Monthly Archives: August 2016
Regardless of whether you’re 25 or 55, saving for retirement is a wise financial strategy. Everyone will face retirement at some point, either by choice or necessity. Whether you are on track for retirement savings or need to play catch up, or you’re a financial advisor who wants to give clients a leg up on preparing for their later years, these eight essential tips for retirement savings will put more money in your account.
1. Grab the 401(k) or 403(b) company match.
If your workplace offers a retirement plan and a company match, you should contribute up to the amount that the company kicks in. Let’s say that José’s company contributes up to 5% of his salary and matches every dollar he puts into his workplace retirement account. If José doesn’t add his 5% to the pool he misses out on free money. José earns $50,000 per year. By investing at least $2,500 into his 401(k), he automatically gets a $2,500 bonus from his employer, along with important tax benefits.
For the greatest retirement benefit, contribute up to the maximum amount allowed by law to your retirement savings plans. Start now for the greatest financial benefit.
2. Claim double retirement plan contributions.
A little known retirement savings opportunity allows some teachers, healthcare workers, public sector and nonprofit employees the opportunity to contribute twice as much to retirement plans. These workers can add $18,000, the maximum amount (in 2016) to a 403(b) and up to $18,000 to a 457 retirement plan. That’s a total tax advantaged savings amount of $36,000 in one year.
3. File for Uncle Sam’s retirement savings credit.
If you are a middle- or lower-income taxpayer, you may claim a tax credit for up to 50% of your retirement plan contribution. If you are married and filing jointly with adjusted gross income of $61,500 or less (in 2016), and you contribute to a qualified retirement plan, you may be eligible for a tax credit.
The maximum credit amount per couple is $4,000 and $2,000 for an individual, depending upon your contribution amount and income.
4. Use the back door Roth IRA as a way to increase retirement savings.
If your current income is too high and makes you ineligible (for 2016: married filing jointly – $194,000; single – $132,000) to contribute to a Roth IRA, there’s another way in. First, contribute to a traditional IRA. There is no income ceiling for contributions to a non-deductible traditional IRA. After the funds clear, convert the traditional IRA to a Roth IRA. That way the funds can compound for the future and be withdrawn tax free, as long as you meet the withdrawal guidelines.
“I have high-income clients who open traditional IRAs and make non-deductible contributions on an automatic monthly basis to the maximum allowable amount ($5,500, or $6,500 for those age 50-plus). At the end of each quarter, we submit a full conversion request so that the entire IRA balance gets converted to their Roth account. By converting on a quarterly basis, there is not a lot of time for taxable gains to accrue in the traditional IRA. So the tax implication of the conversion is minimal for the client. And, they’re saving additional retirement dollars to compound and withdraw tax-free later on,” says Alyssa Marks, lead advisor, CMFS Group, Inc., Morton, Ill.
5. Retire in the right state.
Florida, Tennessee, South Dakota, Wyoming, Texas, Nevada and Washington: These states boast “no state income taxes.” Be aware that New Hampshire and Tennessee do tax dividends and interest. Fortunately for retirees, most states don’t tax Social Security. Before packing up and moving, evaluate all of the taxes in your proposed new home state.
6. Self-employed? Take advantage of available retirement savings vehicles.
Even if it’s just a side job, self-employment income allows you to contribute to a solo 401(k) and a Simplified Employee Pension (SEP) plan. You can contribute up to 25% of your net self-employment income, up to $53,000 (the 2016 limit; in 2017, it’s $54,000) with a SEP. If you’re under age 50, you can invest up to $18,000 (2016) in a Solo 401(k) in the role of employee. There’s also an opportunity to contribute more to the solo 401(k) in the role of the employer.
7. Don’t overlook the health savings account.
With healthcare costs growing and the proliferation of high deductible health plans, the health savings account (HSA) is a golden retirement planning opportunity. This tool can not only be used to pay for health care expenses, but also to squirrel away additional funds for retirement. The individual or employer contributes up to $6,750 for a family or $3,350 for an individual. The contributions are 100% tax deductible, and funds unused for medical expenses may continue to be invested and grow over time. Those over age 55 can sock away an additional $1,000 per year.
