When it comes to finances, there tend to be two approaches that people take: They either ignore their finances in the hope that things just work out or they constantly look at every little aspect of their finances and analyze every decision. And no, neither approach provides a healthy way to view your money. Instead, they can lead you to over-analyze your decisions or to ignore warning signs that your financial future might not be so bright. What you really want to do is find a sweet spot somewhat in the middle. That means checking on your finances enough to know what’s going on and make good decisions regarding your money, but not stressing or worrying about every little decision. For example, you can check your bank accounts–and another financial accounts you use consistently–daily, but you probably don’t need to check your retirement accounts every day. Instead view those lesser used accounts weekly or a few times a month. This will allow you to know what’s happening and to catch potential issues early, but will prevent you from making too many decisions that could hurt your savings in long run. Also, keep in mind that many things regarding your finances are outside of your control (i.e. market swings). Thus, there is only so much you can really worry about and only so many decisions you can make. However, you can be on the lookout for signals that things may change in the near future and take action based on those indications. So, do you constantly check your finances and over-analyze or do you ignore your money and hope it will be fine in the future?
It can be easy to forget about required minimum distributions (RMDs), especially as you move into retirement or if you inherit an IRA. Now, forgetting to take an RMD isn’t the absolute end of the world, but it should not be taken lightly. The penalty to missing an RMD is half the amount that was to be distributed, which is quite harsh and can be a substantial amount of money depending on the size of your retirement savings. So, what should you do if you forgot to take an RMD or you learned that you needed to take one from an inherited RMD? First off, withdraw the RMD out of the account as soon as you realize you need to take it. Next you will need to report the mistake to the IRS on the Form 5329, which can be filed along with your annual tax returns. On the form, make sure to report the RMD that should have been distributed, the amount distributed before the deadline, any reasonable cause amounts you would like waived, the penalty amount, and a letter explaining the reason for missing the RMD. Finally, and this is very important, do not pay the penalty until you hear back from the IRS with a denial or approval of your reason for the mistake. If your reason is denied, the IRS will then ask for payment of the penalty. As with anything involving the IRS, unless you are absolutely certain you know what you are doing, you should consider either hiring a financial advisor or tax professional to fill out and file your From 5329 so as to make sure it is done correctly. If you don’t want to have them actually file for you, you may want to at least consider talking to them during the process so as to make sure you’re doing things right. Remember, the key thing is that you correct your mistake as soon as you realize it and that you be honest with the IRS. Chances are your excuse won’t be accepted, but you will only have to pay the RMD penalty and nothing more. Missing and RMD is no laughing matter, but it’s not something you need to have a meltdown over, either. Just stay calm and do what you need to do!
There’s a lot of fine print on any paperwork associated with a financial account. Whether it’s a bank account or an IRA, the amount of legal jargon and required information can be pages long and mind-boggling to understand. However, that should not stop you from knowing what you can and cannot do with your financial accounts. This is particularly important when it comes to your retirement accounts and beneficiaries. First off, you want to make sure that you designate beneficiaries and update that information as needed. Next, you will want to know what your beneficiaries can and cannot do with your account and adjust accordingly. Certain accounts allow beneficiaries to do certain things. If you find that your account doesn’t allow your beneficiary to, say, place the money in an particular type of account when they inherit it, then you may want to consider putting your money in an account that allows that. Another important thing to understand with retirement accounts is the custodian policies involved. Each custodian may have varying policies depending on the state they operate in or their own personal preference. Knowing such policies can save both you and your beneficiaries headaches in the future. Believe it or not, there are certain circumstances when the custodian can dictate what happens with your money when you pass on. Such situations can make a tough time all the more difficult for friends and family who might be working to probate or distribute your estate. Furthermore, custodial policies can affect your ability to transfer money between your retirement accounts and can make what you think is a simple transaction really frustrating. Now, it might be overwhelming to have to sit down and read pages or legal mumbo-jumbo, but it’s worth it. Furthermore, you may find that you have questions after reading such documentation. I encourage you to reach out to your custodian to ask those questions and make sure you are satisfied with the answers.
