The Roth IRA is my favorite retirement savings account. It offers compelling benefits, including tax-free growth, no required minimum distributions (RMDs), and better terms for heirs. Unfortunately, if your income exceeds the Roth IRA limits, you are not eligible to contribute.
There is a strategy for high-income earners that avoids the Roth income limits entirely. This strategy is known as a backdoor Roth contribution.
A high-income earner can always make a non-deductible contribution to their traditional IRA, up to the contribution limits. They are also allowed to convert traditional IRA assets to Roth IRA assets. The backdoor Roth takes advantage of these rules. The strategy requires making a non-deductible contribution into a traditional IRA and then immediately converting those assets to Roth. It is a valuable move under the right conditions.
But the backdoor Roth contribution is not entirely unguarded. If you have tax-deferred assets in a traditional IRA, SEP IRA, or a SIMPLE IRA, the backdoor contribution may result in undesired taxation. This is because the Pro Rata Rule will calculate taxes due from a backdoor contribution based on all IRA assets proportionally. If you have tax-deferred IRA assets, I recommend caution with a backdoor Roth contribution.
The types of accounts used to save for retirement can greatly impact a financial plan. Are you using the best accounts for your situation? Is there a strategy you are unaware of that may be advantageous? Have you had a change in income or employment? We recommend you review your retirement plan with your advisor regularly to ensure you are taking advantage of the best options available to you. Call us today!
The past year has kept most Americans safe in their homes, searching for something to occupy their minds and their time. Generally, staying home is a way to save money. Unfortunately, many found hunkering in at home to be a financial drain.
How can staying home possibly equate to a financial disaster? Subscription services. I know what you are thinking – they do not cost that much.
Today’s world allows us to have almost anything delivered, streamed, or accessible for a small monthly fee. If you are tired of coming up with a menu and shopping at the grocery store, you can have a box delivered to your doorstep complete with ingredients and a recipe to create a delicious family dinner.
Finding something to watch on TV is easier, too; just sign up for a streaming service from one or several of the companies offering hundreds of movies and television series. They are great for binge-watching an entire season. From Disney+ to Netflix to Discovery+ to ESPN+, you should be able to find something worth watching, right?
If you can dream it, you can probably find a subscription for it. A beauty box, food and toys for pets, clothing boxes for men and women, toys and activities for the kids, book of the month, car wash, online fitness gurus with programmed workouts, diet monitoring apps, theater, shaving supplies, wine, shoes, and the list goes on and on.
There is nothing wrong with subscribing to any of these services. Believe me, I have several myself. Many can help increase our quality of life and save us time. While reviewing your budget and planning for the year ahead, be aware of these financial drains. The cost for each is generally low and easy to justify. Altogether, they can really add up. Do your subscription costs fit into your long-term spending plan, or could they be preventing you from reaching your financial goals?
Your spending plan should be focused on meeting your monthly needs and achieving your financial objectives. These objectives should be aligned with your personal values and goals.
If you have not already done so, take some time and ponder the year ahead. Where do you want to end up financially speaking? You have a limited amount to spend each month; make it count.
If you need some ideas or suggestions on creating a spending plan, watch our Money Matters recorded webinar on budgeting. You can find it at SmedleyFinancial.com under Just for Women.
Opening an investment account for a child is a great way to give them a financial head start. It also provides an excellent opportunity to teach a child the importance of saving and investing. Before you decide to contribute to an account for a loved one, make sure your own retirement goals are on track. I assure you, children prefer financially secure parents to gifts of money or financial inheritance.
Once you’ve decided you can afford to save for a child and still accomplish your own goals, the question becomes what type of account you should open. There are several options, each having benefits and drawbacks. I have provided a brief summary of some of the more popular account types below. Please reach out to us for more information before choosing which account is best for you.
Savings Account This may be the best choice for short-term savings, but it is not usually recommended to fund expenses more than 24 months in the future. Savings accounts do not provide significant growth, offer tax benefits, or reduce the risk of inflation.
529 Plan This is a great investment account if your goal is to fund qualified higher education and the beneficiary is still young. It is important to understand what constitutes qualified education, as not all education is qualified. Although this account can fund expenses at lower education levels, the benefits of a 529 plan increase the longer assets are in the account. All growth is tax-free, but taxes and penalties will apply to non-qualified expenses. The account owner can change the beneficiary of a 529 account.
UGMA/UTMA Account These investment accounts are for minors. They offer flexibility, as money can be spent on anything that benefits the minor. Because the money placed in a UGMA/UTMA account is owned by the child, the earnings are generally taxed at the child’s tax rate. Those rates are usually lower than the benefactor’s rates and are often zero. When the child reaches the age of majority, the account must transfer to an individual investment account. At that time, the beneficiary gains full control and can use the funds however they choose.
