4 Investment Accounts You Need to Have

What investment accounts are available for me?  What are the tax consequences of investing?  Planning your investments to build a retirement fund can be a dizzying prospect. The various questions, options, details, accounts, and amounts are enough to make anyone’s head spin. It is important to work with an investment coach that can understand your specific needs.

Below are a few basics and suggestions on some options available to most people.

1. Fulfill Your Company’s Match Program: If you work for an employer that has a retirement plan option, this is a must.  Most companies, even small companies, offer some sort of retirement account.  Smaller companies usually have simple IRA’s or SEP IRA’s, while larger companies usually have 401k’s.  There is a high likelihood that your company has a match program as part of their plan.  This means that for each contribution you make into your account, the company will match it up to a certain amount.  So match programs offer an instant 100% return on the money invested.   Before you invest anywhere else, make sure you are investing enough in your work retirement plan to get your full match.

Warning!  If you don’t plan on working for the company long term, make sure you check out the vesting schedule.  A lot of company retirement plans don’t give you full access to the employer contributions unless you work there for a 3 to 5 years.

2. IRA to the Max: An IRA is an individual retirement account that can be opened by anyone seeking to invest.  Investing in an IRA usually gives you more investment choices and flexibility than is offered in many 401k plans.   Also, you have the Roth option.  There has been a long standing battle between the Traditional IRA’s and the Roth IRA’s. When it comes to your retirement planning, your Roth IRA should win this battle in most cases. There are a few different reasons why you should make this move. Investing in a Roth allows you to pay taxes on your income now, and avoid the higher tax rate as it grows in your retirement.  The total taxes paid with a Roth IRA from opening of account to death and beyond are almost always less than with a Traditional IRA.

Who’s eligible?  Even if you have a retirement plan at work you are eligible to contribute to a Roth IRA.

Another thing to consider if you are married is opening a Roth IRA for your spouse.  Even if they are not working you can contribute to their Roth IRA and max it out as well.

3. Open Taxable (Non-Qualified) Accounts: If you have maxed out your company plan and an IRA for your and your spouse, congratulations, you are doing very well in the retirement planning side of things.  But what if you still want to put more money away?  There are still options.   You can still invest more money in a non-qualified account.  If you are married this would be a joint account, and for the singles it is a personal account. There are a few advantages and disadvantages of this type of account.  This is not a tax sheltered account, so there is no taxable advantage.

One big advantage.  There is no tax penalty or fee for taking the money out at any age for any reason.  For that reason a lot of people use this account as an emergency fund, or in any case where they want extra flexibility.

4. Education Planning:  If you have kids, you need to think about saving money for their future, especially their college expenses.  There are Education Savings Accounts, and other ways and means of doing this that are advantageous for tax purposes.

 
There is a lot of things to know, and I haven’t even gotten into life insurance and that side of the retirement planning.   Like I mentioned before, there is a reason that no one has created a perfect plan that fits everyone. Depending on your personal income, you might not be eligible for certain accounts, like a Roth IRA.  But, for most people, these four steps are a great place to start.

By Jimmy Hancock



College Savings Piggy Bank. Digital image. Flickr. N.p., n.d. Web. 27 June 2017.

How to Beat Taxes by Investing

It is tax time once again and no matter how much you hate taxes you should know about the tax advantages of IRA’s.  Contributions to IRA’s can help you in many different ways at tax time.  They can lower your taxable income dollar for dollar to reduce your tax burden, or even increase your refund.  I will compare Traditional IRA’s with Roth IRA’s to show you the benefits of each.  Everyone that is able should be putting money away into an IRA.  The contribution limit per year is $5500, or $6500 if you are over age 50.

Traditional IRA Summary- A Traditional IRA allows you to take the tax advantage in the year that you make contributions to the account.  This type of IRA is used by people who are looking for tax deductions.

Pro’s

  • – You get to write off your contributions you make each tax year from your Income.
  • – If you are not covered by a retirement plan at work, the income limit does not exist.  Meaning you can write off contributions no matter how much you make.
  • You don’t have to itemize deductions in order to get the deduction, it affects your AGI, (Adjusted Gross Income) not your net income.

