Do you have a bunch of old retirement plans scattered around? Do you have multiple different IRAs and 401(k)s from past employers? If you are nodding your head yes, then this is for you! In the most recent episode of The Field Guide Podcast, Brian Colvert, CFP® dives into the world of retirement account consolidation. We’ll explore the pros and cons of streamlining your accounts, the factors to consider when making a decision, and some key strategies when juggling multiple retirement accounts.
Why Consolidate Your Retirement Accounts?
It is important to acknowledge the bureaucratic burden of scattered retirement accounts. Imagine the frustration of receiving statements from each past employer’s plan, trying to decipher fees, and wondering if your investments are aligned with your goals. Here’s how consolidation can help:
Simplicity: Having everything in one place makes tracking your progress and managing investments a breeze. No more scrambling through multiple statements.
Control: Consolidation empowers you to make informed decisions about your investments with a holistic view of your retirement savings.
Reduced Fees: While fees might not be the deciding factor anymore, with some consolidation options, you may find lower expense ratios in your target investment choices.
Things to Consider When Consolidating Accounts:
While consolidation offers clear benefits, it’s not a one-size-fits-all solution. Here are some crucial aspects to consider before diving in:
Investment Options: Compare the investment choices available in your existing accounts with those offered by your target consolidation location (current employer’s plan or IRA). Does the new platform provide the flexibility you need to achieve your investment goals?
Fees: While expense ratios have become more competitive, don’t overlook potential fees associated with the consolidation process itself, such as transfer fees or rollover penalties.
Tax Implications: Traditional and Roth accounts have different tax implications. Depending on your income level and future tax plans, consolidating into a Roth IRA might not be an option (Brian mentions “backdoor Roth” strategies, but these can be complex and require consulting a financial advisor).
Retirement Account Consolidation Strategies: Choosing the Right Path
Now that you understand the pros and cons, let’s explore some common consolidation strategies:
Rollover to Your Current Employer’s Plan: If your current employer’s 401(k) allows rollovers and offers a good selection of investment options with low fees, this might be your best bet. It simplifies your life and potentially reduces fees.
Consolidate into an IRA: An IRA offers a wider range of investment options compared to most employer-sponsored plans. This flexibility can be valuable if you have specific investment goals or want to explore alternative asset classes not typically available in a 401(k).
Taking Action: Streamlining Your Retirement Savings
Here are some steps to guide your retirement account consolidation journey:
Gather Information: List all your retirement accounts, including account types (401(k), IRA), current balances, and investment details.
Research Options: Review the investment options and fees associated with your current employer’s plan and potential IRA custodians.
Run the Numbers: Consider potential transfer fees and any tax implications of the consolidation. There are online calculators available to help with this step.
Make a Decision: Based on your research and risk tolerance, choose the consolidation method that aligns best with your goals and financial situation.
Seek Professional Advice: For complex situations or if you’re unsure about any aspect of the consolidation process, consulting with a CERTIFIED FINANCIAL PLANNER™ is highly recommended.
Beyond Consolidation: Building a Personalized Financial Roadmap
Consolidation is just one piece of the puzzle. Developing a comprehensive financial plan that considers your income, expenses, retirement goals, and risk tolerance is crucial for a secure financial future.
The Takeaway: Consolidation Can Be Powerful, But Knowledge is Key
Consolidating your retirement accounts can simplify your life and potentially improve your investment returns. However, it’s important to understand the various factors at play, the potential fees involved, and any tax implications. By carefully considering your options and potentially seeking professional guidance, you can make an informed decision that empowers you to achieve your retirement goals.
Remember:
Consolidation might not always be the best solution.
Always consider fees, tax implications, and investment options before making a move.
A personalized financial plan goes beyond consolidation and provides and puts your entire financial life under one roof and gives you the confidence you need to move towards retirement.
Have questions or need help with retirement account consolidation?
In the most recent episode of The Field Guide Podcast, Brian Colvert, CFP®, takes a fresh look at aging – not as a decline, but as a time brimming with opportunities, especially when it comes to building a secure retirement. Brian dives into the often-underutilized benefits of increasing contributions to retirement accounts as you get older, demonstrating how these seemingly small tweaks can significantly impact your financial future.
Leveraging Catch-Up Contributions: A Detailed Look:
One of the perks of aging is the ability to contribute more to retirement accounts like IRAs, 401(k)s, and HSAs. Let’s break down the specifics and explore why maximizing these contributions is crucial.
IRAs and Roth IRAs: The standard contribution limit for both Traditional and Roth IRAs for 2024 sits at $7,000. However, individuals aged 50 and above are eligible for Catch-up contributions, allowing them to add an extra $1,000, bringing their total contribution to a substantial $8,000. Don’t let high income discourage you; strategies like the backdoor Roth conversion can help you take advantage of these benefits, even if your income exceeds the Roth IRA contribution limits. Here’s a deeper dive into the backdoor Roth conversion:
Backdoor Roth Conversion: A Backdoor Roth is a strategy that involves contributing to a traditional IRA and then converting those funds to a Roth IRA. There are tax implications associated with this conversion, but for those who wouldn’t qualify for a direct Roth IRA contribution due to income restrictions, it can be a valuable way to access the tax-free growth benefits of a Roth IRA in retirement.
Company Plans: Similar benefits exist for company-sponsored plans like SIMPLE IRAs and 401(k)s. Catch-up contributions are available for those over 50, allowing them to significantly increase their contributions and accelerate retirement savings. Let’s explore some additional considerations for company plans:
Employer Matching: Many employers offer matching contributions on employee contributions to retirement plans. This essentially translates to free money for your retirement. Be sure to contribute at least enough to capture your employer’s full match. It’s like leaving free money on the table if you don’t!
Investment Options: Company plans often offer a variety of investment options within the plan. Understanding your risk tolerance and investment time horizon is crucial when choosing how to allocate your contributions within the plan. We recommend seeking guidance from a CERTIFIED FINANCIAL PLANNER™ regarding your best investment options.
The Power of Compounding Interest with Your Catch-Up Contributions
Here’s where the magic truly happens: compounding interest. Even seemingly small additional contributions can snowball into a significant sum over time. Consider this: a $1,000 extra contribution to an IRA each year, consistently invested for 15 years with a moderate 6% rate of return, could grow into over $23,000. This is the magic of compounding interest working in your favor. Let’s delve a little deeper into the concept of compounding interest:
Exponential Growth: Compound interest allows your money to grow exponentially over time. Your earnings not only come from your initial contributions but also from the interest earned on those contributions. This creates a snowball effect, accelerating the growth of your retirement savings.
Time is Your Ally: The longer your money is invested, the greater the impact of compounding interest. Starting to contribute to retirement savings early and taking advantage of catch-up contributions later allows you to maximize the power of compounding interest.
HSAs: A Tax-Advantaged Powerhouse – Unveiling the Benefits
The benefits extend beyond traditional retirement accounts. HSAs (Health Savings Accounts), often overlooked in retirement planning, offer additional avenues for saving. Individuals aged 55 and above can contribute an extra $1,000 on top of the standard limits as of 2024. Let’s explore the unique advantages of HSAs:
Triple Tax Advantage: HSAs boast a unique “triple tax advantage.” Contributions are tax-deductible, investment earnings grow tax-free, and qualified medical withdrawals are tax-free. This makes HSAs a powerful tool for saving for future medical expenses while minimizing your tax burden.
Portability: HSAs are portable, meaning the funds belong to you, not your employer. You can retain your HSA even if you change jobs, providing long-term financial security for healthcare costs.
Embrace the Silver Lining:
Growing older comes with its challenges, but it also unlocks valuable opportunities to solidify your financial future. By maximizing catch-up contributions and strategically utilizing retirement accounts, you can pave the way for a secure and comfortable retirement. Remember, you’re not alone in this journey. If you have any questions or need guidance on your retirement planning path, don’t hesitate to reach out to The Field Guide. Your financial security is our top priority.
Taking Action:
Catch-Up Contributions are just the start. Here are some actionable steps you can take today:
Schedule a consultation with a CERTIFIED FINANCIAL PLANNER™: Discuss your retirement goals and explore personalized strategies to maximize catch-up contributions and retirement savings.
Research retirement account options: Understand the contribution limits, tax implications, and investment options for IRAs, Roth IRAs, 401(k)s, and HSAs.
