It can be tempting to look at your nest egg and see an untapped source of money, particularly if your nest egg is sizeable and you are nearing retirement. For example, maybe you found your dream retirement home and need money for a down payment. You may look to your IRA for a short-term loan to meet those money requirements. I’m here to tell you that that is a bad idea and to discourage you not to do so. The biggest reason being that you don’t want to tap into your IRA monies until you actually retire and, even then, you will want to have a plan for doing so. You’ve worked hard to save up for your post-work life and you want to make sure that money goes towards your retirement goals (of course, if purchasing a retirement home is part of your plan, then that’s a different discussion). The other risk of viewing your IRA as a loan source is the risk of making a mistake when taking out money. Keep in mind that there are two routes you can go when taking money out of your IRA before reaching retirement age. First off, you can take a distribution, pay the taxes and penalties, and then not have to worry about what you do with the money. The other option is to take out the money and do a 60 day rollover, which will involve paying back the money within that 60 day window. There’s a lot of risk involved with that. I repeat, there is a lot of risk involved with doing this. Mainly, if you take out the money, is there any guarantee that you will recoup it within that 60 day window? Chances are, you are going to be making a large purchase if you need a loan (probably talking thousands of dollars), so what are the chances that you will make that money back in two months? If you are certain that you can do that, then maybe you can consider it. However, if you aren’t so sure that you can complete such a transaction in that timeframe, stay away from this idea. That can lead to a lot of problems if you aren’t able to put the money back within those 60-days. Hint: Don’t open yourself up to the IRS taking more of your money through penalties! If you are in need of money, you should consider other types of loans or selling off other assets before even considering your IRA as a loan source. You may even want to really think about whether you even need to make the purchase at that time and whether you can put it off until you actually have the funds and leave your retirement money alone.
Health Savings Accounts (HSA)–often coupled with a high-deductible plan–have become quite popular with employers in recent years. In many places they’ve replaced traditional employer insurance offerings as they pass more healthcare costs on to the employee. They can be beneficial to the employees to as they can take the HSA with them if they leave for a new job and can use it as a place to save money for health expenses as retirement. In fact, if you start saving in an HSA early in your career and invest properly (yes, you can invest a chunk of your HSA) you could have a hefty number in there by the time you retire. Could you image having an HSA available to cover your medical expenses in retirement and not having to tap your IRA Or 401(k)? Now, back to the CARES Act. The CARES Act, known officially as the Coronavirus Aid, Relief, and Economic Security Act, contains some parts that also impact HSAs, along with your retirement accounts. One example is that the legislation temporarily allows for a health plan to provide coverage for telehealth services and other remote care services that do not meet regular deductible requirements. Under normal circumstances, your health plan cannot waive the deductible for medical expenses not considered to be preventative. Another big change is that you can now take tax-free distributions from your HSA to pay for a wider range of medical expenses, including over-the-counter medicines and other medical costs. This is a permanent change and is not temporary. Of course, I would encourage you to check to make sure whatever you plan to spend your HSA money on is qualified. I also encourage you to think long and hard about whether using HSA to buy something like, say, allergy medicine, is really worth it (hint: it probably isn’t worth it). It’s still good to know that these changes exist and to know that you can take care of things like telehealth services without worrying about whether you meet deductible requirements.
After decades of saving for retirement, it can be difficult to switch over to a spending mindset. Now, I’m not saying you won’t be looking forward to retirement, but from a financial standpoint, it isn’t always easy, especially if you’ve been very diligent in your retirement saving. There is where protecting your portfolio comes into play. Once you reach retirement, you want to take steps to make sure your nest egg will last. In doing so, you want to keep your money in the markets, but you will want to lower your risk. This means diversifying your investments (but not too much!) and staying away from risky market sectors and industries. It also requires that you block out market predictions as they usually tend to be wrong and very, very rarely do they ever actually help your portfolio. Another big part of moving past the accumulation phase is to get over any fears you may have of your nest egg lasting long enough. After all, if you’ve been saving diligently and have a plan in place for your money in retirement (i.e. how you will spend it, what your budget is, etc.), then you should be fine. However, if you don’t have a plan, then it’s not to late to create one. It might be tough–might involve delaying retirement or working part-time after you retire–but you can still manage to lead a comfortable retirement. If you are struggling with the accumulation phase or from making the transition from the accumulation to distribution mindset, you should speak with a certified financial planner or wealth manager.
