Colorado Secure Savings Mandate – What you need to know

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 is launching in October 2022 and employers throughout Colorado will be required to comply starting in 2023.

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
  • Annual Salary Deferral Limit $6,000 (Extra $1,000 catch-up if over 50) as of 2022
  • 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 shortlist 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. 

 

What Are Alternatives to the Colorado Secure Savings Program?

 

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

State Run Retirement Plan vs 401k

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. 

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10 Mistakes to avoid with your Roth IRA

Roth IRA Mistakes

 

An individual retirement account (IRA), specifically a Roth IRA, is a great option to save for retirement.  However, there are a handful of common Roth IRA mistakes people make. 

One of the great things about a Roth IRA is that while contributions to a Roth IRA are not tax-deductible when you make them, the distributions can grow tax-free. Unlike a traditional IRA which is tax-deductible, you’ll have to pay taxes on them at your income tax rate.

Currently, a Roth IRA contribution allows investors to save up to $6,000 an additional $1,000 if over 50 years into an account that will forever be tax-free. That means if you started a Roth IRA when you were 18 years old, and you’re now 55, every single dollar including the gains are tax-free. Peter Thiel, a hedge fund manager, turned his Roth IRA into a 6 Billion Dollar tax-free account. Maybe you won’t end up with that much in a Roth IRA, but any amount that is not taxed by Uncle Sam, the better. 

Many pre-retirees want to find more ways to save for retirement. They also want to make sure they are setting themselves up for a better tax situation when they start taking money out of their accounts. A Roth IRA allows married couples over 50, to add an additional $14,000 ($7,000 each) per year, helping them build a tax-free nest egg. 

However, there are several common mistakes we see that cause people major tax issues or nullify their contributions. Below are the most common mistakes we find and how to avoid them

 

Mistake #1 – Contributing When You Don’t Qualify

 

The government wants people to save, however, they don’t want them to be able to save too much. As such, you can earn too much to contribute to a Roth IRA. Whether you’re eligible is determined by your modified adjusted gross income. Plus the income limits for Roth IRAs are adjusted periodically by the IRS. As such Roth IRA mistakes can be made. 

Find the current Roth IRA Contribution Limits can be found here. 

If you make contributions when you don’t qualify, it’s considered an excess contribution. The IRS will charge a tax penalty on the excess amount for each year it stays in your account.

 

How to avoid it:

 

If you’re close to the income limits, one way to avoid the extra tax penalty is to wait until you’re about to file your taxes. Then you can see how much if anything you can contribute. You have until the day your taxes are due to fund a Roth IRA. This way, you avoid making the mistake of contributing more than the allowable maximum. Plus, helps to avoid paying unexpected penalties. 

 

Mistake #2 – Funding more than one Roth IRA

 

Let’s say you fund a Roth IRA with Bonfire Financial, and also open another Roth IRA at Vanguard, for example, you cannot contribute $6,000 to each Roth IRA. The Roth IRA contribution maximum limit of $6,000 ($7,000 if over 50) if based on an aggregate limit. If you contribute more than you’re allowed to your Roth IRA, you’ll face the same excise tax penalties on those extra funds.

 

How to avoid it:

 

To avoid this problem, be sure to watch and manage the total amount of contributions in all of your Roth IRA accounts. If you do accidentally put in too much, you can make a withdrawal without penalty as long as it is before the tax filing deadline. You also have to withdraw any interest earned.

 

Mistake #3 – Not Funding your spouse’s Roth IRA

 

While your contributions to a Roth IRA are limited by the amount of money you’ve earned in a given year, there is an exception. Your spouse!  Even if your spouse has no earned income, they can still contribute to their own Roth IRA via the Spousal Roth IRA. You must be legally married and file a joint return to make this work.

 

How to avoid it:

 

By using a Spousal IRA, you can double up on your Roth IRA contributions. You can save an extra $7,000 per year in tax-free dollars if over 50 years old. 

Keep in mind that IRAs are individual accounts. As such, a Spousal Roth IRA is not a joint account. Rather, you each have your own IRA—but just one spouse funds them both.

 

Mistake #4 – Too large of a Roth Conversion 

 

Roth conversions are a good tool to use to make your future earnings tax-free and avoid RMDs in the future.  How these conversions work is by moving pre-existing funds in your traditional IRA or traditional 401K into a Roth or Roth 401k. The amount of money that is converted or moved from one account to the other will be taxable at whatever your current income tax bracket is.

One problem that can happen is that if you are close to the next income bracket and you convert funds over to a Roth, some of the conversion could be taxed at a higher rate. It pushes you into the next income bracket.   These conversions cannot be reversed. So, if you are not working with an advisor and your tax professional you can inadvertently pay more taxes than you need to.  

 

How to avoid it:

 

If you have large IRAs or 401k and would like to convert into a Roth, it is best to watch your income brackets and convert an amount of money that would fill your current income tax bracket but not spill over into the next.  It is best to use this strategy over multiple years.

 

Mistake #5 – Not doing a Backdoor Roth

 

Many of our clients have incomes that are above or well above the Roth IRA income phaseout.  Yet they and their spouses are funding their Roth IRA’s $7,000 each year. How? 

By using a strategy called the Backdoor Roth Conversion. A Backdoor Roth Conversion is done by funding an empty IRA up to $7,000 from your bank and then immediately converting the IRA dollars into the Roth IRA. In this way, you are funding a traditional IRA and not-deducting from your income, also known as a nondeductible IRA contribution, and then converting into the Roth IRA, which is allowed regardless of income. In this strategy, you indirectly fund the Roth IRA and can continue to do this every year going forward.

 

How to avoid it:

 

If you make too much money to contribute directly to a Roth IRA, consider doing a Backdoor Roth. There are some drawbacks to converting a traditional IRA to a Roth IRA. Since the money you put into your traditional IRA was pre-tax, you’ll need to pay income tax on it when you do the conversion. It’s possible that this additional income could even bump you up into a higher tax bracket. We highly recommend talking to a CERTIFIED FINANCIAL PLANNER™ about implementing this strategy. 

 

Mistake #6 – Doing a Backdoor Roth with Money in an IRA

 

One mistake we often see is someone funding a backdoor Roth IRA while concurrently having pre-tax dollars in other IRA accounts. The reason this is a problem is that the IRS looks at all accounts. And due to the “Pro-rata Rule” treats them as one. You cannot simply just choose to move after-tax dollars into a Roth IRA.