Review your current contributions: Analyze your current contributions to retirement accounts and consider increasing them to take advantage of catch-up provisions.
Automate your contributions: Setting up automatic contributions ensures you’re consistently saving towards your retirement goals.
By taking these steps and embracing the opportunities that come with age, you can transform your retirement from a distant dream into a fulfilling reality.
Are you contemplating retirement? Are you wondering when you can retire?
In the most recent episode of The Field Guide Podcast, Brian Colvert, CFP® of Bonfire Financial, dives into the complexities of retirement planning and addresses the question we often get asked… When can I retire? From financial considerations to psychological readiness, Brian offers insights to help you navigate this significant life transition.
Psychological Preparedness:
One of the key factors in determining when to retire is psychological readiness. Many individuals tie their identity to their careers, making the prospect of retirement daunting. Brian emphasizes the importance of having a plan in place to alleviate anxiety and uncertainty. Whether it’s traveling, pursuing hobbies, or spending time with loved ones, having a structured schedule can enhance the retirement experience.
Financial Considerations:
While psychological preparedness is crucial, financial planning is equally important. Brian acknowledges the variability in retirement lifestyles, from extravagant globetrotting to simpler pleasures like hiking and local gatherings. Understanding your current expenses provides a baseline for retirement preparedness. Contrary to the popular notion that retirees spend significantly less, Brian suggests that initial retirement years may involve increased spending due to travel and leisure activities.
The 4 Percent Rule:
To estimate retirement income needs, Brian touches on the 4 percent rule—a widely used guideline in financial planning. By dividing the desired income by 4 percent, one can determine the required investment portfolio. While this rule provides a starting point, Brian emphasizes the need for flexibility and ongoing financial planning.
Beyond the Basics:
Retirement planning extends beyond simple calculations. Brian highlights the importance of accounting for factors like healthcare costs, inflation, and unexpected expenses. Collaborating with a financial advisor ensures a comprehensive strategy tailored to individual needs and goals.
Final Thoughts:
Answering the question of “When can I retire?” requires a blend of financial prudence and lifestyle considerations. While the prospect may seem daunting, proactive planning can pave the way for a fulfilling retirement experience.
If you’re seeking personalized guidance or additional resources, don’t hesitate to reach out to us. Our team is dedicated to helping individuals like you achieve their retirement aspirations.
Remember, retirement is not just about reaching a financial milestone—it’s about crafting a life that reflects your values and passions. Start planning today to embark on a retirement journey that’s as rewarding as it is fulfilling.
We often get asked what is Bitcoin all about by our clients, and for good reason. The landscape of cryptocurrency is riddled with terms like “blockchain,” “mining,” “nodes,” and “wallets,” which can be confusing and create a steep learning curve. The underlying technology, though revolutionary, is not always straightforward, leading to questions about how it operates, its value proposition, and its role in the financial ecosystem.
Gerry Signorelli has immersed himself into the world of Bitcoin, having built and operated a significant Bitcoin mine and integrated the digital currency into his daily life for various purposes, from savings to international transactions.
We were grateful to have Gerry on the most recent episode of The Field Guide Podcast to break down what is Bitcoin. He shares his extensive experience with the cryptocurrency, provides insights on its advantages over other cryptocurrencies, and discusses the essential role of nodes in maintaining the network’s decentralization. Gerry also addresses common concerns about Bitcoin’s security and its future potential, offering a comprehensive view of how Bitcoin operates.
A Journey from Stable Coins to Mining
Gerry’s foray into the financial world began with a quest for a saving mechanism, leading him from the realm of stablecoins to the discovery of Bitcoin. Despite experimenting with other cryptocurrencies, Gerry found his home with the currency, drawn by its fundamental differences, use cases, and the depth of its structure compared to the fleeting allure of ‘shitcoins.’
Why Bitcoin Stands Out
Bitcoin’s appeal lies in its foundational principles – scarcity, decentralization, and the prevention of censorship. Unlike other cryptocurrencies, Bitcoin’s limited supply, coupled with its robust and decentralized verification process, establishes it as a more stable and reliable digital asset. Gerry articulates the journey of money throughout human history, positioning Bitcoin as the latest evolution in this continuum, offering a digital solution to age-old problems of currency debasement and lack of control over personal wealth.
The Intricacies of Mining
Mining is not just a business for Gerry; it’s a crucial component of Bitcoin’s infrastructure. He delves into the complexities of Bitcoin mining, explaining how it serves as a mechanism for distribution and validation within the network. The process, while energy and capital-intensive, is vital for the creation of new Bitcoins and securing the network against potential attacks.
Understanding Bitcoin Transactions
Transactions in Bitcoin are more than mere financial exchanges; they signify the transfer of control over the digital asset. Gerry discusses how these transactions occur on the blockchain, ensuring transparency and security without the need for intermediary validation.
The Role of Nodes in Decentralization
Brian and Gerry dive into the importance of nodes in the ecosystem. These nodes, which any individual can run, are the backbone of Bitcoin’s decentralization, ensuring that the network remains secure and operates without centralized control. They allow for a democratic verification process that aligns with the ethos of Bitcoin – providing a system where everyone has a say in its operation.
Bitcoin’s Safety and Accessibility
Addressing concerns about Bitcoin’s safety, Gerry outlines the spectrum of ways one can own Bitcoin, from ETFs to cold wallets, each offering different levels of security and convenience. The decentralized nature of Bitcoin, coupled with the ability for individuals to run nodes, ensures that the system remains robust against potential threats.
The Future Outlook
Gerry envisions a bright future for Bitcoin, predicting a significant increase in its value as more people, institutions, and governments recognize its potential. He foresees a world where Bitcoin facilitates freedom of transaction, protects against inflation, and offers a new standard of financial autonomy.
In summary, Gerry Signorelli’s insights into Bitcoin present a compelling narrative of its potential to revolutionize our financial landscape. From its role in savings and transactions to its fundamental principles of scarcity and decentralization, it stands as a beacon of financial innovation in the digital age. As we navigate the complexities of our global economy, Bitcoin offers a promising alternative, challenging traditional financial systems and offering a new paradigm for money in our increasingly digital world.
We hope you enjoyed this episode! Have more questions about Bitcoin or digital currencies? Feel free to reach out to us with any questions! Be sure to like, review, and subscribe wherever you listen!
Effective planning for taxes in retirement is paramount for retirees looking to maximize their financial security. Understanding the complexities of how different income sources are taxed can empower you to make informed decisions. This guide delves into strategies that can help reduce your tax liability and enhance your retirement income.
Understanding Retirement Tax Basics
Understanding the basics of taxes in retirement is crucial for effective financial planning and ensuring that you keep more of your hard-earned money during your golden years. As you transition from earning a salary to relying on various income sources in retirement, the way your income is taxed changes significantly. Retirement income can come from various sources, each with its own tax considerations. Familiarizing yourself with the tax treatment of 401ks, IRAs, pensions, and Social Security benefits is the first step toward efficient tax planning.
Types of Retirement Income
Retirement income can be categorized into three main types: taxable, tax-deferred, and tax-free. Each type has different tax implications that can affect your overall tax liability in retirement.
Taxable Income: This includes income from traditional investment accounts, rental properties, and part-time employment. It’s taxed at ordinary income tax rates, which range depending on your total taxable income for the year.
Tax-Deferred Income: Comes from accounts like traditional IRAs, 401ks, and other employer-sponsored retirement plans. Taxes on these accounts are deferred until you make withdrawals, which are then taxed as ordinary income. This can be advantageous because many people find themselves in a lower tax bracket in retirement compared to their working years.
Tax-Free Income: Roth IRAs and Roth 401(k)s provide tax-free income in retirement, provided certain conditions are met. Contributions to these accounts are made with after-tax dollars, meaning you don’t receive a tax deduction when you contribute. However, both the contributions and the earnings can be withdrawn tax-free in retirement.
How to Reduce Taxes on Retirement Income
Strategic withdrawals from tax-deferred and tax-free accounts can significantly lower your tax bill. This section outlines how timing and the order of withdrawals can impact your overall tax situation.
Managing Social Security Taxation
Managing the taxation on Social Security benefits is a pivotal aspect of optimizing your retirement income. The tax liability on these benefits hinges on your “combined income.” This encompasses your adjusted gross income, nontaxable interest, and half of your Social Security benefits. The intricacies of this taxation mean that up to 85% of your benefits could be taxable if your income surpasses certain thresholds. Navigating these waters requires a nuanced understanding of how different income streams interact and impact the taxation of your benefits, making it essential to strategize effectively to minimize the tax bite.
