Category

Retirement

Your Year-End Financial Checklist

By | Financial Planning, Retirement, Tax Planning

The end of the year can help remind us of last-minute things we need to address as well as the goals we want to pursue and get serious about. To that end, here are some aspects of your financial life to contemplate as this year leads into 2022. 

Your investments. Set up a meeting to review your investments with your financial professional. You’ll want to come away from the meeting with an understanding of your portfolio positions and a revisit of your asset allocation based on your age, desires and personal circumstances. Remember, asset allocation and diversification are approaches to help manage investment risk, they do not guarantee against stock market drops or equities losses. Make sure your portfolio reflects your desire for protection and safety as well as growth.

Your retirement strategy. You may want to consider contributing the maximum to your retirement accounts—this may be a great time to decide on making catch-up contributions if you are 50 or older. It’s also a good idea to review any retirement accounts you may have through your work to see if your selections are still suitable for you. If you are getting close to retirement, you’ll want to start considering your Social Security filing strategy in advance, since that will dovetail with your overall retirement income plan.

Your tax situation. It’s a good idea to check in with your tax or legal professional before the year ends, especially if you have questions about an expense or deduction from this year. Also, it may be a good idea to review any sales of property as well as both realized and unrealized losses and gains. Look back at last year’s loss carryforwards. If you’ve sold securities, gather up cost-basis information. As always, bringing all this information to your financial professional as well as your tax professional is a smart move.

Your charitable gifting goals. Plan charitable contributions or contributions to education accounts and make any desired cash gifts to family members. The annual federal gift tax exclusion allows you to give away up to $15,000 in 2021, meaning you can gift as much as $15,000 to as many individuals as you like this year. Such gifts do not count against the lifetime estate tax exemption amount, as long as they stay beneath the annual federal gift tax exclusion threshold. Besides outright gifts, you can explore creating and funding trusts on behalf of your family. The end of the year is also a good time to review any trusts you have in place. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, it’s important to work with a professional who is familiar with the rules and regulations.

Your life insurance coverage. The end of the year is an excellent time to double-check that your policies and beneficiaries are up to date. Don’t forget to review premium costs and beneficiaries and think about whether your insurance needs have changed. Several factors could impact the cost and availability of life insurance, such as age, health, and the type of insurance purchased, as well as the amount purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, you may pay surrender charges, which could have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Finally, don’t forget that any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Life events. Here are some questions to ask yourself when evaluating any large life changes in the last year: Did you happen to get married or divorced this year? Did you move or change jobs? Did you buy a home or business? Was there a new addition to your family this year? Did you receive an inheritance or a gift? All these circumstances can have a financial impact on your life as well as the way you invest and plan for retirement and wind down your career or business.

Keep in mind, this article is for informational purposes only and is not a replacement for real-life advice. Make certain to contact a tax or legal professional before modifying your tax strategy. The ideas presented are not intended to provide specific advice.

If you would like to discuss your year-end checklist items, please give us a call. You can reach Bulwark Capital Management at 253.509.0395.

 

The Latest Facts About Social Security

By | Retirement, Social Security

On October 13, 2021, the Social Security Administration (SSA) officially announced that Social Security recipients will receive a 5.9 percent cost-of-living adjustment (COLA) for 2022, the largest increase in four decades. This adjustment will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2022. Additionally, increased payments to more than 8 million Supplemental Security Income (SSI) beneficiaries will begin on December 31, 2021.

 

Biggest COLA Increase in Decades?

While many predicted a bump of as much as 6.1% given recent movement in the Consumer Price Index (CPI), the announced 5.9% increase is still substantial. Some fear that rising consumer prices may dilute the impact of the increase with inflation currently running at more than 5 percent. While this remains to be seen, Social Security beneficiaries will no doubt welcome the largest adjustment since 1982.

 

How You Will Be Notified.

According to the Social Security Administration, Social Security and SSI beneficiaries are usually notified about their new benefit amount by mail starting in early December. However, if you’ve set up your SSA online account, you will also be able to view your COLA notice online through your “My Social Security” account.

 

Is it Enough?

For years organizations like the AARP have pointed out that the index used to calculate inflation—the CPI-W, a consumer price index that reflects the increasing cost of goods for urban wage earners—does not reflect the inflation on goods and services needed by the elderly, such as health care. In July, a bill titled “Fair COLA for Seniors Act of 2021” was introduced which would require the Consumer Price Index for the Elderly (CPI-E) be used when Social Security calculates their annual COLA (Cost of Living Adjustment).

 

Is Social Security Going Broke?

Per the Washington Post, each year, the Social Security Board of Trustees releases a report that analyzes the current and projected financial health of Social Security and Medicare. This year, the trustees found that: “The finances of both programs have been significantly affected by the pandemic and the recession of 2020.”

