their compensation (maximum contributions up to $51,000 for 2013, $52,000 for 2014); here’s the small catch: each eligible employee has to get the same percentage.
There are distinct advantages to setting up a plan like this:
- You can contribute more (up to $51,000) to a plan like this than the traditional IRA maximum annual contribution of $5,500
- The contribution is tax deductible
- The account grows tax deferred until you withdraw the money
- There are no annual reporting requirements for SEPs as long as each participant or individual who is in the plan receives a copy of the plan agreement and disclosure form (this is unlike a traditional 401K, defined contribution plan, or defined benefit plan, which have an annual 5500 form filing requirement)
In order to deduct the contribution, you must establish the plan by April 15th and contribute to the plan by April 15th (or the due date of your return including extensions – check with your accountant).
There are very few drawbacks to setting one of these plans up.
How to set up a SEP-IRA:
SEP-IRAss can be set up through a financial advisor, through a brokerage house, or through a bank.
Participants are eligible to sign up for a wide variety of investment opportunities including mutual funds, stocks, bonds, ETFs, and many more.
There should be no establishment fees to launch the plan and annual fees are minimal.
One of the biggest retirement issues that people face is that they have not spent enough time planning for retirement and therefore don’t have a plan in place to retire confidently. No matter your age, you should have a plan that is specifically designed to meet your personal goals and needs while taking into account your time horizon and level of risk tolerance.
Every retirement plan should:
1. Provide for predictable streams of income that are reliable and can help avoid surprises.
2. Allow for access to your financial assets to meet your changing needs over time
3. Include some elements for growth opportunities so that your income has the potential to keep pace with inflation.
There are 5 big retirement risks that people face:
1. Inflation Risk This is your reduction in purchasing power over time. At a bare minimum, your income should keep pace with inflation in order to maintain your standard of living. Did you know that you that you would need $264.12 in 2010 to match the buying power of $100 in 1980. [Beauty of Labor statistics, CDI calculator 2010]
2. Healthcare Risk The cost of healthcare has increased dramatically. Did you know that the average price increase of prescription drugs from 1994-2005 was 8.3% per year?
3. Longevity Risk This is the possibility of people outliving their financial assets. Did you know that there is a 63% probability that one person from any given couple (currently age ~65) will live to age 90? With many people living 20-30 years (or more!) in retirement, it is important to appropriately plan so that your financial assets don’t run out.
4. Excess Withdrawal Risk This is the risk of withdrawing too much money from your investment portfolio too quickly, which could result in running out of money. Did you know that 70% of people falsely believe they can safely withdraw 10% or more a year from their retirement saving?
5. Market Risk This is the possibility that you have investment losses that may reduce the amount of money you have to live on in retirement.
In order to retire with confidence, developing a sound retirement plan that addresses these specific issues is integral, instrumental, fundamental. We will dive more deeply into these topics in the coming weeks. For now, if you have questions or want to set up an initial assessment of your retirement strategy, contact us.
Distributions from retirement accounts (such as IRAs and 401ks) are not only considered part of your taxable income, but are also generally subject to an additional 10% penalty for early withdrawals if you are under the age of 59 ½. However, there are a few ways to take early distributions while entirely avoiding the second penalty tax.
Here are 9 exceptions to the 10% Early withdrawal penalty:
1. IRA owner is age 59 1/2 or older
2. Death or disability of the IRA owner
3. Series of substantially equal payments over the life of the IRA owners (or joint lives of the IRA owner and beneficiary)
4. Payment to the extent qualified medical expenses exceed 7.5 or 10% of the AGI depending on the tax year
5. Payment of health insurance for certain unemployed individuals
6. Payment of qualified higher education expenses
7. Payment of qualified first time home purchases
8. Payment due to IRS levy
9. Qualified distribution made to certain military reservists
Have questions about retirement planning? Call us.