Strategic measures, such as timing the withdrawal of funds from retirement accounts and potentially delaying the onset of Social Security benefits, can significantly influence your tax situation. Drawing on Roth IRA savings, which offer tax-free withdrawals, can be a smart move to manage your combined income levels, thereby reducing the taxable portion of your Social Security benefits. These strategies underscore the importance of a well-thought-out plan that considers the timing and source of your retirement income, aiming to secure a more tax-efficient stream of income in your retirement years.
The Role of Investment Income
The role of investment income in retirement planning is pivotal. It not only supplements your primary income sources like Social Security and pensions but also carries specific tax considerations that can significantly impact your overall tax liability and financial stability in retirement. By strategically managing capital gains, dividends, and interest from investments, retirees can optimize their tax situation, potentially benefiting from lower tax rates on long-term capital gains and qualified dividends, thus enhancing their income streams while minimizing tax expenses.
Navigating Required Minimum Distributions
Navigating Required Minimum Distributions (RMDs) is an essential aspect of retirement planning, particularly for those with tax-deferred retirement accounts like traditional IRAs and 401(k)s. Once you reach the age of 73, the IRS mandates that you begin taking these distributions, which are then taxed as ordinary income. The amount of the RMD is calculated based on the account balance and life expectancy, creating a potential tax impact by increasing your taxable income in retirement.
Properly managing RMDs involves strategic planning to minimize their effect on your tax bracket, such as considering Roth conversions before reaching RMD age to reduce future taxable income or employing strategies like Qualified Charitable Distributions (QCDs) to meet RMD requirements tax-free by directly transferring funds to a qualified charity. This careful approach to RMDs can help maintain a more favorable tax position and preserve retirement savings.
Utilizing Roth Accounts for Tax-Free Income
Utilizing Roth accounts for tax-free income is a strategic approach that can greatly benefit retirees by offering a source of income that does not increase their tax burden. Contributions to Roth IRAs and Roth 401(k)s are made with after-tax dollars, meaning that while there are no tax deductions at the time of contribution, the withdrawals, including earnings, are tax-free in retirement as long as certain conditions are met.
This feature is particularly advantageous as it allows retirees to manage their taxable income more effectively, keeping them potentially in a lower tax bracket and reducing or even eliminating taxes on Social Security benefits. Moreover, Roth accounts do not have Required Minimum Distributions (RMDs) during the account owner’s lifetime, providing further flexibility in planning and extending the tax advantages over a longer period. This makes Roth accounts a powerful tool in retirement income planning, offering tax diversification and the potential to optimize overall tax liability.
Estate and Gift Tax Planning for Retirement
Estate and Gift Tax Planning for Retirement is a critical strategy for managing how your assets will be distributed to your heirs while minimizing the tax impact on both your estate and the beneficiaries. This aspect of retirement planning involves understanding and navigating the complex rules surrounding estate and gift taxes, which can significantly affect the value of the assets transferred.
By leveraging annual gift exclusions, taking advantage of the lifetime estate and gift tax exemption, and setting up trusts or other estate planning tools, retirees can efficiently transfer wealth to their heirs or favorite charities, potentially reducing or eliminating estate taxes. Such planning ensures that more of your assets go to your intended recipients rather than to tax payments, preserving the financial legacy you wish to leave behind.
State-Specific Retirement Tax Considerations
State taxes can significantly affect your retirement finances. Each state has its own set of rules regarding income, sales, property, and estate taxes, which can affect the overall tax burden on retirees. Some states offer favorable tax treatments, such as no state income tax, exemptions on Social Security income, or deductions for pension and retirement account withdrawals, making them attractive destinations for retirees. Understanding these differences is crucial for making informed decisions about where to live in retirement or how to allocate assets. Taking into account state-specific tax considerations can lead to substantial savings, enhancing the ability to maintain a desired lifestyle in retirement.
Healthcare Costs and Their Tax Implications
Healthcare Costs and their tax implications are a significant concern for retirees, given that healthcare expenses often increase with age. Navigating these costs requires an understanding of how they can affect your tax situation. For instance, certain healthcare expenses, including Medicare premiums and out-of-pocket costs for prescriptions, doctor’s visits, and medical procedures, can be deductible if they exceed a specific percentage of your adjusted gross income (AGI).
Leveraging a Health Savings Account (HSA), if eligible before enrolling in Medicare, offers a tax-advantaged way to save for and pay these expenses, with contributions being tax-deductible, growth tax-free, and withdrawals for qualified medical expenses also tax-free. Effectively managing healthcare costs and understanding their tax implications can significantly reduce your taxable income and lower your overall tax liability, providing more financial flexibility in retirement.
The Importance of Tax Diversification
Diversifying your retirement accounts can provide tax flexibility in retirement. It offers a strategic way to manage, and potentially minimize taxes on retirement income. Tax diversification involves spreading your investments across various account types—taxable, tax-deferred, and tax-free—to create flexibility in how you can access funds in a tax-efficient manner. This strategy allows retirees to navigate the tax landscape more effectively, choosing from different income sources in a way that keeps their taxable income in a lower bracket, thereby reducing overall tax liability.
By having a mix of Roth IRAs, traditional retirement accounts, and taxable investment accounts, retirees can decide which accounts to draw from each year based on their current tax situation and future income predictions. This flexibility is crucial for managing taxes in response to changing tax laws and personal circumstances, ultimately leading to a more financially secure retirement.
How Tax Laws Impact Retirement Planning
Tax laws are continually changing. Staying informed and flexible in your planning is crucial for adapting to new laws and maximizing your retirement savings. These laws can affect how different types of retirement income are taxed. For instance, alterations in tax rates, adjustments to the rules governing retirement account contributions and distributions, and changes to estate tax exemptions can necessitate adjustments in how individuals save for retirement, when and how they withdraw from their accounts, and how they plan to pass on their assets.
Moreover, tax legislation can introduce new opportunities or challenges for retirees. Recent examples include adjustments to the age for Required Minimum Distributions (RMDs) and changes to the tax treatment of certain income sources, which can influence retirement timing decisions and income strategies. Therefore, staying informed about current and proposed tax laws is essential for effective retirement planning. It enables individuals to make proactive adjustments to their financial strategies, helping to ensure they can maximize their retirement savings’ growth and minimize their tax liabilities, thereby securing a more comfortable and financially stable retirement. Regular consultation with tax professionals and financial advisors can provide valuable guidance in navigating these changes, helping retirees to adapt their plans to benefit from favorable tax treatments or mitigate the impact of less favorable ones.
FAQs on Navigating Taxes in Retirement
How can I minimize taxes on my retirement income?
Minimizing taxes on retirement income involves several strategies, such as understanding the tax implications of various income sources, making strategic withdrawals from retirement accounts, and considering Roth conversions. It’s essential to balance withdrawals from taxable, tax-deferred, and tax-free accounts to manage your tax bracket effectively. Additionally, timing your Social Security benefits can also impact your tax situation. The same goes for managing investment income to take advantage of lower tax rates on long-term capital gains.
How can I reduce the taxes on my Social Security benefits?
To reduce taxes on Social Security benefits, you can manage your combined income, which includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. Keeping this combined income below certain thresholds will reduce or eliminate taxes on your benefits. Strategies include delaying Social Security benefits while withdrawing from tax-deferred accounts earlier, investing in Roth IRAs for tax-free income, and being mindful of how much and when you withdraw from taxable accounts.
What is the most tax-efficient way to handle my investment income?
The most tax-efficient way to handle investment income is to take advantage of tax-favorable investments and strategies. Holding investments for more than a year before selling can qualify you for long-term capital gains tax rates, which are lower than ordinary income tax rates. Consider investing in tax-exempt bonds or funds, particularly if you are in a high tax bracket. Utilizing tax-loss harvesting can also offset any capital gains you might have, further reducing your tax liability.
How do Required Minimum Distributions (RMDs) affect my taxes?
RMDs from tax-deferred retirement accounts such as traditional IRAs and 401(k)s must start at a certain age and are taxable as ordinary income. These mandatory withdrawals can push you into a higher tax bracket, increasing your tax liability. Planning for RMDs involves considering strategies like starting withdrawals earlier to spread out the tax impact, converting to Roth accounts where RMDs are not required, or using RMDs for charitable contributions (Qualified Charitable Distributions) which can exclude the amount donated from taxable income.