You have to calculate the amount of money that can be moved into a Roth without paying taxes by dividing the amount of after-tax dollars by the total amount of money in all your  IRA accounts. 

 

How to avoid it:

 

A way to avoid this common pitfall is to account for all IRAs. (SEP IRAs, Simple IRAs, and or traditional IRAs)This will help know whether you can contribute without triggering the Pro-rata rule. You could also convert all pre-tax dollars at once. Or, another option would be to roll your IRA money into a 401k so that you no longer have any money in an IRA.  

 

Mistake #7 -Not properly investing the money

 

One common mistake we see investors make is that they believe the Roth IRA is an investment when it is simply an account. Just because you contribute to a Roth IRA doesn’t mean it is invested automatically.

It is not enough just to open an account. You have to go into the account and select investments and manage them. If you just contribute to a Roth IRA without selecting an investment in the account, it could be just sitting in cash! 

 

How to avoid it:

 

Invest the money in your Roth IRA. If you are unsure of a good investment strategy, schedule a meeting with one of our CERTIFIED FINANCIAL PLANNER™ professionals. We can help make sure your Roth IRA is invested correctly for you based on your goals,  time horizon, and risk tolerance. 

 

Mistake #8 -Not optimizing your Roth Dollars 

 

Oftentimes, we see Roth IRA investors using allocations that are very conservative. Or they match other allocations in their 401(k). This is a massive oversight and not planning for a proper tax allocation strategy. A Roth IRA should be managed more aggressively than your other accounts so that you can take full advantage of the tax-free benefit. 

 

How to avoid it:

 

Leave the conservative allocation to the after-tax and tax-deferred accounts.  A Roth IRA should be as aggressive as you are willing and capable of doing. One advantage of  IRAs over 401k plans is that, while most 401k plans have limited investment options, IRAs offer the opportunity to put your money in many types of stocks and other investments.

 

Mistake #9 – Forgetting to name Beneficiaries

 

It’s important to name a primary and contingent beneficiary for your IRA accounts. Otherwise, if something happens to you, your estate will have to go through probate. And that can take more time, cost more money, and cause a lot of inconveniences.

 

How to avoid it:

 

Name your beneficiaries and be sure to review them periodically and make any changes or updates. This is especially important in the case of divorce. We see a lot of issues arise because a divorce decree won’t prevent a former spouse from getting your assets if he or she is still listed as a beneficiary on those assets. 

 

Mistake #10 -Not having a CFP® Manage your investment and tax strategy

 

There are many nuances to opening and maintaining a Roth IRA. The investments, the tax strategies, and the timing of contributions can all make or break your account’s tax-free status. This potentially could cost you additional taxes and penalties. 

 

How to avoid it

 

Work with a CERTIFIED FINANCIAL PLANNER™ to help you set up, and maintain your Roth IRA.  They can help plan for an effective retirement and tax strategy. Having a professional help you with your retirement accounts and other complicated retirement plan strategies can potentially help you avoid expensive Roth IRA mistakes.

 

To Sum it Up- Don’t make these Common Roth IRA Mistakes

 

Roth IRAs can provide a lot of great retirement benefits, but they can also be complicated. There are a lot of common mistakes with a Roth IRA. It is important to pay attention to all the regulations and rules to help you avoid these common mistakes.

Have questions about your Roth IRA? Give us a call! We are local in Colorado Spring but help clients all over the nation. We are happy to help. 

10 actionable ways to cut taxes now and in the future

HOW TO CUT TAXES NOW AND IN THE FUTURE

 

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.

An HSA is triple tax-advantaged, which means:

  • Contributions are made with pre-tax dollars 
  • 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. 

Your Roth IRA contribution limits are based on your filing status and income.

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.

Retirement vs. Inflation

How to protect your retirement from inflation 

 

It’s the ultimate battle of good vs evil. Retirement vs. Inflation. Inflation is the arch-enemy of your retirement savings and if you’re near retirement – or even thinking about it – now is a good time to pay particularly close attention to your money.  According to the Bureau of Labor Statistics Press Release on January 12, 2022, it is clear that prices are rising and inflation is here. Overall, prices have climbed 7% year over year which is the greatest increase in over 40 years. Truly there is no other topic that seems to be getting more attention right now than inflation. 

On top of that, the pandemic has most certainly shaken the sense of security that Americans felt when it comes to their finances and a lot of people feel more vulnerable than they did two or three years ago. Even if you have been diligent about saving for retirement inflation can eat into your nest egg quickly.

 

Why Inflation Happens

 

Inflation is, oddly, both incredibly simple to understand and absurdly complicated. It is worth taking a pause and understanding why inflation is happening in the first place. 

In the simplest terms, inflation happens when prices broadly go up. In other words, the average price of everything is increasing (housing, food, gas, cars, etc.). Generally, it is not a bad thing, as wages also rise. Ideal inflation according to the U.S. Federal Reserve targets an annual inflation rate of 2%. Most policymakers believe it leads to a healthy economy. However, we are currently sitting at 7%. A bit off the mark is an understatement. Here is a visual to give you an idea of where we are in relation to just 10 years ago. 

Inflations Impact on Your Retirement

Source: US Inflation Calculator

 

Why is inflation so high right now?

 

Again, simply put…blame the pandemic. In response to the pandemic, the Fed started adding an unprecedented amount of money into the economy via emergency stimulus funds to quickly get the country out of the recession, plus they slashed interest rates. People started spending more and demand was up. Good, right?

Yet, months and months of this fueled inflation because supply wasn’t able to recover as fast. Take for example the automobile industry. Many auto-manufacturers shut down during the pandemic and were slow to get things moving again, some still are, mostly due to supply chain issues. It is a classic formula of high demand plus limited supply equals higher prices. 

Further, inflation is hard to predict because it depends on what people expect of inflation in the future. For example, if businesses expect higher prices and wages next year, they’ll raise prices now. If workers expect higher prices and wages next year, they’ll ask for higher wages now. So Fed Chairman Jerome Powell has long been calling the recent inflation “transitory”, meaning in other words, only a temporary correction of the pandemic. 

However, both Powell and Treasury Sectary Janet Yellen admitted last month (Decemebr 2021) that it is time to retire the term. So, prices will continue to go up and the government is finally admitting it. Now what? 

