Retirement can be a long way off for teenagers, but given how much retirement can cost–and the costs will probably continue to rise throughout future generations–there’s no such thing as getting too early of a head start. No, you teenager might not fully appreciate how much such steps may help in the future, but that shouldn’t be a good enough reason not to at least talk to your teenager about starting to save for retirement as soon as they are able. Of course, you can start off through conversation. However, if you really want to make an impression, you may want to consider setting up a Roth IRA for your teenager once they have a job and earn income. You can teach them the importance of saving for the future by having them make contributions from their income. Now, obviously, it might be hard to get a teenager to part with their money, but you may be able incentivize them by offering something like a matching contribution or a reward for contributions they make. There is a number of things they can do with that money once it’s in a Roth IRA, particularly relating to education expenses or buying a first home. Before you jump right into opening a Roth IRA for your children, you will probably want to speak with a certified financial analyst or wealth manager and possibly even bring your teenager along so that you can hash out a plan for contributions and what the money will be used for. A retirement professional may also be able to better explain what the purpose of a Roth IRA is and be better informed when it comes to helping with such an account–that is if you choose to have a professional oversee it.
I’ve focused a lot on Coronavirus and how it has or may affect retirement plans for many. I see no reason to change that theme now. While parts of the country are starting to re-open, many areas are still largely shut down. There is also a lot of uncertainty surrounding opening up parts of the country. What happens in infections spike in areas that are reopening and they have to shut down again? Many predict, such a situation is a real possibility for places opening without a proper plan. It can be easy to become cautious regarding saving for retirement during such situations. You may cut back on your retirement account contributions so you can save up to build up an emergency fund. Or maybe your worried about not having a job that will make it through, so you focus on paying down some of the debts you have at the moment so that you won’t have to worry about them later. Or maybe you had your hours cut back, so you adjusted your nest egg contributions to make it through these times. There are a lot of reasons why you may have cut back or stopped making retirement account contributions. However, if your going through difficult times work and income-wise, that doesn’t mean you can’t continue to stay focused on retirement. You can work on your budgeting skills and areas you may feel weak in. You can also lower your contribution rates to free up money for the here and now. Once we get through this difficult time, you can then up the contributions when you have the resources to do so. The key is to stay focused on retirement and make the moves that will allow you to get there. If that means surviving through now to get to retirement later, then do so!
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.
I’ve written about the SECURE (Setting Every Community Up for Retirement Enhancement) Act a number of times over the past year or so. I’m writing now following it’s passing Congress last week as part of the year-end spending bill. Now that President Trump has signed it into law, it goes into effect on January 1, 2020. The legislation is a relatively large overhaul to retirement savings accounts. The two biggest changes are to contributions and required minimum distributions (RMDs). First off, the new law eliminates the age limit for traditional IRA contributions. This means that if you are still working, you can continue to contribute to a traditional IRA no matter how old you are. This can be really helpful for people who plan on working well past 70. As for RMDs, the legislation raises the age for beginning RMDs from 70 1/2 to 72. Again, this is beneficial for people who plan to work past 70 as it prevents them from having to tap into retirement accounts too early. Another big change is the ending of the Stretch IRA, which will be replaced with a ten year rule. The rule will be in place for most beneficiaries and requires accounts to be emptied by the end of the tenth year after the year of death. The change only goes into effect for deaths that occur on or after January 1, 2020. As with any legislation, the SECURE Act includes more than just the above mentioned and I suggest you read up on what the legislation offers and how it could impact your retirement plans and accounts.
We’re a little less than 10 days away from Christmas, so chances are, you’ve probably done all your holiday shopping at this point. However, if you’re looking for a few more gift ideas for your children or grandchildren, then maybe you might want to consider something with a focus on finances and money. For example, a book on personal finance can be a great gift that can help people more than they may even realize. There are many such books out there covering various aspects of personal finance, so you may want to stick with bestsellers on this. A personal finance book can make a great stocking stuffer too. If you know the person you’re buying for probably won’t read a book, then maybe consider a financial contribution to a 529 plan. While this may not bring immediate joy to a child’s face on Christmas Day, it may really help them in the future. The cost of a secondary education these days is immense and only looks to get more expensive as time goes on. Helping to get a 529 plan started for a young child or grandchild could go a long way once they graduate college and start out in the real world. It may not cover all the education expenses, but even just having a few thousand dollars less of debt can be a huge boost to a young adult. If you are retired, you can also consider making a qualified charitable distribution (QCD) to a charity in honor of a friend or family member. Not only will such a donation have a positive tax consequence, but it can also be a touching gift, especially if that person being honored has worked closely with that charity or it is a cause that they truly care about. If you have questions about 529 plan contributions or making a QCD, you should speak with a certified financial planner or wealth manager.
No, this is not a blog post about dating games, but it is about matches–employer contribution matching, that is. In case you are unfamiliar, employer contribution matching is a retirement benefit in which a company will match contributions you make to your employer-sponsored retirement account (usually a 401(k)). Such benefits usually have certain limitations or rules for eligibility. For example, you may have to work at the company for a certain length of time before being eligible or you have to contribute a certain amount of your annual income to take advantage of it. While matching contributions are offered by many large companies, it is not as widespread as other retirement benefits–such as employer-sponsored retirement plans–and it also tends to be among the first benefits cut or rolled back when companies hit hard financial times. However, if you find yourself with such an opportunity, you should take advantage of it as it can be an efficient and easy way to build up your nest egg. After all, who wouldn’t want free money added to their retirement savings? Before diving in, take some time to read up on such retirement benefits to ensure that you are taking full advantage of it if you do decide to pursue it. Keep in mind that many of these benefits require that you contribute a certain amount to your retirement plan to be eligible for the match. Also, be sure to remind your children or grandchildren of such benefits when they go out into the working world and encourage them to contribute enough to their employer-sponsored plans to effectively use it. If you want to learn more about whether your employer offers retirement contribution matching, you should speak with the benefits manager or director at your employer.