What should I consider for tax planning if I’m moving to another state?
When moving to another state for retirement, consider the overall tax environment of the new state. This includes income tax rates, exemptions for retirement income, sales tax, property tax rates, and any other local taxes. Some states do not tax Social Security benefits or offer significant deductions on retirement income, making them more favorable for retirees. Additionally, evaluate the cost of living, healthcare facilities, and quality of life, as these factors also play a critical role in retirement planning.
How can I deduct healthcare expenses in retirement?
You can deduct healthcare expenses in retirement if you itemize deductions on your tax return and your medical expenses exceed a certain percentage of your adjusted gross income (AGI). This includes a wide range of out-of-pocket expenses, such as premiums for Medicare and long-term care insurance, prescription drugs, and costs associated with medical and dental care. Using a Health Savings Account (HSA) for qualifying medical expenses can also provide tax-free money for healthcare costs, provided you have an HSA-compatible health plan before enrolling in Medicare.
Conclusion: Mastering Taxes for Retirement
Proactive tax planning is essential for securing your financial future in retirement. It requires a blend of knowledge, strategy, and the right support to navigate the complexities of tax planning. By taking control of your tax situation today, you’re not just helping to ensure a more prosperous retirement for yourself but also laying the groundwork for a lasting financial legacy. With the right approach and resources, you can minimize your tax liabilities, maximize your retirement income, and enjoy the peace of mind that comes with financial security.
However, mastering taxes doesn’t mean going at it alone. Leveraging the expertise of CERTIFIED FINANCIAL PLANNER™ and tax professionals can provide you the guidance and insight needed to navigate complex tax issues. These resources can help tailor a tax strategy that fits your unique situation, taking into account your income needs, tax bracket, and long-term financial goals.
Next Steps
Schedule a free consultation call with one of our CERTIFIED FINANCIAL PLANNER™ professionals. This initial consultation is an excellent opportunity to ask questions, address concerns, and get a sense of how we can help you achieve your retirement goals. Don’t miss out on this chance to lay a solid foundation for a secure and prosperous retirement. Take the next step today and schedule your free consultation call —it could be the most important call you make for your retirement future.
THE ULTIMATE LIFE HACK: THE WHAT, WHY AND HOW OF A FINANCIAL PLAN
There seems to be a life hack for everything out there these days. Aluminum foil in the dishwasher for extra shiny spoons, avoiding TSA lines with strollers for faster times, and toothpaste to clear foggy headlights… but what about your finances?
Well, we have the ultimate hack for that …. A financial plan!
The What: Basics of a Financial Plan
Think of a financial plan as your roadmap to financial success. It’s your strategic guide, outlining how to reach your financial goals. Just like a GPS, it helps you navigate through life’s twists and turns, ensuring every dollar is well-spent. It involves setting goals, creating a budget, making smart investments, and managing debt and taxes effectively. In essence, a financial plan is your key to turning aspirations into achievable milestones. It provides clarity and confidence on your financial journey.
No financial plan is the same
Every financial plan is inherently unique. It should be tailored to individual circumstances, goals, and preferences. Factors such as income, expenses, risk tolerance, and life stages contribute to the unique and personalized nature of every financial plan. It will also adapt and evolve with the individual’s journey, guaranteeing adaptability and ongoing relevance as circumstances change. It really is a living document. However, each plan typically has similar components.
Components of a Financial Plan
A comprehensive financial plan typically includes the following key components, again varying based on the individual’s circumstances:
Financial Goals:
Incorporating financial goals into a financial plan provides a clear roadmap, giving purpose and direction to your financial decisions. These goals serve as motivating milestones, guiding your financial choices and fostering a sense of accomplishment as you work towards tangible objectives. It is important to identify short-term and long-term financial objectives.
Emergency Fund:
An emergency fund acts as a financial safety net, providing a buffer against unexpected expenses or sudden income disruptions. Including it in your financial plan ensures you’re equipped to handle unforeseen challenges without derailing your overall stability or long-term goals. Generally, we recommend at least three to six months’ worth of expenses in an emergency fund.
Budgeting:
A budget is the compass of your financial plan, offering a comprehensive overview of both income and expenses. Beyond instilling disciplined spending habits, it establishes a structured framework for strategic allocation. It allows you to prioritize savings, investments, and goals, ultimately contributing to enhanced financial stability and control.
Debt Management:
Incorporating Debt Management into your financial plan is paramount for achieving and sustaining financial well-being. By strategically managing and reducing debt, you not only free up resources for other financial goals but also cultivate a healthier financial profile, fostering long-term stability and reducing unnecessary financial stress.
Savings Plan:
Integrating a savings plan into your financial strategy is crucial for building resilience. It allows you to allocate funds for both future goals and unexpected challenges. This disciplined approach fosters financial security and positions you to achieve long-term objectives with confidence.
Investment Strategy:
An investment strategy in your financial plan acts as a catalyst for wealth growth, leveraging your resources to generate potential returns over time. By carefully selecting investment vehicles aligned with your goals and risk tolerance, you optimize your financial portfolio, working towards long-term prosperity and financial success.
Insurance Coverage:
Are you covered? Including insurance coverage serves as a safeguard, shielding you from unforeseen risks and potential financial setbacks. Whether it’s protecting your health, property, or income, insurance provides a crucial layer of security, ensuring that unexpected events don’t jeopardize your financial stability and long-term goals.
Retirement Planning:
Retirement planning is a cornerstone of a financial plan, ensuring that you can enjoy your golden years with financial confidence and independence. It’s like giving your future self a high-five from the beach of financial freedom. By systematically preparing for retirement in your financial plan, you build a nest egg that aligns with your lifestyle goals, providing peace of mind and the freedom to savor your post-working years.
Social Security Strategy:
A Social Security strategy is essential in retirement planning due to the impact it can have on your financial well-being. Social Security benefits provide a significant source of income for many retirees. However, the timing and manner in which you claim these benefits can significantly affect the overall amount you receive.
Tax Planning:
By strategically navigating the tax landscape within your financial plan, you optimize your financial picture, dodge unnecessary tax potholes, and help to ensure that your money is working for you in the most efficient way possible.
Estate Planning:
Estate planning is the meticulous crafting of your financial legacy. It ensures that your assets are distributed according to your wishes and minimizes the burden on your loved ones. By incorporating estate planning into your financial strategy, you secure a comprehensive roadmap for the future, fostering peace of mind and preserving your financial legacy for generations to come.
Regular Review and Adjustments:
Regular reviews and adjustments are the steering wheel of your financial plan, ensuring it stays aligned with your evolving life circumstances and goals. It should be a flexible guide. By consistently revisiting and adapting, you optimize its effectiveness, making strategic changes as needed to navigate the ever-changing terrain of your financial journey.
The Why: Benefits of Having a Financial Plan
Embarking on a journey without a map can be a daunting prospect, and the same holds true for managing your finances. The benefits of having a well-structured financial plan are akin to having a reliable guide on a mountain expedition. From providing clarity and direction to ensuring efficient resource allocation, a financial plan serves as a powerful tool that empowers you to navigate the complexities of your finances.
Here are our top 5 benefits to having a financial plan.:
Goal Achievement: A financial plan helps you define and prioritize your goals, providing a roadmap for turning aspirations into actionable steps.
Emergency Preparedness: A financial plan includes building an emergency fund, and offering a financial safety net for unexpected expenses or income disruptions.
Wealth Accumulation: A well-crafted financial plan incorporates strategies for savings and investments, allowing you to build wealth over time and work towards financial independence.
Risk Mitigation through Insurance: Integrating insurance into your financial plan safeguards against unexpected events, protecting your health, property, and income.
Retirement Readiness: Planning for retirement is a key aspect, ensuring that you have the necessary funds to enjoy a comfortable and secure post-working life.
Be part of the 35%
According to Schwab’s 2023 Modern Wealth Survey only 35% of Americans have a documented financial plan, and those who have one feel more in control of their finances. Surprisingly, this means that 65% of Americans have no plan.
One of the biggest reasons why most said they don’t have one is that it seems too complicated to create a plan.
Well… we disagree and that is where our life hack comes in.