 

How to protect your retirement from inflation 

 

Maximize Social Security Benefits

 

With rising costs it may be hard to offset inflation with your traditional retirement benefits, such as social security. However, you can work to maximize your social security benefits by delaying them. Delayed Retirement Credits help you to increase your benefit by a certain percentage each month that you delay starting your benefits. If you can wait to start getting your social security checks until age 70 your monthly payments will be higher and will adjust to the annual cost of living when you do begin to take them. 

It is important for everyone to maximize their social security benefits. This is a small step that could potentially hedge off some inflation and help your retirement savings go a little further. 

 

Get aggressive with any Consumer Debt

 

The Feds have signaled it will aim to make some aggressive policy moves in response to the current situation. It is likely we may see as many as three rate hikes this year, two more next year, and another two in 2024. If you have any outstanding credit card debt now is the time to pay it down before interest rates go up. Any variable rate debt will get very pricey. If you cannot pay it off all at once, but you have good credit try and take advance of some zero to low-interest balance transfers. Doing this will help insulate you from the coming higher interest rates. 

 

Take advantage of lower mortgage interest rates now

 

While mortgage rates move based on long-term bond yields, a spike in consumer prices will certainly make a rise in mortgage rates more likely.  Right now mortgage rates are still low. If you have considered refinancing to a lower rate (or buying a new home) this is your sign to look into it further depending on the term left on your mortgage. If rates do go up, you may wish you would have done it sooner. Also, as mentioned above, if you have an adjustable home equity line it could be at risk for an increase. Call a mortgage broker today to see what options you have. 

 

Look at your portfolio and make adjustments as needed

 

As financial advisors, this is something we are watching closely. Here are some of the general recommendations we have, however, everyone’s financial situation is different so we recommend contacting us (or talking to CERTIFIED FINANCIAL PLANNER™) before making any changes. Also, keep in mind if rates don’t go up like crazy these recommendations may not be the best and may underperform your hopes. 

First, at the very least, review your investment allocations. If you have bonds in your portfolio, we recommend short-term bond funds until interest rates go up. Ultimately these are going to be less risky with rising interest rates. While they may not have as much earning potential they can weather the inflation storm better. 

Also, with rising prices, finding stocks with dividends can add value to a portfolio. Think consumer-based large-cap stocks. Likewise, financial stocks also commonly benefit from higher prices and inflation. These types of investments may help keep pace during an inflationary environment.  

Finally, consider diversifying with Digital Assets, such as Bitcoin. Essentially, owning Bitcoin means you are betting against the world’s fiat currencies. Most major digital assets have a fixed number of coins or have capped the potential circulation growth. Interestingly, the infamous billionaire investor, Paul Tudor Jones, has even claimed that crypto protects better against inflation than gold. While there still may be limited evidence that crypto can hedge inflation and will cure all as it itself is often susceptible to market jitters, it certainly is worth looking into if it fits your risk tolerance and time horizons. 

Again, we emphasize not making any dramatic changes to your investments until you’ve consulted with a professional. Our experience has taught us that unforeseen events can happen and do happen, so it is best to stay diversified, rebalance as needed, and always come back to your long-term goals. We are happy to talk with you about your specific situation anytime. Schedule a call here.

 

In conclusion

 

Inflation can impact your retirement in a variety of ways. If you’re not on the right path to protect yourself against inflation it will be increasingly difficult for you to live comfortably when you can are no longer working. Adjusting your investment strategy, spending habits, and expectations to account for inflation is extremely important for retirees and those close to retirement.

How to prepare for Biden’s new tax laws

President Joe Biden hasn’t hidden his desire to raise taxes on corporations and the wealthy. It is his way to fund a multi-trillion infrastructure package and new social programs. Details are likely to change as the legislation makes its way through Congress, yet many are already wondering how to prepare for Biden’s new tax laws. 

While history reveals that the stock market does well during periods of higher taxes (as higher taxes often come with stronger economic growth), it doesn’t mean you should sit idly by and not do anything with your money amidst increased taxation. In fact, higher taxes will require an investor to be more adaptive and diligent.

 

Here are some ways you can prepare for Biden’s new tax laws:

 

—– (or scroll to the bottom for the recap video) —–

 

Long-Term Capital Gains and Qualified Dividends

 

Proposed change: 

 

The proposed Biden tax plan includes nearly doubling the long-term capital gains (gains on assets held for over a year) for those making more than $1 million. This is up from a 20% maximum rate (plus 3.8% net investment income tax) to 39.6% (plus 3.8% net investment income tax). This results in a top marginal rate of 43.4 percent. 

 

How to prepare: 

 

We are firm believers that long-term goals, not taxes, should be the primary driver of decisions. However, preparing for Biden’s new tax laws surrounding capital gains could compel some high-income investors to consider selling off assets before the tax hike takes effect. Others will look into alternative strategies to lower their taxes.

Gauging the impact of capital gains requires careful analysis. It is important to look at projections of future income and tax brackets. Capital gains taxes, unlike income taxes, are discretionary. This means that investors have greater flexibility on when to sell their investments. As such can determine how much tax they will have to pay in a specific tax year.  For example, there may be years in the future when someone’s income falls below the proposed $1 million threshold, resulting in a lower rate.

As a rule of thumb, realize capital gains when necessary to fund goals and manage risk. Consider realizing capital gains at today’s low rates (pre-Biden’s changes) if needed to fund shorter-term goals. For longer-term goals, investors may choose to retain the investments in the event future tax reform lowers the capital gains tax rate.

Also, consider utilizing an asset location strategy by placing inefficient tax assets in tax-deferred or nontaxable accounts. Interest income, dividend income, and realized capital gains do not get taxed in IRAs. We also recommend considering installment sales to regulate annual income levels, keeping income under $1 million as much as possible.

 

Basis Step-Up at Death

 

“In this world nothing can be said to be certain, except death and taxes.” -Benjamin Franklin

 

Proposed change: 

 

Biden’s new tax plan is proposing to end the longstanding tax exemption for investment appreciation when a taxpayer dies. This tax break is the step-up in basis. Changing it could raise taxes at death significantly for top-earning Americans.

Currently, if you inherit an asset that increased in value when the person who died owned it, the asset’s basis is increased to the property’s fair market value at the date of the previous owner’s death. This adjustment is called a “step-up” basis. The increase in basis also means that the person who inherits the property can sell it immediately without paying any capital gains tax because there is technically no gain at that point to tax.

