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Retirement

What’s the difference between an IRA and a Roth IRA?

By | Financial Literacy, Retirement

Common financial wisdom tells us that as a paid member of the American workforce, you should contribute the maximum to your 401(k), 403(b), 457(b) or similar retirement plan, especially if your organization matches a percentage of your contributions.

But not every company has one of these plans. As an individual taxpayer with earned income, you have other options available to you in order to save for retirement, including the IRA or “Individual Retirement Account.”

An IRA is a type of account which acts as a shell or holder. Within the IRA, you can invest in many different types of assets—you have far more choices than your company 401(k)’s short list of fund options. You can choose between CDs, government bonds, mutual funds, ETFs, stocks, annuities—almost any type of investment available. You can open an IRA account at a bank, brokerage, mutual fund company, insurance company, or some may be opened directly online.

The question is, should you open your IRA as a traditional IRA or a Roth IRA? Your decision should be based on your income as well as your current and future tax situation, because both Roth IRAs and traditional IRAs are retirement savings and investment vehicles subject to different IRS rules.

Here’s a basic overview of how a Roth compares to a traditional IRA:

 

+ The biggest difference between Roth versus traditional IRA retirement accounts is that Roth IRA contributions are made with post-tax dollars, while traditional IRA contributions are typically made with pre-tax dollars. This gets accounted for on your tax return in the year you choose to make the contribution. You have until the April 15 tax deadline to open or contribute to either type of IRA.

+ When you begin taking money out of these two types of accounts for retirement, traditional IRA distributions are treated as ordinary income and taxed accordingly, while Roth IRA distributions are usually taken out tax-free, because you already paid income taxes on the money before you invested it.

Essentially, with a Roth IRA, your interest, dividends and capital gains which accumulate inside it are tax-free as long as you follow all Roth IRA withdrawal rules.

+ Roth IRAs have income restrictions that may disqualify higher-income people from participating; traditional IRAs do not.

For instance, in order to contribute to a Roth IRA for 2019, single tax filers must have a modified adjusted gross income (MAGA) of less than $137,000 (contributions are phased out starting at $122,000), while the MAGA limit for married filers is $203,000 (with contribution phase outs starting at $193,000).

+ The annual maximum contribution limits for both traditional IRAs and Roth IRAs are the same. For 2019, you can contribute up to $6,000, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year.

If married, you can contribute up to that amount for yourself in your own IRA, plus up to that amount in a separate IRA for your non-working or low-earning spouse subject to certain restrictions.

If you are eligible to contribute to both types of IRAs, you may divide your contributions between a Roth and traditional IRA. However, your total contribution to both IRAs must not exceed the total limit for that tax year (including the catch-up contribution if you’re age 50 or over).

+ With Roth IRAs, there is no age limit on contributions. With traditional IRA accounts, you can no longer contribute starting the year you reach age 70-1/2.

+ Roth IRA contributions have never been deductible on your taxes, but contributions to a traditional IRA may be deductible on federal and state tax returns, lowering your taxable income for the year, depending on your tax status and whether or not you or your spouse contributes to a plan through work such as a 401(k).

If you do participate in a plan at work like a 401(k), and if your income is less than $74,000 for an individual or $123,000 for joint filers, your traditional IRA may still be fully tax deductible for 2019.

NOTE: Even if you have a high income, a non-tax-deductible traditional IRA still may be opened for you or your spouse.

+ Both traditional IRA and Roth IRA contributions may make you eligible for a “saver’s tax credit” if your income is low enough. The 2019 AGI (adjusted gross income) limits for the saver’s credit are $32,000 for single filers and $64,000 for married couples filing jointly.

+ Roth IRA accounts are not subject to annual RMDs, or Required Minimum Distributions, which are required for traditional IRA accounts starting at age 70-1/2. The amounts withdrawn are subject to ordinary income tax based on your tax bracket for the year.

+ Roth IRA withdrawals:

When it comes to withdrawing money, you can withdraw your Roth IRA contributions at any time, at any age with no penalty as long as the account has been in place for five years, so your Roth IRA can double as your emergency fund.