The How: Getting Started: Tips for Creating Your Financial Plan
A life hack is all about making your life easier, not more difficult. Hence, that is why we have a motto of “Do it for yourself, not by yourself.”
Don’t Complicate it- Get a professional
It can be a complicated process, but with the right people in your corner, it doesn’t have to be. While some people may create their own financial plans, there are several reasons why you might want to seek professional assistance (Like from us… wink, wink) rather than attempting a DIY (Do-It-Yourself) approach:
Expertise: Financial planners and advisors have specialized knowledge and expertise in various aspects of personal finance. Areas of expertise range from investments, tax planning, insurance, and retirement planning. Their experience allows them to provide valuable insights and guidance tailored to your specific situation.
The complexity of the Financial Landscape: The financial landscape is complex, with laws, regulations, and market conditions constantly changing. A professional can help navigate these complexities, ensuring your financial plan remains relevant and effective over time.
Objectivity: An external financial planner provides an objective perspective on your financial situation. Furthermore, this objectivity can be crucial in making unbiased decisions, especially when emotions might cloud judgment in financial matters.
Comprehensive Approach: Furthermore, Financial planners take a holistic approach to your financial well-being. They consider all aspects of your financial life. They help you create an integrated plan that addresses short-term and long-term goals, risk management, and more.
Time and Effort: Ain’t nobody got time for that! Crafting a thorough financial plan requires time and effort. Professionals can efficiently guide you through the process, saving you time and ensuring that no critical aspects are overlooked.
Risk Mitigation: Professionals can help identify and manage potential risks in your plan. Whether it’s investment risk, tax risk, or other uncertainties, their expertise aids in creating strategies to mitigate these risks.
Adaptability: Financial planners are equipped to adapt your plan as your life circumstances change. Whether it’s a career change, marriage, birth of a child, or other life events, professionals can adjust your plan to align with your evolving goals.
Access to Resources: Financial professionals often have access to a broader range of financial tools, resources, and market insights that may not be readily available to individuals.
Accountability: A financial planner can also serve as an accountability coach and financial mentor. As such, they’ll help you stay disciplined and focused on your financial goals, especially during periods of market volatility or economic uncertainty.
Legal and Regulatory Compliance: Professionals are well-versed in legal and regulatory requirements. They can ensure that your financial plan adheres to applicable laws and regulations, preventing unintended legal consequences.
While DIY financial planning is possible, it’s important to recognize your limitations and the potential benefits of seeking professional guidance. A CERTIFIED FINANCIAL PLANNER™ or advisor can bring a level of expertise, objectivity, and comprehensive understanding that may enhance the effectiveness and success of your financial plan.
In Short
Having a well-structured financial plan is not just a strategy; it’s a necessity for securing your financial future. Above all, it’s the roadmap that guides you through life’s uncertainties, ensuring you’re prepared for both the expected and the unexpected. From managing debt to saving for retirement, a sound financial plan touches every aspect of your monetary life, providing peace of mind and a clear path forward.
Next Steps:
Understanding the intricacies of financial planning can be daunting. That’s why we’ve created the Financial Field Guide – a step-by-step guide to help you simplify, navigate, and elevate your financial life. This isn’t just any financial plan; it’s your financial life, broken down into simple, actionable steps. It is a path to a future where you’re in control of your finances, not the other way around.
Don’t leave your financial future to chance. The power to change your financial story is just a click away. Are you ready to unlock it? Get your Financial Field Guide today!
We are excited to announce that we are launching The Field Guide Podcast! Hosted by the CEO of Bonfire Financial, Brian Colvert, CFP®, each episode will bring you ideas to simplify, navigate, and elevate your financial life. We really hope you enjoy it! Listen anywhere you stream Podcasts!
We are kicking off our first episode of the Field Guide Podcast, with Henry Ip, CPA.
Henry Ip is a seasoned tax professional with a wealth of experience spanning over 17 years in the dynamic field of Tax Advisory and Compliance. Currently serving as a tax partner at Biggskofford PC in the Colorado Springs office, Henry specializes in providing strategic tax compliance and planning services to a diverse clientele, including small public and middle-market private companies and their owners.
Henry shared invaluable insights on tax planning, financial strategies, and considerations for diverse situations. This blog post aims to navigate through the key points of the discussion, shedding light on Henry’s recommendations for navigating taxes in various aspects of financial planning.
Planning for Taxes: Looking Beyond the Present
The conversation began with the crucial importance of planning for taxes. Henry stressed the need to look beyond the current year, emphasizing that tax planning involves not just minimizing taxes for the present but also preparing for future tax implications.
Roth Conversions and Qualified Charitable Distributions: Navigating Retirement Accounts
Turning to retirement accounts such as 401(k)s, the discussion explored Roth conversions and Qualified Charitable Distributions (QCDs). Henry suggested a strategy for retirees comfortable with their financial situation: using Required Minimum Distributions (RMDs) for tax-free donations to charities, meeting RMD requirements while contributing to qualified causes.
Managing Rental Properties: LLCs for Liability Protection
For individuals with Airbnb properties or rental units, Henry stressed the importance of managing personal liability by setting up Limited Liability Companies (LLCs). While not directly impacting income tax, an LLC provides essential liability protection.
LLCs and Tax Implications: Balancing Liability and Tax Benefits
Addressing the common question about the impact of LLCs on income taxes, Henry clarified that, primarily, setting up an LLC benefits individuals in terms of liability protection. However, he emphasized the significance of proper setup and ownership structure.
Selling a Business and Tax Implications: Early Planning is Key
The conversation delved into selling businesses and the associated tax consequences, emphasizing the importance of early planning. Henry recommended considering tax strategies two to five years before selling, including converting ordinary income to capital gains and exploring options for deferring income recognition.
The Importance of Early Planning: Restructuring for Tax Efficiency
Henry highlighted that early planning is essential for restructuring a business to make it more tax-efficient. This proactive approach can significantly impact the tax burden and provide sellers with various options to optimize their financial outcomes.
Filing Extensions and Audit Risks: Dispelling Myths
On the topic of filing extensions and audit risks, Henry dispelled the myth that filing an extension increases the chances of an audit. Extensions provide legal time extensions for filing, reducing stress and allowing accurate information gathering for returns.
Identity Protection PINs: Safeguarding Against Fraud
Touching on identity theft and the IRS’s Identity Protection PIN (IP PIN) program, Henry recommended applying for an IP PIN annually to prevent fraudulent tax filings, providing an additional layer of security against identity theft.
Gifting Strategies: Leveraging Exclusions for Tax-Free Gifts
Discussing client inquiries about gifting money to children, Henry suggested leveraging the annual exclusion amount for tax-free gifts. He emphasized understanding exclusion limits and considering options like 529 plans or trusts based on individual circumstances.
Maximizing Annual Exclusions: Coordinating Gifts for Maximum Benefit
Henry clarified that individuals can maximize the annual exclusion by coordinating gifts between spouses and recommending trusts for beneficiaries who may need additional financial management.
529 Plans and Tax Implications: Exploring Options for Unused Funds
The discussion on 529 plans addressed scenarios where the beneficiary doesn’t use the funds for qualified education expenses. Henry explained options such as changing beneficiaries, using funds for personal education, or exploring exceptions like disability or death.
Tax Implications of 529 Plans: Minimizing Taxes through Strategic Decisions
Henry clarified that taxes and penalties are applied only to the income portion of 529 plan withdrawals for non-qualified expenses. He provided insights into avoiding taxes by changing beneficiaries or leveraging exceptions.
Remote Work and Tax Deductions: Navigating Changes Introduced by TCJA
The conversation concluded with a focus on remote work and tax deductions, highlighting changes introduced by the Tax Cuts and Jobs Act (TCJA) of 2017. W-2 employees working from home can no longer deduct home office expenses, necessitating strategic approaches for tax optimization.
Strategies for S-Corp Owners: Navigating Tax Compliance
For S-Corp owners, Henry recommended a reimbursement approach through an accountable plan to cover business-related expenses, ensuring compliance with tax laws and optimizing deductions for business owners.
Conclusion: Navigating the Tax Landscape
Henry Ip’s expertise provided a comprehensive overview of tax planning strategies for various financial scenarios. From retirement accounts to rental properties, selling businesses, and gifting strategies, the conversation covered a wide range of topics. As individuals navigate the complexities of the tax landscape, early planning and strategic decision-making emerge as key factors in optimizing financial outcomes.