The current step-up saves taxpayers more than $40 billion a year, according to the congressional Joint Committee on Taxation. The new proposal would take back some of that to help pay for social programs. It would be a profound change to a provision that has been in the tax code for 100 years.

Under the proposal, the un-taxed gains on investments held at death, such as stocks, land, or a home, would likely be taxed at a top rate of 39.6%, above an exemption of $1 million per individual, plus $250,000 more for a primary home. For married couples, the total exemption would be doubled, to up to $2.5 million of gains.

 

How to prepare: 

 

Potential strategies that could help with this rule change include the use of flexible grantor trusts, which allow swapping assets, borrowing, loaning;  Irrevocable trusts which permit gifting to charity to avoid a deemed sale and capital gains); consider prioritizing low-basis assets for charitable giving. If this proposal goes into effect, we suggest discussing options with your advisor and tax professionals.

 

Estate and Gift Tax Changes

 

Proposed change: 

 

Under Biden’s new tax laws he is proposing to reduce the estate and gift tax exemption amount to $3.5 million. Maybe lower. The current exemption amount is $11.7 million. A reduction in this amount will result in more tax for many families at death. For example, an estate of $5 million (currently under the $11.7 million limit) would be taxable for amounts over $3.5 million.

 

How to prepare: 

 

Consider using and funding a GRAT (grantor retained annuity trust) to transfer excess growth of appreciating assets while minimizing gift and estate taxes. Today’s GRAT rates are historically low, so this is an ideal time to create a GRAT. Consider funding trusts now.  Particularly those that are expected to need cash to meet future expenses, such as life insurance premiums, in case annual exclusions are capped. We recommend discussing such strategies with your lawyer and/or CPA. 

Further, you can still implement annual gifting. Current limits allow for gifts up to $15,000 per donee per year. A solid strategy used to pass wealth while staying within IRS limits. A  married donee may gift $15,000 to a spouse, as well. 

 

Individual Income Tax

 

Proposed change: 

 

Biden is also proposing to increase the top individual ordinary income tax rate to 39.6% for families making more than $400,000 ($200,000 for individuals). The current tax law is 37% top individual ordinary income tax rate. The proposed income tax increase is relatively small.  It would return it to 2013-2017 levels, however, there are still some tax mitigation opportunities. 

 

How to prepare: 

 

First, make sure you are fully funding your 401k and IRAs, further convert traditional IRAs into a Roth IRA, i.e. a Backdoor Roth. Revisit elections on deferred compensation plans. 

 

Other Proposed Tax Laws

 

Biden’s proposed new tax laws include much more than listed here. These are the biggest changes, to read more about all the proposed changes reference The American Jobs Plan and The American Family Plan.

Although definitive tax policy changes have not yet been enacted, it is highly likely we will see changes to the tax landscape late in 2021 or early 2022. Biden’s new tax laws could have a significant impact on your finances and taxes, with specific changes on investment income. Bonfire Financial can help you create a financial plan and optimize your tax strategy based on your needs and goals.

If you have questions on how to prepare for Biden’s new tax laws or are interested in scheduling a financial planning audit, please reach out to our CFP® professionals at 719-394-3900.

 

—– (watch the recap video) —–

 

United Employee Benefits: How to Leverage Your RHA for Tax-Free Growth

United Airlines Employee Benefits: Retirement Health Account

 

Working as a United Airline Employee has more benefits than just a 401(k) plan or free flights. United provides a Retirement Health Account that gives you another resource to fund medical expenses in retirement.  When doing financial plans for our clients many of which are pilots, one important issue that often comes up is how to fund health care.  The United RHA is a great tool for that.

 

What is an RHA?  

 

The United Retirement Health Account is a health expense reimbursement account like a Health Saving Account (HSA) but one you use in retirement. United Airlines ALPA Retirement Health Account (RHA) allows retired United and legacy Continental pilots to reimburse themselves tax-free for qualified health expenses for them, their spouse, and dependents in retirement. For that reason, it truly is one of the great United Employee benefits.

 

Eligible expenses include:

  • Doctor visits
  • Co-pays
  • Dental premiums
  • Insurance premiums
  • Medicare
  • Long Term Care insurance premiums

 

The RHA is a fringe benefit provided by United and is a unique savings account that most companies do not have. United basically got the blessing of the IRS through a private letter ruling to have this plan.  Because it is more of a one-off plan the rules are more opaque and restrictive.

 

How does the RHA work?

 

Unlike other United Airlines employee benefits, the RHA is funded by United only. No employee money is ever contributed to the account. Every working hour, United contributes $1.00 to your account. More importantly, when your 401(k) limit is reached, all employer contributions will continue, but spill into the RHA. United contributes 16% of your salary into your 401(k), and once the 401(k)  limit is reached at $57,000 in 2020 (not including the employee age 50 catch-up of $6,500 in 2020), further contributions will spill into the RHA. Forfeited vacation can be contributed to either the PRAP or RHA at the employees’ discretion.

 

What can I use the RHA for?

 

The RHA is meant for medical expense reimbursement in retirement or separation of service only. The account itself is held in a pooled account with other employees and pilots at United, and cannot be moved into an individual account. As such, the benefit of the RHA is to allow you and your spouse and dependents to reimburse any health expenses and premiums tax-free.

According to a study done by Fidelity, the average 65-year old couple retiring in 2019 can expect to spend $285,000 in healthcare and medical expenses. Medical expenses increase at nearly twice the rate of inflation, and will likely continue to grow in the future. The RHA allows retired employees and pilots to maximize their retirement benefits by providing a tax-free vehicle to pay for medical expenses, without having to access taxable or tax-deferred accounts like your 401(k).

 

An example

 

Take for example, Sarah. Sarah is a retired pilot and can use her 401(k) to pay for regular retirement expenses. The issue that she runs into is that distributing from her 401(k) will recognize that income. If she is currently in the 22% tax bracket and takes out $50,000 per year to pay for expenses, she will need to pay $11,000 in tax for that year. Sarah needs surgery and will need to pay $10,000 out of pocket. She will pay that money from her checking account, and reimburse herself from the RHA for $10,000. Because she used the RHA for a qualified health expense, she will not have to pay any taxes. If Sarah made the mistake of using her 401(k) for the expense, she would need to pay an extra $2,200 to the government!

