Roth IRA

The Best Retirement Accounts to Start Saving

Jenny Smedra2 Comments

The Best Retirement Accounts to Get Started

Like so many other people, I was not concerned about saving for retirement in my 20s. I was already struggling to pay bills and avoid crushing student loans. Planning for retirement was the least of my concerns. Now that I am in my 30s and settling into my career, I am kicking myself for not starting sooner. However, it is never too late to begin. If you are late to the game, here are some of the best retirement accounts to help you start saving for the future.

The 5 Best Retirement Accounts for Beginners

If you don’t know where or how to begin saving for the future, it is always wise to seek professional advice. When I sat down with my financial advisor, he clearly explained the different investment vehicles available to me. After reviewing loads of information, these five types of retirement accounts seemed to be the best place to get started!

1. Employer Matching 401(k)

The easiest place to begin saving for retirement is through your current employer. Many companies offer employer matching 401(k) retirement plans for their employees. These are retirement savings plan to which your employer also makes annual contributions.

How much you earn depends on the amount you contribute and your employer’s matching program. Some companies match a percentage of your contribution, up to a set portion of your salary. The best plans match up to 100%. However, employers typically choose partial matching scheme. In other instances, the employer’s contribution is based on a pre-determined dollar amount, regardless of the employee’s earning.

While the level of benefits varies, you should always take advantage of employer matching 401(k)s. If you don’t utilize these accounts, then you are missing out on free money.

2. Solo 401(k)

Also referred to as one-participant-k, a Solo 401(k) is great for people who own their own business. Since self-employed individuals do not have access to employer sponsored retirement plans, it provides a great alternative savings vehicle.

To qualify for this type of retirement account, you have to be self-employed and the only employee. The rules state you can’t contribute to these accounts if you maintain any other full-time employees.

However, since you are both the employee and employer, a greater amount of your savings is tax-deferred. Furthermore, you can contribute more to a Solo 401(k) than other types of accounts such as SEPs and Simple IRAs. When options are limited, this is one of the best retirement accounts to get you closer to your retirement goals.

3. Traditional IRA

Traditional IRAs are retirement accounts that offer several tax advantages. Since you put in pre-tax dollars, your contributions are not considered taxable income. Any money you park in these accounts also continues to grow tax-free until you begin taking withdrawals.

These accounts give you incredible flexibility in how much and what kind of investments you can purchase. However, it does require you to manage your own retirement accounts and determine how you invest your money.

4. Roth IRA

When I asked which accounts best suited for my personal goals, my financial advised that I begin by setting up a Roth IRA. It is another retirement account that provides significant tax benefits and more flexibility in your retirement planning.

Since contributions come from after-tax dollars, you pay no taxes on your contributions or earnings once you begin taking withdrawals after retirement. Even if you take money before you are 59 1/2, there are no penalties or taxes if you take money from your original contributions. Unfortunately, you can only contribute $6,000 annually to these accounts.

While there are strict limits, Roth IRAs are a solid foundation to begin building your retirement savings on. Not only does this give you greater adaptability, but also more control over your money.

5. Life Insurance Plans with Cash Value

There are many types of life insurance available to you. In fact, your employer may offer life insurance benefits that have cash value. Investing in these accounts protects you against several kinds of potential risks as well.

Not only do Cash Value Life Insurance plans provide death benefits, but they also allow you to build its cash value that could help supplement your retirement accounts. Initially, your withdrawals first come from the premiums you paid, so they are not taxed. However, be careful not to let policies lapse because you could end owing a ton in taxes.

Life insurance plans are a good option for people who have already maxed out there annual contributions on other retirement accounts. It offers another way to build your nest egg and diversify your portfolio.

Why Should You Start Retirement Accounts

Although you will likely receive Social Security benefits after retirement, most financial advisors tell you not to rely on it as your sole source of income. Some analysts doubt there will even be any money left when millennials reach retirement age. However, one thing is certain. There are no guarantees that your benefits will cover all your expenses after retirement. So, it is important to start planning now and building your savings to fund your retirement.

