There was a lot of fuss around the most recent COVID-19 stimulus bill, which President Trump signed into law shortly after Christmas. While most of what is in the bill is clear at this point–it has been about three weeks since it was signed–one area that seemed to produce at least a little confusion was whether the bill extends tax breaks from Coronavirus-related distributions (CRDs) from retirement accounts. I have written about CRDs in past blogposts over the past year. As you may recall, CRDs allowed you to take a aggregate distribution of up to $100,000 from your retirement accounts in you were directly impacted by COVID-19 (i.e. you were diagnosed and had to quarantine or you were laid off due to Coronavirus restrictions) and that the distribution was not subject to the 10% early withdrawal penalty and you have three years to pay back the distribution. CRDs were designed to help those in financial distress as a result of the Coronavirus pandemic and was most likely a lifeline for many struggling Americans in 2020. Back to the latest Stimulus package. It was reported by at least one news source that the new stimulus package extended CRDs into 2021. I want to be clear here that such information is incorrect and that the new legislation did not carry CRDs into 2021. This is important because if you planned on taking a CRD in 2021, you can’t and also as a reminder to do some research and read up on any Coronavirus-related relief legislation to see how it might impact you. Now, I don’t know what the future holds and depending on how this pandemic continues to play out, the next administration might put CRDs back on the table, but I have heard no definite inklings about that, I’m just saying anything is a possibility at this point. If you took a CRD in 2020 and want to figure out how to pay it back or find yourself in further Coronavirus-related financial hardships in 2021, you will want to speak with a certified financial planner or wealth manager to figure out what the best moves might be best for you.
You may recall that the ability to recharacterize a Roth IRA conversion went away as part of the tax cut that passed in 2017. It wasn’t a major sticking point of the legislation, but it did create some concern about how it could affect those saving for retirement. However, I want to remind you that only recharacterization of Roth IRA conversions went away and that the ability to recharacterize other types of transactions still remains a possibility. For example, if you made a Roth IRA contribution but did not realize that you were above the income threshold to do so, you could potentially recharacterize that contribution to that of a traditional IRA. Obviously, you will want to avoid situations like the aforementioned example, but they do happen often enough to be discussed. Recharacterizations can be tricky and involve and in-depth understanding of how they work. If you think you may have mistakenly made an IRA contribution, then you will want to speak with your IRA custodian. Be sure to provide them with information regarding the transaction you want to recharacterize (i.e. amount of contribution, when it was conducted, etc.). Once they have that information they can find the amount and properly process it as a recharacterization. If you are considering a recharacterization or are unsure of whether a contribution you made should be recharacterized, you will first want to speak with a certified financial planner or wealth manager to make sure you actually can do a recharacterization. From there you can then move forward with the transaction.
I want to start out by stating that this post is not meant to knock employer retirement plans. Such plans can be a great way to get started in saving for retirement or as another source of retirement savings. However, if you do reach a point where rolling a 401(k) or other employer plan into an IRA is a real opportunity/thought, then you should strongly consider doing so. First off, if you are still working and your 401(k) isn’t a huge amount, you could save yourself some serious tax money down the road if you convert to an IRA, especially a Roth IRA. That can be a huge boost when you do retire and don’t have to pay taxes when you take a withdrawal. One of the biggest advantages to an IRA, though, over an employer plan or other retirement accounts is the freedom you have to choose what to invest in. With an IRA you can invest in just about any stocks and markets you wish and can also invest in other things such as certain types of real estate (this can be complicated and not many IRA custodians can do this) and, in some instances, bitcoins/cryptocurrency. You also have more say in your investment strategies with an IRA over an employer plan. Since an IRA is yours–and not an employer benefit–you are the sole person who can decide things such as what you invest in, how much you invest in certain stocks, and when to buy and sell. This freedom can be very enticing for some people and can allow for better customization of goals and benchmarks when it comes to saving for retirement. If it’s too much you can also still start an IRA and have a financial advisor or wealth manager look after it too. You can also have an IRA and a employer-sponsored retirement plan. Many people do this as there are strategic advantages to having both. If you have questions about setting up an IRA or whether it’s even a good idea for your situation, you should speak with a certified financial planner or wealth manager.
With the stock market appearing to head towards a–dare I say it–recession, now might seem like an odd time to talk about converting your traditional IRA to a Roth IRA. However, converting when the markets are low actually might be the best time to do so. When it comes to Roth IRA conversions, the tax bill for doing so is based on the value of your traditional IRA assets. Thus, when the markets are down, there’s a really good chance your IRA assets are down too, which means a lower tax number. As for the actual tax hit, as you may well know, when you convert a traditional IRA to a Roth IRA, the pre-tax funds you convert–your traditional IRA monies–will be included as part of your income for the year. That can be a hefty tax increase depending on how much you are converting and it’s important to keep in mind that that tax hit will only be for the year in which the conversion occurs. It will hurt short term, but long term, you may just avoid a bigger tax hit further down the road if you follow the Roth IRA rules. In other words, you won’t feel great about it now, but when you take your future Roth IRA distributions tax-free you’ll probably feel pretty good about the decision. Keep in mind that a Roth IRA conversion isn’t the easiest thing to do and not doing it right can open you up to some serious issues and penalties. Therefore, I encourage you to reach out to a certified financial planner or wealth manager or your plan custodian. Even if you don’t actually go through with a conversion, you can at least talk to them about the process and when it might make sense for you.
