Required Minimum Distributions: RMDs Explained

Why Required Minimum Distributions Matter

You’ve spent years building your nest egg in tax-deferred retirement accounts, your IRA, 401(k), maybe even TSP. It feels like free money. But once you hit your 70s, a new rule kicks in: Required Minimum Distributions (RMDs). And they’re far from “nice-to-have.” The IRS requires withdrawals starting at age 73, and missing or mismanaging them can blow up your retirement plans instantly.

Let’s break it all down: what RMDs are, why they’re critical, how to calculate them exactly, and the smartest ways to minimize their tax and financial impact.

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What Exactly Are Required Minimum Distributions?

Required Minimum Distributions (RMDs) are the IRS’s way of making sure retirement funds don’t sit forever tax-deferred. Once you reach a certain age, you’re forced to start taking taxable withdrawals from your traditional IRAs or employer-sponsored plans like 401(k)s.

  • Why? Because decades of tax‑deferred growth mean big tax savings. Required Minimum Distributions ensure those deferred taxes eventually get paid.

  • No rollbacks allowed: Once withdrawn, you can’t return RMDs to the account, they’re permanent. 

When Do RMDs Start?

Thanks to the SECURE 2.0 Act, the timeline shifted:

  • Before 2023: RMDs began at age 72.

  • Starting 2023: The starting age moved to 73.

  • From 2033 onward: It will rise to 75 for those born in 1960 or later

Key Deadline Tips

Your first Required Minimum Distribution can be delayed until April 1 of the year after you reach RMD age, but delaying means you will owe two RMDs in the same year. After your first RMD, all future withdrawals must be completed by December 31 of each year.

Although allowed, delaying your first RMD is often a mistake because doubling up distributions can spike your taxable income all in one year.

How to Calculate Your Required Minimum Distribution

The calculation is straightforward, but precision matters.

  1. Find your account balance as of December 31 of the prior year.

  2. Determine your distribution period based on your age using the IRS tables (Uniform Lifetime, Joint and Last Survivor, or Single Life).

  3. Divide the account balance by the distribution period to find your required withdrawal.

Example:

If you are 75 with $2 million in your IRA at year end and your distribution period is 24.6, your RMD is approximately $81,300 ($2 million divided by 24.6).

If you have multiple accounts, you calculate each account’s RMD separately. For IRAs, you can withdraw the total from any one account if you prefer, but employer plans such as 401(k)s and inherited accounts must each have their own RMD taken directly.

Our partner custodian also offers a solid Required Minimum Distribution Calculator that you can use.

Penalties for Missing RMDs

This is where things can get expensive. The old penalty was 50 percent of the missed amount, but the IRS has reduced it.

  • The penalty is now 25 percent of the shortfall if you miss or under withdraw.

  • The penalty can be reduced to 10 percent if corrected promptly, usually by filing Form 5329 and paying the shortfall within two years.

Missing your RMD? Act quickly. The difference between a 25 percent penalty and 10 percent could mean saving tens of thousands of dollars.

Smart Strategies to Manage RMDs

Here is how to make Required Minimum Distributions work for you instead of against you.

Qualified Charitable Distributions (QCDs)

Donating directly from your IRA to a charity reduces your RMD amount and your taxable income. You can begin QCDs at age 70 and a half, even before you must start RMDs. If you are already giving to charitable causes, this can be an excellent way to maximize your impact while reducing taxes.

Roth Conversions

Moving funds from your traditional IRA into a Roth IRA can reduce future RMDs since Roth IRAs do not require distributions during the account owner’s lifetime. This strategy can also lower the tax burden for your heirs. Be aware that the amount converted is considered taxable income and could increase your Medicare premiums. Always take your current year’s Required Minimum Distributions before making a Roth conversion and consult with a tax advisor first.

Timing with Market Conditions

With market volatility, taking RMDs during a down year may force you to sell investments at a loss. One tactic is to liquidate the required amount in advance during stronger market periods and hold it in a stable account until needed.

Employer Plan Delays

If you are still working and do not own 5 percent or more of your employer, you may be able to delay RMDs on employer plans. However, this does not apply to IRAs.

Understanding Inherited RMDs

For inherited IRAs received after 2019, beneficiaries generally must empty the account within 10 years. If the original owner had already started RMDs, you may still need to take annual withdrawals during the 10 year period. This makes Roth IRAs an attractive estate planning option, since withdrawals are tax free and there are no lifetime RMDs for the original owner.

RMDs and Estate Planning

If estate planning is important to you, consider how RMD rules interact with inheritance.

Inherited IRAs now have the 10 year rule for full withdrawal. This means your heirs may be forced to take large taxable distributions during what could be their highest earning years. Sometimes, it makes sense for the account owner to convert funds to a Roth IRA and pay taxes now so heirs can inherit tax free assets later.

A Roth IRA grows tax free, does not require lifetime RMDs for the original owner, and offers heirs more flexibility in managing withdrawals.

Final Thoughts

Required Minimum Distributions are not something you can ignore or leave to chance. They have evolved over the years and so have the strategies for handling them. With new age thresholds, reduced penalties, and tax planning tools like QCDs and Roth conversions, there are opportunities to manage them in a way that benefits your long-term financial plan.

By planning ahead, you can keep your tax bill under control, protect your Medicare premiums, and preserve more wealth for your heirs. The key is to think several steps ahead. What seems like the best move today could have unintended consequences years later. Make sure your RMD plan is part of a broader financial plan and tax strategy that keeps you in control.

Next Steps

If you want help building a personalized RMD strategy or coordinating it with Roth conversions and Medicare planning, schedule a free consultation call with us today to build a strategy personalized to your unique situation.

Frequently Asked Questions About Required Minimum Distributions

What are Required Minimum Distributions?
Required Minimum Distributions are mandatory withdrawals you must take from certain tax-deferred retirement accounts once you reach the IRS-specified age. They ensure taxes are eventually paid on money that has grown tax deferred.

When do I have to start taking Required Minimum Distributions?
As of 2023, you must start taking RMDs at age 73. Starting in 2033, the age will increase to 75 for those born in 1960 or later.

How do I calculate my Required Minimum Distribution?
You take your account balance from December 31 of the previous year and divide it by the IRS life expectancy factor for your age. The result is the amount you must withdraw.

What happens if I miss an RMD?
The IRS can impose a penalty of 25 percent of the amount you failed to withdraw. If corrected quickly, the penalty may be reduced to 10 percent.

Can I avoid Required Minimum Distributions?
You cannot avoid them entirely for tax-deferred accounts, but you can reduce them by using strategies such as Roth conversions or Qualified Charitable Distributions.

Do Roth IRAs have Required Minimum Distributions?
Roth IRAs do not have RMDs during the lifetime of the original owner, making them a valuable tool for tax and estate planning.

Can I take my RMD from just one account?
If you have multiple IRAs, you can withdraw the total RMD amount from one or more of them in any combination. However, RMDs from employer plans like 401(k)s must be taken separately from each plan.

Breaking Down the Big Beautiful Bill: Tax Cuts and Opportunities

Tax Opportunities in the Big Beautiful Bill

The passage of the One Big Beautiful Bill Act marked a major shift in retirement and tax planning strategies across the country. Officially passed in 2024, this sweeping legislation introduced the Big Beautiful Bill tax cuts, which have far-reaching implications for retirees, pre-retirees, and anyone looking to secure a more tax-efficient financial future.

Today, we’re breaking down the most important elements of the Big Beautiful Bill tax cuts and what they mean for your financial plan. Whether you are already retired or planning to retire soon, this guide will help you understand the new rules and show you how to take advantage of them.

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Why the Big Beautiful Bill Tax Cuts Matter

Tax policy affects every part of your retirement plan, from how much you pay now to how much you get to keep later. The One Big Beautiful Bill Act has made several changes that reward proactive planning, particularly for those who understand how to leverage deductions, tax brackets, and Roth conversions.