Whether you’re a business owner, retiree, or someone looking to enhance your financial literacy, the insights from Henry offer valuable guidance for making informed financial decisions. Navigating taxes is a journey, and with the right knowledge, you can confidently chart a course to better understand taxes.
We hope you enjoyed this episode. Be sure to like, review, and subscribe wherever you listen!
What business owners need to know about Colorado Secure Savings Act
In 2020 Colorado passed the Colorado Secure Savings Program. This law mandates that small business owners enroll in a state-run retirement savings plan. The pilot program launched in October 2022 and employers throughout Colorado are now required to comply.
The purpose of this mandate is to increase access to retirement savings for workers in Colorado. The Colorado Secure Savings Act mandates that qualifying employers provide an employer-sponsored individual plan. The cost of this program will be funded through auto payroll deductions.
In general, this seems like it will have positive benefits for employees. However, it may create additional burdens for employers and may in fact limit employees’ options. Here is what small business owners need to know about the Colorado Mandated Small Business Retirement Plan.
Who needs to comply:
The Colorado General Assembly states that you, as an employer, will be required to implement this program if:
You have five or more employees
Have been in business for two or more years
Don’t have an existing qualifying plan
Companies already offering 401ks or other qualified savings plans are not required to use the Colorado Secure Savings Program. The law states that employers with less than 5 employees or who have not yet been in business for 2 years will not be required to participate. However, they will have the option to offer the program to their employees.
What needs to be done:
While there is limited guidance at the moment from the State of Colorado, employers will be required to offer auto-enrollment and facilitate payroll deductions into the program.
Upon enrollment, employees will opt into the default savings rate for Colorado Secure Savings, which is 5% of their gross pay. Beyond this, deferral rates may vary depending on how much you want to save each year. In addition, age, marital status, and income play a role in the amount that employees can contribute.
However, employees will be able to change their contribution amount or opt-out if desired.
As it is written so far, employers will have 14 days to send employees’ contributions to the program administrator. The program oversight will be done by the board of the Colorado Secure Savings Program. The board is currently chaired by the Colorado State Treasurer. This board will be making a process for withholding employees’ wages and remitting withheld amounts into their Colorado Secure Savings account. It’s not yet clear if the program will offer any integrations with payroll providers to facilitate the timely deposit of contributions.
Penalties for noncompliance:
Fines can be costly. For non-compliance, fines will be $100.00 per employee per year and can ratchet up to $5000.00 annually. The compliance period is one year after implementation.
However, they do state they plan to create a grant program to incentivize compliance. Yet no further details have been released. The good news is it’s really easy to comply by setting up a 401k plan or another qualified plan in advance. Keep reading on to find out how.
General Concerns:
There is little to no guarantee of the level of quality or support that will be available to business owners from the state in implementing and managing the Colorado Secure Savings Program. The government has not released any real guidelines. There are some basics, but how is still very undefined.
Further, if a company offers the state-run plan many of their higher income employees will be excluded. Employees with a Modified Adjusted Gross Income of more than $139,000 or $206,000 married filing jointly cannot participate.
As we wait for more details it’s not a bad idea to consider all the various plan options available to you and your company.
State Sponsored vs Employer Sponsored
There are a handful of states that currently have state mandated plans in place. California, Oregon, and New York are a few for instance. State sponsored plans have pros and cons, which business owners should carefully weigh. On one hand, government-mandated plans are generally a cheap solution with few fiduciary implications. On the other, these plans tend to be inflexible, one-size-fits-all. Plus they come with potential government penalties.
State sponsored retirement plans:
Roth IRA Investment structure (after-tax)
The state board selects investments
The plan will “travel with” people if they change jobs or leave the state
Excludes higher income employees
No employer contributions
No federal tax credits for employers
Creates a significant burden for the employer
As an alternative, an employer sponsored 401k or other qualified plans may be a better option than having the state do it for you. A common misconception is that employer sponsored plans are expensive. However, that simply isn’t the case. Many plans are now being tailored for smaller companies. Plus, the IRS gives tax credits to firms with fewer than 100 employees for some ordinary and necessary costs of starting an employer sponsored plan.
Employer Sponsored 401K plans:
Allow an employee to make contributions either before or after-tax, depending on plan options
Wide range of investments at various levels of risk chosen by the employer or by an advisor
Employee may direct their own investments
Higher Annual Salary Deferral Limit
No employee income limits
Allows for employer contributions
Federal tax credits for the employer for start-up and admin costs and employee education
In addition, offering an employer-sponsored plan to your employees may increase your company’s competitiveness in the job market. It could also help you retain valuable staff. Plus, you and other company leaders can participate.
If you work with a payroll services provider, the software can easily and automatically transfer employees’ funds, making the procedure effortless. Additionally, private plans typically come with the support of financial advisors. Moreover, a financial advisor can help regarding plan types and how best to implement them for your business.
Clearly, adding a 401k or other qualified plans to your company’s benefits package has strategic advantages. Yet, by not providing your employees with a retirement plan, you risk having the state impose one.
Do State-Run Plans Even Work?
Time will tell. However, Oregon, the first state to legally mandate a retirement plan, has pretty dismal enrollment numbers. Since its inception in 2018, only 114 thousand workers have enrolled out of a potential of over 1 million total.
Using Oregon again as an example, there are a lot of restrictions. First, the percentage contribution is fixed. Second, the employee’s first $1,000 gets put into a stabilization fund that since its inception has earned 1.52% per annum, or basically 0%, Or less after factoring in inflation. Finally, if and when they have more than $1,000 invested, they must decide between a fund that is a mixture of stocks and bonds and one that is invested entirely with the State Street Equity 500 Index Fund. (03/31/2022)
By comparison, in the private sector, there are multiple low-cost, exchange-traded funds, most of which averaged an annual return of over 10% during the most recent 10 year period. Some would argue that directing employees away from these superior investment products arguably does a disservice to the employees.
Sample Administrative Duties
Further, Oregon has demonstrated what a significant burden the plan can be on employees. Here is a short list of employer duties that Colorado will likely have as well.
Submit an employee census annually
Track eligibility status for all employees
Provide enrollment packets to all employees 30 days after date of hire
Plus, track whether each employee has opted in or out
If an employee doesn’t opt out within 30 days, set up 5% payroll deduction
Manually auto-escalate all employees annually unless they’ve opted out
Repeat auto-enroll process annually for all employees who have opted out
6-month look-back for auto-escalation:
Track if the employee has been participating for 6 months with no auto-escalation
Provide 60-day notice if they do not opt-out again
Hold open enrollment
Auto-enroll anybody who hasn’t been participating for at least 1 year
It’s too early to know whether state-run programs work. After all, Saving for retirement is a marathon, not a sprint. As an employer, it is important to weigh all options.
If you do not already have an existing plan, and you are skeptical about a government-mandated plan, you can always make your own employer-sponsored plan. Bonfire Financial has many 401k, Simple IRA, and SEP IRA options. We provide affordable, hassle-free solutions that will reduce the administrative burden.
Colorado Secure Savings vs Retirement Plan with Bonfire Financial
How can my business establish its own retirement plan?
Above all, retirement plans don’t have to be expensive or difficult to manage. In light of Colorado’s rollout of the Secure Savings Plan, we are offering small business owners and employers a free, no-obligation call with a CERTIFIED FINANCIAL PLANNER™ to help answer all your questions. We can help you create a better, more efficient retirement plan that is tailored to you and your employee’s specific needs. We are local in Colorado Springs and are here to help with all your retirement plan needs.
If you just wrote a big check to the IRS, you may be wondering how you can prepare now to cut your taxes next April. We’ve got you covered. Luckily, there are several legal ways to reduce the amount of tax you pay each year that don’t just include adjusting your withholding. Here are 10, practical and actionable, ways to help you cut your next tax bill and those in the future.
1. UTILIZE YOUR RMD FOR YOUR CHARITABLE GIVING
If you are 72 or older, donating your Required Minim Distribution (RMD) to a qualified charity is a great way to reduce your tax burden. These donations are considered a qualified charitable distribution (QCD) and will not be taxed up to $100,000 per account owner.
Note: The Secure Act raised the RMD age for some taxpayers to 72, but didn’t raise the QCD age from 70 1/2.
