Category: Retirement

Rethinking Home Equity in Your Retirement Strategy

Posted on by Brian Colvert

Homeownership has long been a cornerstone of the American Dream, symbolizing stability, success, and financial security. For many, their home is the most significant asset they’ll ever own. As they approach retirement, the home equity they’ve built over the years can seem like a comforting safety net for retirement. However, relying on home equity as a primary component of your retirement strategy may not be as foolproof as it appears. Today we are exploring why it’s essential to rethink the role of home equity in your retirement planning and consider more reliable alternatives to ensure financial security in your golden years.

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The Illusion of Home Equity as a Retirement Asset

At first glance, home equity seems like a robust financial resource. After all, if your home is fully paid off, you have a substantial amount of value tied up in that property. But this value is often more theoretical than practical when it comes to funding your retirement. Here’s why:

  1. Home Equity is Not Liquid: Unlike investments in stocks, bonds, or even cash, home equity is not readily accessible. To tap into it, you need to either sell your home or borrow against it. Both options come with significant drawbacks that can impact your financial security and quality of life during retirement.
  2. The High Cost of Downsizing: Many retirees consider downsizing as a way to unlock home equity. However, downsizing doesn’t always lead to a financial windfall. Housing markets fluctuate, and the costs associated with selling a home, purchasing a new one, and moving can eat into the equity you hoped to free up. Additionally, many retirees find that when they downsize in square footage, they end up upsizing in quality. Opting for newer or more luxurious homes may not save them much money after all.
  3. Borrowing Against Your Home: Home equity loans or lines of credit allow you to borrow against your home’s value, but this approach comes with risks. You’re essentially taking on debt at a stage in life when your income may be fixed or decreasing. Rising interest rates can make these loans more expensive, and if you’re unable to keep up with payments, you risk losing your home.
  4. The Psychological Value of Homeownership: There’s a strong emotional and psychological attachment to homeownership, especially in retirement. The idea of selling your home or taking on debt against it can feel unsettling for many people. Owning a home outright provides peace of mind. The thought of losing that security can be a significant barrier to making decisions that involve leveraging home equity.

Understanding the Role of Home Equity in Retirement Planning

While home equity may not be the financial windfall many expect in retirement, it does play a role in your overall financial picture. The key is to understand its place within a broader, diversified retirement strategy.

  1. Shelter as a Basic Need: At its core, home equity represents the value of the shelter it provides. Maslow’s hierarchy of needs places shelter as one of the most fundamental human necessities, alongside food and water. In retirement, having a paid-off home can significantly reduce your living expenses, as you no longer have a mortgage to pay. This stability is invaluable, but it’s important to recognize that the equity in your home is primarily tied to your ability to live there, rather than as a liquid asset you can easily access for other needs.
  2. Net Worth vs. Cash Flow: It’s important to distinguish between net worth and cash flow. Home equity contributes to your net worth, which looks great on paper, but it doesn’t directly contribute to your cash flow—the money you have available to spend on daily living expenses. In retirement, cash flow is critical. Having a high net worth due to home equity won’t help you pay for groceries, medical expenses, or travel unless you find a way to convert that equity into liquid cash, which, as discussed, can be challenging and costly.
  3. Strategic Use of Home Equity: For some retirees, there are strategic ways to use home equity that don’t jeopardize their financial security. For example, a reverse mortgage might be an option for those who need to access cash but have no intention of passing the home on to heirs. However, reverse mortgages are complex and can be risky. They typically involve selling the home’s equity to a lender in exchange for regular payments. It’s crucial to fully understand the implications before considering this option.
  4. Emergency Reserve: Instead of viewing home equity as a primary retirement asset, consider it as an emergency reserve. If unexpected expenses arise, or if your other retirement savings fall short, having the option to tap into home equity can provide a safety net. However, this should be a last resort rather than a cornerstone of your retirement plan.