If you are wondering what the headlines mean for you, read on. The Big Beautiful Bill tax cuts could offer you significant opportunities, but only if you act before key provisions sunset.

Locked-In Tax Brackets: Clarity for Long-Term Planning

One of the standout provisions of the bill is the permanent locking in of the 2017 tax brackets. This includes:

  • Expansion of the 24 percent tax bracket
  • Continuation of higher standard deductions

For retirees, this is big news. Why? Because it removes the uncertainty surrounding tax bracket “sunsets” that were originally baked into earlier tax law changes. With stable brackets, you can now plan with confidence for the years ahead.

This consistency is especially helpful for strategies like Roth conversions, where timing and tax bracket forecasting are critical. Knowing your future tax rates allows you to take deliberate action now, instead of speculating on what might happen years down the road.

In addition to Roth conversions, having locked-in brackets makes income planning, charitable giving, and capital gains strategies more effective. Retirees can plan their withdrawals with more precision, minimizing tax surprises and maximizing tax-efficient income streams.

Action Steps:

  • Review your current and projected retirement income
  • Work with your financial advisor to determine if partial Roth conversions make sense given your new bracket stability

SALT Deduction Increase: A Temporary but Valuable Window

The One Big Beautiful Bill Act also increases the State and Local Tax (SALT) deduction cap from 10,000 to 40,000. This expanded deduction is significant, but it comes with an expiration date of 2028.

This change is especially beneficial to taxpayers in high-tax states or those with incomes under 500,000. If you are thinking about accelerating deductible expenses, making charitable contributions, or converting traditional retirement accounts to Roth IRAs, this higher deduction gives you more room to maneuver.

In many cases, combining the higher SALT deduction with strategic Roth conversions can result in substantial long-term tax savings. By using the deduction to offset taxable income from conversions, retirees may be able to shift significant assets into Roth accounts with a lower immediate tax cost.

Action Steps:

  • Calculate your itemized deductions for 2025 through 2027
  • See if bundling deductions, charitable giving, or Roth conversions during this window will help you take full advantage

Bigger Standard Deductions for Seniors

If you are over age 65, the Big Beautiful Bill tax cuts get even better. The Act includes an additional standard deduction of:

  • 6,000 for individuals
  • 12,000 for married couples filing jointly

This increase is stacked on top of the regular standard deduction, further lowering your taxable income. For retirees, this can create a strategic opening to convert traditional retirement accounts to Roth IRAs while remaining in a lower bracket.

Remember, money in Roth accounts grows tax-free and is not subject to required minimum distributions (RMDs). With higher deductions, you can potentially convert more without pushing yourself into a higher bracket.

Additionally, this larger deduction makes it easier for retirees to avoid paying taxes on Social Security benefits or capital gains. When properly planned, these tax savings can compound year after year.

Action Steps:

  • If you are 65 or older, review your adjusted gross income (AGI) and consider Roth conversions or harvesting gains within the new deduction limits

Estate Tax Exemption Increase: Breathing Room for Legacy Planning

Another major highlight of the One Big Beautiful Bill Act is the increase in the estate tax exemption to 15 million per individual or 30 million per couple. This move takes estate tax concerns off the table for the vast majority of Americans.

If your estate is approaching that threshold, now is the time to take advantage of gifting strategies, trusts, and other estate planning tools while the exemption is still high. There is always a possibility that future legislation could reduce this exemption, making it critical to act while the current rules are in place.

You can also use this time to transfer assets to heirs in a tax-efficient way, locking in current valuation levels and removing future growth from your taxable estate.

Action Steps:

  • Speak to your estate attorney or advisor about legacy planning strategies, especially if you own appreciating assets or a business

Medicare and Social Security: Future Uncertainties

While the Big Beautiful Bill tax cuts have many upsides, there are whispers of future funding issues related to Medicare and Social Security. The bill opens the door for potential restructuring in the coming years.

The concern? Future generations might face increased retirement ages or income-based benefit reductions. However, the majority of current beneficiaries likely will not see cuts anytime soon.

The political reality is that seniors make up a significant portion of the voting population, making it unlikely that Congress would enact sweeping cuts that affect current retirees. Still, it is wise to remain aware and plan accordingly.

Action Steps:

  • Continue monitoring Medicare and Social Security changes, but do not make major adjustments based on speculation
  • Keep your retirement plan updated annually to account for any changes

Additional Planning Tips to Maximize the Big Beautiful Bill Tax Cuts

  1. Bunch Deductions Strategically: Use years with higher income or conversions to bunch deductions like charitable contributions and medical expenses.
  2. Harvest Capital Gains: Consider realizing long-term capital gains up to the top of the 0 or 15 percent capital gains bracket.
  3. Leverage Donor-Advised Funds: Use Donor-Advised Funds to frontload multiple years of giving while maximizing itemized deductions.
  4. Set Up Qualified Charitable Distributions (QCDs): If you are 70.5 or older, you can donate directly from your IRA to a qualified charity, reducing your taxable income.
  5. Coordinate With Your CPA: Tax efficiency is best achieved when your advisor and CPA work together on a comprehensive strategy.

Key Takeaways and Next Steps

Here are the biggest things to remember about the Big Beautiful Bill tax cuts:

  1. Locked-in tax brackets allow for more confident long-term tax planning.
  2. The expanded SALT deduction is a limited-time opportunity that expires in 2028.
  3. Bigger standard deductions for seniors can create room for strategic income moves.
  4. Estate tax exemption increase provides flexibility in legacy planning.
  5. Stay grounded when it comes to Medicare and Social Security projections.
  6. Use this window of opportunity to be proactive with Roth conversions, charitable giving, and estate planning.

What You Can Do Right Now:

  • Schedule a retirement planning session with a qualified financial advisor
  • Run projections for Roth conversions over the next three to five years
  • Update your estate plan to reflect the new exemption amounts
    Take advantage of expanded deductions while they are still available
  • Coordinate tax strategies with your financial advisor and CPA for maximum benefit

Final Thoughts: Use the Big Beautiful Bill Tax Cuts to Your Advantage

Legislation like the One Big Beautiful Bill Act does not come along often, and when it does, the people who benefit most are those who act early and plan smart.

These tax cuts and deduction increases open a door for retirees to reduce tax burdens, preserve wealth, and create a more stable financial future. But these benefits will not last forever. With some provisions sunsetting in just a few years, now is the time to take action.

At Bonfire Financial, we specialize in helping retirees and pre-retirees build smart, tax-optimized financial plans. If you are unsure how to take advantage of the Big Beautiful Bill tax cuts, we are here to help.

>>> Schedule your personalized planning session today!

Stay informed, stay empowered, and make the most of every opportunity the One Big Beautiful Bill Act has to offer.

Self-Employed Retirement Planning: How to Maximize Tax Savings and Wealth

Retirement planning can feel overwhelming for self-employed business owners, especially when juggling income, taxes, and growth. But here is the good news: being self-employed actually opens the door to powerful retirement strategies that traditional employees do not always have access to. With the right plan, you can reduce your tax bill today and build substantial wealth for the future.

Whether you are a consultant, contractor, freelancer, or small business owner, this guide will walk you through the top self-employed retirement planning options available. You will learn the benefits, contribution limits, and strategic uses of each so you can make informed choices that suit your goals. Let’s get started.

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Why Retirement Planning for the Self-Employed Is So Powerful

One of the biggest misconceptions among business owners is that retirement planning is just a tax strategy. In truth, it is both a tax advantage and a long-term wealth-building tool.

When you are self-employed, you are not limited to the same options as W-2 employees. You have more flexibility, higher contribution limits in some cases, and the potential to structure plans creatively. That means more money in your pocket now and in retirement.

Let us start by breaking this into two key goals:

  1. Lower your taxable income today

  2. Grow tax-advantaged wealth for tomorrow

With this lens in mind, let us explore the most effective tools available.