There is no single correct approach to retirement planning. Your specific strategy will likely be determined why which types of accounts are available to you. As someone who is self-employed, I have fewer options and require more direct involvement. However, it is best to discuss your specific circumstances with a professional to determine the best course of action. Once you choose the best retirement accounts for your situation, max them out every year. Regular contributions can help you catch up and get you closer to your retirement goals.

While I will always regret not starting my retirement planning from an early age, it is never too late. The most important thing is to recognize that you can start saving now. The more time your money has to accrue compound interest, the more tax-advantaged funds you have to last you through your golden years.

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5 Reasons to Max Out Your Roth IRA

Jenny SmedraLeave a comment

Reasons to Max Out Your Roth IRA Contribution

Time is your greatest asset when you invest with a Roth IRA. The earlier you begin investing, the greater your dividends will be during your retirement years. So, it is easy to understand why you would want to take advantage of accounts that let you build your tax-free retirement funds. There are many reasons to max out your Roth IRA this year, not the least of which is the extension for your 2020 contributions.

The Advantages of Maxing Out Roth IRA

When it comes to starting your retirement fund, the Roth IRA is one of the best options available. When you fund a Roth IRA, you capitalize on an important tax break if you contribute your after-tax dollars now. While traditional IRAs give you immediate tax breaks on your tax return, a Roth IRA lets you make withdrawals tax-free after retirement. A Roth IRA also gives you more control over your money since you choose the amount to invest.

One attractive feature of the Roth IRA is that you can maintain it indefinitely. Since there are no Required Minimum Distributions (RMDs), you are not required to make withdraws once your reach a certain age.

Additionally, you can withdraw what you put in at any time.  You only pay a penalty if you prematurely take out the earnings in your account. So, there is no need to pay taxes if you only withdraw what you put into it.

A Roth IRA is especially good for young savers who will likely be in higher tax brackets after retirement.  Thanks to compounding interest, you get the most of your money when you max out your Roth IRA from an early age. Therefore, the sooner you start funding a Roth IRA, the more time you have to accumulate assets.

The Restrictions for a Roth IRA

These types of accounts have several restrictions on them because they have the greatest returns. These limits are put in place because Roth IRAs offer such a strong incentive to invest and take advantage of them. Here are some of the most important restrictions you should be aware of, but you can find a more comprehensive explanation here that outlines every detail of contribution rules.

Making Contributions

Although you can contribute to your Roth IRA at any age, you must have earned income for the year. However, if your income exceeds the set limit, you are ineligible to make any contributions for the year. If you do qualify, you can only contribute a maximum of $6,000 annually. If your earned income is lower than the threshold, you can only match the amount made after taxes.

There are no minimum contributions required, but you cannot exceed the yearly maximum threshold. The only exception to this rule is for people over 50 who can make a catch up contribution totaling $7,000. Keep in mind though, you can only make your annual contribution up until the tax filing deadline.

Making Withdrawals

When it comes time to make withdrawals, there are no penalties for the sum you have put in. However, you cannot make withdrawals on any earnings the account has generated for at least five years. There is a 10% penalty if you withdraw the earnings within the first five years of opening and funding the account.

To start receiving distributions from your Roth IRA tax and penalty free, you must meet one of the following conditions:

  • You must be at least 59 1/2 years old.
  • The distribution will be used to help purchase, build, or rebuild the first home for an account holder or qualified family member.
  • The account holder becomes disabled.
  • The assets are being distributed to beneficiaries after the account holder’s death.

My Contributions for 2020

With a Roth IRA, you are investing in higher-quality assets so you earn even more tax-free income. So, it makes sense to max out these accounts first. Especially now, when you have an extra month to get your contributions for an extra month thank to the extended tax filing deadline.

When I returned to the U.S. last year, I began investing by setting up my first retirement account with a Roth IRA. Unfortunately, I fall under a weird caveat of restrictions placed on foreign earned income. Although I had been working in country for a few months of the 2020 fiscal year, I am only able to match watch I earned domestically. This amount was less than limits set for maxing out a Roth IRA, so I will not be able to make a full contribution for 2020. However, it will give me a good head start for 2021.

5 Reasons to Max Out You Roth Contribution This Year

Any financial advisor can provide a long list of reason why it is a good idea to begin investing sooner rather than later. However, here are five great reasons you should max out your Roth IRA contributions for 2020 as well.