Building a Comprehensive Retirement Strategy

Given the limitations of relying on home equity, it’s essential to build a comprehensive retirement strategy that incorporates multiple sources of income and assets. Here’s how to approach it:

  1. Diversified Investments: A well-diversified investment portfolio that includes a mix of stocks, bonds, and other assets can provide the cash flow you need in retirement. Unlike home equity, these assets can be more easily converted into cash and are designed to generate income over time.
  2. Retirement Accounts: Maximize contributions to retirement accounts such as 401(k)s, IRAs, and Roth IRAs. These accounts offer tax advantages and are specifically designed to provide income in retirement. The earlier you start contributing, the more time your investments have to grow.
  3. Pension and Social Security: If you’re eligible for a pension or Social Security benefits, these can serve as reliable sources of income in retirement. It’s important to understand how these benefits work and how they fit into your overall plan. For example, delaying Social Security benefits can result in higher monthly payments
  4. Regular Financial Check-Ups: Retirement planning isn’t a one-time event. It’s important to regularly review and adjust your financial plan to account for changes in the market, your health, and your lifestyle. Working with a financial planner can help you stay on track and make informed decisions.

Conclusion: Home Equity as Part of a Balanced Retirement Plan

Home equity can be a valuable component of your retirement plan, but it’s crucial to understand its limitations and not rely on it as your primary source of income. By viewing home equity as a piece of the larger puzzle—rather than the entire solution—you can build a more secure and flexible retirement strategy that provides the cash flow and peace of mind you need.

If you’re unsure how to integrate home equity into your retirement plan or want to explore other options for securing your financial future, we’d love to have a conversation with you.  We specialize in helping clients navigate the complexities of retirement planning, ensuring that all aspects of your financial life are aligned with your goals.

Ready to rethink your retirement strategy? Contact us today to start your personalized financial field guide and take the next step toward a secure and fulfilling retirement.

Retirement Planning for Self-Employed Business Owners and 1099 Employees

Posted on by Brian Colvert

Retirement Planning for Self-Employed & 1099 Employees –  Listen to the full episode on the Podcast!

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Today we are addressing a critical topic for self-employed business owners, Independent Contractors and 1099 employees: retirement planning without a company-sponsored plan. In the absence of traditional employer benefits, it’s essential to take proactive steps. We’ll explore various retirement strategies tailored for those who must self-manage their retirement savings, including Solo 401(k)s, SEP IRAs, and other investment options.

Understanding the Challenge of Retriemtn for the Self-Employed

For business owners and 1099 employees, the lack of a company-sponsored retirement plan means taking full responsibility for your financial future. While this can seem daunting, it also offers unparalleled control over how you save and invest your money. You decide the best ways to grow your wealth and ensure a comfortable retirement.

Why Retirement Planning is Crucial

Retirement planning is about more than just setting aside money for the future; it’s about creating a stable financial foundation that allows you to maintain your lifestyle and achieve your goals without relying on income from your business or contract work. Effective retirement planning involves assessing your current financial situation, setting realistic goals, and implementing strategies to achieve those goals.

The Power of Solo 401(k)s

One of the most powerful retirement planning tools for self-employed business owners and 1099 employees is the Solo 401(k). This plan is designed for self-employed individuals and independent contractor and offers several benefits:

  1. High Contribution Limits: Solo 401(k)s allow for significant contributions, combining employee deferrals and employer contributions. In 2024, the contribution limit is $23,000 for employees under 50, with an additional $6,500 catch-up contribution for those 50 and over. Employer contributions can bring the total to $69,000 or $76,500 for those 50 and over.
  2. Roth Option: Many Solo 401(k) plans offer a Roth option, allowing after-tax contributions that grow tax-free. This can be particularly advantageous for high-income earners looking to minimize future tax liabilities.
  3. Loan Provision: Solo 401(k)s often include a loan provision, enabling you to borrow from your retirement savings if needed. This feature can provide liquidity without triggering taxes or penalties, as long as the loan is repaid according to the plan’s terms.

Exploring SEP IRAs and SIMPLE IRAs

SEP IRAs and SIMPLE IRAs are other viable options for self-employed individuals. Both plans have their unique advantages:

  • SEP IRA (Simplified Employee Pension):
    • Contribution Limits: SEP IRAs allow contributions up to 25% of your net earnings from self-employment, with a maximum limit of $66,000 in 2024.
    • Ease of Administration: SEP IRAs are relatively simple to set up and maintain, making them a popular choice for small business owners.
    • Flexibility: Contributions are flexible and can vary from year to year, which is beneficial for businesses with fluctuating income.
  • SIMPLE IRA (Savings Incentive Match Plan for Employees):
    • Employee and Employer Contributions: SIMPLE IRAs allow both employee deferrals and employer contributions. In 2024, employees can defer up to $15,500, with an additional $3,500 catch-up contribution for those 50 and over.
    • Mandatory Employer Contributions: Employers must either match employee contributions up to 3% of compensation or make a fixed contribution of 2% of compensation for all eligible employees.
    • Lower Administrative Costs: SIMPLE IRAs have lower administrative costs compared to 401(k) plans, making them an attractive option for small businesses.