The trustees now project the Old-Age and Survivors Insurance (OASI) Trust Fund will be insolvent in 2033. What this means there will be enough income to pay out only 76 percent of scheduled payments.

One solution often debated is getting rid of the income threshold for the Social Security payroll tax. In 2021, the maximum taxable earnings subject to the Social Security tax is $142,800. Earnings above the maximum are not subject to the tax, which is 6.2 percent for employees and a matching 6.2 percent for employers. (NOTE: Even though many do not pay in, very few high-earners decline to file for Social Security payments.)

There’s no income cap for the Medicare tax, which is 2.9 percent. (Employers pay 1.45 percent, and employees cover the other half.)

A Gallup poll this year found that 38 percent of U.S. adults not yet retired thought Social Security would be a major source of their income, but the reality is that 57 percent of retirees rely on Social Security as their main source of income.

 

Your Next Steps?

If this information about Social Security surprises or concerns you, it’s always a good idea to seek guidance from your financial professional about changes to any of your sources of retirement income. We welcome the chance to talk with you about this. You can reach Bulwark Capital Management at 253.509.0395.

 

 

Sources:

https://www.ssa.gov/cola/#:~

https://www.cbsnews.com/news/social-security-benefits-cola-cost-of-living-2022-increase/

https://www.forbes.com/sites/davidrae/2021/07/21/will-congress-change-social-security-cost-of-living-adjustment-is-calculated/?sh=21dd13ca373c

https://www.washingtonpost.com/business/2021/09/03/social-security-insolvency/

https://www.latimes.com/business/story/2019-12-03/social-security-wealthy-benefits

 

 

 

What To Do If You’ve Lost a Retirement Account

By | Retirement

A recent study found that the problem of “forgotten 401(k)” and pension accounts is widespread, and amounts to approximately 24 million accounts containing $1.35 trillion in assets. The issue is so big that Congress is considering creating a national online “lost-and-found” database to help people track down their accounts as part of a larger bill containing more benefits and protections for retirees: the “SECURE Act 2.0” as some are calling it.

But until legislation is passed, you will be on your own when it comes to finding your lost retirement money. Whether you changed jobs and forgot about your old plan or your spouse passed away with you unaware of their old accounts with former employers, here are some things you can do.

  1. Search your paper files

Old retirement account statements can provide account numbers and plan administrator contact information to give you a good place to start.

  1. Contact former employers’ human resources departments

If you can’t locate any statements, try reaching out to the HR departments at former employers. You should have dates of employment in hand as well as your Social Security number, and you will need to prove your identity. If you are searching for a deceased spouse’s account, you may have to provide a death certificate or other evidence. Remember, a good HR department knows that they need to protect confidential information and will do so.

  1. If an old employer is no longer in existence

Your 401(k) balance is protected from creditors if an old employer filed for bankruptcy and is likely still at the investment company that administered the plan. By federal law, all 401(k) money must be held in trust or in an insurance contract, separate from the employer’s business assets.

If you are unable to reach the plan administrator, contact the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) toll-free at 1-866-444-3272.or go to their website at https://www.dol.gov/ebsa/.

  1. Search your state’s treasury department

Based on the state where you worked, it’s possible that your former employer turned over your 401(k) balance to that state’s unclaimed property fund. Often state treasury departments have online search tools to help you find money that is considered your “unclaimed property” in the form of bank account or retirement assets. You will have to fill out forms and provide proof of identification.

  1. Try a privately-owned online search tool

A service called the “National Registry” is a national database listing of unclaimed retirement plan account balances used by some employers. It is owned by a firm called PenChecks, Inc. located in La Mesa, California: https://unclaimedretirementbenefits.com/.

  1. If you’ve lost track of a pension

If you have lost track of a pension held by a former employer, you can request a pension benefits statement from your plan administrator. If that employer no longer exists, the pension may have been taken over by an insurance company or PBGC, the federal Pension Benefit Guaranty Corp. You can track down your pension at: https://www.pbgc.gov/search-all.

  1. Detailed work history

If you need to prove your work history and eligibility for your pension and have lost old W-2 forms, you can request a detailed earnings statement from Social Security by using Form SSA-7020.

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Conclusion

We often recommend that you not leave money in a former employer’s 401(k) plan for the simple reasons that you may lose track of it and your money will not be in your control. If you are working, you can roll over the funds into your current employer’s existing 401(k) plan, or you can roll it over into your own IRA (Individual Retirement Account) which can be invested in many different ways.

Beginning at age 59-1/2, your company 401(k) plan may even allow an “in-service rollover” of part of your 401(k) money to your own IRA.

This article is provided for informational purposes only and is accurate to the best of our knowledge. It is not to be construed as financial or retirement advice. Please contact us if you need individualized help with examining your personal rollover options based on your unique situation.

 

Do you have questions? Call us! You can reach Bulwark Capital Management at 253.509.0395. 