However, if you withdraw Roth IRA earnings prior to reaching age 59-1/2, you may have to pay income taxes on them, with some exceptions, such as first-time homebuyer expenses up to $10,000. Qualified education and hardship withdrawals may also be available before the age limit and without the five-year waiting period, but you may have to pay tax on any amount that was attributed to earnings.

Remember, with a Roth IRA, there are no RMDs. If you don’t need the money, you’re not required to withdraw any money from your Roth IRA at all, and it can pass to your heirs with tax advantages, although beneficiaries will be subject to RMDs.

+ Traditional IRA withdrawals:

Traditional IRA withdrawals come with a 10% tax penalty before age 59-1/2, plus ordinary income taxes will be due on the amount withdrawn.

Certain exceptions to the tax penalty on early withdrawals may apply, you may withdraw up to $10,000 to pay for some hardships, health care, disability or higher education expenses, or to make a down payment on your first home. NOTE: Although there may not be a penalty, you will still have to pay income taxes on the withdrawal.

With traditional IRAs, RMDs start at age 70-1/2 whether you need the money or not, and you have to pay ordinary income tax on the amounts withdrawn each tax year. There is no grace period to April 15; you must withdraw the money each year by midnight on December 31 or pay a 50% penalty plus taxes owed.

Additionally, beneficiaries must pay taxes on inherited traditional IRA accounts.

+ You can convert a traditional IRA to a Roth IRA, but strict rules apply. And be careful, because you have to pay income taxes on the money converted, and recent tax law changes mean you can’t undo this later.

+ If you are a business owner or have self-employment income, you may be eligible to set up a Simplified Employee Pension or (SEP) IRA, or a SIMPLE IRA (Savings Incentive Match Plan for Employees), depending on your company’s structure. You can usually contribute a lot more money to these plans than you can to traditional IRA or Roth IRA accounts.

+ One final note. It is very important for you to understand that the beneficiaries you name on your 401(k), 403(b), 457(b), traditional IRA, Roth IRA and insurance policies take precedence over your estate documents. That’s why it’s critical to make sure that your beneficiaries are always kept up-to-date.

 

If you have any questions about this information, or want to review or update your current financial or retirement planning documents, we can help. Contact Bulwark Capital Management at 253.509.0395. Our headquarters are located in Silverdale, Washington.

 

This article is for informational purposes only and is not intended to provide any individual with tax or financial advice. We encourage you to consult with your tax professional, financial advisor or attorney to discuss your personal situation. It’s also important to keep in mind that Congress can change the rules regarding these accounts at any time. The regulations may be very different when you retire.

Sources:
“What Is an IRA and How Many Types Are There?” Thebalance.com. https://www.thebalance.com/what-is-an-ira-and-how-many-types-of-iras-are-there-2388700 (accessed May 8, 2019).
“Traditional IRA vs. Roth IRA,” RothIRA.com. https://www.rothira.com/traditional-ira-vs-roth-ira (accessed May 8, 2019).
“Roth IRA vs. Traditional IRA: What’s the Difference?” Investopedia.com. https://www.investopedia.com/retirement/roth-vs-traditional-ira-which-is-right-for-you/ (accessed May 8, 2019).
“Saver’s Tax Credit Qualifications for 2018 & 2019,” 20somethingfinance.com.  https://20somethingfinance.com/savers-tax-credit/  (accessed May 9, 2019).

 

 

Social Security Taxation

Are your Social Security benefits taxable?

By | Retirement, Social Security, Tax Planning | No Comments

The answer is: Yes, sometimes.

If you don’t have significant income in retirement besides Social Security benefits, then you probably won’t owe taxes on your benefits. But if you have large amounts saved up in tax-deferred vehicles like 401(k)s, you could be in for a surprise later.

AGI (Adjusted Gross Income) versus Combined Income.

You are probably familiar with what AGI, or adjusted gross income, means. To find it, you take your gross income from wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts and other taxable income, like unearned income, that must be reported on tax returns.

(Unearned, taxable income can include canceled debts, alimony payments, child support, government benefits such as unemployment benefits and disability payments, strike benefits, lottery payments, and earnings generated from appreciated assets that have been sold or capitalized during the year.)