Diversifying Your Investments

Beyond retirement accounts, diversifying your investments is crucial for financial stability. Diversification spreads risk and increases the potential for returns across different asset classes. Here are some ways to diversify:

  1. Stocks and Bonds: Investing in a mix of stocks and bonds can provide growth and income. Stocks offer the potential for capital appreciation, while bonds provide steady income and lower volatility.
  2. Real Estate: Real estate investments can provide rental income and long-term appreciation. Consider investing in residential, commercial, or industrial properties based on your risk tolerance and investment goals.
  3. Private Placements: For those with the expertise and risk tolerance, private placements can offer high returns. Investing in startups or private companies can be lucrative, but it’s essential to conduct thorough due diligence.
  4. Cryptocurrency: While more volatile, cryptocurrencies like Bitcoin can be part of a diversified portfolio. It’s essential to approach this asset class with caution and only invest what you can afford to lose.

Creating a Safety Net

Building a financial safety net is critical for self-employed business owners and 1099 employees. Here are some strategies to ensure you have a cushion for unexpected events:

  1. Emergency Fund: Maintain an emergency fund with 3-6 months’ worth of living expenses. This fund should be easily accessible and kept in a liquid, low-risk account.
  2. Insurance: Protect your income and assets with appropriate insurance coverage. Consider disability insurance, life insurance, and business insurance to safeguard against unforeseen circumstances.
  3. Regular Withdrawals: Establish a routine for withdrawing funds from your business or investment accounts. This ensures you are continually building your safety net and not solely reinvesting all profits back into the business.

Tax Efficiency and Planning

Effective tax planning is essential for maximizing your retirement savings when you are self-employed. Here are some strategies to consider:

  1. Deferring Income: Take advantage of retirement accounts that offer tax-deferred growth, such as traditional IRAs and Solo 401(k)s. Contributions to these accounts reduce your taxable income in the year they are made.
  2. Roth Conversions: Consider converting traditional retirement accounts to Roth accounts during years when your income is lower. This strategy can result in significant tax savings over time. You can further this strategy with a Backdoor Roth.
  3. Tax-Loss Harvesting: Offset capital gains with capital losses through tax-loss harvesting. This strategy involves selling losing investments to reduce your taxable gains.
  4. Consult a Tax Professional: Work with a tax professional to develop a comprehensive tax strategy tailored to your unique situation. They can help you navigate the complexities of tax laws and identify opportunities for savings.

Setting Realistic Goals

Setting realistic retirement goals is essential for creating a workable plan. Here are steps to help you define and achieve your retirement objectives:

  1. Assess Your Current Financial Situation: Take stock of your assets, liabilities, income, and expenses. Understanding your financial position is the first step in planning for the future.
  2. Define Your Retirement Lifestyle: Consider the lifestyle you want in retirement. Factor in travel, hobbies, healthcare, and living expenses to determine how much you need to save.
  3. Estimate Retirement Expenses: Calculate your expected expenses in retirement, accounting for inflation and potential changes in your lifestyle. This estimate will guide your savings goals.
  4. Develop a Savings Plan: Create a plan to reach your retirement goals. Determine how much you need to save each year and choose the appropriate retirement accounts and investment strategies to achieve your objectives.
  5. Monitor and Adjust: Regularly review your retirement plan and make adjustments as needed. Life changes, market conditions, and new financial goals may require you to update your strategy.

Conclusion

Retirement planning for self-employed business owners, independent contractors and 1099 employees may lack the convenience of a company-sponsored plan, but it offers the advantage of complete control over your financial future. By leveraging tools like Solo 401(k)s, SEP IRAs, and SIMPLE IRAs, diversifying your investments, creating a safety net, and planning for tax efficiency, you can build a robust retirement strategy. Set realistic goals, stay disciplined, and regularly review your plan to ensure a secure and comfortable retirement. Taking these proactive steps will help you achieve financial peace of mind, knowing you have a well-thought-out financial plan for your future.

Next Steps:

Ready to set up your plan or have questions? Schedule a call with us today! 