Do you want to know a little financial secret on how to avoid rollover headaches? It’s simple, don’t do them! I’m not kidding. Rollovers, especially 60-day rollovers, can be complex as there are limitations on how many you can do each year and how long you have to move the funds. If you don’t read up on the rules or track the time between when the funds are disbursed to when they must go back into an account, you and your retirement funds could be in for a world of hurt. And yes, there are ways to avoid a rollover altogether. The best–and most efficient–ways to do so are through transfers and direct rollovers (yes, I know this is about avoiding rollovers, but direct rollovers are an exception). If you are moving money between IRAs of the same type (i.e. Roth IRA to Roth IRA), then you will want to do so through a direct transfer. If you are moving money from an employer plan to an IRA, then you will want to do so through a direct rollover. By using either of these types of transactions, you can avoid rollover issues, particularly those pertaining to 60-day rollovers. Aside from avoiding 60-day rollover rules, direct transfers in particular, also allow you to circumvent the once-per-year rollover rule too. This means that you can do as many as you need or want to do. The key to these types of transactions is that the money moves from custodian to custodian and not from custodian to you. If the money is sent to you, then it’s treated like a distribution and can open you up to certain rules and limitations. You don’t want to deal with that! As always, if you have questions about direct rollovers and transfers, you should speak with a certified financial planner.
Not all income is treated the same by the IRS. There are actually multiple types of income that you could generate and which are taxed differently from one another. For example, the income your generate from working is looked upon differently by the IRS than income generated from the sale of stock. Thus, it’s important that you understand the different types of income and how they are taxed. I’m not going to get into a detained examination in the blog post, but I will describe them in a nutshell. The first type of income is ordinary income, which includes things like wages and retirement income (i.e. distributions). The next type of income is capital gains income, which is income that is generated from the sale of certain assets, such as bonds, stocks, and some forms of real estate. The third type of income is interest income, which is just what it sounds like, it’s income generated from assets such as savings accounts, CDs, and money market accounts. Now keep in mind too that there may be various ways that income within each group is taxed. For example, within the capital gains group, income generated from the sale of a stock will most likely be taxed differently than income generated from the sale of real estate. Understanding that there are different types of income can be important in retirement planning because you may need to calculate those taxes as part of your savings. A good examples of this is if you are planning on selling stocks or bonds to help pay for things in retirement, it’s good to know how much you will pay in taxes on such a transaction. Finally, I want to remind you that taxes are tricky and complex, so be sure to consult with a certified tax expert when trying to figure out what your tax situation is and how much you may owe to the IRS.
It’s not uncommon for retirees to have more than one retirement account. Usually it’s a result of having worked at multiple employers throughout the course of a career and having opened a retirement account at each place of employment. If you do have more than one retirement account, don’t worry as there’s nothing wrong with that. You may want to consider consolidating similar accounts as you near or enter retirement, but that’s a discussion for another post. If you do have multiple accounts–especially more than one Roth-type account–you may want to make sure that you are maximizing your contributions to those accounts. And yes, if you have more than one account, such as Roth IRA and Roth 401(k), you can make max contributions to both at the same time. That includes any catch-up contributions if you are over the age of 50, which could total up to tens of thousands of dollars when combined with regular (not catch-up) contribution amounts. The same goes for if you have multiple Roth IRA accounts, although, you may want to consider consolidating them at some point for efficiency’s sake. Most retirement accounts allow you to maximize contributions regardless of whether you have multiple accounts or not. However, if you do have more than one retirement account and you want to make max contributions, your best best is to speak with a certified financial planner to make sure there are not issues with that.
As you move through the retirement saving journey and into retirement, there are certain age points that you will need to be aware of. These age points allow you to do things that will help you both in saving for retirement and once you actually cross into retired life. The first major age point is when you reach 59 1/2, at which time you can begin taking distributions–from most retirement accounts–without a penalty. This can be huge for people who are planning to retire in their early 60s and who may need to tap into their retirement funds sooner than most. The next important age is 62, which is when Social Security benefits kick in, again a point that is key for people who may be retiring early or who may be forced to retire sooner than intended. The next important age milestone is 65 at which point you are eligible for Medicare, which again can be important for those who may intending to rely on it in retirement. The next age–and probably the most important age in retirement planning–is age 70 1/2, which is when required minimum distributions (RMDs) begin. This age is commonly used as a key point in most retirement plans as people decide whether they want to begin taking RMDs or see if they could delay them by continuing to work. It’s also an age that people are usually retired by or set as the age at which they will retire. It’s important to remember that these ages are when things begin and not necessarily when you need to start using the benefits that become available at that time. If you are early in the retirement saving and planning process and have years (or decades) to go, it might also be a good idea to consider how these dates may impact your retirement plans or whether you may need to adjust your plans to best take advantage of these ages.