A qualified charitable distribution can satisfy all or part of the amount of your RMD from your IRA. For example, if your required minimum distribution was $10,000, and you made a $5,000 qualified charitable distribution, you would only have to withdraw another $5,000 to satisfy your required minimum distribution.
The more you donate in this way, the more you can exclude and cut from your taxable income This is extremely helpful since RMDs are ordinary taxable income that will often push retirees into a higher tax bracket.
Qualified charitable donations are a great way to use up your RMD if you are planning to give to charity. However, keep in mind that it must be a check sent directly from an IRA to the charity, it is not a charitable deduction per IRS rules.
Schwab allows you to have a checkbook on your IRA that allows you to write such checks directly from your IRA. Be aware, that all donations need to be sent/cashed by 12/31 of the tax filing year.
QCDs can offer big tax savings, as tax rates on regular income are usually the highest. Regardless of the tax benefits, designating this income for charity is a great way to begin or expand your giving and support the causes you care most about.
2. TAKE ADVANTAGE OF TAX LOST HARVESTING
There is always a silver lining, right? For market downturns, that silver lining is tax-loss harvesting. With tax-loss harvesting, you can use your loss to cut your tax liability and better position your portfolio going forward.
Here is how it works, in its simplest form:
First, sell an investment that is losing money and underperforming.
Next, use that loss to reduce your taxable capital gains and potentially offset up to $3,000 of your ordinary income for the tax year. (Any amount over $3,000 can be carried forward to future tax years to offset income down the road).
Last, reinvest the money from the sale into a different investment that better meets your investment needs and asset-allocation strategy.
This allows you to free up cash for new investment and mitigate a tax consequence.
As with anything tax-related, there are limitations. Please note that tax loss harvesting isn’t useful in retirement accounts because you can’t deduct the losses in a tax-deferred account. Additionally, there are restrictions on using specific types of losses to offset certain gains. A long-term loss would first be applied to a long-term gain, and a short-term loss would be applied to a short-term gain. You also must be careful not to violate the IRS rule against buying a “substantially identical” investment within 30 days.
The best way to maximize the value of tax-loss harvesting is to incorporate it into your year-round tax planning and investing strategy. We always recommend talking to a professional about your specific situation.
3. FUND HSA OR FSA
Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) allow pre-tax dollars to be set aside for medical, vision, and dental expenses, thus reducing your overall taxable income. Each has its own benefits.
It grows tax-free (you can invest your contributions and earn interest)
Can be used tax-free for eligible expenses (
Another great thing about an HSA is that you can keep it forever. Funds roll over and never expire. On the other hand, an FSA is a “use or lose it” type of account. However, an FSA is still a good option because it is funded before tax and comes out tax-free. FSA are employer-sponsored so there is often less involved with enrolling and setting up the plan. As such self-employed filers are ineligible to open able to open an FSA.
Regardless of which plan you have, both HSAs and FSAs are good options to help cut and reduce your taxable income.
CONTRIBUTE TO A PRE-TAX RETIREMENT ACCOUNT TO CUT TAXES NOW
Contributing to a retirement plan may be one of the simplest ways to slash what you own to the IRS. Whether a 401k or an IRA, (learn the differences here), both offer tax savings.
4. MAX OUT YOUR 401K
If your employer offers a 401k, maximize it. To realize benefits on your next tax bill, contribute to a Traditional 401k rather than a Roth 401k. Traditional 401k contributions will reduce your taxable salary, another great way to cut your tax bill.
5. CONTRIBUTE TO A TRADITIONAL IRA
Additionally, if you are below the income limits, you can also contribute to a Traditional IRA. They are tax-deferred, meaning that you don’t have to pay tax on any interest or other gains the account earns until you withdraw the money. Contributions to a Traditional IRA are often tax-deductible. However, if you do have a 401k or any other employer-sponsored plan, your income will determine how much of your contribution you can deduct.
6. CONSIDER A CASH BALANCE PLAN
If you are a business owner or solopreneur and have a high income, consider a cash balance plan. A Cash Balance plan is a type of retirement plan that allows for a large amount of money to go in tax-deferred and grows tax-deferred. It is a great option for owners looking for larger tax deductions and accelerated retirement savings.
Cash Balance contributions are age-dependent. The older the participant is, the higher the contribution can be. It can be an extra $60k to over $300k (based on age and income ) on top of combined 401k/ profit-sharing contributions.
An attractive feature of a cash balance plan is that the company offering the benefit can take an above-the-line tax deduction on contributions. Above-the-line deductions are great for tax savings because they reduce income dollar for dollar.
CONTRIBUTE TO AN AFTER-TAX RETIREMENT ACCOUNT TO CUT TAXES IN THE FUTURE
While a 401k, Traditional IRA, and Cash Balance Plan can help curb taxes in the near term, we also recommend planning for future tax implications to help you cut your tax bill for years to come. Roth IRAs are retirement accounts that are made up of your AFTER-tax contributions, however, they offer tax-free growth and tax-free withdrawals.
7. GROW TAX-FREE WITH A ROTH IRA
Again, Roth IRA contributions are after-tax, so you can not deduct your contributions. Nevertheless, your distribution will be tax-free and penalty-free at age 59 ½ Something your future self will thank you for! Another benefit is that a Roth IRA isn’t subject to RMD requirements either.
There are definitely some potential tax savings here, especially for those just starting out. It makes sense to pay taxes on the money you contribute now, rather than later, when your tax rate may be higher.
8. RUMINATE ON A BACKDOOR ROTH
A Backdoor Roth allows people with high incomes to fund a Roth, despite IRS income limits, and reap its tax benefits. Could it be right for you?
In short, you open a traditional IRA, make non-deductible (taxable) contributions to it, then move that Traditional IRA into a Roth IRA and enjoy the tax-free growth.
It is important to note that you can not have any money currently in an IRA, SIMPLE IRA, or SEP-IRA to make this work properly. There are more complexities involved in setting this up, and we recommend talking with a CERTIFIED FINANCIAL PLANNER™.
9. ROTH CONVERSION
A Roth Conversion involves the transfer of existing retirement assets from a traditional, SEP, or SIMPLE IRA, or from a defined-contribution plan such as a 401k, into a Roth IRA.
You’ll have to pay income tax on the money you convert now (at your current tax rate), but you’ll be able to take tax-free withdrawals from the Roth account in the years to come
You can also use market downturns as an opportunity to do a Roth Conversion. If your IRA goes down in value because of market fluctuations, you could convert the account to a Roth, which allows you to pay a smaller amount of taxes because the account is down in value. Then you’ll have the money in a Roth when the market recovers, which would then be tax-free.
While there is no predicting what the tax brackets and tax rates will be in the future, if taxes go up by the time you retire, converting a traditional IRA and taking the tax hit now rather than later could make sense in the long run.
10. PAY ATTENTION TO THE CALENDAR
Lastly, from a tax perspective, there is a big difference between December 31 and January 1st. While some things, such as IRA contributions can be made up until the filing deadline, many must be done during the tax year, like qualified charitable distribution.
It is important to plan as far in advance as possible to help minimize your taxes. We recommend meeting with a tax professional and your financial advisor throughout the year.
The key to lowering your tax bill is to plan ahead and cut your tax liability in a way that makes sense for you. It’s impossible to know what regulations, changes, and updates will go into effect during any given tax season, but rest assured that we’ll be here to help you plan. Schedule a free consultation call with one of our CERTIFIED FINANCIAL PLANNER™ professionals today!
Until then, take these tips to heart and remember that reducing your taxes isn’t an impossible task.
Are your turning 65 soon? Turning 65 is a major milestone and pivotal age for your retirement planning. Not only is this an important age for government programs like Medicare and Social Security, but it’s also a perfect time to check other parts of your financial plan, particularly if you’re about to retire. Here are 6 important things to do as you get closer to your 65th birthday to make sure this year and the many years that follow are amazing!
Prepare for Medicare
Consider Long Term Care Insurance
Review your Social Security Benefits
Review Retirement Accounts
Update Estate Planning Documents
Get Tax Breaks
1. Prepare for Medicare
Medicare is the most common form of health care coverage for older Americans. The program has been in existence since 1965 and provides a way for seniors to have their health needs taken care of after they retire from the workforce.
What is Medicare?
Medicare is basically the federal government’s health insurance program for people 65 or older (or younger with disabilities). Medicare is primarily funded by payroll taxes paid by most employees, employers, and people who are self-employed. Funds are paid through the Hospital Insurance Trust Fund held by the U.S. Treasury.