Understanding the SWAPA Market-Based Cash Balance Plan

Posted on by Nick Coleman

If you’re a Southwest pilot, you recently received many needed changes to your benefits package through the Contract 2020. The introduction of the SWAPA Market-Based Cash Balance Plan (MBCBP) has piqued the interest of many Southwest pilots. As a CERTIFIED FINANCIAL PLANNER™, I’ve had the privilege of working with over 50 pilots, just like you, helping them get on the right track to a successful financial life and retirement as their Fiduciary advisor. My specialization in Southwest pilot benefits helps me to guide you in maximizing your career earnings, benefits, and wealth.

HOW THE SWAPA MARKET-BASED CASH BALANCE PLAN WORKS WITH YOUR CURRENT PLAN

The Market-Based Cash Balance Plan allows you to increase your retirement savings without increasing your current taxes. Once you maximize your 401(k), the 17% contribution from Southwest will then spillover into the MBCBP, on top of contributing 1% of your salary into the MBCBP, and then 2% of your salary starting in 2026 if you spillover or not. 

Many pilots are running into the issue of maximizing their 401(k) and wanting other ways to save for retirement. The MBCBP is the benefit that will solve this issue. The MBCBP allows Southwest’s 17% “spillover” contributions to go into a pre-tax retirement account rather than be given to you via taxable check. The spillover occurs when you reach either the 415(c) Limit or the 401(a) Limit.

The 415(c) Limit sets the total cap on contributions to your 401(k) from both your employee and employer contributions. For individuals under 50, this limit stands at $69,000, while those 50 or older have a total limit of $73,500. Meeting this limit can occur when maximizing your employee 401(k) contributions, which are:

  • $23,000 for individuals under 50
  • $30,500 for those aged 50 or older

This means that you can contribute the $23,000 or $30,500 (50 years+) to your 401(k) and Southwest will contribute 17% of your salary up to the total limit including your contribution of $69,000 or $73,500 if 50 years +. 

The 401(a) Limit limits the amount of salary that can be considered that Southwest can contribute their 17% to. In 2024, this limit is set at $345,000. Southwest can only contribute 17% of your salary up to $345,000. If your salary exceeds this amount, Southwest’s 17% contribution will spill over to you (or the MBCBP). For example, if your salary reaches $445,000—$100,000 over the limit—this excess 17% translates to $17,000 as spillover into the MBCBP.

BENEFIT OF THE SWAPA MARKET-BASED CASH BALANCE PLAN

So, what exactly is a Cash Balance Plan? It serves as a retirement account, much like your 401(k). However, it has the capacity to hold a more significant sum for retirement than traditional retirement accounts. While a 401(k) is constrained by an annual limit—$69,000 or $73,500 if 50+ in 2024, for instance—a Cash Balance Plan can theoretically accommodate contributions of up to $300,000 annually. This account operates differently from a 401(k). It follows a “Defined Benefit” model, allowing for higher contributions to support specific benefits, such as an annual pension.

The Market-Based Cash Balance Plan is a deferred plan, meaning you don’t pay taxes on company contributions or growth within the account. Instead, taxes are paid when you withdraw funds during retirement, aligning with your income tax level at that time. This structure can be advantageous, as it doesn’t increase your taxes while working, potentially leading to lower lifetime taxes.

Regarding investment management, SWAPA Cash Balance Plans prioritize a “reasonable return” within strict ERISA and IRS guidelines to safeguard the defined benefit. As such, investments in the MBCBP aren’t subject to individual choices but rather managed collectively by a committee. Upon retirement, you have the flexibility to roll over the MBCBP into an IRA. This will grant you greater control over investment decisions. You also have the option to take a pension from the account. The pension amount is based on the value of the MBCBP, when you take your benefit, and if you elect to have survivor benefits as a feature to your pension. Determining if taking the pension or the lump-sum transfer into an IRA can be a decision that can have a major impact on your retirement. Discuss with a CERTIFIED FINANCIAL PLANNER on which option might be best for your retirement strategy.

A limitation with the Southwest Cash Balance Plan is that you as an employee cannot contribute to the account. It is only funded by the employer via the 1% contribution (2% in 2026) and any spillover above the 415(c) or 401(a) limits.

IS A MARKET-BASED CASH BALANCE PLAN RIGHT FOR YOU?

Should you consider using the SWAPA Cash Balance Plan? If you want to save more for retirement, especially as retirement draws nearer, it could be a valuable tool. Are you worried about paying too much in taxes and do not need the extra cash? This could be an advantageous option for you. If you want to increase your current income to pay for current bills and goals, you may want to continue using the cash spillover.