“Health savings accounts are the only savings vehicle that is tax deductible on the way in and potentially tax-free on the withdrawal if used for qualified medical expenses. These accounts should absolutely be funded to the maximum since participants are almost certain to have some out-of-pocket medical expenses currently or in the future,” says Robert M. Troyano, CPA, CFP®, founder and managing partner at RMT Wealth Management in Saddle Brook, N.J.
What’s more, “once you reach age 65, any assets inside the HSA account may potentially be used for anything, not just healthcare-related expenses,” says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”
8. Benefit from getting older.
If you’re over age 50, the tax system is your friend. Retirement plan contribution limits are raised, giving the older investor a chance to accelerate their retirement savings. You’re allowed to increase contributions to both traditional and Roth IRAs by $1,000 for a total 2016 amount of $6,500.
Retirement planning can be tough. It is hard enough to save for a comfortable retirement during your working years. Once you actually retire, managing your withdrawals and your spending can be complicated. One important and complex area in both instances is managing the process in the most tax-efficient manner.
If you have portions of your nest egg in various types of accounts ranging from tax-deferred to tax-free (a Roth) or to taxable it can be a challenge to decide which accounts to tap and in what order.
Required minimum distributions (RMDs) also come into play after age 70½. Here are some tips for those saving for retirement, for retirees and for financial advisors advising them. (For related reading, see: Should Retirees Reinvest Their Dividends?)
Fatten Up Your 401(k)
Contributing to a traditional 401(k) account is a great way to reduce your current tax liability while saving for retirement. Beyond that your investments grow tax-deferred until you withdraw them down the road.
For most workers, contributing as much as possible to a 401(k) plan or a similar defined contribution plan like a 403(b) is a great way to save for retirement. The maximum salary deferral for 2016 is $18,000 with an additional catch-up for those age 50 or over of $6,000, bringing the total maximum to $24,000. Add any company matching or profit-sharing contributions in and this is a significant tax-deferred retirement savings vehicle and a great way to accumulate wealth for retirement.
The flip side is that with a traditional 401(k) account, taxes, at your highest marginal rate, will be due when you withdraw the money. With a few exceptions, a penalty in addition to the tax will be due if you take a withdrawal prior to age 59½. The assumption behind the 401(k) and similar plans is that you will be in a lower tax bracket in retirement, though as people live longer and the tax laws change we are finding this is not always the case. This should be a planning consideration for many investors. (For more, see: Are 401(k) Withdrawals Considered Income?)
Money invested in an individual retirement account (IRA) grows tax-deferred until withdrawn. Contributions to a traditional IRA may be made on a pre-tax basis for some, but if you are covered by a retirement plan at work, the income limitations are pretty low.
The real use for an IRA for many is the ability to roll over a 401(k) plan from an employer when they leave a job. Considering that many of us will work at several employers over the course of our careers, an IRA can be a great place to consolidate retirement accounts and manage them on a tax-deferred basis until retirement.
Considerations With a Roth IRA
A Roth account, whether an IRA or within a 401(k), can help retirement savers diversify their tax situation when it comes time to withdraw money in retirement. Contributions to a Roth while working will be made with after-tax dollars so there are no current tax savings. However, Roth accounts grow tax-free and if managed correctly, all withdrawals are made tax-free.
This can have a number of advantages. Besides the obvious benefit of being able to withdraw your money tax-free after age 59½ and assuming that you’ve had a Roth for at least five years, Roth IRAs are not subject to RMDs – required minimum distributions, that have to begin when you reach 70½. That’s a big tax savings for retirees who do not need the income and who want to minimize their tax hit. (For more, see: Why Boomer Retirements Will Be Vastly Different Than What They Planned For.) For money in a Roth IRA, your heirs will need to take required distributions, but they will not incur a tax liability if all conditions have been met.
It is generally a good idea to roll a Roth 401(k) account into a Roth IRA rather than leaving it with your former employer in order to avoid the need to take required distributions at age 70½ if that is a consideration for you.