The RHA can be used to pay for Medicare premiums, co-pays, insurance premiums, dental insurance premiums and expenses, and even long-term care insurance premiums. The RHA can grow rather quickly and it can be very useful for your family. For example, if you have a balance of $0 in your RHA, and United contributes $5,000 each year for 20 years, and you expect an annual return of 6%, your ending RHA value will be $183,928 of tax-free dollars at 65! If you have contributed $10,000 per year, you would have $367,856!

 

Eligible Expenses

 

All of the following in red are covered by the RHA. The blue are non-eligible medical expenses that must be paid out-of-pocket. 

United Airline Employee Retirement RHA

(Image: Further/SelectAccount Family of Products)

 

When can I excess the money in my RHA?

 

There are a few times in which you will be able to access your RHA. The most straightforward one is in retirement. Also, if you are laid off or fired you will be able to access it. Additionally,  if you are furloughed, you can use the RHA to pay for COBRA premiums until you get back to work. Just another one of the United Employee Benefits.

 

How do I maximize my RHA?

 

If you are nearing retirement, you may be seeing that you have a very large 401(k), which can also mean a very large tax problem when you go to withdraw from it in retirement, especially with Required Minimum Distributions (RMD) beginning at 72 years old with the new SECURE retirement act. To maximize RHA funding, you can contribute more to your 401(k), up to $19,500 in 2020. Moreover, if you maximize your contribution, you will have only $37,500 ($57,000-$19,500) left for the employer to contribute. Say if you make $280,000 in 2020, United will contribute $44,800. Because there is only $37,500 left for United to fund the 401(k), the rest, $7,300, will spill into the RHA. Therefore, if you wish to save more in your RHA, you can maximize your contribution early in the year to fund the 401(k) using your employee contribution.

Further, you can also elect to move all forfeited vacation days into the RHA. You can maximize or minimize what is in your RHA by either over- or under-funding your PRAP using your employee contribution or forfeited vacation. The United Retirement & Insurance committee has an RHA spill calculator available to you, to estimate your projected RHA funding.

Here is an example of two pilots, they both make $280,000. Both pilots are 47 years old. Tom (Pilot A) maxes his 401(k) contribution up to $19,500. Bill (Pilot B) contributes $10,000 to his 401(k). Remember, the total amount allowed in the 401(k) per year is $57,000. Any amount over will spill into the RHA:

Salary United’s 16% Contribution Pilot’s Personal Contribution Total Contribution (limit of $57,000) Spill into RHA (above $57,000)
Tom (A) $280,000       $44,800     $19,500     $64,300 $7,300
Bill (B) $280,000       $44,800     $10,000 $54,800 $0

How do I limit contributions to my RHA?

 

Because United funds your RHA based on your salary, there is no way to avoid contributing to the RHA if United has maximized your 401(k) contribution. Based on the 401(k) rules, the 401(k) spill will begin once a pilot has reached a total of $57,000 contributed in his 401(K) in 2020 (not including $6,500 in catch-up at 50). All employer contributions will go to the RHA  after that. By underweighting what you contribute into the 401(k), you can limit the amount of spill into the RHA. If you have a salary of $250,000 and United contributes 16%, you will have $40,000 in your 401(k). You still have $17,000 without having any spill into the RHA ($57,000 – $40,000 = $14,000 left to fund). Regardless, you are not losing money when United contributes to the plan. It is essentially a free benefit to you.

 

What happens to my RHA if I die?

 

The RHA can be used by you, your spouse, and qualified dependents. If you are 65, and your children now support themselves, they are not considered to be your dependent. When you die, your spouse will be able to use and access the RHA. Once your spouse dies, and you have no dependents, any remaining amount in the RHA will be reverted back into the pooled investment account at the record keeper. The RHA is not able to be inherited like other accounts. Therefore, it is important to take advantage of your RHA when you are able to use it so you don’t leave any money on the table. 

 

The RHA and Tricare for Life

 

Many pilots are retired military and will use Tricare to supplement part of their medical coverage. For example, a family on Tricare for Life in retirement will still be using Medicare Part A & B, and Tricare is used in conjunction to pay for coverage outside of hospital stays (A) and doctor’s visits (B).  Similarly, Tricare is used for other coverage such as prescription drugs, and the remaining premiums from Medicare Part B. Tricare and Medicare Part A & B cover most health-related expenses, but the RHA can be used tax-free to cover other parts such as dental insurance premiums, long term care insurance premiums, vision plans, therapy, and other eligible medical expenses outside of Medicare and Tricare coverage.

 

RHA to fund long term care insurance premiums

 

According to Genworth Insurance, $51,480 in 2019 was the national annual median cost of In-Home Care. Long-term care can quickly drain older Americans’ retirement and savings. According to AARP, 52% of people turning 65 in 2017 will need long-term care at some point. The estimated cost for end-of-life care in 2016 ranged from $215,820 and $341,651 according to Alzheimer’s Association. Ultimately, the last thing you want is to drain your worth in your final years and not be able to leave anything to your estate, children, heirs, and charities.

Long-term care insurance is one way to pay for long-term care and nursing care. LTC insurance can cost up to $3,000 per year for one person and can be even more if you have a family history of dementia. Luckily, you can pay for LTC insurance premiums tax-free with the RHA. Therefore, you can have LTC insurance and leverage your RHA’s tax-free characteristics. 

The Retirement Health Account might just be one of the best United employee benefits out there. It’s employer-funded, more money without more taxes, extra money for health care expenses during retirement benefit.

 

Questions?

 

We are here to help. Bonfire Financial acts as a fiduciary financial advisor for our clients. We have a staff of Certified Financial Planners™ that specialize in helping United Airline Employees and Pilots with their retirement and benefits. Schedule a free consultation with us today. We’d love to talk to you. 

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Roth 401k or Traditional 401k?

Roth 401k or Traditional 401k? 

 

The 401k plan is the cornerstone to retirement. Gone are the days of big company and school district annual pensions and generous social security benefits. It’s now up to the individual to plan and save for their entire retirement. In addition to all the expenses that go with it. Luckily, a Roth 401k or Traditional 401k is a fantastic tool. One of the best that you can use to save for your retirement and goals. However, there is a lot to understand about how they work and how to use the 401k for your best outcome.