1. The IRS extended the tax filing deadline this year.

Now is the best time of all for maxing out your Roth IRA contribution. This year, you have an extra month for 2020 contribution thanks to the filing extension deadline until May 17.

2. You can begin accruing tax-free income for retirement now.

Retirement may not be on your mind if you are just starting your career, but it is never too early to begin investing in your future. Every dollar you contribute today equates to more tax-free income available to you in your golden years.

3. With time on your side, compounding interest is reason enough to open a Roth IRA.

Since you are unable to easily access the earnings from a Roth IRA, it encourages the account holder not to make withdrawals. If the principle amount remains untouched, compounding interest will drastically increase your initial investment. If you have time on your side, compounding interest is your best friend.

4. You never know when circumstance will change.

At some point in your future, you may not qualify for Roth IRA contributions. So, it is wise to take advantage of opportunities when they present themselves.

5. A Roth IRA protects against increased taxation rates.

Taxes are most people’s biggest expense after retirement. Therefore, maxing out your Roth IRA means you keep more of your money since withdrawals are tax free.

Furthermore, if you add more money now, a Roth IRA protects you against increased taxation rate. Other retirement accounts like 401(k) and traditional IRAs will be heavily taxed when you withdraw. However, the money you add to your Roth IRA would be unaffected by any future rise in taxation rates.

As you can see, there are several good reasons to max out your Roth IRA this year. Contact your financial advisor with and specific questions about how to set up and take advantage of these retirement accounts.

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What Are Your Retirement Options after Employment Termination?

Jenny SmedraLeave a comment

What Are Your Retirement Options after Employment Termination?

When you leave a job, there are several loose ends that you will need to tie up. One important consideration when you leave your position is what to do with your employer-sponsored retirement accounts. If you are new to investing or not well-versed in financial matters, you may be wondering what your retirement options are after employment termination. You have a few choices. But, some are better than others. Before you make any major decision, you must evaluate eligibility requirements, know the tax implications, and compare the fees and investment options available to you.

Options for Your Retirement Plans after Employment Termination

1. Leave it where it is.

Depending on how much you have invested in the employer-sponsored 401(k), you may be able to leave your money in the current account. If you have more than $5,000 invested in the old plan, most companies allow you to maintain your retirement account. Even if you are no longer work for the employer, you may be able to leave your money parked in the account.

This will be most beneficial to you if the old plan has low fees, good investment options, or you have a large balance. If you go in this direction, you could always roll it over to a different account in the future as well.

However, if the balance is less than $5,000, your former employer might require you to move it after employment termination. For balances under $1,000, the company could force you out by simply writing a check. But, for balances between $1,000 – $5,000, your former employer must assist you in setting up an IRA if they are forcing you out of their plan.

When considering you retirement options after employment termination, this may not the best one for you. You may want to consider alternatives if you are likely to forget about it, let the account sit dormant, or you are not impressed by the terms. Your former employer’s plan may have more limited options when compared to various IRA offerings or your new employer’s retirement savings program.

2. Roll it over to a plan with your new employer.

Another possibility is to roll over the balance to your new employer’s retirement plan. Most companies will allow new employees to enroll in their retirement savings plan once they have reached the minimum length of employment. It is a fairly simple process, and only requires some paperwork to complete a direct transfer. The administrator of your former plan can deposit the balance of the previous account into your new one.

Rolling your retirement plan into a new one prevents you from paying any taxes on the balance. If you do not want the direct transfer, you can also have your former employer issue a check for the balance. Then, you can deposit the funds yourself. However, you must do so within 60 days. Otherwise, you will pay income tax for the entire lump sum. Before you close the first account, make sure the new 401(k) is set up and able to receive balance transfers.

This option is cost-effective because you can defer taxation. Additionally, you can consolidate your funds into a single account rather than keeping track of several different retirement accounts after employment termination. It also makes things easier down the line for family members or heirs when they need to handle your financial affairs. Just be sure to compare the available options and fees. Once you transfer the balance, you cannot go back to your old plan.