Con’s

  • – When you take the money out in retirement, you pay the full taxes on not only the money you put in, but the growth as well. (Assuming there is growth)
  • – You are required to take the money out and pay taxes beginning at age 70 1/2, this is called a Required Minimum Distribution.
  • – If you have a retirement plan at your work, you cannot write off contributions if your Adjusted Gross Income is more than $118,000 for Married Filing Jointly. ($71,000 for Single Filers)

Roth IRA Summary- A Roth IRA allows you no advantage in the year of the contribution, but the money you take out in retirement or after death is completely tax free.   It is used by people with lower current tax rates and by those wanting tax free money in retirement or as an inheritance for their children/spouse.

Pro’s

  • – You get all of your money that you contributed plus all the growth of the account completely tax free after the age of 59 1/2.
  • – If you die, the money goes tax free to your beneficiaries.
  • – You have the option  of withdrawing money, up to the total of all your contributions made, tax and penalty free at any age or for any reason.  

Con’s

  • – Your contributions do not lower your Adjusted Gross Income in the year contributed.
  • – If you make more than $194,000 as married filing jointly($132,000 for single) you cannot contribute to a Roth IRA.

Things to Consider

  • – You can open as many Roth IRA’s and Traditional IRA’s as you want, but that may not be in your best interest.
  • – If your income is below $37,000 (Married Filing Jointly) then you probably qualify for the Retirement Savings Credit, which gives you up to 50% of your total contributions in the form of a tax credit on top of any other tax benefit you would already receive.  See last weeks blog for more info on this.  
  • – If you are married, you can contribute with the tax advantage up to $11,000 total, $5500 in both spouses accounts. 
  • – If you believe your current tax bracket is significantly higher than it will be when you take the money out, then you should probably consider a traditional IRA.

The most important part of the decision should be your goals and priorities.  A Roth IRA will give you more long term assurance of tax free wealth, while a traditional IRA will help you to dodge big tax bills in the short term.   If you need to open up an IRA or Roth IRA this tax season, get in contact with us and we can help you out with no upfront cost.  

By Jimmy Hancock

Reference

IRS. “Retirement Topics – IRA Contribution Limits.” Retirement Topics – IRA Contribution Limits. IRS, 18 Feb. 2014. Web. 03 Aug. 2014. <http://www.irs.gov/Retirement-Plans/Plan-Participant%2C-Employee/Retirement-Topics-IRA-Contribution-Limits>.

Boxing Gloves. Digital image. Misswoodenglish.wikispaces.com. N.p., n.d. Web. 14 Mar. 2017.



Should you rollover your 401k?

401k pigAfter leaving a company, former employees can usually opt to keep their 401K or move the money over into a Rollover IRA. The benefits of rolling over old employer 401ks often outweigh the negatives.

1. Investing Efficiency
Most company sponsored 401k plans offer only a small selection of mutual funds, target-date funds and company stock. With a Rollover IRA, a person can choose to invest in a wide variety of stocks and bonds within institutional funds. Diversification is the key to investment success.  Investing in a wide base and including small, value, and international stocks can help to boost your annual return.  A small amount of increase in annual return due to investing in a more efficient portfolio can add thousands of dollars to your bottom line in retirement.

2. Avoiding tax complications
By rolling over an old 401K rather than taking the money out, a former employee does not have to worry about paying taxes or penalties to the IRS associated with early distributions from a retirement account. According to a recent study by Fidelity cited by a Forbes article, one in three people cash out their 401K plan when they leave a company or change jobs. People who cash out their 401k not only owe ordinary income taxes on the full amount, but also owe an additional 10 percent penalty unless they qualify for a rare exemption.  Cashing out a 401k should only be done in an emergency when there are no other options.

3. The Roth Conversion

Once someone has rolled over 401k to an IRA, they then have the option of converting that money into a Roth IRA.  A Roth IRA has great tax advantages in that your money, including principle and growth is not taxed when taken out after age 59 1/2.  When you do a Roth Conversion, you pay the taxes in that year, and are never taxed on it again.  If you are in a low tax bracket after ending or changing employment, then a Roth Conversion is a must.

4. Ease of Access

There can be a lot of people to go through if you want to make changes or withdraw from your 401k.  I personally have had some experiences where 6 months has passed without anything happening after someone requested a change in an old 401k.  With an IRA, you can email, call, or text your advisor, and he will help you to accomplish whatever you need done with your account.