I’ve talked about diversification quite often in blog posts over the years. Most of that diversification talk has centered around investing in different types of investments, such as having a mix of stocks and bonds or investing in different market sectors. However, today I want to talk about diversifying the places where you actually put your money. You’re probably well aware that there limitations on how much you can contribute to an IRA or 401(k). So, what do you do if you have extra money? Well, you could put the money in a savings account or another IRA, or you could consider a brokerage account. I know investing in the stock market can seem risky, especially in the current economic climate, but there are advantages to a brokerage account, particularly a taxable brokerage account. The account is funded by after-tax dollars and any dividends, interest, or capital gains distributions are subject to taxation. Futhermore, if you hold assets in your brokerage account for more than a year, you may find they are subject to more favorable tax rates. A brokerage account can be very appealing for those who may want to supplement their retirement savings or want to have an emergency fund to tap into in the future. If you start an account in your twenties and follow a strategy designed to meet your goals, you may find that account worth a substantial amount in two or three decades. If it’s large enough, it may allow you more flexibility regarding when you retire. A brokerage account can also allow you more flexibility when it comes to taxes in retirement. Having a brokerage account combined with a IRA and/or 401(k) can allow you to choose the most favorable tax option each year when it comes to distributions or withdrawals. A brokerage account can also continue to grow in retirement as dividends and investments increase in value. Also, with a brokerage account there are no required minimum distributions (RMDs), so you can tap into in when you want as well as take out as much as you want. Now, in wrapping this up, there are numerous options for setting up a brokerage account. You can easily set one up yourself, but if you really want to make it a part of your retirement plans, you should speak with an investing professional who will help you set a strategy and plan to reach your goals.
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.
There’s a good chance that you have a will, especially if you have assets that you want to share once you have passed on. If you don’t have many assets or few family and friends to share them with, then you can get by with a simple will (i.e. maybe a page or two long saying who gets what). However, if you have young children–or grandchildren–a simple, boilerplate will probably won’t cut it. Furthermore, if you find that your will may end up leaving a large inheritance to a child or young adult, you will want to consider guidelines and limitations on how the money can be used and when it can be used. This is where a trust comes into play. Since there is a whole section of law devoted to trusts (usually combined with wills and estates), I am not going to get into the legal mumbo-jumbo of the different types of trusts and how they all work. In a nutshell, though, a trust is a legal vehicle that allows for the distribution of money or assets, as overseen by a trustee, to a beneficiary. The trustee may have certain guidelines and rules that he or she must follow when distributing the assets within the trust, which are defined by the settlor–the person who is looking to have his or her assets or money distributed. There are multiple types of trusts out there and each have different ways that they are created and can be used. Why am I talking about trusts? Well, if you have children (or grandchildren), particularly ones that are young, a trust can be an effective way to make sure that they don’t blow through any inheritance they receive. For example, you can instruct the trustee to not distribute the assets or money in the fund before the beneficiary reaches a certain age or that is can only be used for certain purposes. This can protect both the assets you place in the trust as well as the beneficiary and prevent the beneficiary from becoming to reliant on an inheritance. Despite the simplistic approach of this blog post, trusts can be complex. Thus, you will need to speak with an attorney, particularly one specializing in estates or trusts, if you decide you want to set one up as they can legally do so and will ensure that it is done properly.
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’re probably familiar with what a required minimum distribution (RMD) is, but do you know what a required beginning date (RBD) is? If you guessed that it’s the date that you begin taking your RMDs, then you are spot on. Knowing your RBD–and any associated options–can be almost as important as knowing how much you need to take out for your RMD. If you have an IRA, your RBD is April 1 of the year following the year in which you turn 70 1/2. There are no exceptions to that rule, unfortunately. However, if you have an employer plan (i.e. a 401(k)), you may be able to push back your RBD if you continue working or if you have a 403(b), you may be able to push back the RMD start date under the “old money” exception. If you have both an IRA and a retirement plan through an employer, then you may have more than one RBD, depending on whether you intend to take advantage of a “still working” exception or not. If you have questions about your RBD or are interested in discussing whether you may be able to delay it, you should speak with a certified financial planner or with your plan custodian.
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.
It is highly likely that most–if not, all–your taxable income in retirement will consist either or IRA distributions and investment returns. If that turns out to be the case, you will have more than one way to pay taxes owed on that income to the IRS. You can either make quarterly estimated tax payments or have tax withheld from the distributions. Let’s look at the withholding option first. Withholding does not open you up to the complexities of estimating your tax payments on distributions, which can lead to penalties–or overpayment–if done incorrectly. Also, withheld tax is viewed as if it is paid evenly throughout the year, even if only paid in a lump sum later in the year, whereas quarterly estimated tax payments must be paid each quarter. It should be noted that most custodians withhold 10% of a distribution by default anyways, but you can change that number either up or down by instructing the custodian to change it. If you aren’t enamored with the withholding option, you may find that the quarterly estimated tax payments on your distributions fits you and your lifestyle better, especially if you prefer to have tight control over your taxes. You may also find the quarterly estimated tax payment method to be beneficial if you want to pay tax for each period as income is received. For example, if you find that most of you income will be received later in the year, this option allows you to make smaller tax payments earlier in the year and save the larger ones for when you actually receive the income. Now, there is no right or wrong choice here, but rather, options designed to fit you and your life. If you have questions regarding taxes and income from your retirement accounts, you should speak with a tax professional or certified financial planner.