Individual Investment Account This account cannot be opened for a minor. It can be opened in the name of an adult with the intent to gift assets to a child at some point in the future. This account will never change ownership, and the account owner will always maintain control. All growth will be taxed at the account owner’s tax rate, and transfers of more than $15,000 per year to a single beneficiary may require filing a gift tax form, although gift tax may not be due.
Roth IRA for Minors A Roth IRA may be opened for a child under the age of 18 if they have earned income. This account is a great way to jumpstart retirement for a minor. All growth is tax-free if used after the age of 59.5; otherwise, taxes and penalties may apply.
With interest rates at historic lows, there is a lot of talk about refinancing current mortgages. If you own a home, this is a great time to evaluate your loan and ensure you have the best terms available.
While interest rates across all loan types may be low, not all loans are the same. Here are some tips to help you understand the nuances and determine if you should refinance a first mortgage, take a home equity loan, or open a home equity line of credit.
Mortgage loans, referred to as first or second mortgages, are paid over a fixed period of years: 30, 20, 15, 10, or less. The interest rate can be fixed for the entire loan term or variable, changing based on the Prime rate. While rates are low and you can spread the payments over many years, keep in mind that you will pay less in overall interest if the loan term is shorter, say 15 years, versus a longer-term, say 30 years. While the payment may be higher, the difference can save you tens of thousands of dollars.
In this example, the savings for taking the shorter-term loan is $126,450. Not to mention that you are out of debt in half the time. This example does not include taxes, insurance, or any associated closing costs.
I realize that locking yourself into a higher monthly payment may limit your monthly discretionary cash flow. It does not have to be all or nothing. Choose the mortgage term that helps you save as much as possible and still maintain a flexible cash flow—making an extra principal payment when possible will save you interest and shorten the term of the loan.
Home equity loans allow you to borrow based on the equity in your home. These loans are gaining in popularity as home values continue to skyrocket. The increasing value of your home has likely created a pool of equity. Tapping into that equity for home improvements, such as upgrading a kitchen or adding a room or garage, is a favorable option compared to borrowing on a signature loan or credit card. Home equity loans have a fixed loan period, up to 10 or 15 years, and offer both fixed and variable interest rates.
Home Equity Line of Credit loans, referred to a HELOCs, allow you to use the equity in your home in another way. These loans offer a fixed credit limit that you can tap into as needed. The interest rate is variable and can increase or decrease over time. Repayment of the loan is more like a credit card in that there will be a minimum required payment each month, such as 1.25% of the loan balance. The trick here is discipline. You must form a plan to get the loan paid in a certain period. Otherwise, you will find that making the minimum payment has cost you a great deal of money.
After looking at the loan options available, consider what you will pay in closing costs. You may be required to pay for an appraisal, and sometimes a lower advertised rate requires that you pay points to secure the loan. This means you will have to come up with a percentage of the loan amount at closing.
Choosing between a fixed or variable rate can be difficult. I will say this; it is more likely that interest rates will go up in the future rather than down. Variable rates are generally lower than fixed rates and may make sense if it is likely that interest rates will go down. In the current environment, fixed rates are so low that you can feel confident you are locking in a good rate for the term of your loan.
Before you move forward, take the time to compare the facts on your current loan versus a new loan. The closing costs associated with a new loan may cost you more than keeping the current one. If you have questions, please reach out to our team. We can help you assess your options and determine the best course of action.
When asked, “When are they going to retire?” Most people reply with a specific age or date, something they have pinpointed and are looking forward to with anticipation. Unfortunately, only 53 percent of retirees leave the workforce based on their planned time-frame. Forty-seven percent are unexpectedly forced into retirement at an early age. This staggering number supports the importance of having a retirement plan that prepares you for all outcomes, those you anticipate, and those you don’t.
In a Federal Reserve study of non-retirees, 40 percent responded they feel their retirement savings are on track.
Sadly, 25 percent responded that they have not prepared for retirement and have no retirement savings. This can be due to many factors. They may work for a company that does not provide employees with retirement savings options such as a 401(k). Often they feel like they should do something but are overwhelmed and do not know how to start or where to turn for advice. If you are in this situation, please reach out to us for assistance.
The number of DIY investors with self-directed accounts changes as they reach their retirement years. This could be for a number of reasons. One is the complexity of turning a lifelong savings plan into an income-producing plan. Like climbing a mountain, the greatest risk comes on the way down. The same is true with retirement savings. Many fear taking on the wrong type of risk and jeopardizing their future income.
Source for all data: Federal Reserve Bank of St. Louis
If we have learned anything from the last 90 days, it is to expect the unexpected. As we watched the pandemic unfold, basic necessities such as hand sanitizer, cleaning supplies, canned goods, meat, and even toilet paper became high demand commodities, creating an uncomfortable situation for many of us. Having excess on hand helped ease the pain when store shelves were empty.
