Posts Tagged ‘Roth IRA’

Don’t Let These IRA Myths Deter Your Savings

Monday, April 24th, 2017

How do myths about Traditional or Roth IRAs get started? Typically, you’ve heard myths from an acquaintance who knows someone who knows someone. That person then tells you that they once had either a bad advisor, or had a bad experience, and there starts a rumor/myth. Let’s move past all of that, and get to the truth of the matter.

I make too much/too little to make contributions

Even if you’re only able to contribute $50 a month to your retirement account, it’s SO much better than nothing. Starting to save in your early 20s means you can set aside less and come away with more once you reach retirement age. Set goals for yourself, and make a decision today that will impact your future.

It’s true that if you make $196,000, or more if you’re filing jointly (married), you cannot fund a Roth IRA. But you will, however, be able to fund a traditional IRA with no problem. But there’s a caveat that can make the rules more confusing. Your household income, as well as whether you or your spouse have access to a workplace retirement plan, like a 401K, can change eligibility. These factors impact how much of your traditional IRA contribution the IRS will allow you to deduct from your taxes.

All IRAs are the same

With a traditional IRA, the money you contribute into your account is contributed in tax-free. Once you reach retirement, your withdrawals are taxed as ordinary income.

Roth IRAs basically work the opposite way. Your contributions are made with after-tax dollars, but withdrawals can be made tax-free in retirement. The annual contribution limit for both traditional and Roth IRAs in 2017 is $5,500 if you’re under 50, or $6,500 if you’re 50 or older.

However, as stated above, not everyone can open a Roth IRA. If you earn more than $133,000 as a single tax filer this year, or more than $196,000 as a married couple filing jointly, you won’t be eligible to contribute to a Roth.

I’m too young to start saving for retirement

Impossible. The sooner that you start saving for retirement, the more interest you’ll accrue over your lifetime, also referred to as compound interest. Starting retirement savings in your 20s gives you a huge advantage over those who start a decade later. Again, due to compound interest. If you’re able to save just $2,000 a year beginning at age 25, (about $166 a month), you will have saved more than $500,000 by retirement age. If you start saving ten years later in your thirties, you will save less than $250,000 saved. Kind of speaks for itself. Start as early as possible.

It’s Tax Season: Avoiding Big Taxes on Your Investments

Monday, January 25th, 2016

tax season

Since tax season is in full swing, now is the appropriate time to do a mini series of tax-related articles, right? That’s what we thought, so over the next few weeks, that’s what we’ll be doing. To kick things off, let’s go over taxes on your investments. Taxes can eat into your investment performance in ways that you can’t imagine, and definitely don’t anticipate. Thankfully, there are ways to improve your returns while keeping Uncle Sam at bay.

Developing a “tax-efficient” investment strategy should be on the top of your money resolutions this year if you don’t already have one in place. It’s relatively easy to do once you identify some problem spots.

First off, where you hold your investments makes a big difference in how your investments will be taxed. For long-term savers, 401(k)s, 403(b)s, Roths and 529 college savings plans all allow you to compound your money tax deferred.

While you’ll pay taxes on contributions to Roth 401(k)s and IRAs, you can take withdrawals tax free, but they are subject to certain conditions. If you hold money in the account at least five years and you’re 59 1/2 or older, there’s no tax on what you take out.

Here’s where it gets troublesome. Anything held outside of a qualified retirement account can trigger capital gains, dividend, or ordinary income taxes. That’s what I mean by “tax efficiency.” If you can keep money in a retirement or 529 account, you don’t have to worry about funds you plan to leave alone for a while.

The act of keeping money outside of tax-deferred accounts can cost you plenty, and there are an array of taxes that may apply:

  • Ordinary dividend and net short-term capital gain distributions—on sales of securities held 12 months or less—are taxed at the investor’s ordinary income tax rate, currently a maximum of 39.6%.
  • Long-term capital gain distributions—on sales of securities held more than one year—are taxable as long-term capital gains.
  • The maximum tax rate on “qualified dividend” income and long-term capital gain distributions for most investors is 15%, but increases to 20% for high-income individuals.
  • In addition, high-income taxpayers are subject to the 3.8% health care tax on “net investment income.”

For those who also invest in taxable accounts— about 47% of bond and stock mutual fund assets are held in such accounts— should consider their asset location strategy as well as their asset allocation strategy. This approach should enhance tax efficiency (which measures the difference between pretax and after-tax returns) and potentially improve after-tax returns.

What can you do to save on taxes outside of deferred accounts? Keep in mind that vehicles paying dividends or long-term capital gains are taxed at a lower rate than investment returns taxed at ordinary income.

If buying mutual, or exchange-traded funds, also consider the funds’ “tax efficiency ratio”. Generally the higher the ratio, the lower your tax bill from owning that fund. As a rule, passive index funds, which buy and hold a basket of securities, will have a higher tax-efficiency ratio than an actively managed fund.

Make sure to consult with a registered investment advisor or a certified financial planner before making big changes to your tax strategy, or if you have questions on what to do with your portfolio to lower taxes.

Five Changes Coming to the Retirement World in 2016

Monday, January 11th, 2016

2016 changes

It’s still early in 2016, but big changes are coming in the retirement world, as it’s always changing. As you plan for retirement, it’s important to stay on top of specific changes that can affect your self-directed IRA retirement accounts, regular retirement accounts, Social Security and investment vehicles. These changes could impact your saving strategy:

The new myRA is now available

The myRA is a Roth individual retirement account (IRA) that has no fees, and the government guarantees that it will never lose its value. We talked about myRA’s back in September, and weighed the pros and cons. This is pegged as an ideal option for those who are just getting started on their retirement savings because it’s easy to set up contributions.

The saver’s credit threshold increases

People who make slightly more money might have a better chance qualifying for the saver’s credit in 2016. The limit for adjusted gross income (AGI) increased $250 to $30,750 for single filers, and for married couples filing jointly, the AGI limit rose $500 to $61,500.

Obama’s 2016 budget focuses on retirement

President Obama’s budget proposals include eliminating the special tax break for net unrealized appreciation on retirement accounts, limiting Roth conversions to pretax dollars, putting a cap on retirement savings and more.

While some or all of Obama’s proposals might not happen, these changes could impact what you can do with your retirement accounts.

No more ‘restricted applications’

The “restricted-application” option is being eliminated. Before this new law, couples would file a “restricted application” after reaching full retirement age to receive only spousal Social Security benefits while their own benefit earned delayed credits until age 70. But now, only those who were 62 years old at the end of 2015 qualify.

Rebooting ‘file and suspend’ strategy

Spouses have been using the “file and suspend” strategy to increase their Social Security benefits. Changes are coming by May. As CNBC reports, in order for your spouse to receive a benefit based on your earnings record, you need to actually be receiving benefits as well. Some extensions are possible for those 62 and over.