Archive for November, 2015

Does Anything Change for Your Retirement After Marriage?

Thursday, November 12th, 2015

retirement marriage

It’s no secret that married couples in the US are eligible for a variety of nuptial benefits, like tax breaks, deductions, estate planning, and so on. But what most people don’t know if that there are retirement benefits as well, and some that single retirement savers are not eligible for. What those benefits are differ depending on what type of retirement plan you invest in, so let’s break them down.

401ks

If both people in a marriage are working and earning income both have a 401k can defer income tax twice as much cash as single people. Couples who are only able to save a limited amount can decide which 401k has the better employer contributions, and focus their savings efforts there, but the ideal situation would be getting matches from both employers. It’s silly to turn down free money. Between 1992 and 2010, married women’s contributions to retirement accounts increased from 20 percent to 38 percent, on average, according to a Government Accountability Office analysis of Federal Reserve data. And among dual-earner households ages 55 to 64 with 401ks or similar types of accounts, women contributed an average of 44 percent of the household’s deposits in retirement accounts.

Individual Retirement Accounts

According to IRS rules regarding IRAs, married couples have different income limits than individuals when it comes to their ability to make tax-deductible IRA contributions if they also have retirement accounts at work, such as a 401K. For example, the tax deduction for traditional IRA contributions is phased out for married couples with a modified adjusted gross income between $96,000 and $116,000, compared to between $60,000 and $70,000 for individuals. An individual who doesn’t have a workplace retirement account, but is married to someone who does have one can claim the tax deduction until the couple’s income is between $181,000 and $191,000. The adjusted gross income phase out range for Roth IRAs is $181,000 to $191,000 for married couples and $114,000 to $129,000 for unmarried individuals.

Social Security

Married individuals have Social Security claiming options that single people don’t, and they can use various strategies to maximize their benefit as a married couple. Spouses are eligible to receive Social Security payments worth as much as 50 percent of the retired worker’s benefit (if it’s more than they would get based on their own work record), and surviving spouses are entitled to up to 100 percent of the higher earner’s benefit. Married individuals can also claim spousal payments and benefits based on their own work record at different times in their lives. For example, a wife claiming Social Security payments based on her own work record might switch to survivor’s payments based on her husband’s work record when he passes away if his payment is higher than the one she is getting. Couples have an advantage in that they can play the game a little bit and try some strategies, a widow’s benefit is going to be based on whatever his final benefit is, so by waiting until age 70, if something does happen to him, she will get that higher benefit. Divorced spouses can get these payments too if the marriage lasted at least 10 years. In contrast, single people or divorced individuals whose marriage did not last a decade can only claim benefits based on their own work record.

Traditional Pension

Traditional pensions generally provide a steady stream of payments over the lifetime of the retiree and are also required to provide payments to a surviving spouse. However, more than a third of married households with pensions opted not to receive a spousal survivor benefit, often to get higher monthly payments, the Government Accountability Office found. But a worker who wishes to opt out of the spousal coverage needs written consent from the spouse. Some pension plans also give workers the option to take lump-sum cash payments instead of lifetime payments, which allows them greater freedom to spend or invest the money, but also results in the loss of the security of guaranteed monthly payments in old age.

Author: Tanya

Rules and Limitations for Owning Real Estate Through an IRA

Monday, November 9th, 2015

real estate and IRA long

Buying real estate through your IRA is a lucrative and competitive business. It can substantially increase the return on your IRA’s investment, and make for a big, cushiony retirement nest egg. One of the biggest reasons that more people don’t take advantage of owning real estate through their IRA is all the rules and confusion that comes along with it. It can be a meticulous task, but well worth it.

Self-Directed IRA

Although IRS rules permit IRA funds to be invested in real estate, IRS rules do not require an IRA trustee to offer real estate as an investment option. Most trustees who offer traditional IRA investments, such as depository banks, do not allow an IRA owner to invest in real estate because of the extra administrative burden of real estate management. As a result, if you want to invest your IRA funds in real estate, you will most likely have to convert your traditional IRA to a self-directed IRA, which is an IRA that requires you to decide what investments to make, such as real estate.