 

Ultimately, the benefit of an IRA rollover is flexibility. Not only does a person have more investment options, but he or she can eventually choose to convert money from a Rollover IRA into a Roth IRA. Many people view the Roth IRA as the ultimate retirement investment account because the money can be withdrawn tax free in retirement.

By Jimmy Hancock

Investing to Beat Taxes

cut taxesIt is tax time once again and no matter how much you hate taxes you should know about the tax advantages of IRA’s.  Contributions to IRA’s can help you in many different ways at tax time.  They can lower your taxable income dollar for dollar to reduce your tax burden, or even increase your refund.  I will compare Traditional IRA’s with Roth IRA’s to show you the benefits of each.  Everyone that is able should be putting money away into an IRA.  The contribution limit per year is $5500.

Traditional IRA Summary- A Traditional IRA allows you to take the tax advantage in the year that you make contributions to the account.  This type of IRA is used by people who are looking for tax deductions.

Pro’s

  • – You get to write off your contributions you make each tax year from your Income.
  • – If you are not covered by a retirement plan at work, the income limit does not exist.  Meaning you can write off contributions no matter how much you make.
  • You don’t have to itemize deductions in order to get the deduction, it affects your AGI, (Adjusted Gross Income) not your net income.

Con’s

  • – When you take the money out in retirement, you pay the full taxes on not only the money you put in, but the growth as well. (Assuming there is growth)
  • – You are required to take the money out and pay taxes beginning at age 70 1/2, this is called a Required Minimum Distribution.
  • – If you have a retirement plan at your work, you cannot write off contributions if your Adjusted Gross Income is more than $118,000 for Married Filing Jointly. ($71,000 for Single Filers)

Roth IRA Summary- A Roth IRA allows you no advantage in the year of the contribution, but the money you take out in retirement or after death is completely tax free.   It is used by people with lower current tax rates and by those wanting tax free money in retirement or as an inheritance for their children/spouse.

Pro’s

  • – You get all of your money that you contributed plus all the growth of the account completely tax free after the age of 59 1/2.
  • – If you die, the money goes tax free to your beneficiaries.
  • – You have the option  of withdrawing money, up to the total of all your contributions made, tax and penalty free at any age or for any reason.  

Con’s

  • – Your contributions do not lower your Adjusted Gross Income in the year contributed.
  • – If you make more than $193,000 as married filing jointly($131,000 for single) you cannot contribute to a Roth IRA.  In tax year 2016 that limit goes up by $1000 respectively.  

Things to Consider

  • – You can open as many Roth IRA’s and Traditional IRA’s as you want, but that may not be in your best interest.
  • – If your income is below $36,500 (Married Filing Jointly) then you probably qualify for the Retirement Savings Credit, which gives you up to 50% of your total contributions in the form of a tax credit on top of any other tax benefit you would already receive.  See last weeks blog for more info on this.  
  • – If you are married, you can contribute with the tax advantage up to $11,000 total, $5500 in both spouses accounts. 
  • – If you believe your current tax bracket is significantly higher than it will be when you take the money out, then you should probably consider a traditional IRA.

The most important part of the decision should be your goals and priorities.  A Roth IRA will give you more long term assurance of tax free wealth, while a traditional IRA will help you to dodge big tax bills in the short term.   If you need to open up an IRA or Roth IRA this tax season, get in contact with us and we can help you out with no upfront cost.  

By Jimmy Hancock

Reference

IRS. “Retirement Topics – IRA Contribution Limits.” Retirement Topics – IRA Contribution Limits. IRS, 18 Feb. 2014. Web. 03 Aug. 2014. <http://www.irs.gov/Retirement-Plans/Plan-Participant%2C-Employee/Retirement-Topics-IRA-Contribution-Limits>.



Don’t Miss this Investing Tax Credit!

tax credit1The Saver’s Credit: almost a well-kept secret?

It’s becoming increasingly difficult for low to middle-income families to save; however, the IRS allows a Saver’s Credit that could mean a $2,000 tax credit per family. Of course, it depends on the tax filer’s status as well as their adjusted gross income, or AGI.  The tax benefit is to increase the incentive for lower income families to put money away for retirement.  Every family that qualifies should be taking advantage of this bonus tax credit.

To be eligible for the Saver’s Credit…

  1. You must be 18 years or older
  2. You must not have been a full time student
  3. You must not be claimed as a dependent on another person’s tax return.
  4. Your Adjusted Gross Income must be below $61,000 (married filing jointly), or $30,500 (individual).