 

A little background

 

The purpose of the 401k plan is to save for retirement. Currently (as of 2019), an employee can contribute $19,000 of their own money to their account and an additional $6,000 if they are over 50 years old per year. Your company can match or add to the 401k plans. The total plan can add up to $56,000 or $62,000 (if 50) per year in 2019. Some plans also allow for you to contribute to a Roth 401k. Many people wonder if this may be a better option for them. We’ll explore the key differences between a Roth 401k or Traditional 401k so you can make a confident decision.

 

The Roth 401k

 

The Roth 401k is a relatively new concept. It was introduced in 2001 for the purpose of allowing employees to take taxes now and forever shield the gains from tax. Many people see the benefits of contributing to the Roth 401k. However, some are hesitant as to whether the traditional tax-deferred 401k will still be better for them because of its favorable tax deferral. When you elect to contribute to the Roth 401k, you can use your entire employee contribution of $19,000 (plus $6,000 if over 50) to your account each year.

The money you add to the Roth is still considered income. You will be taxed on that amount. Once your savings in the account have been taxed at your regular income level, it will grow tax-free. Then, when you take money out of it, that will also be tax-free.

This is a great option if you do not want to pay extra tax in your retirement. Also, good if you are in a lower tax bracket than you expect to be in the future.

 

Example

 

As an example, if you contribute $25,000 to your Roth 401k at the 22% tax bracket, you will still pay $5,500 as a part of your tax bill. Let’s say if you contribute $25,000 annually for 10 years at a rate of 8%, you would be the owner of an account that has $362,164 completely tax-free! The benefit of having a Roth IRA is that you will never pay taxes on the gains that you make in the account. If your account is still around for your heirs, they will not have to pay any tax either!

Having this option will allow you to grow your money . Addtionally, you will not have to worry about paying extra taxes. It is important to note that your employer does NOT match your contribution on a Roth basis if you do. They will continue to match your contribution, but it will only be in traditional tax-deferred dollars.

Let’s say your company matches you 3% of your salary. If you are in the plan and make $100,000, you will be contributing $3,000 each year into your Roth 401k. Plus, your company will contribute $3,000 to the traditional 401k. They will be in the same account but will be accounted for separately by the administrator of the company 401k plan. When you are deciding, if you can afford to do the Roth 401k, you absolutely should.

 

The Traditional 401k

 

The traditional 401k allows an employee to defer their income of what they contribute. That means if you made $100,000 and decided to contribute $25,000 to your 401k, you will only have to report $75,000 to the IRS. This is because you “deferred” your income into the account. Once you retire and withdraw that money, you will have to pay the income that you “realized” at the tax rate you are at when you withdraw.

The advantage of the traditional 401k is that you get to defer your income and save it while it grows in your account. When you retire, you may move your traditional 401k to an IRA. As an example, you made $170,000 as a married couple. At $170,000, you are pushed into the 24% tax bracket (over $168,450 Married Filing Jointly). But because you understand the 401k can defer your income, you decide to defer $15,000 into the account, dropping you out of the 24% bracket and into the 22% bracket, which saves you money!

The traditional 401k is best if your cash flow is tight. It is extremely important to save for your retirement. You should always save 10% or more of your salary as a rule of thumb. When you save on taxes, you will be saving yourself money.

 

Example

 

Here is an example that will illustrate how your contributions of $20,000 affect your cash flow.

 

Roth 401(k) or Traditional 401(k)

 

Here we can see with a salary of $100,000 we cannot defer any money from taxes if we contribute $20,000 into the Roth 401k. Our total taxes at 24% will be $24,000 for the year. If we contribute $20,000 to the traditional 401k, we will defer that money from taxes, so only $80,000 will be taxed at 24%. At the end of the year, using the traditional will save us $4,400, which is $367 per month. If that money is needed for your cash flow, do the traditional. If you can take the hit now on taxes, you should do the Roth 401k.

 

Which one is best for me?

 

You are weighing now versus later. If you are just starting out in your career and are in the lower tax brackets you should contribute to the Roth 401k. At the end of the year, you will have a bigger tax bill from Uncle Sam because you recognized all of your Roth contributions. Have no fear! Your Roth retirement account will grow tax-free all the way up until you retire. Plus, all the gains that you have made throughout those years will be tax-free as well!

If you have a good handle on your cash flow, you should contribute to the Roth 401k. If cash flow is an issue you can use the traditional 401k to lower your tax bill. You get to defer that income and save it in a tax-deferred account that will grow. Once you take money out of the account, you will have to pay income tax on it. This can be quite advantageous if you are at the top of your career and at the higher tax brackets. If you believe that you will be in a lower bracket when you retire, the traditional is your best bet.

 

The Backdoor Roth IRA

 

People want to enjoy deferring their income to save on taxes but also want the ability to have a Roth account that they can draw from tax-free in retirement. Many people close to retirement are looking at all the taxes they have saved in their accounts and now see a huge dollar sign going to the government every time they take money out for their retirement expenses.

The Backdoor Roth IRA allows a person to continue to defer their income through their 401k, but also contribute $6,000 (plus $1,000 if over 50) per spouse into a Roth IRA. A married couple can contribute up to $14,000 each year to Roth IRAs. If this planning technique is done for 5 – 10 years before retiring, this would give a retiring couple a substantial tax-free account.

 

Example

 

As an example, if a married couple were to contribute the max amount of $14,000 for 10 years. Assuming a yearly return of 8%, they would have $202,811.87 of assets that would never be taxed again! The benefit of a Roth is also that there are no Required Minimum Distributions as there are with a traditional account. If a married couple paired the backdoor Roth IRA with the 401k plan, they would have an effective diversification of their tax accounts, which would be very helpful in retirement.

This is a complex planning strategy. It is important to work with a financial advisor that understands your objectives and will help you leverage your current situation to help you meet your expectations.

 

The Bottom Line

 

If you can stomach the tighter cash flow and you are suspecting that you may be in a higher tax bracket, the 401k Roth is best for you. If you are tight on cash flow and could use the extra money while also saving for your retirement, the traditional 401k is for you. Also, if you suspect to be in a lower tax bracket in the future when you take out money, the traditional 401k is what you should choose.

The Backdoor Roth IRA is great for people that wish to save in a traditional 401k to take advantage of the tax deduction, but also want to grow a Roth IRA that will never be taxed. Using this mechanism, a single person could add $62,000 into a traditional 401k and $7,000 into a Roth IRA.

 

What’s next?