3. Roll it over to an IRA.

If your new employee does not have a retirement plan for its employees or the options are not ideal, you should consider rolling it into an IRA. Whether you choose a traditional or Roth IRA, the account will be in your name. Therefore, you have greater control over the account and can choose any financial institution you like. Since you are not restricted by your employer, you have freedom to decide how and where you invest your money.

There are few restrictions or limitations on these kinds of transfers. Furthermore, both traditional and Roth IRAs provide a wide range of low-cost offerings. Consolidating your investments into a single account also makes them easier to track.

If you go this route, you will have to include the untaxed amount in your gross income for the fiscal year you completed the rollover. But, if you meet certain qualifications, future withdrawals could be tax-free.

4. Begin taking distributions.

If you are nearing retirement age, you may want to begin taking distributions from your accounts. You can begin receiving distributions at age 55. But, you may have to pay the penalty on the taxable portion of it. Most retirement accounts dictate that you must be 59 ½ to receive distributions without the 10% tax penalty on early withdrawals. However, those who retire between the ages of 55 and 59 ½ do not need to pay this penalty.

Many people avoid this option because of the taxation and penalty fees. Moreover, when you begin receiving distributions from a traditional 401(k) you will need to pay income tax. On the other hand, distributions from your IRA will be tax free as long as you meet the age requirements and had the account a minimum of five years.

5. Cash out the balance of the account.

The last resort is to cash out your retirement accounts. However, if you liquidate your retirement accounts early, you will have to pay taxes on the full amount in addition to the 10% penalty. Most financial advisors warn against this because you are depleting your retirement savings. Unless you need the cash now, it is better to leave it in your accounts until the balance and distribution payments are tax-deferred.

Explore Your Retirement Options

Before making any major financial decisions, you should explore all your options. Weigh the pros and cons and determine which route gets you closer to your financial goals. There are many online resources that can help you make informed decisions. However, there is no shame in admitting you need help if you are in over your head. When in doubt, it is always wise to seek professional advice.

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Retirement Planning for Expats Abroad

Jenny SmedraLeave a comment

 

Retirement Planning for Expats Abroad

One option many Americans overlook is the possibility of spending their retirement years abroad. Moving to a new country is the beginning of a new adventure for some retirees. It is also an affordable alternative for those wanting to stretch their savings. However, there are some serious questions you must ask yourself about retirement planning for expats abroad. Which country best suits your needs? How do you ensure access to your retirement funds and draw your social security benefits? What financial policies and tax laws apply to U.S. citizens abroad?

If you already have a destination in mind, relocation guides such as this one can give you all the information you will need. If not, here is some basic information for any expat planning to retire abroad.

Social Security Benefits

Social security benefits provide financial support to the retired, disabled, and dependents or beneficiaries of a deceased worker. They should not be the sole source of income when retirement planning for expats. Instead, your monthly benefits replace a portion of your wages based on your pre-retirement income.

The amount you receive is determined from your indexed monthly earnings over the 35 years. If you worked more than 35 years, they will use the years when you earned the highest income. This can become more problematic for expats, such as myself. Since I have lived and worked outside the U.S. since my early 20s, it is going to be more difficult to accrue 35 qualifying years. In order to receive any benefits, you must have ten years of employment (40 credits) to be eligible.

The federal government uses different formulas and factors to calculate your social security benefits. This means monthly amounts will vary from person to person. The good news is that you are able to claim your Social Security benefits from anywhere in the world. As long as you have access to your domestic accounts that receive your checks, you should have no trouble getting your money. Many international banks also accept direct deposits into foreign accounts as well.

IRA Contributions

Traditional and Roth IRAs are key components of any investment portfolio. Unfortunately, there are tight restrictions on any contributions you make if you claim the Foreign Earned Income Exclusion. The FEIE is an exclusion credit that reduces your taxable income. Any amount over the yearly adjusted threshold is subject to double taxation.

For my particular case, all my foreign income is excluded. I fall below the qualifying amount of $107,600 for 2020. Therefore, none of my foreign income is eligible for IRA contributions. However, the IRS taxes any foreign income above this threshold so it is eligible. Unfortunately, all my contributions must be generated domestically and filed accordingly.

Due to financial policies for foreign banking institutions, there are severe penalties for any violations. Not only must I be careful how I fund my IRA, but I cannot legally make any portfolio changes while I am outside the U.S. This carries heavy fines and legal repercussions no one would want to face.