How it works…

In 2015, if your tax status is married filing jointly and your AGI is not more than $36,500, and you meet the other requirments, then you qualify for an additional 50% tax credit.  This number increases annually for inflation.  For 2016 it will be $37,000.  If you are above that income level it goes to a 20% tax credit until you are phased out above the $61,000 threshold.

Let’s say that you earned $36,500 for all of 2015, and your spouse was unemployed for the entire year. If you made a $2,000 contribution to your Qualified Plan (ie IRA, Roth IRA, 401K, 403B) for 2015, then you can receive that 50% tax credit which in this case is $1000 against any taxes owing or to add to your refund.  On top of that you can contribute $2000 to your spouses Qualified Plan and get an addition $1000.   That is $2000 cash money in your pocket for contributing $4000 into a retirement account.  $2000 is the maximum tax credit any family can receive.

This tax credit is in addition to the tax benefit you get within the IRA such as being able to deduct from your income all contributions to a Traditional IRA.

Don’t miss out on this too little known tax credit that can save you big money on your taxes this year.

Also, if you don’t have any investment account currently, and you know you qualify for this credit, why would you forego getting 50 cents cash back for every dollar invested.  And at the same time you are putting money into a growing retirement account. A win win for sure.  You can open up an IRA and contribute to it for tax year 2015 up until April 15th of this year.

By Jimmy Hancock

References

  1. IRS. “Retirement Savings Contributions Credit (Saver’s Credit).” Retirement Savings Contributions Credit (Saver’s Credit). IRS, 23 Oct. 2015. Web. 02 Feb. 2016. <https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit>.

Is a Roth Conversion Right For You?

roth iraMany people are taking advantage of the tax benefits that come along with Roth accounts.  No matter what your income or tax status is, you can take advantage as well.

What is a Roth Conversion?

A Roth conversion is when you convert a pre-tax account (Traditional IRA, 401k, 403B) to a Roth IRA.   By doing this you pay the taxes now on any money converted over, and get the benefit of never having to pay taxes on that money or its growth ever again.

Advantages of a Roth IRA

With a Roth IRA you have many tax advantages over a Traditional IRA.  The most obvious one is that any money you take out after age 59 1/2 and after having the account open for at least 5 years is 100% tax free.  As a part of this benefit is that there are no required minimum distributions at age 70 1/2, and your Roth money can go tax free to future generations at your passing.   Another advantage is that you can always take the total amount contributed to a Roth IRA out without any tax penalty, even if you are not 59 1/2.  It is just the growth on the account that would cause a penalty if taken out early.

Do I qualify for a Roth Conversion?

There are no income restrictions or limits for who can convert to a Roth IRA.  There are income limits for contributions to a Roth IRA, but not conversions.  Because of this anyone who wants to can take advantage of this possible huge tax saving trick.

What is a Backdoor Roth IRA?

A backdoor Roth IRA is for savers that don’t qualify to contribute to a Roth IRA because their income is too high.  There is a way for them to contribute to Roth IRA by first contributing to a Traditional IRA with after tax money and then immediately converting the money in the Traditional IRA to a Roth IRA.   Because there are no income limits on after tax Traditional IRA contributions this is legal, and can be very beneficial in terms of tax savings.

How much will it save me?

Just to show you the power of a Roth account vs a Pre-tax account, I will give you an example.  Elicia is 30 years old and plans to contribute $5500 a year into a Roth IRA until retirement at age 65.  Ryder is also 30 and plans to do the same but into a Traditional IRA.   In this example I will assume they both get exactly the same return(8% before retirement, 6% after), are in the same average tax brackets each year(30% before retirement, 15% after), and take the money out over a 25 year span in retirement.    During the working years Ryder would have saved $57,750 on taxes compared to Elicia’s $0 saved.   But as they took the money out in retirement Ryder will pay $250,667 to Uncle Sam while Elicia will pay $0.   In this example, a Roth IRA saved Elicia almost $200,000 in tax payments to the government.

Is a Roth Conversion for Everyone?

A Roth Conversion is not right for everyone.  There are a lot of things to consider depending on your age, tax bracket, and current investments.  A Roth Conversion may be very beneficial to you, especially in the long run, but you need the help and advise of a knowledgeable investment coach to decide if it is best in your situation.

By Jimmy Hancock