Yesterday, I wrote about diversifying your retirement savings by having more than one type of retirement account. While such a concept is a good idea, it also needs to be done reasonably. While it’s okay to have more than one retirement account, it’s not a good idea to have multiple types of the same account or to have so many retirement accounts that you can’t keep track on them. If you find yourself in such a situation, you should consider streamlining your retirement accounts by doing a conversion or rollover so that you only have two, maybe three, accounts. Thus, if you have multiple IRAs, you should strongly consider rolling them over into one account. This will not only allow you to better track your money, but it will also save you on paperwork as one IRA means only one beneficiary document and one statement. Same thing goes with 401(k)s. If you find that you have multiple 401(k)s after working for multiple employers, I would strongly urge you to merge them all into one account. Again, this will save you time and paperwork hassle. This is even more important as you get closer to retirement and have to begin taking required minimum distributions (RMDs) as it will make it easier to calculate your distribution and ensure that you are meeting requirements. While this may seem a bit contrary to what I wrote about yesterday, it is really intended to make things easier for you. Furthermore, yesterday I was encouraging diversification and having multiple accounts of different types and not multiple accounts of the same type. This time of year is a good time to consider streamlining your retirement accounts also because tax season is right around the corner and you probably are going to review your account paperwork very soon, if you haven’t already. If you need help with streamlining your retirement savings, as always, you should speak with a certified financial planner or retirement expert.
There is obviously more than one way to save for retirement. There are different strategies and accounts that you can use when building up your nest egg. Chances are, you probably have more than one retirement account. Those odds increase if you’ve worked at more than one company throughout your career or if you’ve inherited a retirement account from a relative. While I’ve mentioned on here the efficiency of streamlining your retirement accounts (i.e. converting or rolling over accounts), that doesn’t mean that you have to have only one retirement account. In fact, it’s probably a good thing that you have more than one such account while you are working and saving for your post-career life. Given that different retirement accounts have different advantages–and disadvantages–it can be beneficial to be diversified with your retirement accounts so that you are prepared to make use of the advantages. This means that it’s perfectly fine to have both an IRA and an employer-sponsored 401(k), just to name two common retirement accounts, while you are working and saving. This will allow you to take advantage of either account should you find yourself in a situation where it would be incredibly beneficial. Such situations may arise based on the tax bracket you are likely to fall into in retirement, when you plan on taking distributions from your retirement accounts, expenses that may arise both before and during retirement, and any other things that could impact your retirement finances. If you already have more than one retirement account and want to understand what you should do with them or you want to open a retirement account in addition to one you already have, you should speak with a certified financial planner.
Do you have trouble keeping track of withdrawals from your checking or savings accounts? Do you not want to ever have to worry about whether you might overdraft from your checking account? Then you may want to consider building a “cash cushion” into your finances. A cash cushion is an account limit that you set for yourself and use to protect yourself from overdrafting or incurring insufficient fund fees. That amount can be anything your are comfortable with. For some it may be $200 dollars, while for others it may be $1,000. Basically, when your account hits that number, you know you’ve reached your balance for that account. This may require rethinking some expenses or exploring your budget. If you are young and living paycheck to paycheck, having a cash cushion can be a great way to practice budgeting as well as give you some breathing room with your finances. If you are nearing retirement, a cash cushion can provide a bit of a security blanket and allow you peace of mind regarding checking and savings accounts. It should be noted, however, that a cash cushion is not an emergency fund. The amount you set aside as your cushion is not intended to keep you afloat during a difficult financial period and should not be viewed as such. It is really just a safety measure for your bank accounts that will allow you to avoid costly fees and penalties.