Traditional and Roth IRAs

The Basics

IRAs are available to just about everyone with earned income, including the self-employed. These are often the starting point for many business owners who are just beginning their retirement planning journey.

  • Traditional IRA: Contributions may be tax-deductible depending on your income and participation in other retirement plans.

  • Roth IRA: Contributions are not tax-deductible, but your money grows tax-free and qualified withdrawals in retirement are also tax-free.

Head to this page to get the most up-to-date annual contribution limits for each plan. Head over here to dig deeper into the difference between a Traditional IRA and a Roth IRA.

Why IRAs Work for Business Owners

While the contribution limits are relatively low, IRAs are easy to set up and require no ongoing employer maintenance. They are especially useful when used in combination with higher-limit plans like Solo 401(k)s or SEP IRAs.

SEP IRA: Simplified Employee Pension Plan

What It Is

The SEP IRA is a favorite among solopreneurs and business owners without employees. It allows you to contribute a percentage of your business income directly into your retirement account.

Key Benefits

  • Contributions are tax-deductible

  • Flexible contributions (you can vary or skip them from year to year)

  • Very easy to set up and maintain

Things to Watch Out For

If you have employees, SEP contributions must be made equally for them. For example, if you contribute 10 percent of your salary for yourself, you must contribute 10 percent for eligible employees too. This makes the SEP less ideal for growing teams.

Solo 401(k): A High-Powered Option

What It Is

A Solo 401(k), also known as an Individual 401(k), is available to business owners with no full-time employees (except for a spouse). It combines features of both a traditional 401(k) and a profit-sharing plan, making it a powerful vehicle for self-employed retirement planning.

Roth Option

One of the best parts of a Solo 401(k) is that it offers a Roth component. You can choose to contribute post-tax dollars, which then grow tax-free.

Advantages

  • Much higher contribution limits than IRAs

  • Option to go pre-tax or Roth

  • Ability to add profit-sharing

  • Loans are allowed from the plan

When to Use It

Solo 401(k)s are ideal for business owners who are trying to contribute the maximum possible each year and want flexibility in tax treatment. They do require more paperwork than IRAs, but the benefits are significant.

SIMPLE IRA: For Business Owners with Employees

What It Is

A SIMPLE IRA is designed for small businesses with fewer than 100 employees. It is easier to administer than a 401(k) and allows both the employer and employee to contribute.

Pros and Cons

This is a good solution if you want a low-cost retirement plan for you and your employees. However, it lacks the higher limits and Roth options of other plans.

Cash Balance Plans: Supercharging Late Starters

What It Is

Cash balance plans are defined benefit plans that allow large contributions well above those of 401(k)s or SEP IRAs. They are best suited for high-income earners looking to accelerate retirement savings.

Contribution Potential

Depending on your age and income, contributions can range from $100,000 to over $300,000 per year. This makes it one of the best options for late starters or those looking for a big tax deduction.

Ideal Candidates

  • Consultants

  • Attorneys

  • Solo medical professionals

  • Business owners earning $500,000+

Cash balance plans are complex and must be administered carefully, but they are unmatched when it comes to high-limit contributions.

Multi-Plan Strategy: Yes, You Can Combine

If you have multiple businesses or streams of income, you may be able to layer plans and contribute more overall. Here is how:

  • Max out your 401(k) as an employee in one business

  • Use a SEP or Solo 401(k) on your 1099 income from a different, unrelated business

The salary deferral limit applies once across all plans, but employer contributions (like profit-sharing) can be made separately as long as the businesses are unrelated.

This strategy is ideal for high earners who wear multiple hats and want to optimize every angle of self-employed retirement planning.

Self-Employed IRA Rules: What You Need to Know

When using any of these plans, it is crucial to understand and follow the IRS rules that govern self-employed IRAs. A few key rules include:

  • Contribution deadlines: IRAs and SEP IRAs can be funded up to the tax filing deadline (including extensions). Solo 401(k)s must be established by year-end.

  • Eligibility: Your business income must be earned and reported. Passive income (like rental income) typically does not qualify.

  • Catch-up contributions: Catch-up contributions are available for those 50 and older on most plans.

  • No employees: For Solo 401(k)s and cash balance plans to stay simple and beneficial, you should not have full-time employees.

Always work with a financial planner and/or tax professional to confirm that your contributions and setups follow current IRS regulations.

Supercharge Your Wealth: Tips for the Self-Employed

Ready to take your self-employed retirement planning to the next level? These tips are designed specifically for self-employed business owners who want to do more than just check a box. Whether you’re just getting started or looking to accelerate your savings, these strategies can help you make the most of your income, reduce taxes, and build lasting wealth.

  1. Start now: The earlier you begin, the more compound growth works in your favor.

  2. Work with a pro: Designing custom plans (like cash balance or multi-plan strategies) is worth doing right.

  3. Reevaluate annually: Income changes? Business structure shifts? Your retirement plan should adjust too.

  4. Think long term: Do not just aim to reduce taxes this year. Plan for distributions, Required Minimum Distributions, and tax brackets in retirement.

  5. Consider layering: Use IRAs alongside SEP or Solo 401(k)s for maximum flexibility.

Final Thoughts

Self-employed retirement planning is not just about saving for the future. It is about taking control of your finances, minimizing taxes, and building serious wealth as a business owner. Whether you are earning $80,000 a year or $800,000, there are strategies you can implement now to change your financial future.

Next Steps

If you are unsure where to start or want help designing a custom retirement plan that fits your income and lifestyle, reach out to our team at Bonfire Financial. We specialize in helping business owners make the most of every dollar they earn. Schedule your call now.

What to Do After Maxing Out Your 401k

What to Do After Maxing Out Your 401k

Maxing out your 401k is a major milestone when investing for retirement. It shows commitment to long-term financial planning, a proactive mindset, and an understanding of the power of compound growth. But it also leads to the inevitable question: What do I do next?

If you’re asking this, congratulations, you’re already ahead of the pack. And you’re in the right place to explore your next best steps.

Today, we’ll walk through a structured framework for what to do after maxing out your 401k, diving into Roth IRAs, taxable brokerage accounts, backdoor Roth strategies, and how to think about liquidity, flexibility, and tax planning in your broader investment picture.

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Step 1: Confirm You’ve Truly Maxed Out the 401(k)

First things first: let’s define what “maxed out” means. Check the annual contribution limits < This page is updated annually to make sure you have the most up-to-date numbers.

But here’s a nuance: maxing out your 401k isn’t just about hitting the annual limit. It’s also about making sure you’ve taken full advantage of your company match. Never leave free money on the table. If your employer offers a match (say 100% of the first 4% of your salary), make sure you’re contributing at least that much.

Once you’ve contributed to the max and received the full match, then it’s time to move on to the next vehicle.

Step 2: Explore a Roth IRA

The Roth IRA is often the first recommendation for clients who are looking to invest beyond their 401k, and for good reason:

  • Tax-free growth: You fund a Roth IRA with after-tax dollars, and in exchange, your investments grow tax-free.

  • Tax-free withdrawals: Once you’re 59½ and the account has been open for at least five years, you can withdraw both contributions and earnings tax-free.

  • No required minimum distributions (RMDs): Unlike traditional IRAs and 401(k)s, Roth IRAs don’t require you to take distributions in retirement.

There are annual contribution limits here too.

But don’t worry. There’s a workaround.

Step 3: Consider a Backdoor Roth IRA

If your income is too high for a regular Roth IRA, you may still be able to contribute through a Backdoor Roth IRA. This involves:

  1. Contributing to a non-deductible traditional IRA (after-tax money).

  2. Converting it to a Roth IRA.

Seems simple, but there are a few caveats:

  • If you have existing traditional IRA balances, the IRS uses a pro-rata rule to calculate taxes, meaning some of the conversion may be taxable.

  • Timing matters. It’s smart to consult a tax advisor or financial planner to execute this properly.