 

 

Sources:

https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/

https://www.kiplinger.com/retirement/retirement-plans/602821/secure-act-2-10-ways-the-proposed-law-could-change-retirement-savings

https://www.kiplinger.com/retirement/retirement-plans/401ks/603334/how-to-find-a-lost-retirement-account

Retirement Saving at Each Age

By | Financial Planning, Retirement

While it’s true that each person is unique and every financial plan should be customized according to their situation, it is generally accepted that people should start saving for retirement early in their lives so they can take advantage of compounding returns.

Here is some general information and things to consider about saving for retirement for each age group.

Gen Z

Roth IRA accounts. As soon as children or grandchildren have earned income, either you or they can open and contribute to a Roth IRA (Individual Retirement Account) in their name. Roth IRA contributions can’t exceed the child’s earned income and the maximum amount that can be contributed for the year is $6,000 for 2021. The benefit is that Roth accounts grow tax-free as long as all IRS rules are followed. After the account has been open for five years, any amount contributed can be borrowed or taken out for any reason without any taxes or tax penalties due. (But Roth IRA account earnings—meaning returns or interest credited—can’t be taken out before age 59-1/2 without a 10% penalty.) That means your child could have a very flexible way to borrow for college, down payment on a house or any other purpose—including retirement—later on.

Permanent life insurance. Another option to help children, teens and young adults save for retirement is permanent life insurance. New types of life insurance policies can be a tax-advantaged way to save and borrow later from the policy for retirement, college or any other purpose. Often the cost of insurance is very low for healthy young people.

Gen Y

Workplace retirement plans. People in their mid-20s to 40s are often pursuing careers where their employers provide 401(k) or similar retirement plans with a “match” for contributions. One rule of thumb says to max out pre-tax contributions during these years up to the maximum match by your employer; you get the added benefit of lowering your taxable income.

Traditional IRA accounts, Roth IRAs, permanent life insurance, investment portfolios. For those who don’t have a workplace retirement plan, or for those that want to invest beyond their employer’s group retirement offering, traditional pre-tax IRAs are available depending on your income level while providing a tax write-off, while tax-advantaged Roth IRAs and permanent life insurance can offer other benefits. Once you reach the maximums on retirement savings, you may want to begin to invest in stocks and bonds, forming your first investment portfolio. If possible, hire a financial professional to help you create a complete financial plan which can be updated and reviewed every year.

Gen X

Save, invest, and save some more. People in their 40s and early 50s can be sandwiched between providing for their older children’s expensive needs—like transportation, health care and college—while caring for their parents as they get older. Yet it is incredibly important for Gen X to begin to maximize their retirement savings. All of the possibilities discussed for younger ages also apply to Gen X, and after age 50, you can contribute $7,000 per year ($1,000 extra) to an IRA or Roth IRA in 2021, depending on your income and IRS rules. Some permanent life insurance or deferred income annuity products can allow you to save for retirement while providing other optional benefits like disability, long-term care insurance or spousal protection should you need it. Find efficient ways to pay for your kids’ college, and as you make more money, use it for retirement investing while keeping your spending on housing, automobiles and similar items as low as you can. Work closely with your financial professional to make sure you are on track to achieve your retirement goals.

Baby Boomers

How much money will you need to retire? If you are 55 or older, it is probably time to get serious about what you want your retirement lifestyle to be so that you can get some idea of what kind of retirement savings you will need to support yourself after you are no longer receiving a paycheck. For instance, someone who wants to do a lot of international traveling will need a lot more saved than someone who plans to stay close to home during retirement. Retirement planning is essential, since pulling money out of your portfolio is much different than putting money in as you have been used to. Make sure your financial professional is focused on retirement; retirement planning is a distinct specialty.

Claiming Social Security. It’s time to start learning about Social Security. The Social Security Administration recently changed the design of your statement to show you how much your benefit will be at the earliest time you can file (age 62), at full retirement age (around age 66 or 67 depending on your birth year) and at age 70, when your benefit amount stops growing. You can obtain your latest statement here. Important: Remember that Medicare is not free; premiums come out of your Social Security check.

Consider taxation. Remember that if you have the majority of your retirement savings held in taxable accounts like traditional 401(k)s, you will owe income taxes on that money. Depending on your tax bracket, your savings may actually be from 22% to 35% less after you pay income taxes. As an example, someone with $500,000 saved for retirement may actually only have $385,000 if they are in the 23% tax bracket. Current tax law requires you to start withdrawing money and paying income taxes on taxable, tax-deferred retirement accounts every year beginning at age 72. Start working with your financial professional early, because there may be ways to save on taxes for the long-term using strategies over the five to 10 years preceding retirement.

Multigenerational Wealth

As part of retirement planning, it is important that each member of the family works together for tax-efficient wealth transfer in the future, minimizing the chance for strife, confusion or excess taxation during family transitions or adverse events. New legislation—the SECURE Act—changed the rules about inherited traditional IRA accounts, and potential tax impacts should be addressed now rather than later.