If you’ve been reading up on the SECURE Act, then you are probably well aware of the fact that it eliminated the age restriction on contributions to traditional IRAs. This is a big deal for those Americans planning to work into their 70s by allowing them to put money into their traditional IRAs while they continue working. It should be noted, though, that removal of the age restriction does not remove required minimum distribution (RMD) age requirements. That means that people will still need to begin taking RMDs from a traditional IRA at 72, even as they are still making contributions. The ability to continue making contributions can blunt the blow of having to take RMDs out of your nest egg before you really want to. It may feel a bit weird having money coming in and out at the same time when it comes to your retirement accounts, but it can also be a good feeling. It can be nice knowing that you can continue to work and still build up your nest egg. Furthermore, future generations may continue to push these age restrictions, especially as medicine and planning allow people to live longer and thus work longer (it’s debatable whether that’s for good or bad reasons). If you plan to work well into your 70s and take advantage of the ability to continue contributing to a traditional IRA, you should speak with a certified financial planner or wealth manager to make sure it’s the right decision for you.
If you have more than one IRA, you can aggregate the required minimum distributions (RMDs) and take them from one IRA. Most IRA owners are familiar with this allowance. However, not everyone is aware of that fact that you cannot include inherited IRAs as part of that aggregation. It can be easy to overlook. It should be noted though, that if you inherited multiple IRAs of the same type (Roth vs. traditional) from the same person, you can aggregate the RMDs from those. In short, if you have multiple IRAs, one of which is an inherited IRA, you will need to take at least two RMDs. One for the inherited IRA and an aggregation of the others–should you choose to aggregate. As with everything else regarding RMDs, you want to make sure that you are following this rule as failure to properly take an RMD could open you up to IRS penalties and could be costly. If you have questions about whether you can aggregate your RMDs or need help with doing so, you should speak with a certified financial planner or wealth manager.
If you have an IRA, you are probably familiar with the one rollover per year rule it comes to rollovers between the same type of IRA (i.e. traditional to traditional IRA). As stated, the rule only allows one rollover per year between the same type of IRA, regardless of how many IRAs you have. If you have 3 traditional IRAs, you only get one rollover between them all. That’s it. It’s important to know when that 365 day period begins. It does not begin when the money ends up in the final retirement account, but rather when the distribution from the original account is received. This is important to know if you want to have an idea as to when you can complete another rollover and to prevent being penalized. It should be noted, however, that this limitation does not count in regards to traditional IRA to Roth IRA conversions, trustee to trustee transfers, IRA to employer plan, employer plan to IRA, and employer plan to employer plan transactions. Basically, it only counts for Roth to Roth or Traditional to Traditional IRA transactions. If you are considering a rollover, you should speak with a wealth manager or certified financial planner to make sure you can do on and to ensure that you do it correctly.
If you are a freelancer or small business owner, you probably have a lot to worry about when it comes to your work or business. You have expenses to track, work to do, clients to satisfy, and maybe an employee or two to oversee. With all that, it can be easy to forget about saving for retirement. Not only that, but you don’t have the reminders regarding opening a retirement account or automatic retirement account enrollment that are standards in larger business and corporations. Thus, it’s imperative that you take it upon yourself to think about and take the required steps to start saving for retirement. If you are freelancing as a semi-retirement gig or started your own business after putting in time in the corporate world, then you may already have an IRA or 401(k) where you have built up a nice nest egg. If you don’t, then go and open a traditional or Roth IRA (401(k)s are employer sponsored). There are other options too that are geared towards those that own their own small business. A SEP IRA is another great option for freelancers and the self-employed as eligibility is fairly wide-ranging and it offers a lot of flexibility regarding contributions. However, it should be noted that it has required minimum distributions (RMDs) just like that of a traditional IRA. Another option that can be enticing if you own a business with a few employees–or work for a small business–is a SIMPLE IRA. A SIMPLE IRA offers options for both employees and employers and requires employer matching, which is a win for employees. You could also consider just doing a traditional IRA or a Roth IRA, which are fairly common retirement saving options for many Americans. Regardless of what you decide to do, all that matters is that you are saving for retirement and are preparing for your future. If you need help deciding, you should talk with a financial advisor, particularly one who works with a lot of small business owners.
Have you been considering converting a traditional IRA to a Roth IRA? Well, if you want to do so and have the associated taxes count in 2018, you only have three (3) weeks left to do so. IRA conversions must be done by the end of the calendar year if you want them to count for 2018, which is particularly important if you want to take advantage of 2018 tax rates. If you do decide you want to make a conversion, make sure that it’s definitely something you want to do as recharacterizations are no longer allowed. The tax reform legislation, which was passed in 2017 and became effective this year, does away with recharacterizations. This means that if you convert to a Roth IRA and decide it’s not what you wanted, then you’re unfortunately stuck with the transaction. Given that conversions can be a bit tricky and there are various rules to follow, you should talk with a certified financial planner and get them involved if you plan on doing a conversion. Such professionals can also help you discuss whether a conversion is right for you and whether you may want to reconsider such a move.
When considering whether a traditional IRA or a Roth IRA is right for you, you will most likely focus on whether you want to pay taxes on your retirement money now or in the future. That’s very important, but when you think about taxes you need to make sure that you focus on more than just paying now versus in the future; you need to think about what that decision could look like in regards to your goals. You will want to consider various scenarios regarding your retirement. For example, you may want to consider a scenario where you work past age 70 or consider a scenario in which you retire earlier than you intend to. These scenarios should also consider various investment situations (i.e. differing portfolio growth rates) that may impact the overall amount of your nest egg. Running through scenarios will be able to give you an idea as to what the future may hold and help you to best decide what works best for you and your goals. Now, I should warn you that these are only scenarios and that it’s almost impossible to predict the future. However, if you treat these scenarios realistically, you will get a good sense as to what might and most likely will not be feasible. As always, I also strongly encourage you to discuss–better yet, run through these scenarios–with a certified financial planner who should be able to help you run the numbers on the scenarios and offer advice.