 

Interested in learning about the differences between an IRA and a 401k? Read up on that here.  Still have questions? Please feel free to contact us!  719-394-3900- We offer free 30 minute consultations that can help answer many of your questions.

3 Questions to ask before making any financial decision

 

Whether it is hiring a financial advisor, picking a mutual fund, or refinancing your mortgage it is a good idea to ask a lot of questions when it comes to your money. However, if you only ask a few, here are our top 3 questions to ask before making any financial decision.

 

What is the investment philosophy?

 

Make sure to ask yourself if the investment makes sense to you. It may be great for 99% of the population but is it a fit for you and your current situation. Does it match up with your risk tolerance and timeline?  Really take the time to contemplate this.  Further, do you understand it? Or is it too complex? Understanding this will help move you forward in a meaningful way.

 

Do I trust the person giving the advice or offering the investment?

 

Simply put, what is your gut telling you about who is behind this. What is the person’s credibility and credentials? Was it your cousin Eddie spouting off a stock tip at the family reunion? Or a longtime friend and financial advisor who has been in the industry for years? It may seem like a no-brainer to ask this question, but it is sometimes easy to get caught up in the hype of the product and the potential returns.

A quick way to tell if an advisor truly has your best interest in mind is if they are CFP® (Certified Financial Planner)- learn more on that here, but in short, it means they are a true fiduciary and must have your best interest in mind regardless of commissions. Trust is so important, don’t take it lightly.

 

What is the downside risk, and can I afford it?

 

What can you stand to lose? Sure, look at what the potential of the investment is, but don’t ignore the risk. Make sure the amount you invest matches your risk tolerance. The old saying stands true here- “Don’t put all your eggs into one basket.”  Before you make an investment decision know the risks.

Short and simple, those are the top 3 questions to ask before making any financial decision!

Are you considering an investment and aren’t sure if it is right for you? Asked these questions and are still unsure? We are here to help…just give us a call.

 

10 Books for a Better Money Mindset

10 Books for a Better Money Mindset

 

The list of personal finance and investing books is pretty extensive. This is not that list. While those books can be helpful, many get very technical, and if your mindset isn’t in the right place to take in that knowledge – what is the point?  Plus, technical knowledge alone won’t lead you towards a wealthy and rich life (financial or otherwise). A lot of what holds people back from success are their thoughts and beliefs about money. 

 

 

 

What stories do you tell yourself about money?

 

For some, and as society has come to reinforce, is that money is the root of all evil, or that rich people are greedy, or some other negative belief along those lines. Living with a negative or scarce mindset will never lead you to a positive or abundant life. In fact, research shows that one of the BEST predictors of success in life is one’s mindset.

 

Get your mind right, get your life right!

 

So then, what is this list? This is a list of books for a better money mindset.  Some talk specifically about money, others don’t, but all should spark something in your mind and help you view the world, and your money in a different and more positive way.  Let’s get to it!

 

 

1. Mindset by Carol Dweck

 

This is an obvious first choice because, well, this book is THE book about mindset.  There are decades of research behind this book that gets translated into specific, actionable, and tangible detail. Dweck has a very compelling view of why we should look differently at failure and learning. Further, this book helps you to evaluate if you are approaching your money from a fixed or growth perspective. There is a huge difference, which is why I recommend this book.

You can pick it up here.

Books for a Better Money Mindset

 

2. Start with Why by Simon Sinek

 

Simon Sinek is a genius when it comes to getting to the heart of why you should do something, not how.  Why do you want more money? Certainly, it’s not to have more pieces of paper with dead Presidents on them laying around. Defining what is truly behind your financial goals will help propel you in the right direction. You will discover that money is never really the WHY.

The book is here (or audiobook). Sinek also has a powerful TED Talk around this concept as well.


Books for a Better Money Mindset

 

 

3. The Power of Broke by Daymond John

 

Shark Tank investor and entrepreneur Daymond John was broke with a $40 budget when he was starting his clothing brand FUBU, which today is a $6 billion brand. How is that for bootstrapping?! This book is great for putting money into perspective. It shows that it doesn’t always take money to make money (another disempowering colloquialism that society has)- the book has so many perfect examples of this. Use your lack of financial resources to your advantage. We also recommend this book to those well off because it can reignite a hustle you may have lost along the way.

This is a must-read for anyone- get it here or on audiobook.


Books for a Better Money Mindset

 

4. The Talent Code by Daniel Coyle

 

This book is grounded in science. It doesn’t skip straight to the “here’s how it works, go do that”, instead, it helps you understand what influences the development of your skills and as a result helps you become a better learner in all areas. This book has expanded my mind and it is another great perspective builder. There are practical stories and examples of the concepts. Above all, Coyle shows how all of us can achieve our full potential (and the best money mindset) if we set about training our brains in the right way.

Check it out here, or again on audiobook.


Books for a Better Money Mindset

 

5. Think and Grow Rich by Napoleon Hill

 

This is a classic and one of those books I revisit at least once a year. It is that good. If you haven’t read it, stop what you are doing and read it already.  In fact, I believe this should be required reading for high school students. In the book, Napoleon Hill recounts his research of more than 500 self-made millionaires (keep in mind the book was originally published in 1937) and then he boils down the “secret” to building wealth into 13 principles and reveals “major causes of failure” that hold many of us back from getting rich. This should really be on every list of books for a better money mindset, or self-improvement book list in general.

If you haven’t read it, do yourself a favor and pick up a copy today. Get one for yourself and two more as gifts for a recent grad.


Books for a Better Money Mindset

 

6. The Inner Game of Tennis by W. Timothy Gallwey 

 

I had to convince my wife to read this because she isn’t a huge Tennis fan, she read it and loved it. So, if you are not a  big Tennis Fan either, simply ignore the title and read on.  This book is about how to master your inner dialog. The inner game of tennis theory states that two opposing mindsets are always battling. The first, the “teller” mind which is filled with self-judgments and criticism. This mindset wants to over-control your performance.  The second “doer” mindset is the best mindset for peak performance and happens when you are free and react with your game. You must master both.  Again, master your mind- master your money.

Definitely worth a read. You can pick it up here.


Books for a Better Money Mindset

7. The Millionaire Next Door by Thomas J. Stanley Ph.D.

 

This book examines the lives of unlikely, unexpected millionaires. It goes into the habits, careers, and relationships that shape these people. Some of the material is dated to the 90’s but the concept is still applicable today- especially the principle that wealth is more common than you would think, actually it that might be even more relevant today. There is lots of practical advice in this classic book and one worth checking out.