The family that plans together, stays happy together, hopefully for the long-term. Whenever possible, everyone should be involved in financial, retirement and estate planning matters working hand-in-hand with a trusted financial professional, tax professional and estate attorney to document inheritance matters, final wishes, health care directives, wills and trusts.

If you have any questions about this article, please call us. We’re happy to help you and your family members. You can reach Bulwark Capital Management at 253.509.0395. 

It’s Annuity Awareness Month. How much do you know about annuities?

By | Financial Literacy, Retirement

Because June is Annuity Awareness Month, here is an overview about them.

Annuity product designs and types continue to evolve, primarily to meet the demands of people nearing retirement. In addition to their original purpose of providing retirement income, insurance companies have developed hybrid policies, adding features to address the multiple risks consumers face as they get older.

The most important thing you should know about annuities is that they are insurance policies, or contracts between you and an insurance company. Guarantees in them are backed by the financial strength and claims-paying ability of the issuing insurance company.

As with any contract, it’s important to read and understand the fine print before you sign, and you should compare policies from multiple insurance companies to find the best value. That’s where a good independent financial advisor can help.

Fixed Annuities

Fixed annuities are probably the easiest type of annuity to understand. (They are also the oldest—a simple form of the fixed annuity was originally created for Roman soldiers who grew too old to serve.) An insurance company will guarantee* a fixed interest rate on your fixed annuity contract for a selected term, usually from one to 15 years. You can usually purchase a fixed annuity with either a lump sum of money or a series of payments over time.

At the end of the contract term, you can take the money out, put it into another investment, or “annuitize,” meaning you can begin to take periodic payments over time to create income for retirement. This is called the “payout phase” of an annuity contract and it may last for a specified number of months, years, or be guaranteed* for as long as you live.

If you do choose to annuitize a fixed annuity policy, you can begin to receive periodic payments at once (called an immediate fixed) or you can wait until a certain age or time in the future to start receiving payments (called a deferred fixed).

If you purchase one of these annuities with non-qualified money (meaning you have already paid taxes on it), the interest in the annuity policy accrues on a tax-deferred basis. At the point where you take the money out of the annuity or begin taking periodic annuity payments, distributions are taxed based on an “exclusion ratio” so that you only pay taxes on the interest or gains.

If you purchase one of these annuities with qualified money, such as by rolling it over from a traditional 401(k) or IRA, distributions are 100% taxable, since you have not paid any taxes on any of the money yet. As with any qualified plan, if you take or withdraw money before age 59-1/2 you may owe additional tax penalties.

Variable Annuities

Variable annuities were developed in the 1950s. The best way to explain variable annuities is to compare them to fixed annuities. First of all, most variable annuities require a prospectus since part of your money will actually be invested in the stock market, called “sub-account investments.” That means that there is market risk involved with variable annuities, because you can either make money on the amount invested in sub-accounts, or you can lose it depending on market performance.

Variable annuities are usually purchased with the expectation that at some point the contract owner will annuitize or begin taking periodic payments. These are called deferred variable annuity contracts. (You can also purchase an immediate variable annuity contract.)

The important thing to understand about the variable annuity contract is that your periodic annuity payments may fluctuate based on stock market performance, depending on policy terms. And it’s possible that some variable annuity policies can lose principal due to stock market losses.

Variable annuities often come with a death benefit for your beneficiaries based on the contract terms, but some specify that there must be enough money left in the policy after annuitization payments have been taken out and/or will pay the death benefit as long as the sub-accounts have not lost too much money.

Fixed Indexed Annuities

Fixed indexed annuities were first designed in 1995. The biggest difference between them and variable annuities is that fixed indexed annuities are not actually invested in the stock market so they are not subject to market risk. With fixed indexed annuities, after you have owned the policy for a specified number of years your principal is guaranteed*.

With fixed indexed annuities, any policy gains are credited and then locked in annually, bi-annually or at specified points in time. The gains credited to the policy are determined by the insurance company based on the performance of a selected index (for instance, the S&P 500) or multiple indexes. Some fixed indexed annuity gains are capped relative to index performance, meaning you can only be credited a certain percentage, but some are uncapped.

Index performance is used as a benchmark for policy gains or periodic crediting and lock-in. With fixed indexed annuities, you have the potential to participate in market gains. And if the benchmark index loses money, your policy is credited with 0%, keeping the most current locked-in principal value in place.

Fixed indexed annuities can be purchased on an immediate or deferred basis. They can be purchased with qualified or non-qualified money. And they can offer a lifetime income option and/or a death benefit.

Other Things to Know About Annuities

*The guarantees provided by annuities rely on the claims-paying ability and financial strength of the issuing insurance company.

