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.
Have you made an IRA contribution for 2019 yet? Are you worried that you might not get the chance to? Well, there is good news. While you probably heard that the IRS extended the deadline for filing taxes to July 31, you probably did not know that the deadline for making a prior year contribution was pushed back to July 15. That’s three extra months! That might not seem like a big deal, but it could be for many Americans who didn’t get to make a contribution for 2019. If you didn’t get to make a contribution–and of course have the money to do so–you should strongly consider taking advantage of the extended deadline. If you already made your 2019 contribution, then no worries, just focus on your 2020 contribution. Of course, if you do take advantage of the extended contribution deadline, be sure to notify your IRA custodian of the year the contribution is for and to ensure that it is properly designated so that there are no issues with taxes or anything else that could open you to penalties. If you have questions about Roth or traditional IRA contributions, you should talk with a certified financial planner or wealth manager.
We are less than a month away from 2020, which means you need to start thinking about your future retirement account contributions for the upcoming 12 month period. If you have more than one retirement account, this may include deciding when and how much you will contribute to each account. For example, if you have a traditional IRA and plan to max out your contributions, will you be making the contribution in one big lump sum or do you plan to spread that contribution out throughout the year in smaller sums. If you have a retirement account with your employer, do you plan to increase your contribution amount (if you aren’t already maxing out) or do you plan to remain the same? Decisions about how much you will contribute–as well as when you will make the contributions–will be determined by your budget and finances. If, say, you have a goal of paying down a particular debt (i.e. a credit card) or know that you will be making a large purchase over the next 12 months (i.e. a used car for your teenager who just got their license), then you may want to take that into account when deciding when and how much you want to put into your retirement account. Obviously, if you are maxing out your contributions, you can’t increase them, and I’d encourage you to do everything you can to keep up those maximum contributions. However, if you feel that you may need to reign those in a bit, then you can do that too. There’s also the topic of catch-up contributions, if you find yourself of the age when you can do so. If you reach that magic age next year–or did so this past year–you may want to budget that extra catch-up amount into your planning. As always, if you have questions about your contribution amount, you should speak with a certified financial planner or wealth manager.
If you aren’t participating in your company’s retirement plan (i.e. a 401(k)), then you are really missing out. Not only is it a great way to save for retirement, there may be numerous perks and benefits that you may be giving up. For one, if your company offers contributing matching, you could be leaving extra money on the table. Even if the match is only a small amount–such as 3%–that’s still better than nothing and can go a long way over a long period. Being an active participant in an employer retirement plan can also potentially allow you to deduct a traditional IRA contribution from your taxes should you fall within the proper range. A deduction of a contribution on your taxes doesn’t have to do with your salary or Modified Adjusted Gross Income (MAGI). Furthermore, you don’t have to contribute a large amount to your retirement plan nor do you need to be a participant for a long period of time. So long as you make a contribution and are active for the required period each year, then you will be considered an “active participant” for tax purposes. Even if you don’t intend to use your employer retirement plan as your main source of retirement savings, it can still be a good idea to at least set up an account and contribute a little each year. If you have questions about your company’s retirement benefits, you should speak with the benefits manager or human resources contact where you work. So, are you an active participant?
Life–let alone, retirement–can be expensive. Thus, it’s not uncommon for many Americans to hold down a side hustle to earn a few extra dollars. For some, that may mean getting a legitimate second job, while others may look to turn a hobby into a source of extra income. If you decide to go the way of turning a hobby or interest into a business, be sure that you take advantage of the retirement savings benefits. Yes, you can use a small business, side gig to help bolster your nest egg, thanks for SEP IRAs. A SEP (Simplified Employee Pension) IRA can be easy to setup and relatively inexpensive. If you own your own business, you can easily make contributions and once the money enters the IRA, it gets treated just like any other IRA money and follows the same rules as other IRAs. Like a traditional IRA, the funds in a SEP IRA are taxed upon distribution and can be subject to early distribution penalties if taken before age 59 1/2. However, one big advantage that SEP IRAs have is a higher contribution limit (up to $56,000 annually). While chances are very slim that your side gig will allow you to contribute $56,000 to an IRA, you can still make smaller contributions. Putting away even just an extra few thousand dollars a year can have a big impact on your retirement savings over time. Furthermore, a self-employing side job can be carried into retirement and used as a source of extra income and a way to stay active. That extra income may even allow you to limit the distributions you take from your retirement accounts to just required minimum distributions (RMDs). As with any retirement account, you will want to make sure that you set it up properly and follow the rules. Therefore, you will want to speak with a certified financial planner before setting up a SEP IRA to make sure it’s the right move for you.
