It’s been a while since I’ve written a post about the importance of making sure your paperwork is correct and up-to-date. I was reading an article over the weekend that had two stories of what can go wrong when your paperwork is not correct. I won’t go into the details, but one story involved thousands of dollars in costs to correct an outdated address and the other involved a painful court battle for a deceased account owner’s family. Both stories re-instilled the importance of having your paperwork in order. Remember, retirement accounts cannot be passed on through a will or similar instrument. The account custodians will follow the paperwork they have and send information to the account addresses they have. And yes, the courts will side with them the vast majority of the time. You can prevent this, though, by informing the account custodian of any address changes and any major life changes (i.e. a child birth, marriage, divorce, etc.). These simple updates–most of the forms can be found online and are fairly easy to fill out–can prevent a world of hurt in the future, both for yourself and for your family and friends. Ideally, you should be checking your paperwork at least once or twice a year and should save a copy of the forms each time you submit new ones. If you have questions about whether you need to update your forms, you should speak with your retirement account custodian.
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.
There’s been a lot of talk over the past few weeks about how the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has provisions impacting IRAs (no RMDs for 2020) and other retirement accounts (waives early distribution penalties for multiple, common retirement accounts). However, there’s been little talk about how the legislation may impact Qualified Charitable Distributions (QCDs). Why is that? Well, it’s because the CARES Act doesn’t impact QCDs. Yes, that’s right; QCDs will work the same this year as they did in previous years. So if you were thinking about making a charitable contribution from one of your retirement accounts before the Coronavirus pandemic hit, then you can still go ahead with your plans so long as it’s still feasible for you. As with all QCDs, regardless of the global and economic conditions, it’s important that you understand what you can and cannot do with them and to follow the rules for making one. If you have questions or are uncertain about whether a QCD is right for you, then you should speak 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 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.
The IRS recently announced retirement account contribution limits for 2020. The quick take away: 401(k) contribution limits are going up, IRA contribution limits stay the same, and just about all other retirement account contribution limits are also going up. Per usual, the increases are minimal. The 401(k) contribution limit is up $500 to $19,500, while the catch-up contributions will increase to $6,500 from $6,000 last year. IRA contributions remain topped out at $6,000 with a $1,000 catch-up contribution for those over 50. Contribution limits have been increasing just about every year in recent memory, so these should really come as no surprise. However, they should be used as a bit of motivation to start saving if you haven’t been doing so. It’s also a good time to think about upping your contributions next year–if you can–and trying to reach that max. While you probably won’t be able to max out your retirement account contribution limits every year during your career, if you are able to max out for a decade or even a few years, that can go a long way towards building up your nest egg. If you need help with getting your finances in order in regards to retirement account contributions and building up a nest egg, you should speak with a certified financial planner or wealth manager.
Life can be unpredictable. Do you know how you will handle that unpredictability? For example, if you were faced with a sudden, substantial medical bill or your home was damaged in a storm, do you know where the money to pay for those expenses will come from? If you’re financially savvy/smart, you probably have an emergency fund set aside to help with those expenses. However, if you don’t have such money set aside or the costs are more than your emergency fund, you may need to find other financial resources to tap into. While I strongly discourage it and will only suggest it as an absolute last resort, taking an emergency withdrawal from your retirement funds is a potential option. I want to remind you, again, that taking emergency withdrawals from your retirement account is highly discouraged and should only be done under the rarest of circumstances. It’s also important that you at least understand the rules and consequences of taking a hardship withdrawal. First off, you will want to see if your retirement plan even allows hardship withdrawals. Most 401(k)s and IRAs allow for hardship withdrawals, but there may be specific guidelines you will have to follow. You will also need to ensure that the expenses you intend to use the money on qualifies as a “hardship” as defined by the plan rules or custodian. Many plans have a list of such events that automatically qualify (i.e. certain emergency medical procedures, required home improvements, etc.). Be aware that there will be tax consequences to a hardship withdrawal if coming from somewhere that isn’t a Roth IRA. You may even get hit with an early distribution penalty, depending on your age when you make the withdrawal. You will also need to make sure that the withdrawal is only for the amount of the expense and nothing more. Before you make a hardship withdrawal, you need to show that you have no other options as well, which may require opening up your financials to scrutiny. These are the main things you will need to be aware of, but there may be more depending on the retirement plan you want to take money out of and your personal situation. Taking a hardship withdrawal can be a tricky transaction that can open you up to serious penalties if not done correctly. If you are considering a hardship withdrawal, you will want to speak with a certified financial planner both to decide if the move it right for you and also to make sure that you do it correctly should you decide to do it.