From your gross income amount, you make adjustments, subtracting amounts such as qualified student loan interest paid, charitable contributions, or any other allowable deduction. That leaves you with your adjusted gross income, which is used to determine limitations on a number of tax issues, including Social Security.

Combined Income is a formula used after you file for your Social Security benefits.

Whether or not your Social Security benefits are taxable depends on your combined income each year, which is defined as your adjusted gross income (AGI) plus your tax-exempt interest income (like municipal bonds) plus one-half of your Social Security benefits.

The IRS provides a worksheet for this. (See the worksheet here: https://www.irs.gov/pub/irs-pdf/p915.pdf#page=16)

If your combined income exceeds the limit, then up to 85% of your benefit may be taxable. But in accordance with Internal Revenue Service (IRS) rules, you won’t pay federal income tax on any more than 85% of your Social Security benefits.

What are the combined income limits?

Social Security benefits are only taxable when your overall combined income exceeds $25,000 for single filers or $32,000 for couples filing joint tax returns.

If you file a federal tax return as an “individual” and your combined income is:

  • Between $25,000 and $34,000 – you may have to pay income tax on up to 50% of your benefits.
  • More than $34,000 – up to 85% of your benefits may be taxable.

If you file a “joint” return, and you and your spouse have a combined income that is:

  • Between $32,000 and $44,000 – you may have to pay income tax on up to 50% of your benefits.
  • More than $44,000 – up to 85% of your benefits may be taxable.

RMDs (Required Minimum Distributions) can be an unwelcome surprise.

Starting at age 70-1/2, you are required to start taking money out of your tax-deferred accounts, whether you need the income or not. These accounts include:

  • Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • Rollover IRAs
  • Most 401(k) and 403(b) plans
  • Most small business retirement accounts

There are precise formulas for calculating how much you have to withdraw each year based on the IRS Uniform Lifetime Table. If you miscalculate, or if you or your plan administrator fail to move the money by December 31, you could face a 50% tax penalty; there is no grace period to April 15.

NOTE: The table goes up to age 115 and beyond. You can find the IRS life expectancy table as well as an IRS worksheet for calculating RMDs here: https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

Simplified RMD example for illustrative purposes only:*

Let’s say you are single, age 72, and you have one qualified account—$400,000 was the value of your 401(k) plan as of December 31 last year. You divide $400,000 by your life expectancy factor of 25.6 which give you $15,625.

This is the amount that you have to take out of your 401(k), which will count as part of your AGI.

Simplified Combined Income example for illustrative purposes only:*

To continue with our simplified example, let’s say you, our 72-year-old single person above, receives $2,800 per month in Social Security ($33,600 per year) and you don’t have any other source of income besides the RMD taken from your 401(k) account as illustrated above.

Based on the combined income formula:

AGI = $15,625

+ Non-taxable interest = $0

+ Half of Social Security = $16,800

__________________________________________

Your total combined income is = $32,425   

Because you are over the combined income limit of $25,000 for an individual, but less than the $34,000 which would require 85%, you would pay taxes on 50% of your Social Security benefit.

###

At Bulwark Capital Management, we provide retirement planning and Social Security benefit optimization, and we work in conjunction with your CPA or tax professional to help you consider taxes and how to minimize them as part of your overall retirement plan. Call us at
253.509.0395.

* This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local taxes or penalties. The information in this article is provided for general education purposes only. Do not rely on this information for tax advice. Check with your CPA, attorney or qualified tax advisor for precise information about your specific situation.

Sources:

https://www.investopedia.com/ask/answers/013015/how-can-i-avoid-paying-taxes-my-social-security-income.asp

https://www.investopedia.com/terms/t/taxableincome.asp

https://smartasset.com/retirement/how-to-calculate-rmd

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

Top 5 Things Baby Boomers Should Know

By | Retirement | No Comments
  1. The Social Security COLA (cost of living adjustment) in 2019 will be 2.8%.