There’s a good chance that you’re familiar with what a Health Savings Account (HSA) is. You may not have one, but you may have considered opening one at some point in recent years as it has become a common offering by many employers. If you are unfamiliar with HSAs, they are tax-free accounts that can be used to pay for qualified medical expenses and are used in conjunction with high deductible health plans. Distributions used to pay to medical expenses are tax free and there are no income limits for contributions. Furthermore, HSAs can be a great long-term investment as you can build them up in ways similar to your retirement accounts (investing, contributions, etc.) and use them to supplement your nest egg when you do actually retire. While there are no income limitations when it comes to contributions, there are limits on how much you can contribute to the account each year (just like a retirement account). For 2019, the contribution limit was $3,500 for individuals and $7,000 for those with family coverage. For 2020, that numbers rises, ever so slightly, to $3,550 for individuals and $7,100 for family coverage. These numbers are announced by the IRS each year and account for inflation adjustments, so they are usually incremental. Having the numbers a year in advance can help you plan for 2020, especially if you want to max out your HSA contribution or want to make an adjustment to your contribution numbers. If you have an HSA and want to make better use of it or build it up for the future, you should speak with a certified financial planner or a representative of your plan’s custodian. They should be able to provide helpful tips and advice about the limitations of your account and how you may want to invest or grow it.
If you work in the public sector or for the government, you’ve probably heard of a type of retirement plan called a Deferred Retirement Option Plan (DROP). A DROP plan allows for an employee to work past their retirement-eligibility date while the employer adds annual, lump-sum payments into an interest-bearing account during that period. Once the employee actually retires, they gain access to the account and all the money in it. It benefits the employer as the employer avoids dealing with an increased pension amount that normally would come with added years of service. It should be noted that DROP accounts are only really associated with employers and offer pensions, which these days is pretty much only in the public sector (i.e. firefighters, police officers, teachers, etc.). As with any retirement account, there are rules and guidelines that employers will follow. Usually the extended period of service is only for a few years, the employer must specify how much they will pay into the account and interest accrual rates, and the employer can set how it will distribute the DROP account in retirement (i.e. a lump sum vs. annual payouts). How the account is distributed can have a huge impact on your taxes, so you may want to pay particular attention to that. A DROP account can be appetizing, however, to those who don’t necessarily feel like retiring when they become eligible. Keep in mind that a DROP account is a defined contribution retirement plan as compared to a defined benefit plan, which is usually what a pension is. This is important because it will impact how much money you may expect to get in retirement and you should know that a DROP account and your pension are two different things. If you are a public sector employee and are nearing retirement eligibility and feel that a DROP account opportunity may be available, you should look into it as well as speak with a certified financial planner about how it may impact your retirement plans and whether it’s right for you.
It’s not talked about nearly as much as Roth IRAs or regular 401(k), but you can have a Roth 401(k). No, not every employer retirement plan offers it. Yes, it does have many of the same advantages as a Roth IRA. If you know what makes a Roth IRA so enticing then you can probably guess the how a Roth 401(k) works. If you guessed that it’s because your contributions are taxed when they go into your account and not when they are distributed, then you are correct. This can be very advantageous, especially if you have an understanding of tax brackets and how you most likely will end up in a higher tax bracket when you retire and begin tapping into you nest egg. Furthermore, having a Roth 401(k) could have a positive impact on any Social Security benefits you receive in the future as a Roth 401(k) distribution is not considered taxable income and thus your Social Security benefits may also not be taxable. Furthermore, a Roth 401(k) doesn’t have the income limitations that a Roth IRA has and thus, you can make contributions regardless of your income. There is one drawback, though, to a Roth 401(k) and it has to do with employer contributions. While you can have employer matching with a Roth 401(k), the money from your employer will go into a pre-tax account as your employer is most likely allowed a tax deduction for the matching contribution. This means that any matching dollars from your employer are not Roth dollars and will be taxable when you take a distribution from that account. Finally, it should be noted that you need to make sure that your employer plan offers a Roth 401(k) option, as not all plans offer it. If you find that your employer plan does allow such an account and you have questions about it, you should either speak with your plan custodian or a certified financial expert.
You may not realize it, but there the money in your Roth IRA will be distributed in a particular order. The order is important as it will determine any potential tax consequences you may have when you take a distribution from your account. In a Roth IRA, there are generally four (4) classifications of assets within an account: (1) regular contributions, (2) taxable conversion and rollover amounts, (3) non-taxable conversion and rollover amounts, and (4) earnings on Roth IRA assets. Remember, that your contributions are tax-free, but that doesn’t mean that other money in the account is not taxable. Thus, for example, if you take a withdrawal that is larger than your contribution total in your account, that amount beyond your contributions amount will be taxable, especially once it dips into any taxable conversion/rollover money or earnings. Knowing that there may be a potential tax consequence should factor into your decision to make a withdrawal and consideration of how you much to withdraw. If you know you may get into taxable money and you are taking an early distribution, you may want to really think long and hard about whether you are making a good decision or if there is another place to get the funds you need. If you are considering doing a withdrawal from a Roth IRA, or just want to have an understanding of the type of money you have in your Roth IRA, you will want to speak with a certified financial planner or tax professional.