A backdoor Roth IRA conversion can be tempting if you are considering retiring early and are currently over the income limits for a Roth IRA contribution. In case you are unfamiliar, a backdoor Roth IRA conversion is where you contribute money to a traditional IRA and then convert that money into a Roth IRA. This is a useful transaction for those who earn too much income to contribute to a Roth IRA as Traditional IRAs have no income limits. It’s also a perfectly legal transaction. However, when doing a backdoor conversion, keep in mind that the taxman will get his due and that this is not a way to avoid paying taxes on IRA contributions. The money you convert will most likely count as income and you will have to pay taxes on the money in your Traditional IRA that hasn’t already been taxed. It’s also important to understand how the IRS looks at your retirement funds. If you have more than one IRA, the IRS looks at the total of your IRAs and not just the IRA you make the conversion from. This can really pose a problem if you have more than one IRA with a large balance and may make you walk away from doing a backdoor Roth IRA conversion if the taxes are too high. Income limits are another important thing to understand when doing a backdoor Roth IRA conversion. Doing one backdoor conversion doesn’t mean you can start making regular contributions to the newly created Roth IRA. Rather, you will need to do a backdoor conversion every year that you are over Roth IRA income limits, which can potentially be for many years, especially if you are a high-income earner early in your career. That’s a lot of backdoor conversions and that can leave you open to the possibility of making more mistakes. A mistake on a backdoor Roth IRA conversion can be costly depending on the amount you convert and it can be as much as 6% of the conversion if you do so over the income limits. Since backdoor Roth IRA conversions are not particularly common and require a lot of thought, you should seek out the advice of a certified financial planner before doing one.
Contrary to what you may think, you don’t need to earn income to be able to make contributions to an IRA. You’re probably familiar with spousal contributions, but did you know that you can make contributions from when you exercise non-qualified stock options? The taxable portion is considered taxable income for IRA purposes. If you receive alimony, that too is taxable as ordinary income and is eligible for IRA contribution. Some scholarships and fellowships may be considered taxable income, depending on reported on the W-2 form. This last one can be valuable to young savers, such as your children or grandchildren. If you have a child (or grandchild) in graduate school living on a fellowship or scholarship money, you may want to see if that money is considered taxable income. If it is, you should talk to them about either setting up an IRA or, if they already have one, making a contribution. This could go a long way towards getting them on the right track towards retirement early on. If you have questions have whether or not something is considered taxable income or whether you are in a position to make a contribution to your IRA, you should speak with a certified financial planner.
Owning your own small business or sole proprietorship can be a lot of work. Depending on what industry you operate in and what your overhead costs are, it can be tough to eek out a profit or pay yourself what you really think you’re worth. Thus, planning for retirement as a small business owner can seem like a fruitless endeavor, especially if you are struggling to keep your business afloat. However, that doesn’t mean you can’t save for retirement. You can open an IRA and will have options regarding what type of IRA you open regardless of how much you make. You could do a traditional IRA, a Roth IRA, or Simplified Employee Pension (SEP) IRA. You may be asking yourself what a SEP IRA is. It’s a relatively simple and inexpensive retirement account that is popular among small business owners and sole proprietors. They are easy to administer and come with relatively straightforward rules. There are some nice perks to SEP IRAs. First off, if you make a contribution to a SEP IRA, you can also still make a contribution to a Roth or traditional IRA in the same year as long as you are eligible to do so. Another advantage is that a SEP contribution may be made to the same IRA to which you make your traditional IRA contribution, so long as it as your custodian allows it and you are eligible to make a contribution. Finally, there is no age limits on making contributions. You can make contributions as long as you are still working and eligible to make one. The one drawback to a SEP IRA is that you cannot do a salary deferral. Therefore, you have to make the contribution yourself. If you are a small business owner and considering a SEP IRA, you should talk with a certified financial planner to make sure you do so correctly and to set a plan for making contributions.
You may not realize it, but you still have time to make a contribution to your IRA and still have it count for 2018. Whether it’s a traditional IRA or a Roth IRA, you have until tax day to make a contribution for the previous year. Thus, you can make a contribution anytime before April 15, 2019, and have it count as though it was made in 2018. Many people don’t realize that such an opportunity exists. However, keep in mind that the April 15 deadline is a hard deadline, which means there is no ability to extend it, unlike your taxes. If you are considering making a contribution and want to have it count on your 2018 tax return, you have just over a month at this point to do so. If you have questions about your IRA contributions and what implications they may have on your taxes, you will want to speak with either a tax professional or a certified financial planner.
Many Americans don’t really put much thought into the difference between “financial” planning and “retirement” planning. After all, they both focus on retirement and saving enough to enjoy that period in your life. However, if you talk to a certified financial planner, they’ll probably tell you that there is a difference. Financial planning focuses on investments and saving strategies that will help you meet your retirement goals. Simply put, it’s the work and effort you put in as you save for retirement. Whereas, retirement planning tends to zero in on your spending once you enter into retirement and your paychecks stop. Financial planning tends to take a broad approach as it is focused on where you are currently as it takes into account both your retirement plans as well as future financial goals that you may want to hit before retirement (i.e. costs associated with sending a child off to college or paying off a mortgage). The focus tends to be on the ways to save (i.e. different retirement plans, contribution amounts, etc.) and making sure that you are saving enough. Retirement planning is much more detailed than financial planning as it focuses on your expenses and how you will deal with them once your income stops or becomes greatly reduced. It tends to be more focused on the details, such as how you will make your savings last in retirement as well as how you will cover expenses such as medical and housing. Knowing the difference between retirement planning and financial planning is important because it can allow you to better focus on both aspects and ensure that you are better prepared for when you actually do retire.