Prohibited Transactions

IRS rules require IRA-owned real estate to be for investment purposes only. This requirement places several prohibitions on how the real estate can be purchased and used, the key to understanding the prohibitions is the term “disqualified persons”. This term is used in the IRS rules regarding IRA-owned real estate to refer to the IRA owner and related persons–that is, the IRA owner and spouse, ancestors (mother, father, grandparents) and descendants (children, grandchildren and their spouses). The term disqualified person also includes the IRAs investment advisers, including a trustee of the IRA funds, and any business in which a disqualified person has a5 0 percent or greater interest. IRS rules prohibit the use of IRA funds to purchase real estate from a disqualified person, the rules also prohibit a disqualified person from using any real estate purchased with IRA funds, either as a home or business. These rules even preclude you from purchasing a vacation home that is only partly for personal use and otherwise rented to others.

Tax Consequences

If you violate the IRS rules regarding prohibited transactions, the IRS will consider the IRA funds used in the transaction as a distribution of your IRA. You will be taxed on the funds from the first year in which the transaction occurred, with penalties and interest included. Depending on your age, you may also incur an additional penalty for taking an early distribution.

Author: Tanya

How Could The Federal Rate Hike Affect Your Retirement?

Thursday, November 5th, 2015

Rate hike - taller

It hasn’t even been 24 hours since Fed Chair Janet Yellen told Congress that the Federal Reserve may be closer than ever to hiking interest rates for the first time in nearly a decade, and already, there’s already been an uproar from the market in anticipation. The Washington Post reported that mortgage rates have surged as of Thursday morning due to talks of the possible Federal rate hike from Chair Yellen. Although economic and job growth has slowed recently, Yellen told the House Financial Services committee the economy is performing well. But a decision on whether to hoist rates at the Fed’s Dec. 15-16 meeting will depend on economic reports in coming weeks, she said.

While rates are most likely rising next month, this makes us question whether or not these changes will affect retirement in any adverse way. There’s some speculation that Federal Reserve doesn’t want Americans to retire, that they want to keep rates as low as they have to encourage spending, and deter saving in order to prolong retirement. While there might be some truth to that, it is far from the grand conspiracy that some claim it to be. And unfortunately, no one can say with certainty whether the effects of a hike will be mostly positive or negative until it happens. For those who hope to retire some day, that uncertainty is disconcerting at best.

When it comes to long-term debt, increased rates directly affects how much it costs banks to borrow from one another, and subsequently, to consumers, the cost of borrowing will also increase. For those who have say, a variable rate mortgage loan or are in the market to borrow money for a large purchase, the fed rate hike will make borrowing slightly more expensive. The best thing to do if you’re in either of those situations is to either lock in today’s low rates, or work to eliminate potentially expensive debt that could eat away at retirement savings.

With equities, experts say that in preparation of a hike, that investors should do what’s called ‘sector rotation’ within portfolio and should think about selling some stocks from industries that perform well during falling rate environments, such as apparel, retail, construction, durable goods and autos, and buying stocks in industries that perform well during rising rate environments, such as energy, consumer goods, utilities, food and steel products.

Experts suggest that when it concerns bonds, investors should get out and look for safer options. The reason for this is because history shows when interest rates go up, bond values go down, and since most people use bonds to protect their money, when interest rates go up, bonds will no longer hold the title of safe. As the Fed begins to solidify its plans, retirement savers will need to move some of that money into other securities to offset the price drop.

Retirement savers should not be afraid when the Fed initiates its first interest rate hike in more than nine years. Our economy and markets have been through them many times before and weathered the storm. As always, asset allocation within your self-directed IRA, or 401K, and persistence remain the most important ingredients to retirement success.

Author: Tanya

What is an IRA? Roth or Traditional? Which is Better? {infographic}

Monday, November 2nd, 2015

roth or traditional

An Individual Retirement Account, or IRA, is an account that payments are made into bi-monthly or monthly, earnings such as interest, dividends or capital gains are accumulated, investments can be made with it through a self-directed IRA, and it is meant to supplement income after a person is retired. The account, depending on the type, whether Roth or Traditional, can be tax-free or tax-deferred.
If you’re new to the retirement planning world, and all of this new information is confusing, hang tight, we’ve got you covered.

Click image to enlarge

What is an IRA - Infographic

Author: Tanya