Paying down your debts should be an important retirement savings plan. Yes, I know it’s not saving, but it’s vital to your retirement plans. First off, the sooner you pay off your debts, the sooner you can start diverting more money into your retirement accounts. That money going towards debt payments will be much more useful in an IRA or a 401(k). Secondly, your debts won’t go away in retirement and you don’t want them to eat away at your nest egg only you actually get to retirement. Also, keep in mind that debts often involve interest and that the longer it takes you to pay off a debt, the more you will pay. Thus, it’s always a good idea to pay off your debts as soon as you can and to make it a priority during your income-earning years. Even if you aren’t able to pay off all of your debts before retirement, you should make it a goal to pay down as much of it as possible. Yes, you can pay down your debts and save for retirement at the same time. This will take some planning and budgeting. Most likely, you will want to involve a financial planner in such aspects so that they can help you take advantage of your assets or portfolio in paying down debts. A financial planner can also help you discuss budgeting and how be efficient in your saving and paying efforts. So, what are your plans in paying down debt in preparation for retirement?
Did you know that you can invest in real estate with your IRA? However, it’s not as simple as just buying property with IRA money. There is a lot of thought and consideration that should go into such as decision as the rules for using an IRA to invest in land are limiting and leave very little room for error. First off, you need to make sure you have the right IRA for such an investment. Most Roth and traditional IRA custodians do not allow investments in real estate, thus it’s highly likely you will have to set up a self-directed IRA to do so. Next, you need to make sure that the transaction occurs within the IRA. This means that if you intend to rollover property between accounts, only that property can be rolled over, as opposed a cash amount that is equal to the value of the property or a similarly valued property. The biggest issue you need to be aware of if you invest in real estate with your IRA is prohibited transactions. If a prohibited transaction occurs, it could make your entire IRA taxable and open you up to IRS penalties. And yes, prohibited transactions include any transactions in which you or your family benefit. Usage is also important, especially if you intend to use the real estate to generate income. It’s perfectly fine to generate income, but you could end up in serious trouble if you also use it yourself, even if you pay to do so. There also fees associated with real estate investments, usually involving annual appraisals or other measures of the valuation of the property. As you can see there are numerous considerations that need to be taken when it comes to investing in property with your IRA. If you are seriously considering doing so, your best bet is to do so with the help and knowledge of an investment advisor or financial professional with experience in this area.
Did you know that some employer 401(k) retirement plans allow you to delay taking your required minimum distribution (RMD) if you are still working at 70½ and own less than 5% of the company? Doesn’t that sound enticing? If you have a 401(k) with your current employer, you should check to see if delaying your RMD is an option and whether it is right for you. If you envision yourself working well into your 70s, that may be viable option. It should be noted, however, that this delayed RMD option only works with your current employer and not plans you may have from past employers or with a traditional IRA. If you intend to delay taking RMDs from an employer account and will be funding your retirement from another source, you should make sure doing so is the most efficient and safest way possible. This means that you will most likely want to consult with a certified financial planner so as to draw up a plan as to how much will come from each account or–if you have more than two accounts–which accounts will be used first and which will be saved for later. Delaying taking RMDs is not a bad idea, but it is one that should be thought out and you really need to make sure that you meet eligibility requirements to do so.