This is the largest COLA increase from the Social Security Administration since 2012.1

  1. Social Security benefits are often taxed.

If you work and are at full retirement age or older, you can earn as much as you want and your benefits will not be reduced; however, you may have to pay taxes on them. If your annual combined income is from $32-$44,000 filing jointly, you may have to pay taxes on 50% of your benefits. If your income is more than $44,000 filing jointly, then you may have to pay taxes on up to 85% of your benefits.2

Social Security calculates “combined income” by adding one-half of your Social Security benefits to your other income.2

  1. RMDs can have a profound effect on taxes.

Many people forget that RMDs (Required Minimum Distributions) begin at age 70½. You are required by the IRS to start withdrawing money annually from your 401(k)s, traditional IRAs and other tax-deferred accounts using a precise formula, and you must do so by December 31st of each year or owe the income tax plus a 50% penalty.

Since you’ve never paid taxes on this money, you will owe income tax on your withdrawals based on your tax bracket for the year, and the income from your withdrawals are added in to the combined income amount that Social Security calculates. Some Baby Boomers are shocked at the amount of income tax they will actually owe, and come to the realization that their nest egg is actually much less than they thought.

RMDs, tax planning and income planning are the major reasons having a retirement plan in place is so important.

  1. Medicare isn’t free.

Not only is Medicare not free, but the premiums are usually deducted from your Social Security check.

Medicare health and drug plan providers often make changes to their policies each year, including changes to costs, coverage, deductible and coinsurance amounts, and what pharmacies and providers are in their network, so it pays to do your homework every year. Medicare Open Enrollment runs from October 15 through December 7, and this is your opportunity to make new choices and pick plans that work best for you; changes made are effective as of January 1, 2019.

During Medicare Open Enrollment you can sign up for a Medicare Prescription Drug (Part D) Plan, switch plans, drop your Part D coverage altogether, switch from Original Medicare to a Medicare Advantage plan or select a Medicare Advantage plan from another provider.

You should review drug costs because the prices of some brand-name drugs could be lower next year. As part of the recent tax plan changes, some drug manufacturers will pay more of the costs for enrollees in the drug coverage gap (also known as the “donut hole”) starting in 2019.3

  1. Everyone should have an estate plan

Estate plans are for the people you leave behind when you pass away. Here are some things you should be aware of:

  • An estate plan helps ensure your final wishes get carried out, and also let your family, trustees and health care providers know what your wishes are in terms of finances, possessions and end-of-life health desires.
  • Having a trust in place usually allows your estate to avoid probate court and keeps your finances private.
  • A will allows you to name guardians for minor children and to specify how possessions will be distributed. But if you have only a will in place, your estate will have to go through probate court, which could be a lengthy and costly process for your heirs. Probate also leaves your finances open to public scrutiny.
  • Beneficiaries you have named on individual life insurance policies, 401(k)s and other financial accounts take precedence over your estate planning documents. There have been cases where a former spouse has received financial benefits that weren’t intended, simply because the beneficiaries were never changed on individual accounts. Make sure you review and make updates to all documents on a regular basis.
  • The estate tax exemption, which was doubled by the latest tax legislation to $22.36 million per couple until 2025, means that you should investigate to see if or how you might be able to take advantage of the favorable tax laws while they exist.4

 

For more information about these issues as well as many other retirement issues, please call Bulwark Capital Management in Silverdale, Washington at 253.509.0395 or email us at invest@bulwarkcapitalmgmt.com.

 

Sources:
1 “Social Security Benefit to Increase 2.8 Percent in 2019,” AARP.org. https://www.aarp.org/retirement/social-security/info-2018/new-cola-benefit-2019.html (accessed October 16, 2018).
2 “Benefits Planner | Income Taxes And Your Social Security Benefit,” SSA.gov. https://www.ssa.gov/planners/taxes.html  (accessed October 16, 2018).
3 “Medicare ‘Doughnut Hole’ Will Close in 2019,” AARP. https://www.aarp.org/health/medicare-insurance/info-2018/part-d-donut-hole-closes-fd.html (accessed October 9, 2018).
4 “How the new tax law upends estate planning,” Financial-planning.com https://www.financial-planning.com/news/how-the-new-tax-law-changes-estate-planning-trusts-income-tax-planning  (accessed October 17, 2018).