Annuities must be considered carefully based on your particular situation because they are not liquid. Almost all annuities are subject to early withdrawal penalties. Make sure you understand the contract terms and the type of annuity you are purchasing. Your financial advisor can help you compare and analyze policies.

This article is provided for information purposes only and is accurate to the best of our knowledge. This article is not to be relied on or considered as investment or tax advice.

Have questions about annuities? Please call us! You can reach Bulwark Capital Management at 253.509.0395. 

 

RMDs Are Back for 2021

By | Retirement, Tax Planning

RMDs, or Required Minimum Distributions, are withdrawals that are required by the IRS each year out of your traditional retirement accounts like 401(k)s and IRAs starting at age 72. The money that you have to take out annually by December 31st at midnight is taxed based on your income tax rate for that tax year.

Some retirees forget about RMDs when planning for retirement, and don’t realize how big the tax bite may be for them. This year, because of the pandemic, the CARES Act suspended the RMD for the 2020 tax year in an effort to help retirees avoid withdrawing money from accounts when the market was down.

(An RMD is calculated based on the closing balance of the account at the end of the previous year. When the markets drop significantly, the RMD represents a much higher percentage of a diminished portfolio and that reduces the ability to recover from big losses.)

In 2021, the RMD will be back. As an example, a 75-year-old man with a traditional IRA worth $100,000 will have to withdraw $4,367 this year.

Roth 401(k) Plans

Roth 401(k) plans, which are funded with after-tax dollars, are subject to the same RMD rules that traditional 401(k) and IRA plans are. The amounts are calculated using the same IRS life expectancy tables and account holders must begin taking them after they turn 72. (One exception is if you continue working after age 72 for the company that sponsors the plan and you don’t own more than 50% of the company.)

The difference is that Roth 401(k) withdrawals are usually not taxed.

You can avoid taking the minimum distributions entirely by rolling a Roth 401(k) into a personal Roth IRA, which is not subject to RMD rules.

2020 RMDs Without Penalty, But With Taxes

As part of the CARES Act, the IRS allowed COVID-related withdrawals from traditional retirement plans up to $100,000 without penalty in 2020 for those who were impacted by the pandemic. Income taxes were due on those withdrawals, which could be paid over a three-year period. Those who can afford to can pay the withdrawals back this year (or over a three-year period) can get the taxes back by filing amended tax returns.

Those Who Just Turned 72—It’s Complicated

The SECURE Act of 2019 raised the age when RMDs must begin to age 72. If you turned 70-1/2 in 2019, the old rules applied—your first RMD should have been due April 1st, 2020. However, because the CARES Act suspended RMDs, the new due date was April 1, 2021 for those individuals.

For retirees who turned 72 in 2020 or will turn 72 this year, you can take your RMD at any point in 2021, or even delay it up until April 1, 2022. But if you choose to delay it, you will owe two RMDs in 2022, which could put you into a higher tax bracket.

You should check with your tax professional before making decisions about RMDs, because there are strict rules about which accounts must be withdrawn from and stiff penalties for mistakes—to the tune of taxes owed plus an additional 50%!

 

To discuss your retirement plan, including RMDs, please call us. We are happy to discuss ideas with you and/or your tax professional. You can reach Bulwark Capital Management at 253.509.0395. 

 

This article is provided for educational purposes only and its content should not be relied upon for tax advice. As always, check with your tax professional or attorney for specific tax advice related to your situation.

Source:

https://www.cnbc.com/2021/03/01/required-minimum-distributions-on-retirement-plans-are-back.html

Roth Conversions

What is a Roth Conversion?

By | Retirement, Tax Planning

To understand what a Roth conversion is, you must first understand some of the basics about the different types of retirement accounts, called “qualified accounts.”

  • Pensions

Also called defined-benefit plans, pensions are paid for by employers. They have largely gone away for Americans in the private sector starting with the passage of three laws during the Reagan administration, the Tax Equity and Fiscal Responsibility Act passed in 1982, The Retirement Equity Act of 1984, and The Tax Reform Act and Single Employer Pension Plan enacted in 1986.

The lack of pensions is one reason why it’s important for people to create their own retirement income plans.

  • 401(k) Accounts

Defined-contribution plans, including 401(k)s and similar plans, rely on an employee to elect to contribute a percentage of their salary in order to save for retirement. Contribution amounts are usually taken out of an employee’s check on a “pre-tax” basis, and sometimes a company will add a “matching” amount based on the percentage the employee contributes, often based on an employee’s length of service.

A 401(k) plan generally has a limited list of fund choices. The maximum an individual can contribute to a 401(k) in 2020 is $19,500 per year, or $1,625 per month, not including the employer’s matching amount.

For traditional 401(k)s, no taxes are due on 401(k) accounts until the money is withdrawn. Ordinary income taxes are due upon withdrawal at the account owner’s current tax bracket rate, and withdrawals are mandatory starting at age 72. NOTE: Roth 401(k)s are available at some companies, and contributions for those are made on an after-tax basis.