The same can be said for finances. What if the next crisis hits financially – will you have the cash supply needed to stay afloat? Preparing for a financial emergency is essential. Here are some things to consider.
A Federal Reserve report reveals many Americans could not cover an unexpected expense of $400. Those who carry a credit card balance, or do not have a credit card, are unlikely to have money set aside and are most at risk.
An emergency savings account will help soften the blow if your paycheck stops for a period of time. We recommend saving enough to cover between 3 and 6 months of income, less taxes, and retirement plan deductions.
The next decision is where to put the money you have saved. You can use a single account or a combination of accounts. The important thing is to keep the money liquid and readily accessible.
Options For Emergency Savings
1: Savings Account 2: Money Market 3: Certificate of Deposit (CD) 4: Low-Risk Investment 5: Combination of 1-4 above
Source for all data: Federal Reserve Bank of St. Louis. Past performance does not guarantee future results. Diversification does not guarantee positive results. CD’s are FDIC insured up to $250,000 and offer a fixed rate of return. They do not necessarily protect against a rising cost of living. The FDIC insurance on CD’s applies in the case of bank insolvency, but does not protect market value. Other investments are not insured and their principal and yield may fluctuate with market conditions.
It is no secret that Americans need to save more for retirement. The amount of money an individual or couple will need to carry them through their retirement years varies based on numerous factors, including age, standard of living, location, expected fixed income sources – like a pension and Social Security – and more. Everyone needs to know where they stand based on their specific needs. Have they saved enough, or do they need to save more? Here are some shocking statistics that illustrate that Americans are falling short.
This chart shows the average retirement savings account balance of active savers. Averages can be deceiving as there are many balances far above the number shown. The issue lies in the realization that there are a significant number of accounts with balances far below the average. This creates a future financial crisis for these savers. Living today on the income they receive is doable. However, it will be almost impossible for these savers to maintain their standard of living in their elder years if they continue at the same rate of saving.
We are not proponents of Rule of Thumb planning. We prefer planning using actual key information specific to each client’s situation. But, in this situation, it helps us illustrate a reality. This chart shows how much someone should have in their retirement savings based on age. The amount shown is a multiple based on a $100,000 income.
Rule of thumb would say, based on the desired income amount you want in retirement, you should have saved a multiple of your current income. The amounts illustrated are multiples of a $100,000 income. For example, if you are age 45, you should have already saved 3 to 4 times your income. If you are 65, you should have saved 9 to 11 times your income. How are you doing?
The good news is there is always hope. If you are not on track, regardless of your age or situation, we can help create a roadmap to get you back on track, one step at a time. Contact one of our Wealth Advisors for more information.
Economies fluctuate. They always have. They probably always will. These cycles are imperfect and a little chaotic. That’s what makes them so difficult to predict.
Most people would say we are currently in a bull market and we have been in it since March of 2009. That makes it over 10 years old and the longest bull market ever.
Bull markets don’t die of old age. However, some of the current data is positive, and some is negative. That means a recession in the next twelve months is unlikely, but we should expect a rough road ahead.
What should we be doing ten years into an economic expansion? We should get our finances in order. That means more than just our investment portfolios. We should take a good look at all of our savings and spending as well.
Let’s say you received an inheritance, or you sold your home or business, or you earned a big bonus. Where do you park your cash while you decide how to make the best use of it? The best short-term account is the one that best matches your needs. Call us to talk about what would be best in your situation. Here are a few ideas to consider:
Savings accounts, money market accounts, and certificates of deposit are FDIC or NACU insured up to $250,000 and offer a fixed rate of return. Other investments are not insured and their principal and yield may fluctuate with market conditions.
Leading economic indicators are predictive changes that give us clues about the future direction of the economy. Lagging indicators are after the fact. They confirm what has already happened.
Just as the economy has leading and lagging indicators, so does your personal financial preparedness. Regardless of your age, or alternatively, your personal lifecycle, ask yourself where you are in the following questions.
Do you have a three-to-six-month emergency fund that matches your net income?
Are you free of all debt?
If you were to die suddenly, would your family have enough money to live now and through retirement?
Do you have enough money saved for retirement? (See graph below.)
Are the beneficiaries and contingent beneficiaries on your retirement accounts, life insurance policies, etc., the way you desire?
Have you created will(s) and trust(s) and ensured they are up to date?
If you answered “Yes,” to all of these leading indicators, then you are financially prepared for the future. If you answered “Yes,” to most of these, then you are on the right path. If you answered “No,” to most of these, then you should take immediate action. Please come and talk with one of our expert wealth managers who have the experience, credentials, and training to get you to and through your retirement years.
So many changes can take place within a year’s time, that when it comes to your personal finances, it is better to be safe than sorry. The most important people in your life depend on you. Will they be harmed or helped by your preparation or lack thereof?