Resist Tapping Into Your 401(k), Employer-Sponsored Plan If You Can

By | Financial Planning, Retirement | No Comments

‘Leakage’ can erode assets and negatively impact your retirement wealth

If you find it difficult to save or pay for big financial emergencies when they arise, tapping into a pot of money can be tempting – even if it’s your 401(k)-style employer-sponsored plan.

But if you’re able to resist, rewards do come from the power of compounding. The problem, though, is that a small percentage of Americans take early withdrawals and withdrawals after age 59½ from their 401(k)s each year or cash out of their plan when they switch jobs.

A large percentage – typically about 20% of plan participants – have loans outstanding. They’ve used loans from their 401(k) to, among other things, pay down high interest credit card debt, make home improvements, buy a home or refinance a mortgage, or pay outstanding bills. Some don’t repay the outstanding loans they’ve taken, however.

This “leakage” – as the industry refers to it – has financial consequences. For example, the remaining balance of policy loans that aren’t repaid because of a job loss or default may be treated as a lump sum distribution and subject to income taxes and the 10% penalty tax. Moreover, a lower account balance due to leakage means less money in retirement.

An analysis by Alicia H. Munnell and Anthony Webb at Boston College’s Center for Retirement Research compared some scenarios. They found that the 401(k) wealth of a 60-year-old plan participant who began contributing at age 30 could be reduced by about 25% because of leakage compared to a participant who didn’t withdraw, cash out or fail to repay loans. The reduction in plan wealth was similar – 23% – for an individual who rolls over money from a 401(k) plan three times during his or her career with the initial rollover into an Individual Retirement Account (IRA) at age 30.  (The research, published in 2015, includes a few assumptions such as contribution rates, employer match and annual investment return rates. You can find more details here 1.)

The good news is that employers are focusing on decreasing leakage and many are turning to financial wellness programs to improve employee financial behaviors, according to Fidelity Investments. And loan usage has been trending lower in recent years, according to Fidelity’s second quarter analysis of retirement plan accounts.

That analysis found that the percentage of employees with a 401(k) loan fell to 20.5%, its lowest percentage since 2009’s second quarter when it was 19.9%. Among Gen X workers, who historically have the highest outstanding loan rate, the percentage dropped for the third straight quarter to 26.4%. The data is based on Fidelity’s analysis of 22,600 corporate defined contribution (DC) plans and 16.1 million participants as of June 30 2.

While participants may have good intentions for what those 401(k) loans are earmarked for, the loans could hold back participants from fully achieving their financial retirement goals. That’s because participants with outstanding loans might reduce their plan-saving amounts to pay off the loans, or stop saving altogether until the loan is paid off and they recommit to deferring some of their salary to their 401(k)s.

Kevin Barry, Fidelity’s president of workplace investing, noted that the stock market’s performance over the past several years has “definitely” helped retirement savers. But now would be a good time for investors to take a moment and make sure they’re doing their part to meet their retirement goals.

“Markets may go up and down, but there are a number of steps individuals can take, such as considering a Roth IRA, increasing your savings rate and avoiding 401(k) loans, which can play an important role in their long-term savings success,” Barry said, in a news release.

Now, indeed, is as good a time as any to connect with your retirement goals. Call us for a detailed financial and retirement income strategy session or overview that fits with your needs and goals.

We’re here to help you stay on track!  Call Bulwark Capital Management in Silverdale, Washington at 253.509.0395 or email us at invest@bulwarkcapitalmgmt.com.

 

 

Sources:
1 “The Impact Of Leakages On 401(k)/IRA Assets,” Alicia H. Munnell and Anthony Webb. Boston College’s Center for Retirement Research, February 2015. http://crr.bc.edu/wp-content/uploads/2015/02/IB_15-2.pdf
2 “Fidelity Q2 Retirement Analysis: Account Balances Rebound, While Auto Enrollment Continues to Drive Positive Savings Behavior,” Fidelity Investments, August 16, 2018. https://www.fidelity.com/about-fidelity/employer-services/fidelity-q2-retirement-analysis-account-balances-rebound

7 Things You Should Know About Medicare Before You Retire

By | Retirement | No Comments

It’s important to understand the facts about Medicare before heading into retirement. Here is a basic overview of seven things you should be aware of when it comes to this important federal health insurance benefit. But keep in mind that certain parts of the Medicare program vary by state, so you will want to get more in-depth information before you turn 65 based on your primary retirement residence.