  • Traditional IRA Accounts

An IRA—Individual Retirement Account—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 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.

For 2020, you can contribute up to $6,000 to an IRA, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year. Traditional IRA contributions are typically made with pre-tax dollars, which gets accounted for on your tax return in the year you choose to make the contribution. Depending on your income level, sometimes traditional IRA contributions can also be tax-deductible. Traditional IRA withdrawals are treated as ordinary income and taxed accordingly, and withdrawals are mandatory starting at age 72.

  • Roth IRA Accounts

Like a traditional IRA, a Roth IRA is a type of account which acts as a shell or holder for any number of different types of assets. The difference is that Roth IRA contributions are made with after-tax dollars.

Withdrawals are not mandatory for Roth IRAs, but you can withdraw funds tax-free as long as you follow all rules, which include having the account in place for at least five years. Those age 59-1/2 or older can withdraw any amount—including gains—at any time for any reason, and can also leave Roth IRA accounts to their heirs tax-free—beneficiaries just have to withdraw all the money within 10 years of the account holder’s death.

For people under age 59-1/2, as long as they have had their Roth IRA account in place for five years or longer, they can withdraw any amount they have invested at any time—but not the gains or earnings. If they withdraw the gains or earnings, they may have to pay ordinary income taxes plus a 10% penalty on those, with some exceptions, such as first-time homebuyer expenses up to $10,000, qualified education and hardship withdrawals, which may avoid the penalty but still require tax be paid on any amount attributed to earnings.

Roth IRAs offer the potential for tax-free retirement income as well as tax-free wealth transfer to heirs. 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.

For 2020, you can contribute up to $6,000 depending on your income, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year. However, Roth IRAs have income restrictions that may disqualify higher-income people from participating. The income restrictions on Roth IRA accounts are not always a barrier to conversions—a perfectly legal tax strategy called a “backdoor Roth IRA conversion” can be accomplished as long as all IRS rules are followed.

Roth Conversions

Because of the many Roth IRA tax advantages, some people may benefit from converting some of the money in their taxable 401(k) and/or traditional IRA accounts into tax-free Roth IRAs. Conversions are a taxable event in the year they are done, and they cannot be undone, so it is important to work with a qualified advisor to run anticipated tax savings calculations to see if they make sense. Additionally, there are complex tax rules which must be adhered to in regard to the ratio of taxable to non-taxable amounts held in IRAs.

If you have a low-income year due to a job loss or cutback, or you are five to 10 years away from retirement, you may benefit from a Roth conversion, or a series of them at today’s lower tax bracket rates, set to revert back up to 2017 levels for the 2026 tax year.

There are basically three ways to do Roth conversions according to Investopedia:

1) A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days.

2) A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution.

3) A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution.

Whatever method you use, you will need to report the conversion to the IRS using Form 8606 when you file your income taxes for the year and follow all rules. Roth conversions are complex and you should seek expert tax guidance.

Let’s talk. Contact Bulwark Capital Management in the Seattle area at 253.509.0395.

 

 

This article is for informational purposes only and should not be used for financial or tax advice. Future tax law changes are always possible. Be sure to consult a tax professional before making any decisions regarding your traditional IRA or Roth IRA.

Sources:

https://protectpensions.org/2016/08/04/happened-private-sector-pensions/)

https://blog.turbotax.intuit.com/tax-deductions-and-credits-2/can-you-deduct-401k-savings-from-your-taxes-7169/.

https://www.nerdwallet.com/blog/investing/how-much-should-i-contribute-to-a-401k/.

https://www.debt.org/tax/brackets/

https://www.investopedia.com/terms/b/backdoor-roth-ira.asp#

https://www.investopedia.com/roth-ira-conversion-rules-4770480

https://www.kitces.com/blog/roth-ira-conversions-isolate-basis-rollover-pro-rate-rule-employer-plan-qcd/

How Rich Do You Have to Be in Order to Retire?

By | Health Care, Long Term Care, Retirement, Tax Planning

Even though perceptions have changed during the pandemic with more Americans now saying they need less money to feel rich1, when it comes to retirement, most people are still unclear about how much they will need to have saved before they can quit their jobs.

The answer to that question is different for every person.

Here are some of the things you need to think about in order to get a realistic retirement number in mind.

 

What do you want to do during retirement? Where will you live?

Different people have different retirement goals and visions. You may not realize that you need to answer lifestyle questions before you can answer the “how much do I need” question.

Think about it this way. A single woman downsizing into a tiny home in a rural community to enjoy hiking in nature is going to need to have saved up a lot less money than a couple who wants to buy a big yacht, hire a crew and travel around the world docking at various international ports. A man who wants to spend all his time woodworking in his garage in the Midwest will need a smaller nest egg than a power couple collecting art and living in a penthouse in New York.