Online Banking

Probably the most important tool at your disposal is online banking. Before moving abroad, make sure you put all your accounts online and notify your bank. It is also a good idea to switch to digital correspondence. This is especially important if you have monthly bills to pay or Social Security checks to collect.

Moving abroad and retirement planning for expats can seem overwhelming at first. If you are uncertain whether it is the right decision, read through this checklist to see what it would require. You may be closer than you think.

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Should You Roll Over A Retirement Plan Distribution

Calvin Ebun-AmuLeave a comment

retirement plan redistribution

Different circumstances arise that call for one to rollover their retirement plan. You may be left with little time and tough decisions to make. The decisions you make on whether you rollover your retirement plan and how you rollover your retirement plan distribution can have profound effects on several areas of your life, including how much you are taxed. Whether or not you rollover your distribution is not a decision to be taken lightly.  Continue reading →

Using Real Estate to Fund Your Retirement

Calvin Ebun-Amu1 Comment

With the right assets, one can ensure they have sufficient cash flow to not only fund their retirement but also to fund the lifestyles of their children and grandchildren. While 65 is a common age to retire, real estate could lower the age for many to retire. Continue reading →

2019 Roth IRA Contribution Limits

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Fall is quickly approaching.  Every October the IRS (Internal Revenue Service) releases their updated retirement limits for a number of accounts.  The Roth IRA is one particular account that many will be looking at.

For 2018, the contribution limit for a Roth IRA is $5,500 with an additional $1,000 catch-up for individuals over the age of 50.  The 2019 Roth IRA contribution limits will be announced by the IRS in less than two months.

Image result for 2019 roth ira contribution limits

The government uses inflation numbers to determine when and by how much to raise retirement limits.  When it comes to IRA’s, any annual increase in contribution limits will be in $500 increments.  Meaning that there are only two possibilities when it comes to the 2019 Roth IRA contribution limits.

Either the limits remain the same at $5,500 ($6,500 for individuals 50 or older) or it is increased to $6,000 ($7,000 for individuals 50 or older).  It is expected that the 2019 Roth IRA contribution limits will increase to the latter amount.

So what does an increase in $500 a year for a Roth IRA account mean?  Well, for starters, instead of being able to contribute an awkward $458.33 per month to the account, you will now be able to contribute an even $500.  Of course this only applies to individuals under the age of 50.  Contributing on a consistent basis has proven time and again the best way to invest.  You can take advantage of the market when it hits various highs and lows.

Are you worried that you won’t have the additional funds to contribute an extra $500 a year to a Roth IRA?  Then now is as good of a time as ever to go and create your very own free budget.  The best way to see where you are spending your money every month is to track it.  Although it might seem like a challenge at first, you will most likely be able to find a way to contribute the additional $41.67 per month to your Roth IRA.

Why choose a Roth IRA?  There are many benefits to having one.  First and foremost, the money you put into it will grow and compound tax free through the years.  Additionally, when you do decide to withdraw from the account, you will not be required to pay any income taxes on the withdrawals.  It’s an especially good account to have in order to help offset tax burdens brought on by 401k’s and social security.

With the official numbers for the 2019 Roth IRA contribution limits less than two months away, we will have to wait a little longer, but we can predict that more than likely the amounts will increase.

Budget Smart, Invest Wise

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2018 Roth IRA Contribution Limits

Budget and Invest2 Comments

2018 Roth IRA Contribution Limits

We all know that we should be saving for retirement.  Whether you have a 401k, a pension, or an IRA, retirement accounts give individuals great tax breaks to help them prepare for their golden years.  It is often reported that people misjudge how much they will need in retirement.  The rule of thumb for a long time has been you need your retirement income to supplement 80% of your income when you were working; however, this number is different for everyone based on a number of factors.  One thing is certain.  Maxing out your retirement accounts never hurts.  For 2017, the IRA contribution limits stayed the same as they were in 2016.  You could contribute up to $5,500 towards your IRA, and if you were 50 or older you can contribute an additional $1,000 bringing your total yearly contribution limit to $6,500.  The 2018 Roth IRA contribution limits won’t be released until October of this year, but we can speculate what they might be.