For many high earners, the backdoor Roth can be a powerful tool for adding tax-free growth to their portfolio.

Step 4: Open a Taxable Brokerage Account

Once your tax-advantaged options are maxed out and you want to continue investing for retirement, it’s time to consider a taxable brokerage account. Don’t let the term “taxable” scare you. This type of account actually offers some key advantages:

Advantages of a Taxable Account:

  • Unlimited contributions: Unlike retirement accounts, there’s no cap on how much you can invest.

  • No income limits: Anyone can open and fund one.

  • No early withdrawal penalties: You can access funds at any time.

  • Wide investment flexibility: You can invest in stocks, bonds, mutual funds, ETFs, real estate trusts, private placements, and others.

  • Liquidity: Need to fund a real estate purchase? Pay for a wedding? Start a business? This account gives you that flexibility.

Tax Considerations:

Growth in a brokerage account is taxed, but how it’s taxed matters:

  • Capital gains tax applies to investments held over one year (long-term).

  • Ordinary income tax applies to gains on assets sold within one year.

  • Dividends may also be taxable depending on their classification.

But there are strategies to reduce taxes, like:

  • Tax-loss harvesting: Selling underperforming assets to offset gains.

  • Asset location: Placing tax-efficient investments in your taxable account and tax-inefficient ones in your tax-deferred accounts.

Step 5: Think Flexibly with Your Future in Mind

A common mistake is viewing investment accounts in silos. Instead, think about them as tools that serve different purposes and timeframes.

Here’s how it breaks down:

Account Type Best For Key Benefit
401k Long-term retirement savings Tax-deferred growth + employer match
Roth IRA Long-term + tax diversification Tax-free growth + no RMDs
Brokerage Acct Flexibility + early retirement + legacy planning No contribution limits, no penalties for early withdrawals

If you plan to retire before age 59½, a taxable account becomes even more important. It gives you penalty-free access to funds while your retirement accounts keep compounding in the background.

Step 6: Use Brokerage Accounts for Creative Planning

Let’s take it a step further.

Real Estate Opportunities

Thinking about buying a rental property? A brokerage account can be tapped to fund a down payment without penalties. This is especially helpful for investors who want to diversify into real estate assets without triggering retirement withdrawal rules.

Tax Bracket Optimization

Planning to retire early? You may enter a lower tax bracket before Medicare or Social Security kicks in. You can draw from brokerage accounts strategically, keeping income low and managing your bracket for Roth conversions or to reduce long-term tax exposure.

Collateralized Lending

Did you know you can borrow against your taxable account? Many custodians offer lines of credit backed by your portfolio. This can be helpful for:

  • Avoiding the sale of appreciated assets (and the taxes that come with it)

  • Making time-sensitive investments

  • Helping family members (like a child’s down payment) without touching the principal

It’s not for everyone, but for high-net-worth individuals, this can be a sophisticated strategy to create liquidity without triggering taxes.

Step 7: Automate and Grow

Just like your 401k, your brokerage account can benefit from automation. Set up monthly contributions to stay disciplined and consistent. Over time, this can grow into a substantial pool of capital.

We often see clients fund these accounts with:

  • Annual bonuses

  • RSU or stock option sales

  • Proceeds from home sales

  • Inheritance windfalls

  • Business profits

By treating it like your 401k, with regular contributions and a long-term mindset, you’ll build serious wealth over time.

Bonus: Don’t Forget the Other Vehicles

401(k)s, Roth IRAs, and brokerage accounts are the main trio when investing for retirement, but depending on your goals, you might also explore:

  • Health Savings Accounts (HSAs): HSAs are triple-tax advantage (pre-tax contributions, tax-free growth, tax-free withdrawals for medical expenses).

  • 529 Plans: For tax-advantaged education savings.

  • Cash-value life insurance: Life insurance can be a niche tool for legacy or advanced planning.

  • Real estate LLCs or syndications: Direct ownership or fractional investments.

Each tool has its own benefits, risks, and tax implications, so work with a financial planner to build a strategy tailored to your life.

Final Thoughts

If you’ve maxed out your 401k as you are investing for retirement, you’re doing something right. But don’t stop there. Understanding what to do after maxing out 401k contributions opens the door to a wider world of wealth-building strategies that are more flexible, tax-aware, and goal-driven.

Here’s a quick recap:

  1. Max out the employer match and annual limit in your 401(k)

  2. Open a Roth IRA or explore a backdoor Roth

  3. Build out a taxable brokerage account

  4. Think long-term and flexible, especially for early retirement or large life events

  5. Use tax strategies and automation to make your plan efficient and consistent

At Bonfire Financial, we work with clients every day who want to optimize their savings and make the most of their money. If you’re ready to go beyond the basics and build a plan that’s personal, strategic, and forward-thinking, we’re here to help.

Ready to take the next step?

Schedule a free consultation. Let’s map out your next move.

Roth Conversion Strategies: Build Wealth for Your Family, Not the IRS

When it comes to building wealth and leaving a financial legacy, most people focus on how much they can accumulate. But what many overlook is how much of that money will actually reach their family, and how much could end up going to the IRS instead.

One of the most powerful yet underutilized strategies in estate and tax planning is Roth conversion strategies. While often discussed in the context of retirement planning, Roth conversions can play a key role in reducing the future tax burden on your heirs and maximizing the impact of the wealth you leave behind.

Today we’ll break down exactly how Roth conversions work, why they’re valuable for estate planning, and how to decide whether this strategy is right for you.

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What Is a Roth Conversion?

A Roth conversion is the process of transferring money from a traditional retirement account (like a traditional IRA or 401k) into a Roth IRA. When you make the conversion, you pay ordinary income tax on the amount you transfer, but after that, the funds grow tax-free, and withdrawals are also tax-free, assuming the account has been open for at least five years and you’re over age 59½.

People often use Roth conversions when they expect to be in a higher tax bracket later or want to maximize tax-free income in retirement. But there’s another layer to this strategy: reducing the tax burden on your heirs.

Why Roth Conversions Matter for Estate Planning

Thanks to recent tax law changes under the SECURE Act and SECURE 2.0, inherited IRAs now come with a strict timeline. If a non-spouse (such as a child) inherits your IRA, they must withdraw all the funds within 10 years, and those withdrawals are taxed as ordinary income.

This is a big shift from the previous “stretch IRA” rule that allowed beneficiaries to spread withdrawals over their lifetime. The new 10-year rule compresses the tax liability into a much shorter period, often hitting heirs during their peak earning years.

For example, let’s say your child earns $120,000 annually and inherits a $500,000 IRA. Instead of spreading withdrawals out over decades, they have to withdraw all the funds within 10 years. That could push their income over $170,000 in a given year, bumping them into a much higher tax bracket and significantly reducing what they ultimately get to keep.

By converting portions of your IRA to a Roth IRA during your lifetime, you pay the taxes now, and your heirs inherit an account that grows tax-free and can be withdrawn tax-free. Even though they still have to empty the account within 10 years, the absence of taxes makes it far more beneficial.

Real-World Example: A Client’s Legacy in Action

We recently worked with a client who brought her adult son to a financial planning meeting. She was a single woman in her 70s, financially secure, and had no need to rely on her IRA for living expenses. Her son, a successful professional, was in a significantly higher tax bracket than she was.

If she left her IRA untouched and passed away, her son would inherit a sizable sum and an equally sizable tax bill. Not only would he need to withdraw hundreds of thousands of dollars within a decade, but each withdrawal would be taxed at his current income rate.

By contrast, if she slowly converted the IRA into a Roth over a period of several years, carefully keeping each conversion within her lower tax bracket, she could shoulder the tax bill at her lower rate, allowing her son to inherit a Roth IRA instead. He would still need to withdraw the funds within 10 years, but he wouldn’t owe a dime in taxes.

The approach of evaluating Roth conversion strategies not only preserved more of the money for her family, but it gave them more flexibility and peace of mind during an emotionally difficult time.