Most people are somewhere in the middle of these extremes. Yet answering these questions for yourself is very important both financially and emotionally for everyone entering retirement. You don’t want to end up feeling lost or bored not working—you want to feel that you are moving forward into a phase of life that is rewarding to you. And you certainly don’t want to run out of money because you miscalculated.

Take some time to get specific about your needs and desires. Will you want to spend holidays with family or friends? Start an expensive new hobby like golf? Take a big vacation every year? (The pandemic will end eventually!) Visit your grandchildren who live across the country multiple times? Go out to eat every day?

Based on your goals and objectives for your retirement lifestyle, your financial advisor will help you prepare a realistic monthly budget, adding in calculations for inflation through the years.

Once you’ve developed your monthly budget, it can be compared against your Social Security benefit to give you a good idea of how much additional monthly retirement income you will need to generate from your savings. From there, your advisor can come up with strategies to help you create income from savings, and then give you a realistic figure that you will need to have saved up before you retire.

But in addition to your retirement lifestyle, there are a couple of other things that need to be considered.

 

How is your health?

Nearly every retiree looks forward to the day they can sign up for Medicare. But Medicare is not free; the standard Part B premium for 2020 is $144.60 per month2 for each person. Your premiums for Medicare are usually deducted right from your Social Security check.

If you elect to purchase additional coverage through Medicare Advantage, Medigap and/or prescription drug plans, your premiums will cost more. And there will still be deductibles to meet and co-pays you will owe.

Some estimates for health care expenses throughout retirement are as high as $295,000 for a couple both turning 65 in 2020!3

Even worse, keep in mind that this figure does not include long-term care expenses—Medicare doesn’t cover those after 100 days.4

 

Have you planned for taxes?

It’s not how much money you have saved, it’s how much you get to keep net of taxes.

When designing your retirement plan and helping you calculate how much you need to save, your advisor will take into consideration an important piece of the puzzle—taxes. Tax planning is often different than the type of advice you get from your CPA or tax professional when you do your tax returns each year. Tax planning involves looking far into the future at what you may owe later, and finding ways to minimize your tax burden so you will have more money to spend on things you enjoy doing in retirement.

Different types of accounts are subject to different types of taxation. “After-tax” money that you invest in the stock market can be subject to short- or long-term capital gains taxes. Gains accrued on “after-tax” money that you have invested in a Roth IRA account are not taxed due to their favorable tax rules. Interest paid on “after-tax” money in savings, CDs or money market accounts is taxed as ordinary income, although this usually doesn’t amount to much especially with today’s low interest rates.

What your financial advisor will be most concerned about is your “before-tax” money held in accounts like traditional IRAs or 401(k)s which are subject to ordinary income taxes when you take the money out, which you have to do each year starting at age 72 per the IRS. (These mandatory withdrawals are called required minimum distributions.)

If “before-tax” money like 401(k)s are where the bulk of your savings is held, you will want to run projections to calculate how much of a bite income taxes will take out of your retirement, especially since tax brackets will go back up to 2017 levels5 beginning in January of 2026. There may be steps you can take now to help you lower your taxes in the future.

 

Please contact us if you have any questions about your retirement. Contact Bulwark Capital Management in the Seattle area at 253.509.0395.

 

 

Sources:

1 https://www.financial-planning.com/articles/americans-now-say-they-need-less-money-to-feel-rich

2 https://www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance#

3 https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

4 https://longtermcare.acl.gov/medicare-medicaid-more/medicare.html

5 https://taxfoundation.org/2017-tax-brackets/

How COVID-19 Has Impacted Retirement Confidence

By | Retirement

The Transamerica Center for Retirement Studies recently conducted an online survey of more than 6,000 people in the U.S. and found that many are feeling financially vulnerable.

Americans are feeling a distinct lack of confidence, particularly when it comes to retirement. Whether employed or unemployed, the survey found that 23% of workers are no longer certain they can retire comfortably following the coronavirus pandemic.

Not unsurprisingly, the insecurity was highest for baby boomers, born between 1946 and 1964, who are closest to retirement—32% said their confidence in their ability to retire has gone down due to COVID-19. Meanwhile, 25% of Generation X, those born between 1964 and 1978, said their retirement confidence has declined, and 20% of millennials, people born between 1979 and 2000, said the same.

The research also uncovered the average amount that each generation has put away in savings toward their retirement years. While millennials have a median of $23,000 saved in all household retirement accounts, Gen Xers had a median of $64,000, and boomers $144,000.

The study found that survey respondents also had some money saved to use toward emergencies. Millennials had a median of $3,000 set aside, while Gen Xers had $5,000 and boomers had $15,000 in emergency funds.

Despite having some emergency money, around 22% of survey respondents said they have taken or plan to take a loan or withdrawal from a 401(k) or other workplace retirement savings account to pay for living expenses like their mortgage, rent or food during the pandemic. Millennials were most likely to take such withdrawals, at 33%, compared to 15% of Gen Xers and 10% of baby boomers.