Each year, the Internal Revenue Service (IRS) sets the income and contribution limits for IRA’s.  The last year that the IRS raise the contribution limit was for the tax year of 2013.  The contribution amounts for traditional and Roth IRA’s are the same each year.  They are evaluated and raised based on inflation.  The IRS will raise contribution limits in increments of $500.  This means that the next time they are raised, people under the age of 50 will be able to contribute a maximum of $6,000 a year to their IRA, while people over the age of 50 will be able to most likely contribute $7,000 a year.  In order for this raise in contribution limits to take place, inflation would need to be around 9% over a period of time for this to occur.

9% of $5,500 = $495

This would be near the $500 increment level the IRS would like to see to raise the contribution limits.

Since the last time the IRS raised contribution limits in 2013, inflation has risen by about 6.5% based on data tables.  This means that another 2.5% increase in inflation would be needed for the IRS to raise the contribution limits for traditional and Roth IRA’s.  With all of this being said, the most likely scenario is that 2018 Roth IRA contribution limits will remain unchanged.  A more likely scenario would be a raise in the contribution limits for 2019.

Despite the fact that the 2018 Roth IRA contribution limits won’t change, the IRS will still probably change some limits.  The limit they will change, and almost always do, is the income limits associated with eligibility for participation in IRA’s.  For 2017, the IRS raised the income phase-out limit to $118,000 for single earners and $186,000 for married, joint filling earners, raises of $1,000 and $2,000 respectively.

There are still many months to wait until the IRS reveals their 2018 Roth IRA contribution limits.  An increase in the limit would allow individuals to save an additional $500 a year in a tax-advantaged account.  Although an increase is doubtful, we can still remain hopeful.

Budget Smart, Invest Wise

The Retirement Crisis and How to Avoid It

JW Steinert1 Comment

retirement crisis

There is a retirement crisis currently underway.  Why is this?  Because people don’t save during their working years to fund their golden years.  The Economic Policy Institute recently released is a startling report about American’s retirement savings.

The Retirement Revolution That Failed: Why the 401(k) Isn’t Working

The graph above shows the median account values of retirement savings for a given age group.  The overall median among all age groups is a meager $5,000 while the median value for those closest to retirement, 56-61 age group, have only $17,000 saved up.

To put this in perspective, I am 26 years old and have been employed full time for less than 4 years.  In my retirement accounts, which include a company 401k, a rollover IRA and a Roth IRA, I have $47,589 saved.

Retirees are relying on Social Security by larger percentages these days.  Nearly 2 out of every 3 retirees rely on Social Security for at least 90% of their retirement income.  No matter your current age, there are ways to ensure that you are setting yourself up for success in your later years.  Here are the steps I followed to have my current retirement savings:

  1. Fund a Company 401k and get a full employer match.  This should be a no brainer.  Fund your company’s 401k plan at least to the amount that will maximize your employer’s match.  It’s FREE MONEY.
  2. Start an IRA.  I prefer a Roth IRA because it is money you will never be taxed on again, and is a good complement to a 401k (which you will pay income tax on in the future).  Go to Vanguard’s website and get one started in a matter of minutes.
  3. Maximize out your 401k.  If you are under 50, you can contribute up to $18,000 of your pre-tax pay to a 401k.  If you are over 50, you can contribute an additional $6,000.  See if you can contribute an additional 1 or 2 percent each year until you reach the maximum.

Planning for retirement is now more important than ever.  Many don’t have pensions to rely on anymore, so the responsibility is now on YOU to determine your retirement destiny.

Budget Smart, Invest Wise

Should I Save or Invest?

JW SteinertLeave a comment

save or invest

Why not do both?

Whether you save or invest your money really depends on the financial objectives you are trying to accomplish.  Saving usually refers to putting money away from where it can be accessed quickly and easily for an impending purchase.  On the other hand, investing should tie up your money for a length of time, but it will also produce better returns.

TIAA-CREF’s video below breaks down the difference between the two.  After watching, decide what financial goals you are trying to achieve in both the short term and long term.

https://www.youtube.com/watch?v=PvKXr_mkF5s

 

Budget Smart, Invest Wise