Understanding the Tax Bracket “Fill” Strategy

One of the most practical ways to approach Roth conversions is through “tax bracket filling.” The idea is to make use of your current marginal tax bracket without tipping into the next one.

Here’s how it works:

Let’s say you’re a single filer with $60,000 in taxable income. The 22% federal income tax bracket in 2025 goes up to about $95,375. That means you could convert up to $35,375 of IRA money and still stay within the 22% bracket.

By “filling the bracket” with Roth conversions, you can transfer funds without triggering a jump into a higher tax tier. This is especially effective if you’re in a low-tax phase of life, such as early retirement, before taking Social Security or required minimum distributions (RMDs).

This strategy is repeatable year after year and can gradually shift large portions of your traditional IRA into a Roth IRA while minimizing your total lifetime tax liability.

Why Timing Matters for Roth Conversions

The effectiveness of a Roth conversion strategy often comes down to timing. The most advantageous window tends to be:

  • After retirement but before you begin collecting Social Security

  • Before you are required to take RMDs at age 73 (or 75, depending on your birth year)

  • During years when your income is temporarily lower (job transition, business loss, early retirement, etc.)

In these windows, your marginal tax rate may be much lower than what it will be in future years, or what your heirs will face.

It’s also important to think about where tax policy is heading when considering Roth conversion strategies. Many financial professionals believe federal income taxes are likely to increase in the coming decades due to growing national debt and budget deficits. Paying taxes today, when rates are relatively low, could be a smart long-term decision.

A Closer Look at the 10-Year Inheritance Rule

The SECURE Act’s 10-year rule means that non-spouse beneficiaries must completely drain an inherited IRA within a decade. While there’s no rule that says the withdrawals must be taken evenly each year, they must be completed by the end of year 10.

The downside? If the heir waits too long and takes a large lump sum at the end of the 10 years, it could cause an enormous tax spike.

This rule does not apply to Roth IRAs in the same way. Beneficiaries still have to follow the 10-year withdrawal rule, but distributions are tax-free, as long as the Roth account has been open for at least 5 years.

That means your heirs can:

  • Let the money grow tax-free for up to a decade

  • Withdraw it at a time that suits their financial situation

  • Avoid adding taxable income during their highest-earning years

Who Should Consider Roth Conversions for Estate Planning?

Roth conversion strategies are especially effective for individuals who meet the following criteria:

1. Retired and in a lower tax bracket than their children
If your income has decreased but your children are in their peak earning years, it makes sense for you to pay the taxes now so they don’t get hit with a much larger tax bill later.

2. Financially secure and not dependent on IRA withdrawals
If you don’t need your traditional IRA for day-to-day expenses, you can afford to strategically convert and handle the tax costs over time.

3. Planning to leave a large IRA to heirs
The larger the IRA, the greater the potential tax burden on your beneficiaries. Roth conversions reduce this future liability.

4. Wanting to reduce estate size for tax purposes
While estate tax only affects a small percentage of families, converting to a Roth can reduce your estate’s taxable size while still preserving value for your heirs.

5. Believing tax rates will go up in the future
If you suspect federal income tax rates will increase over the next 10–20 years, locking in today’s lower rates could be a wise move.

When Roth Conversions Might Not Make Sense

Like all financial planning tools, Roth conversions aren’t right for everyone. Situations where it might not be ideal include:

You need the money now
If you rely on your IRA for income, the added tax burden of a conversion might not be worth it.

You’re currently in a high tax bracket
If your current tax rate is higher than what your heirs will face, paying the taxes now may not make sense.

You plan to donate the IRA to charity
Qualified charities don’t pay taxes on IRA distributions. Leaving your IRA to a nonprofit could be more efficient than converting it to a Roth.

You can’t afford the taxes from the conversion
Ideally, taxes on a conversion should be paid from cash savings, not from the IRA itself. If you have to dip into the converted funds to cover the tax bill, the strategy loses a lot of its effectiveness.

Debunking Common Roth Conversion Myths

Let’s address a few common misunderstandings:

Roth conversions are only for young investors
Reality: Roth conversions can be especially effective for retirees and those doing estate planning, especially if their tax bracket is lower than their heirs’.

You’ll lose money by paying taxes now
Reality: Paying taxes now at a lower rate can save money in the long run, especially if future tax rates are higher.

Roth IRAs don’t help with inheritance planning
Reality: Roth IRAs can be a powerful inheritance tool, especially under the 10-year rule — no required taxes means more flexibility and value for your heirs.

How to Execute a Roth Conversion Estate Strategy

If you’re considering this strategy, here are a few key steps to follow:

Step 1: Run Projections
Work with a CFP® or tax professional to analyze your current and future tax brackets, your heirs’ tax situations, and your long-term retirement needs.

Step 2: Start Small and Be Strategic
Don’t convert your entire IRA in one year. Spread conversions over several years to manage your tax bracket and avoid triggering unintended Medicare or Social Security impacts.

Step 3: Use Non-IRA Funds to Pay the Taxes
To get the full value of the conversion, pay the taxes using cash from savings. That keeps the entire converted amount growing tax-free.

Step 4: Communicate Your Plan  
Make sure your heirs understand what you’ve done and why. Update your beneficiaries and document your estate plan accordingly.

Final Thoughts: Taxes Are Inevitable, But Smart Planning Isn’t

At the end of the day, the choice often comes down to this: Would you rather your money go to your family, or to the IRS?

Roth conversion strategies allow you to take control of that decision. When used strategically, they can reduce the long-term tax burden, offer more flexibility to your heirs, and help ensure that the wealth you worked so hard to build actually benefits the people you care about most.

It’s not a one-size-fits-all solution, but it’s one of the most powerful planning tools available if used at the right time, in the right way.

Need personalized Roth conversion strategies?

At Bonfire Financial, we help clients turn complex tax rules into smart, actionable strategies. We welcome you to schedule a call to see how Roth conversions could fit into your estate plan.

How Diversification Can Save You From a Retirement Meltdown

If you ask most people what the secret to a successful retirement is, you might hear answers like “save early,” “invest in the right stocks,” or “work with a good financial advisor.” All great advice. But there’s one strategy that often gets overlooked because it’s not flashy, it’s not new, and it won’t land you on the cover of Forbes. That strategy? Diversification.

Let’s be honest: Diversification isn’t exciting. It doesn’t come with big headlines or viral TikToks. But if you’re heading into retirement (or already there), diversification could be the very thing that helps you sleep at night when the markets get bumpy. And that’s worth talking about.

Today we’re going to break down why diversification is more than just a buzzword, it’s a lifeline. We’ll look at how it works, why it matters more in retirement than during your growth years, and how to use it strategically to protect your hard-earned assets.

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What Is Diversification, Really?

At its core, diversification means not putting all your eggs in one basket. In investment terms, it means spreading your money across different asset classes, sectors, industries, and geographies. The goal? To reduce your exposure to any single risk.

It doesn’t mean you won’t ever lose money. It does mean that when one area of the market is down, another might be up—helping to smooth out the ride.

Why Diversification Matters More in Retirement

When you’re in your 30s, 40s, or even early 50s, you’re in growth mode. You have income coming in, time on your side, and the ability to take on more risk. You might go all in on tech stocks, try your hand at crypto, or take a flyer on a promising startup. And when those bets pay off, it feels great.

But retirement changes the game.

You’re no longer building your nest egg, you’re relying on it. Your paycheck is gone. Your expenses? Still very much alive and well. And the fear of running out of money? Real.

This is where diversification becomes critical.

A highly concentrated portfolio might have served you well in your accumulation phase. But in retirement, big swings in value become dangerous. A 50% drop in a single stock might not have phased you before, but it hits differently when you’re drawing from your portfolio to cover everyday expenses.

Growth vs. Protection: The Shift in Strategy

Think of it like this: In your career, being specialized often leads to higher pay. A cardiac surgeon earns more than a general practitioner. A software engineer specializing in AI might command a bigger paycheck than a generalist developer.