  1. It’s not free.

Even though studies have shown that Medicare is cheaper than most health plans offered by private insurers, it still does not cover all health costs when a person retires. In some cases, Medicare is one of the largest expenses for retired individuals. A retired couple aged 65 in 2018 may need an average of $280,000 to cover Medicare expenses (not including over-the-counter medications, most dental services, or long-term care) according to Fidelity Investments.1

  1. There is no out-of-pocket annual or lifetime limit.

When it comes to Medicare, there is no yearly or lifetime out-of-pocket maximum. In addition to deductibles, for Medicare Part B retirees usually pay at least 20% coinsurance for approved costs, regardless of how high the costs may be.

  1. The four parts of Medicare.

The “alphabet soup” of Medicare consists of four separate parts: A, B, C, and D.

Part A: This part is sometimes called “original” Medicare, and is basically hospitalization insurance. It covers inpatient care, short stays at skilled nursing facilities, hospice stays, lab tests, surgery, doctor visits and home health care related to a hospital stay. Part A is usually free.

Part B: Part B is the medical insurance portion of “original” Medicare coverage. It covers outpatient care, doctor’s office visits, lab work, preventative services, ambulance services, and medical equipment. The standard premium for 2018 is $134 per person, per month, but premiums are higher for people in higher income brackets.

Part C: This optional part refers to Medicare Advantage plans. Medicare Advantage is not a separate benefit, but is used for private health insurers that provide Medicare benefits. Part C plans replace Parts A and B, and usually replace Part D (optional).

Medigap: Sometimes called Medicare supplement insurance, Medigap is not a Part C plan. Medigap policies do not replace Parts A and B, in fact, Parts A and B are required in order to have it. Medigap is private insurance that helps supplement or pay some of the costs not covered by Parts A and B, which may include copayments, coinsurance, and deductibles. There are many rules which apply to Medigap, and plans are standardized by state.

Part D: This optional part provides prescription drug coverage. A person is eligible for Part D if they are enrolled in Part A and B, or Part C replacement coverage (which may include Part D coverage.) Part D coverage varies by plan and types of prescription drugs.

  1. Medicare does not cover everything.

The question in regard to Medicare is not what is covered, but what is not covered. Parts A and B of Medicare do not cover the following:

  • Amounts not covered by deductibles and coinsurance (20%), with no limits
  • Care outside of the U.S.
  • Eye exams (except for diabetics), vision care or eyeglasses
  • Hearing exams or hearing aids
  • Most dental care services or dentures
  • Routine foot care (except for diabetics)
  • Limited physical therapy, occupational therapy, speech pathology services
  • Long-term care (LTC) or custodial care

Some Part C or Medigap plans may offer some coverage for these, depending on the policy or plan.

  1. Medicare is mandatory.

Once you are 65 and receive Social Security there is no way to opt out of Medicare.

  1. When to sign up for Medicare.

An individual must sign up for Medicare within three months after they turn 65 years old, unless they are covered by an employer plan (subject to certain rules.) If a person is already receiving Social Security benefits when they turn 65, they will automatically be enrolled in the original Medicare plan Parts A and B.

  1. How Medicare is deducted.

Medicare Parts A and B are automatically deducted from a Social Security check if the individual is 65 and receiving Social Security benefits. Coverage begins the first month that an individual turns 65-years-old. Medicare Part B premiums must be deducted from Social Security if the monthly benefit amount covers the deduction. If deduction exceeds the benefit amount then the individual will be billed quarterly. Optional plans like Part C, Medigap or Part D may have other payment options, or may also be deducted from Social Security.

Sources:

This overview has been compiled from information sourced from the official Medicare website, https://www.medicare.gov/. Please visit the site for more information.

1 Fidelity Investments, “How to plan for rising health care costs,” April 18, 2018. Fidelity.com. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs (accessed August 7, 2018).