Available in paperback or audiobook.

Books for a Better Money Mindset

 

8. The Other 90% by Robert K. Cooper

 

I believe there are two main problems with the majority of self-help and leadership books. First, the vast majority of self-improvement books don’t seem to challenge conventional thinking in any meaningful way, nor do they bring about fresh insights. Second, they tend to offer oversimplified platitudes about success. The other 90% goes in the opposite direction.  Dr. Robert Cooper, a neuroscience pioneer, urges us to take a radically different view of human capacity. We are mostly unused potential, he says, employing less than 10 percent of our brilliance or hidden talents. This book provides action steps to develop your full potential in all areas of your life.


Books for a Better Money Mindset

 

9. Unfu*k Yourself by Gary John Bishop

 

I love this book because it offers a no-BS, tough-love approach to help you move past self-imposed limitations. It is a great alternative to cozy, everything is rainbows, self-help books. Beyond the catchy title, it offers practical insights on fostering the will for change, changing your language to serve you, and overcoming analysis paralysis. It drives home the point, quite bluntly, that you currently have the life (and the money mindset) that you are willing to put up with. It is certainly a refreshing read and why it made our list of books for a better money mindset.

Pick up the paperback or audiobook here.

 

10. The Power of Habit by Charles Duhigg

 

Habits around money can either be the most empowering or the most detrimental. This book walks you through everything you need to know about breaking and forming habits that will transform your life, and of course your money mindset. This book is a fascinating account of recent research into habits and worth the time to read it. What cues some of your current money habits? What rewards do you have in place for your good habits? Do you have a plan in place to create better habits around money? This book dives into it all. Change might not be fast and it isn’t always easy. But with time and effort, almost any habit can be reshaped.

The paperback or the audiobook is great!


The Power of Habit - Books for a Better Money Mindset

 

There you have it! Our top Ten Books for a Better Money Mindset. Have you read any of these already? Are there others you would add to the list? We hope you find value in these and that at least one resonates with you in a way that makes you want to intentionally improve your mindset,  because if you improve your mindset- you improve your life!

 

What’s next? 

 

Reading all these books is a great starting place to helping to develop a better money mindset, however, that’s not where it should end. We want to be by your side in your journey. Let’s talk! We offer free 30-minute consultation calls that can help get your questions answered and you pointed in the right direction towards your goals. Reach out to us to set up a call and use the link below for the time that works best for you!

Money Mindset Coach

 

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Books for a Better Money Mindset

Please note this post includes affiliate ad links -As an Amazon Associate, we earn from qualifying purchases.

 

Is Insurance an Investment?

Is Insurance an Investment?

 

The simple answer is no. You don’t view car insurance as an investment, so why would life insurance be?

If insurance is not an investment, why do we have insurance? Simple, it is for protecting your assets and for protecting your loved ones.

Think about this… You have car insurance and home owner’s insurance, but why?  It’s so you will be covered if you get into an accident, or stuck in an unreal hail storm, or if the water heater breaks and floods the basement, or in the unlikely event your house catches fire.

In all these cases people purchase insurance to make sure that they are not going to have to pay the full amount to get back to whole after something terrible happens. That’s it.

We have yet to meet a person that bought car or homeowners insurance as an investment thinking they were going to make money or get returns off the insurance.

Why is life insurance different?

It’s so that your loved ones are taken care of if something happens to you.  If you are no longer here, who or what is going to replicate the income you generate? Most people say that if they pass on early or unexpectedly they want their family to be able to maintain the same quality of life.

 

The important questions to ask yourself are:

 

  1. How much do I need to achieve the goal?
  2. What is the most effective and inexpensive way to achieve that goal?

 

There are certain factors to think about that will help determine what kind of insurance to buy and how much. These factors include your time frame, health, and resources (other investable assets).

When you ask these questions you are looking at insurance from a needs-based approach. It helps you find a solution that fits your particular situation.  When acting from this point of view, very rarely does a whole life or universal life product make sense.  Term life insurance normally gives you the greatest amount of coverage for the least amount of money.

 

Why do people say life insurance is an investment?

 

Well, have you ever gone to see a movie and walked out a little disgruntled saying “Man, the best parts were in the trailer, why did I even go?!”  That is the feeling most people get when they buy insurance as an investment. The story or sales pitch was better than the product and the only winner was the one selling the insurance.

In the end, people often say “my advisor said it would be like a forced savings that I can borrow against, but I have no idea what it is” or “they said it grows tax-free or something like that” It is one thing to waste your money on a $15 movie, it is another thing to waste thousands of dollars on insurance you think is an investment but in reality doesn’t meet your needs.

If your financial advisor has tried to pitch you insurance as an investment, you don’t have a financial advisor, you have a salesperson. 

Insurance is not an investment.

 

Here are some facts on whole life insurance, universal life insurance, portfolio or permanent life products that should help bring some perspective:

 

  • They cost a lot more to get the same amount of coverage as a term policy.
  • There are hidden fees.  You can find them buried in the 8 pt. font 20+ page contract. Are you are up for some “light” reading?
  • These products pay big commissions to the insurance salesmen, which they do not have to disclose to you.
  • If you borrow against it, your death benefit will be reduced, and your loved ones will be left with less.
  • If you do mix investment with insurance, i.e. you ‘invest’ in insurance products like endowment or money back plans, your returns are bad, limited at best. Usually less than 3 or 5%.
  • When you die with a cash value, they only pay out the face amount, not the extra money you’ve put into it. Your extra investment vanishes- they keep it.
  • And finally, you are borrowing the money so there is interest to be paid, which means you pay even more.

 

These products have many moving parts and are quite convoluted. Many clients come to us asking for help to understand what they bought from someone else and how it works.

In most cases, we end up having to call the insurance company to get full indoctrination of the product so that we can understand that if this happens, that happens, and so forth and so on. Whole life and universal life products simply have too many variables.

 

Insurance unfortunately is unnecessarily complicated, but it doesn’t need to be.

 

If you understand that insurance is not an investment, the picture can comes into focus. Term life is more than often the best solution for the lowest cost. The best way to buy it is through a broker or advisor that shops several companies to get you the best deal. Which, by the way, is what we do.

We’d love to discuss this more with you and truly find a solution that meets your needs, so give us a call and join us around the fire.

 

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