The same logic applies in investing. Specializing—or concentrating—can yield big results. But it comes with more volatility.

As you near retirement, your strategy needs to shift from growing your wealth to protecting it. You don’t need 40% returns. You need reliable, steady performance and the confidence that your money will be there when you need it.

What Diversification Looks Like in Retirement

So what does a diversified portfolio actually look like for someone in or near retirement? Here are the main components:

  1. Equities Across Sectors and Sizes: Investing in a broad mix of stocks, including large-cap, mid-cap, and small-cap companies across different sectors (technology, healthcare, consumer goods, etc.) helps avoid overexposure to one area of the market.
  2. ETFs and Mutual Funds: Exchange-traded funds (ETFs) and mutual funds offer built-in diversification. One fund can give you exposure to hundreds or even thousands of companies.
  3. Fixed Income (Bonds, CDs, Treasuries): Bonds are a staple of retirement portfolios. From Treasury bonds backed by the U.S. government to corporate bonds and municipal offerings, they provide income and stability. CDs and short-term Treasuries offer ultra-safe options for near-term needs.
  4. Real Estate: Whether through REITs or directly owned property, real estate can provide a stable income stream. It also adds a layer of diversification that doesn’t always move in lockstep with the stock market.
  5. Alternative Investments: Private credit, private equity, or commodities like gold can offer additional diversification. Alternative investments often behave differently than stocks and bonds.
  6. Cash Reserves: Don’t underestimate the power of having some cash on hand. In market downturns, cash gives you flexibility to avoid selling assets at a loss.

It’s Not Just About What You Own—It’s About When You Use It

Diversification isn’t only about what you invest in. It’s also about how and when you draw on those assets. If the stock market drops 20%, you don’t want to be forced to sell equities to fund your living expenses. Instead, you might pull from your bond ladder, real estate income, or cash reserves. This approach gives your equities time to recover—and your overall portfolio a better chance of staying intact.

Strategic diversification gives you flexibility. It gives you options. And options are everything in retirement.

Common Misconceptions About Diversification

Let’s clear up a few myths:

  • Myth 1: “I already own five stocks, so I’m diversified.”Not quite. True diversification spans sectors, asset classes, and risk profiles. Five tech stocks? That’s not diversification—it’s concentration.
  • Myth 2: “Diversification means I won’t make as much money.”Possibly true, but also missing the point. You don’t need outsized gains in retirement—you need consistency. Remember: doubling your money won’t change your life as much as losing half of it.
  • Myth 3: “All diversification is equal.”Nope. Diversifying across mutual funds that all hold the same top 10 stocks isn’t true diversification. Look under the hood of your investments.

How to Tell If You’re Truly Diversified

A few good questions to ask yourself :

  • How much of my portfolio is in one sector or company?
  • Am I exposed to different types of investments (stocks, bonds, real estate, etc.)?
  • Do I have income sources that don’t rely on the stock market?
  • If the market dropped 30% tomorrow, would I be forced to sell something at a loss?
  • Is my risk level aligned with my retirement goals?

If you’re unsure, it’s time for a checkup.

The Real Goal: Peace of Mind

At the end of the day, diversification isn’t about being fancy. It’s about creating a plan that gives you confidence.

You don’t want to be the retiree glued to CNBC, wondering if your favorite stock is about to tank. You want to be the retiree sipping coffee, knowing your portfolio is built to weather the storm.

Because here’s the thing: the market will dip. There will be recessions. Headlines will get scary. But a well-diversified portfolio doesn’t panic—it pivots.

Final Thoughts: Diversify Like Your Retirement Depends on It (Because It Does)

If you’re still chasing big returns with concentrated bets as you near retirement, it’s time to reconsider. There’s nothing wrong with going big during your accumulation years. But once you’re approaching or entering retirement, the name of the game is preservation.

And that’s where diversification shines.

It may not be exciting. It may not be trendy. But it works. And when it comes to your retirement, that’s exactly what you want.

Next Steps

Need help creating a diversified retirement plan that actually fits your life? Let’s talk. At Bonfire Financial, we help clients build smart, stable portfolios that are designed to go the distance. Schedule a call with us today! 

Roth Conversion: Turning Market Lows Into Tax-Free Growth

Market downturns can be nerve-wracking. When stocks dip, it’s easy to feel like you should hit pause on any big financial moves. But what if a downturn was actually an opportunity? If you’ve been considering a Roth conversion, now might be the best time to act.

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A Roth conversion allows you to move money from a tax-deferred retirement account (like a traditional IRA) into a Roth IRA. The trade-off? You’ll pay taxes now on the converted amount, but in return, your money grows tax-free and can be withdrawn tax-free in retirement. And when markets are down, this strategy becomes even more attractive.

In this post, we’ll break down why a downturn is an ideal time for a Roth conversion, how it works, and what you need to consider before making your move.

What Is a Roth Conversion?

A Roth conversion is the process of moving pre-tax retirement funds from a traditional IRA or 401(k) into a Roth IRA. Normally, traditional retirement accounts are tax-deferred, meaning you don’t pay taxes when you contribute, but you will when you withdraw in retirement.

With a Roth IRA, the opposite is true—you pay taxes upfront but enjoy tax-free withdrawals later. By converting funds now, you lock in today’s tax rates and eliminate the uncertainty of potentially higher tax rates in the future.

Why a Market Downturn Is a Smart Time for a Roth Conversion

A downturn in the stock market may seem like a time to retreat, but for savvy investors, it can be the perfect moment to make strategic financial moves. Here’s why:

1. You Get More Shares for Your Money

When stock prices drop, the value of your traditional IRA also declines. If you convert those assets to a Roth IRA during a downturn, you’re moving shares at a lower valuation, meaning you pay taxes on a lower dollar amount.

For example:

  • If your traditional IRA held $100,000 before a downturn and its value drops to $80,000, a Roth conversion would only trigger taxes on the $80,000 instead of $100,000.
  • When the market recovers, those assets will grow tax-free within your Roth IRA.

By converting at a discount, you position yourself for greater tax-free growth when the market rebounds.

2. You Can Pay Less in Taxes

Since the IRS taxes Roth conversions as ordinary income, the lower your conversion amount, the less you’ll owe in taxes. If a downturn reduces your taxable income (for example, if you have lower capital gains or fewer bonuses this year), you may land in a lower tax bracket—making a Roth conversion even more attractive.

3. No Required Minimum Distributions 

Unlike traditional IRAs, Roth IRAs don’t require minimum distributions (RMDs) when you hit age 73. That means you can keep your money invested longer, allowing it to grow tax-free for as long as you want.

4. More Flexibility in Retirement

A Roth conversion now can provide greater flexibility later. By having both traditional and Roth funds, you can better control your taxable income in retirement, pulling from different accounts depending on your tax situation each year.

Breaking It Down: A Simple Roth Conversion Example

Let’s say you’re planning to convert $8,000 into a Roth IRA. Here’s how the numbers might play out in different market conditions:

  • When the market is high: The stock you want to buy is $100 per share. Your $8,000 buys 80 shares.
  • When the market is low: The same stock is now $80 per share. Your $8,000 buys 100 shares.

If the stock eventually rebounds to $100 per share, the account value in each scenario would be:

  • Market High Conversion: 80 shares × $100 = $8,000
  • Market Low Conversion: 100 shares × $100 = $10,000

That’s a 25% gain in your tax-free Roth account simply because you converted during a downturn.

How to Decide If a Roth Conversion Is Right for You

While a Roth conversion can be a smart move, it’s not a one-size-fits-all strategy. Consider these factors before moving forward:

1. Your Current vs. Future Tax Bracket

  • If you expect your tax rate to be higher in retirement, a Roth conversion now at a lower tax rate makes sense.
  • If you’re currently in a high tax bracket but expect it to drop later, waiting might be a better choice.

