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
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.
What is does “Required Minimum Distribution” mean?
The Required Minimum Distribution, or RMD as it is often called, are minimum amounts the federal government requires you to withdraw from your traditional IRA each year.
When do I begin withdrawing my RMD?
You must begin withdrawing the required minimum distribution from your IRA by April 1st of the year following the year in which you reach the age of 70 ½. For example, if you turned 70 ½ in 2013, you have until April 1st, 2014 to withdraw your RMD.
What happens if I don’t withdraw my RMD as required?
Failure to withdraw your annual RMD subjects you to a federal penalty tax. This IRS excise tax is equal to 50% of the amount you should have withdrawn. For example, if your RMD is $10,000 and you withdraw only $6,000, the penalty is 50% of the additional $4,000 you should have withdrawn, subjecting you to a penalty of $2,000.
Avoid the unnecessary 50% penalty by properly planning for the withdrawal of your RMD.
What if I am younger than age 70 ½ ?
There are some general rules for IRA withdrawals that are critical to understand, even prior to age 70 ½.
Anytime you withdraw money from an IRA or retirement account, you are subject to tax.
If you are under the age of 59 ½, there is an early withdrawal penalty equal to 10% of the amount withdrawn (in addition to the federal and state income taxes).
If you are between ages of 59 ½ and 70 ½, if you withdraw money from an IRA account, you will be subject to federal and state income taxes.
If you are over the age of 70 ½, you must begin withdrawing money from your IRA account (see above for more information).
I turned 70 ½ this year, what are my options?
If you turned 70 ½ in 2013, you are allowed to take your first RMD any time between January 1, 2013 and April 1, 2014. For all future years, you can withdraw that particular year’s RMD between January 1st and December 31st of that year.
This does not necessarily mean you should wait until April 1, 2014 to withdraw your 2013 RMD. If you withdraw your 2013 RMD in 2014, you will still be required to withdraw your 2014 RMD by December 31, 2014; this would result in two IRA distributions in the same year and could increase your overall tax bill.
Proper planning should be done before the end of the year to determine the optimal tax and financial strategy for you. Contact us to discuss your options.