In part, this may be because recently-enacted legislation, the CARES Act, allows those impacted by the coronavirus to withdraw funds from 401(k)s up to $100,000 without the 10% IRS penalty for withdrawals for people under the age of 59-1/2.

Keep in mind that even though there is no 10% IRS penalty for withdrawals from workplace retirement plans, income taxes will still be due on the money withdrawn, which can be paid to the IRS over a period of three years if needed. Or the withdrawn money can be returned to the plan over three years with no taxes due per the CARES Act.

It’s important for people considering withdrawing money from their retirement accounts to remember a couple of things. One, the CARES Act doesn’t actually mandate that a workplace retirement plan has to allow hardship withdrawals for those impacted by coronavirus—it is up to each individual plan administrator whether or not they will allow withdrawals.

Two, the rules about who will qualify for these withdrawals if allowed by the plan are: being diagnosed with COVID-19, having a spouse or dependent diagnosed with COVID-19, or experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare because of COVID-19.

Experts remind people that those taking withdrawals need to follow all rules, or they will have to pay income taxes on the money withdrawn and owe the 10% penalty.

 

If you have any questions about the current retirement situation in America and what you can do now to protect yourself and your retirement savings, please contact us for a complimentary consultation.

Retirement planning is one of our focus areas, and we are here to help you as well as your family members and friends.

 

Contact Bulwark Capital Management in the Seattle area at 253.509.0395.

 

Source:

https://www.cnbc.com/2020/06/01/how-the-coronavirus-pandemic-is-hurting-retirement-confidence.html

Clearing Up Confusion About RMDs

By | Retirement, Tax Planning

Last month, we posted information about how the SECURE Act has increased the age for required minimum distributions (RMDs) from 70-1/2 to 72 starting this year, 2020.

If you turned age 70-1/2 in 2019, your RMDs were required for the 2019 tax year, and WILL BE required for 2020, 2021 and every year from now on.

For everyone turning 70-1/2 in 2020, your RMDs will not be required until the year you turn 72, even if you have received notification from your custodian to the contrary.

Because the law was passed and became effective within two weeks of passage, automated computer notifications and settings have not been changed yet. Call us if you have any questions!

 

LET’S MEET ABOUT YOUR ESTATE PLAN

Remember that inherited “stretch IRAs” have been shortened to 10 years in many circumstances due to the passage of the SECURE Act.

Let’s get together and discuss how this may affect your current estate plan, what burdens your heirs may face, and what we need to do now in conjunction with your estate attorney.

 

SECURE ACT CHANGES FOR EMPLOYEES AND EMPLOYERS

  1. PART-TIME EMPLOYMENT ELIGIBILITY

Unless there is a collectively-bargained plan in place (such as a union agreement), you may be eligible for your employer’s 401(k) or similar retirement benefit plan even if you work part time. If you have worked for your employer for one year consecutively for at least 1,000 hours, or for three consecutive years for at least 500 hours (roughly 25 work-weeks of 20 hours per week), you will be eligible.

  1. ANNUITY OPTIONS IN 401(k) PLANS

Even though employers were already allowed to offer annuities in their 401(k) plans, only about 9% of them did. The SECURE Act shifts the burden of legal liability away from employers who offer annuities in their plans; you will need to be diligent about examining them before choosing. (We can help you with this.) The DOL will require standardized monthly retirement income projections to help you compare; they are expected to issue guideline regulations about this in the coming months.

  1. ANNUITY PORTABILITY

Within a retirement plan, an annuity portability requirement has been added by the SECURE Act. If an annuity offering is removed from a 401(k) plan menu, you will be able to roll that annuity investment over into your own IRA with no penalty.

  1. FOR EMPLOYERS

The SECURE Act raised the tax credit for employers to $15,000 to set up, administer and educate employees about retirement plan changes over a three-year period. (NOTE: Employer contributions to 401(k) plans have been and still are tax deductible.) There is a new tax credit of $500 per year for automatic enrollment of employees into a company’s 401(k) plan—and the cap for auto enrollment has been raised from 10% to 15% of wages.

 

If you have any questions about this information, please don’t hesitate to call our office! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395.

 

Sources:
https://www.plansponsor.com/in-depth/getting-secure-acts-lifetime-income-provisions-right/
https://humaninterest.com/blog/part-time-employees-secure-act/
https://www.investopedia.com/what-is-secure-act-how-affect-retirement-4692743
https://www.cnbc.com/2019/07/03/if-annuities-come-to-your-401k-savings-plan-heres-what-to-know.html
The SECURE Act is a complex new law still being analyzed and assessed by industry experts. IRS clarifications may follow. The information in this article is provided for general information and educational purposes only. It is not designed nor intended to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in or refrain from a particular course of action.
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.