2. Your Ability to Pay the Taxes

  • Taxes on the conversion should ideally be paid from a non-retirement account.
  • Using IRA funds to pay taxes means you’ll be left with a smaller balance growing tax-free.

3. Your Retirement Timeline

  • If you plan to retire soon and need the money within five years, a Roth conversion might not be ideal. Withdrawals from converted funds within five years of conversion trigger a penalty.

4. Your Estate Planning Goals

  • If you want to pass on wealth tax-free to heirs, a Roth conversion is a great tool.
  • Unlike traditional IRAs, Roth IRAs don’t require heirs to pay taxes on withdrawals.

How to Execute a Roth Conversion in a Downturn

If you decide a Roth conversion makes sense, here’s how to get started:

  1. Evaluate Your Portfolio – Identify which assets are best suited for conversion.
  2. Estimate Taxes Owed – Work with a fiduciary financial advisor or CPA to calculate tax liability.
  3. Choose a Conversion Amount – Decide how much you can afford to convert while staying in your tax bracket.
  4. Initiate the Conversion – Work with your brokerage to move funds from your traditional IRA to a Roth IRA.
  5. Pay the Taxes – Ensure you have cash on hand to cover the tax bill without tapping into retirement savings.

Common Roth Conversion Mistakes to Avoid

Before you jump in, avoid these pitfalls:

  • Converting Too Much at Once – Large conversions can push you into a higher tax bracket. Consider a multi-year conversion strategy.
  • Not Planning for the Tax Bill – Don’t forget you’ll owe taxes on the converted amount in the year of conversion.
  • Overlooking the Five-Year Rule – If you convert funds, you must wait five years before withdrawing them without penalty.

Final Thoughts: Should You Convert to a Roth During a Downturn?

A Roth conversion is one of the smartest moves you can make during a market downturn. By converting assets when their value is temporarily lower, you reduce your tax burden and set yourself up for greater tax-free growth in the future.

However, this strategy isn’t right for everyone. If you’re unsure whether a Roth conversion fits your financial plan, contact us today to discuss whether a Roth conversion is the right move for you.

Zoom Out: Optimizing Retirement Accounts

Optimizing Retirement Accounts Tax Strategies

Managing and optimizing your retirement accounts and tax strategies is no small task. As you approach retirement, you may find yourself juggling a variety of accounts—401(k)s, IRAs, brokerage accounts, and even less common investments like private equity or cryptocurrency. This fragmented landscape can make it hard to see the full picture, let alone create a strategy that minimizes taxes and maximizes growth.

If this sounds familiar, it might be time to “zoom out” and look at your accounts as a cohesive portfolio. By shifting your focus from individual accounts to your overall financial landscape, you can create a tax-efficient strategy that works for your unique situation. In this post, we’ll walk you through the benefits of this approach and how to implement it.

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Why You Have So Many Accounts

It’s common for people to accumulate multiple accounts over the years. Perhaps you’ve switched jobs a few times, leaving behind 401(k)s with previous employers. Maybe you and your spouse have opened separate brokerage accounts or inherited an IRA. Add in tax-advantaged accounts like Roth IRAs and Health Savings Accounts (HSAs), and it’s no wonder your financial picture feels cluttered.

While having diverse accounts can offer flexibility, it can also lead to inefficiencies. If each account is managed in isolation, you may miss opportunities to optimize your retirement accounts and overall tax strategy or align your investments with your risk tolerance.

The Risks of Managing Accounts in Isolation

When managing retirement accounts individually, many people default to mirroring the same investment strategy across all of them. For example, they might allocate 60% to equities and 40% to bonds in every account. While this approach might feel consistent, it can lead to inefficiencies, particularly when it comes to taxes.

Each type of account—taxable, tax-deferred, and tax-free—has unique rules about how contributions, growth, and withdrawals are taxed. Ignoring these differences can result in unnecessary tax burdens, lower returns, and missed opportunities to grow your wealth.

The Solution: Viewing Your Portfolio as a Whole

The key to overcoming these inefficiencies and optimizing retirement accounts is to view your accounts as parts of a unified portfolio rather than standalone entities. This strategy, often referred to as asset location, involves placing investments in the accounts where they are most tax-efficient. By “zooming out” and considering your entire portfolio, you can optimize for both tax savings and growth.

Step 1: Understand Your Accounts

Before you can optimize your portfolio, it’s important to understand the tax implications of each account type:

  1. Taxable Accounts (Brokerage Accounts):
    Contributions are made with after-tax dollars, and you’ll owe taxes on dividends, interest, and capital gains each year.

    • Best for: Investments with low tax burdens, such as municipal bonds or tax-efficient index funds.
  2. Tax-Deferred Accounts (401(k)s, Traditional IRAs):
    Contributions are often pre-tax, and you won’t pay taxes on growth until you withdraw funds in retirement.

    • Best for: Growth-oriented investments, as taxes are deferred.
  3. Tax-Free Accounts (Roth IRAs):
    Contributions are made with after-tax dollars, but growth and withdrawals are tax-free.

    • Best for: High-growth investments, as all gains are tax-free.

Step 2: Allocate Assets Strategically

Once you understand the tax implications of each account type, you can decide where to place your investments for maximum efficiency. Your asset allocation strategy is key.

  1. Place Fixed-Income Investments in Taxable Accounts
    Fixed-income investments like bonds generate interest, which is taxed as ordinary income in taxable accounts. However, municipal bonds (munis) offer a tax-efficient alternative, as their interest is generally exempt from federal taxes (and sometimes state taxes if issued in your state).
  2. Put Growth-Oriented Investments in Tax-Deferred and Tax-Free Accounts
    Stocks and other high-growth assets are better suited for tax-advantaged accounts like IRAs and Roth IRAs. In a traditional IRA, your investments grow tax-deferred, meaning you won’t pay taxes until you withdraw the money. In a Roth IRA, growth is entirely tax-free, making it an ideal home for aggressive investments.
  3. Balance Across Accounts
    For example, if you want a portfolio that’s 50% equities and 50% bonds, you might place all your equities in a Roth IRA and all your bonds in a taxable account. Together, your accounts maintain your desired allocation, but each investment is housed in the most tax-efficient location.

Step 3: Optimize Withdrawals

As you approach retirement, the order in which you withdraw funds from your accounts can also impact your tax burden. A common strategy is to withdraw from taxable accounts first, allowing tax-deferred and tax-free accounts to continue growing. However, this depends on your specific situation, including your income needs and tax bracket.

Benefits of a Unified Approach

By treating your accounts as a whole, you can unlock several benefits:

  1. Tax Savings:
    Minimizing taxes on dividends, interest, and capital gains allows you to keep more of your money.
  2. Higher Growth Potential:
    Placing growth-oriented investments in tax-advantaged accounts lets them compound more effectively.
  3. Simplified Portfolio Management:
    Instead of managing each account individually, you can focus on your overall allocation and strategy.

Common Misconceptions

It’s easy to fall into the trap of thinking every account should have the same allocation. While consistency feels safe, it often leads to inefficiencies. Another misconception is that asset location only matters for high-net-worth individuals. In reality, anyone with multiple accounts can benefit from this strategy.

How to Get Started Optimizing Your Retirement Accounts

  1. Review Your Accounts:
    Take stock of all your accounts, including their balances, investment types, and tax statuses.
  2. Consult a Financial Advisor:
    Asset location can get complex, especially if you have a mix of account types. A CERTIFIED FINANCIAL PLANNER™  (like us, wink, wink) can help you create a strategy tailored to your needs.
  3. Monitor and Adjust:
    Life changes, market conditions, and tax laws can all impact your strategy. Regularly review your portfolio to ensure it remains aligned with your goals.

Final Thoughts

Managing and optimizing multiple retirement accounts doesn’t have to be overwhelming. By zooming out and viewing your portfolio as a whole, you can create a tax-efficient strategy that maximizes growth and minimizes headaches. Whether you’re just starting to think about retirement or already have a mix of accounts, it’s never too late to take a smarter approach.