Those in or nearing retirement might consider converting some or all of their traditional IRA dollars to a Roth in order to reduce the impact of RMDs when they reach 70½ if they don’t need the money. Retirees younger than that should look at their income each year and in conjunction with their financial advisor, decide if they have room in their current tax bracket to take some additional income from the conversion for that year. For more, see Why Age 70 Is Pivotal for Retirement Planning.
Open an HSA Account
If you have one available to you while you are working, think about opening an HSA account if you have a high-deductible health insurance plan. In 2016, individuals can contribute up to $3,350 per year; families can contribute $6,750. If you’re over age 50 you can put in an additional $1,000.
The funds in an HSA can grow tax free. The real opportunity here for retirement savers is for those who can afford to pay out-of-pocket medical expenses from other sources while they are working and let the amounts in the HSA accumulate until retirement to cover medical costs that Fidelity now projects at $245,000 for a retiree couple where both spouses are age 65. Withdrawals to cover qualified medical expenses are tax-free.
Choose the Specific Share Method for Cost Basis
For investments held in taxable accounts, it is important to choose the specific share identification method of determining your cost basis when you have purchased multiple lots of a holding. This will allow you to maximize strategies such as tax-loss harvesting and to best match capital gains and losses. Tax-efficiency in your taxable holdings can help ensure that more is left for your retirement.
Financial advisors can help clients to determine cost basis and advise them on this method of doing so.
Manage Capital Gains
In years when your taxable investments are throwing off large distributions – to the extent that a portion of them are capital gains – you might utilize tax-loss harvesting to offset the impact of some of these gains.
As always, executing this strategy should only be done if it fits with your overall investment strategy and not simply as a tax-saving measure. That said, tax management can be a solid tactic in helping the taxable portion of your retirement savings portfolio grow.
Many financial advisors are seeing their profit margins steadily shrink in the wake of increased pricing competition from robo-advisors and rising compliance costs that have been exacerbated by the new fiduciary rule that was handed down by the Department of Labor earlier this year. This margin squeeze is being felt at all levels of the industry, from solo practitioners to pension and mutual fund managers, and all indications point to this trend continuing for the foreseeable future.
Here are three critical factors that can help advisors to maintain their profits and grow their businesses.
Today’s financial consumers are demanding cutting-edge technology that allows them to access their money and monitor their portfolios at any time from their computers, smartphones and tablets. Advisors today need to maintain a strong digital presence in order to stay ahead of the competition; they also need to employ social media to their advantage. Online endorsements on sites such as LinkedIn may carry more weight today than other forms of prospecting, and advisors who are able to earn these client recommendations can keep themselves in the driver’s seat in their efforts to generate new business.
Clients who are provided with the products and services that really matter to them will be less likely to complain about fees or poor investment performance, but advisors need to be ready to justify the fees that they charge to their clients irrelevant of investment performance. Attracting millennial clients may be especially difficult, as this generation grew up during the subprime mortgage meltdown and the Great Recession. Many of them are skeptical of financial planners and expect total transparency from them before they will invest. Advisors can combat this tendency with a combination of the latest digital tools and human empathy and reasoning.
The Department of Labor’s new fiduciary standard has had an enormous impact on the retirement planning industry, and many financial advisors are being forced to restructure their business model and pony up additional money to ensure that they remain compliant. But advisors can also use this change as an opportunity to land new clients that may leave advisors who previously only met the suitability standard for their transactions. Many firms can stay ahead by recreating themselves to embrace the fiduciary standard and provide clients with top-notch services and transparency. Firms that fail to do this may find themselves falling behind in the race for new clients. (For related reading, see: How Human Advisors Can Compete With Robo-Advisors.)
The advent of robo-advisors is one of the biggest developments in the financial industry in recent years. These automated platforms can provide basic investment management to consumers at a fraction of the cost of most human advisors. But they have some limitations, and many advisors are choosing to employ these programs in their practices in order to more effectively scale their businesses and devote more time to dealing with the human element of their business. They’re also using them to perform more specialized transactions, such as working with stock options or buy-sell agreements. Many advisors are also adding additional services such as a free financial plan for their clients in order to add value and justify their fees.