When can I enroll in Medicare?
Starting 3 months before the month you turn 65, you are eligible to enroll in Medicare, you can also sign up during your birthday month and the three months following your 65th birthday. Essentially, you have a seven-month window to sign up for Medicare. Be mindful of your timing and enrollment because Medicare charges several late-enrollment penalties.
What does Medicare cover?
Medicare benefits vary depending on the enrollment plan you choose. Medicare is made up of four enrollment plans: Medicare Part A, Part B, Part C, and Part D.
Here is a quick breakdown of the four parts of Medicare:
Medicare Part A: Know as the Original Medicare, Part A covers inpatient hospital care, home health, nursing, and hospice care. Part A is typically paired with Medicare Part B.
Medicare Part B: Still considered part of the Original Medicare, Part B helps cover doctor’s visits, lab work, diagnostic and preventative care, and mental health. It does not include dental and vision benefits.
Medicare Part C: This option offers traditional Medicare coverage but includes more coverage for routine healthcare that you use every day, routine dental care, vision care, and hearing. Plus, it covers wellness programs and fitness memberships. Medicare Part C is also known as Medicare Advantage and is a form of private insurance. Note that you will not be automatically enrolled in these benefits.
Medicare Part D: Medicare Part D is a stand-alone plan provided through private insurers that covers the costs of prescription drugs. Most people will need Medicare Part D prescription drug coverage. Even if you’re fortunate enough to be in good health now, you may need significant prescription drugs in the future.
While Medicare is great it’s not going to cover all your medical expenses. You’ll still be responsible for co-payments and deductibles just like on your employer’s health plan, and they can add up quickly.
To offset these expenses, a Medicare Supplement (Medigap) insurance policy could be a good option as well. Medigap is offered by private insurance companies and covers such as co-payments, deductibles, and health care if you travel outside the U.S.
How can I enroll in Medicare?
For most people, applying for Medicare is a straightforward process. If you already receive retirement benefits from Social Security or the Railroad Retirement Board, you’ll be signed up automatically for Part A and Part B.
If you aren’t receiving retirement benefits, and you don’t have health coverage through an employer or spouse’s employer, you will need to apply for Medicare during your 7-month enrollment window.
You can sign up for Medicare online, by phone, or in-person at a Social Security office.
Please note that if you have a Health Savings Account (HSA) or health insurance based on current employment, you may want to ask your HR office or insurance company how signing up for Medicare will affect you.
2. Consider Long Term Care Insurance
Another prudent thing to do when you are turning 65 is to consider your long-term care insurance options before retirement.
What is long-term care insurance?
The goal of long-term care is to help you maintain your daily life as you age. It helps to provide care if you are unable to perform daily activities on your own. It can include care in your home, nursing home, or assisted living facility. The need for long-term care may result from unforeseen illnesses, accidents, and other chronic conditions associated with aging.
Medicare often does not provide long-term care coverage, so it is a good idea to factor this additional coverage in.
Why do I need long-term care insurance?
While it may be hard to imagine needing long-term care now, the U.S. Department of Health and Human Services estimates that someone turning age 65 today has almost a 70% chance of needing some type of long-term care service in their lifetime.
Unfortunately, long-term care coverage is often hindsight, only thinking about it once it is needed. Planning for it now can help you access better quality care quickly when you need it and help you and your family avoid costly claims.
How do I get long-term care insurance?
First, talk with a CERTIFIED FINANCIAL PLANNER™ about whether long-term care insurance makes sense for you. Coverage can be complex and expensive. A good Financial Advisor can help guide you to a plan that is right for you.
Most people buy their long-term care insurance through a financial advisor, however, some states offer State Partnership Programs and more employers are offering long-term care as a voluntary benefit.
It is important to start shopping before you would need coverage. While you can’t predict the future, if you wait until you are well into retirement and already having medical issues, you may be turned down or the premiums may be too high to make it a feasible option.
3. Review your Social Security Benefits
If you haven’t yet started to collect Social Security, your 65th birthday is a great time to review your social security strategy to help you maximize your benefits.
When can I take Social Security?
The Social Security Administration (SSA) considers the full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960 until it reaches 67. For anyone born in 1960 or later, full retirement benefits are payable at age 67.
In deciding when to start receiving Social Security retirement benefits, you need to consider your personal situation.
How can I maximize my Social Security Benefit?
Turning 65 might raise questions about how to maximize your Social Security befits in retirement. Rightfully so. Receiving benefits early can reduce your payments, however, the flip side is also true. If you’re still working or have savings that will allow you to wait a while on receiving benefits, your eventual payments will be higher. Your benefits can stand to grow 8% a year if you delay until age 70. Plus, cost of living adjustments (COLA) will also be included in that increase.
In addition to delaying receiving your benefits, it is important to make sure all your years of work have been counted. SSA calculates your benefits based on the 35 years in which you earn the most. If you haven’t clocked in 35 years, or the SSA doesn’t have those years recorded, it could hurt you.
Be sure to create a “My Social Security” account and check to make sure your work history is accurately depicted. It is wise to download and check your social security statement annually and update personal information as needed.
Another potential boost in your benefit can come from claiming spousal payments. If you were married for at least 10 years, you can claim Social Security benefits based on an ex-spouse’s work record.
Everyone’s financial situation is different, but it can be helpful to have a plan for how you’re going to approach Social Security before you turn 65.
4. Review Retirement Accounts
Even if you are not planning to retire soon, now (and every quarter for that matter) is a good time to check in on your retirement accounts. Is your portfolio allocated in a way that lines up with your target retirement date? When is the last time you met with your financial advisor? Do you need to catch up a little? Do you have a plan for your Required Minimum Distributions?
Meeting with a CERTIFIED FINANCIAL PLANNER™ can help you evaluate your risk tolerance in comparison to your retirement goals, make sure your investments are aligned to help you retire when you want, and make a plan for you to maintain the lifestyle you want in retirement.
A financial advisor can also help with planning for 401(k) catch-up contributions, RMDs, early withdrawals, or completing a Mega Backdoor Roth IRA.
A big hurdle as retirement approaches is often all the homework you have to do. Penalties, enrollments, coverage gaps, deadlines, etc. A great financial advisor can help guide you through this process.
If you are wondering how to find a great financial advisor, we have put a simple guide here. Or, we would love for you to schedule an appointment now to meet with one of our CERTIFIED FINANCIAL PLANNERs™.
5. Update Estate Planning Documents
The next item on the retirement checklist of important things to do when Turning 65 is to get your estate planning documents and legal ducks in a row. If you do not yet have an estate plan, will, medical directive, or financial power of attorney, it is time to get those in order. It is not too late! If you do have them, take some time to update them.
Have you had recent changes in personal circumstances? Do you need to update beneficiaries? Reviewing your plan at regular intervals, in addition to major life events, will help ensure that your assets and legacy are passed on in accordance with your wishes and that your beneficiaries receive their benefits as smoothly as possible.
Further, it is also a good idea to take inventory and organize all your financial documents. Keep a list of all your accounts (banking and investment), insurance, and estate documents as well as key contact information in a safe place. Make note of any safety deposit boxes you have. Keeping all this info organized and in one place will be a big help to your loved ones during a difficult time.
You’ll feel great knowing that you and your family are prepared
6. Get Tax Breaks
Finally, don’t let Medicare be the only gift to you when you turn 65. Starting in the year you turn 65, you qualify for a larger standard deduction when you file your federal income tax return. You may also qualify for extra state or local tax breaks at age 65.
Many states also offer senior property tax exemptions as well. For example, in Colorado for those who qualify, 50 percent of the first $200,000 of the actual value of the applicant’s primary residence is exempted. Check with your local tax assessor to see what property tax breaks may be available to you.
Turning 65 Birthday Advice
Relax and enjoy it. As much as turning 65 is a time to plan for retirement, it is also a time to celebrate.
If you plan to indulge in a much-deserved tropical getaway or a quick trip to visit your grandchildren, you may be able to take advantage of new travel discounts. Delta, American, and United Airlines all offer senior discounts on selected flights. Additionally, many hotels, car rental companies, and cruise lines all also offer senior discounts. So treat yourself!
Have more questions? We’d love to talk. You can reach us at 719-394-3900 or you can schedule a call here!
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