At Bonfire Financial, we specialize in helping clients make sense of their financial landscape. If you’d like help evaluating your accounts and creating a strategy, reach out to us today.

5-10 Years to Go: Retirement Reality Check -Are You Really Ready?

5-10 Years to Retirement

As you get closer to retirement, the financial planning landscape changes. Those final 5-10 years bring new priorities, questions, and a natural desire for clarity. Do I have enough to retire comfortably? Will my savings and investments support my lifestyle? This period is critical for setting up the financial security and peace of mind that most people seek as they step away from work. Below, we’ll dive into how to build confidence in your retirement planning by addressing key steps and practical strategies to ensure you’re ready.

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Step 1: Start with Your Expenses

The foundation of a successful retirement plan is understanding your current expenses. The goal is to get a clear picture of what it costs to live your life on a monthly and annual basis. To do this:

  1. Track your monthly spending: Look at your recent bank statements and credit card bills to get an idea of your average monthly spending. Include every category, from housing to groceries to entertainment.
  2. Account for yearly fluctuations: Certain months are often higher-spend months. For example, holiday season costs or summer travel expenses can raise expenses significantly. Make sure to average out these costs for a realistic annual spending figure.
  3. Consider future changes: Think about how your expenses might change in retirement. Will you be mortgage-free, or do you anticipate moving? Are there hobbies you plan to pursue that might increase costs?

Once you have a firm grasp on your current and anticipated expenses, you’ll have a more accurate starting point to build your retirement plan.

Step 2: Identify Income Sources

After estimating your expenses, it’s time to look at income sources you can rely on in retirement. For most people, these will fall into a few main categories:

  1. Social Security: Check your Social Security statement to see what you can expect to receive monthly. Remember that delaying Social Security benefits past your full retirement age can increase your monthly payments.
  2. Pensions: If you’re fortunate enough to have a pension, include it here. Know the details, such as whether the payout is fixed or adjusted for inflation, and if any survivor benefits are available.
  3. Investment Income: Income from investments in retirement accounts, brokerage accounts, or real estate holdings is crucial. This is where the bulk of many people’s retirement income comes from.
  4. Other Sources: You may have other income sources like part-time work, royalties, or annuities. Consider whether these will be consistent and predictable.

Tally these income sources to see how they measure up against your projected expenses. Many retirees find that guaranteed income from Social Security and pensions falls short of covering their needs. This difference, or “gap,” is what your investments need to cover.

Step 3: Calculating Your “Gap” and Understanding Withdrawal Strategies

Once you have an estimate of your guaranteed income versus your expenses, you can calculate your “gap.” This is the amount you’ll need to withdraw from savings and investments each year to meet your spending needs.

For instance, if your annual expenses are $120,000 and your guaranteed income covers only $60,000, then your gap is $60,000 per year. This is the amount you’ll need to draw from your investments to maintain your lifestyle.

Step 4: Implementing the 4% Rule

The “4% rule” is a popular rule of thumb for retirement planning. It’s a straightforward way to estimate how much you can sustainably withdraw from your investments each year without depleting your savings prematurely.

The rule suggests that if you withdraw 4% of your retirement portfolio each year, your savings should last approximately 30 years, even with inflation adjustments.

Here’s how to use the 4% rule to estimate your retirement readiness:

  1. Calculate your gap: For example, if your gap is $60,000, you’ll need enough saved to cover this annually.
  2. Divide by 4%: Divide your gap by 0.04 to estimate how much you need saved. Using our example, $60,000 / 0.04 = $1.5 million.

The 4% rule provides a conservative starting point. However, remember that it’s just a guideline. Depending on your personal situation, investment portfolio, and tolerance for risk, you may need to adjust this percentage.

Step 5: Assessing Risk and Adjusting Your Portfolio

As you near retirement, consider adjusting your investment portfolio to better align with your time horizon and risk tolerance. This often means reducing your exposure to high-risk assets, such as stocks, and increasing holdings in more stable assets like bonds or cash equivalents.

That said, maintaining some exposure to growth assets, like stocks, is still essential to keep pace with inflation over what could be a lengthy retirement. We can help you determine the right balance based on your needs and market conditions.

Step 6: Creating a Flexible Withdrawal Plan

A successful retirement plan includes flexibility. The 4% rule is a useful baseline, but there are times when adjusting withdrawals can help stretch your retirement savings further.

  1. Stay adaptable in lean years: If markets are down, consider withdrawing slightly less or pausing major expenses. Adjusting withdrawals during market downturns can prevent you from selling investments at a loss.
  2. Re-evaluate annually: Each year, assess your expenses, investment performance, and overall portfolio balance. Staying engaged helps you avoid surprises and make minor course corrections as needed.
  3. Bucket Strategy: Some retirees find it helpful to use a “bucket strategy,” where they segment their savings into short-term, medium-term, and long-term buckets. For example, keeping 1-3 years’ worth of expenses in cash equivalents can cover immediate needs, while medium and long-term investments grow to support later years.

Step 7: Plan for Taxes and Healthcare Costs

Taxes and healthcare costs are among the largest expenses retirees face, so accounting for them in your retirement planning is essential.

  1. Plan for taxes: Withdrawals from tax-deferred accounts, like traditional IRAs and 401(k)s, are typically subject to income tax. Understanding your tax liability and strategies to minimize it, like Roth conversions or strategic withdrawal planning, can make a significant difference in retirement income.
  2. Healthcare expenses: Medicare will cover some costs, but it doesn’t cover everything. Consider supplemental insurance, long-term care insurance, HSA, or creating a separate savings account for healthcare costs to ensure you’re prepared for medical expenses.

Step 8: Pay Attention to Inflation

Retirement can span two or three decades, and inflation will erode purchasing power over time. Make sure your income sources and withdrawal strategy account for inflation so your savings can cover the rising costs of living.

  1. Use inflation-adjusted estimates: When calculating future expenses, consider the effect of inflation. A 3% annual increase in expenses is a conservative estimate many financial planners use.
  2. Inflation-resistant assets: Keeping some investments in assets that typically rise with inflation, such as stocks or Treasury Inflation-Protected Securities (TIPS), can help offset inflation’s impact on your retirement income.

Step 9: Take Advantage of Catch-Up Contributions

For those 50 and older, catch-up contributions allow you to add extra money to retirement accounts, such as 401(k)s and IRAs. Maximizing these contributions can help bolster your savings in the final years leading to retirement.

  1. 401(k) catch-up contributions: As of 2024, you can contribute an extra $7,500 to your 401(k) annually if you’re over 50. This is in addition to the regular contribution limit.  >>> Check here for this year’s contribution limits <<<
  2. IRA catch-up contributions: Similarly, individuals over 50 can contribute an extra $1,000 annually to IRAs.

These catch-up contributions can add up significantly over time, especially when invested wisely.

Step 10: Seek Professional Guidance

Planning for retirement involves many variables, and even with simple rules, the calculations can become complex. Professional guidance can be valuable for ensuring your plan is realistic. We can work with you to create a tailored financial plan that addresses your unique needs, assets, and goals. We can also guide you in making adjustments and keeping your strategy on track as conditions change.

The Bottom Line: Retire with Confidence

The final years before retirement are the perfect time to refine your plan, reduce uncertainties, and build confidence in your financial future. By knowing your expenses, identifying reliable income sources, and understanding your investment strategy, you’ll be well-prepared to retire with peace of mind. As you refine your strategy in these critical years, small incremental steps, like boosting savings rates, can compound into big benefits.

Remember, retirement planning doesn’t have to be overwhelming. Each of these steps, from budgeting to the 4% rule, provides you with a roadmap to a secure retirement. Following these strategies and seeking guidance when needed can set you up to transition from work to retirement with confidence, knowing you’ve planned well for the years ahead.

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