OTHER OPTIONS TO MAXIMIZE YOUR RETIREMENT STRATEGY

Additionally, you can maximize your 401(k) contributions further by taking full advantage of your personal contribution limit:

  • $23,000 for individuals under 50
  • $30,500 for those aged 50 or older

By doing so, you not only bolster your retirement savings but also may enjoy significant tax benefits. Contributions are tax-deductible, potentially leading to substantial tax savings.

Furthermore, you may consider diversifying your retirement savings by exploring Tax-Free retirement options like the Backdoor Roth IRA Conversion. This strategy can help you build tax-free retirement income while avoiding Required Minimum Distributions (RMDs).

NEXT STEPS

To ensure you’re making the most of your 401(k) and SWAPA benefits, consider discussing your retirement goals with a CERTIFIED FINANCIAL PLANNER who specializes in helping pilots plan for retirement. I’ve worked closely with many pilots, helping them get on the right track to a successful retirement and financial life, and I’m here to help you achieve your financial goals and maximize your benefits and wealth.

Let’s have a conversation about your financial goals and explore the strategies that can help set you on the path to financial freedom and a prosperous retirement. Set up a free consultation call today to learn more about how we can help you!

Looking for information about the United Pilots Cash Balance Plan? Read more on that here! 

Backdoor Roth: From Tax Burden to Tax-Free Growth

Posted on by Brian Colvert

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The name might sound exclusive or even clandestine, but a Backdoor Roth is simply a powerful financial tool, particularly for high-income individuals seeking tax-savvy savings strategies for retirement. In the most recent episode of The Field Guide Podcast, Brian Colvert, CFP® unpacks the intricacies of Backdoor Roth IRAs, an often-misunderstood approach to tax-efficient retirement saving. He covers everything from the basics of Roth IRAs to navigating the complexities of Backdoor conversions, offering actionable tips for maximizing wealth-building potential. Whether you’re a high-income earner or simply looking to optimize your retirement savings, this episode provides a comprehensive guide to leveraging a Backdoor Roth IRA.

Understanding Traditional and Roth IRAs

First, let’s establish a foundation by understanding traditional and Roth IRAs. Traditional IRAs allow pre-tax contributions, meaning you don’t pay taxes upfront on the invested amount. However, taxes are deferred until withdrawals in retirement, when they’re taxed as income. In contrast, Roth IRAs involve after-tax contributions; taxes are paid upfront, but growth and withdrawals are tax-free. This provides a significant advantage, especially in the long run.

The Power of Tax-Free Growth

The magic of a Roth IRA lies in its tax-free growth potential. Considering the extended time horizon of retirement planning, funds in a Roth IRA can compound significantly without the drag of taxes. This offers a valuable asset for your golden years. Additionally, the tax benefits extend beyond your lifetime. Roth assets can be passed on to heirs tax-free, providing a lasting financial legacy.

Income Limits and the Backdoor Solution

The IRS sets income limits for people who can directly contribute to a Roth IRA. These limits apply to your modified adjusted gross income (MAGI) which is basically your total income minus certain adjustments. If your MAGI exceeds the limit, you can’t contribute directly to a Roth IRA for that year.

Here’s a quick breakdown of the 2024 limits:

Single filers: Cannot directly contribute if MAGI is over $160,000
Married filing jointly: Cannot directly contribute if MAGI is over $240,000 (There’s a phase-out range between $206,000 and $240,000)

This is where the Backdoor Roth IRA strategy comes in.

The Backdoor Roth IRA in Action

The Backdoor Roth strategy involves making after-tax contributions to a traditional IRA and then converting those funds into a Roth IRA. Unlike direct contributions, there are no income limits for Roth conversions, making it an attractive option for high earners to access tax-advantaged savings.

The Pro-Rata Rule: A Potential Hurdle

This is where things get a bit more nuanced. There’s an important caveat – the pro-rata rule. When converting funds from a traditional IRA to a Roth IRA, any pre-tax amounts in existing IRAs are factored into the conversion. If a significant portion of your IRA holdings is pre-tax, the conversion will trigger taxes on a proportional basis.

Here’s a simplified example:

  • Let’s say you have a $10,000 pre-tax balance in an existing traditional IRA and make a $5,000 non-deductible contribution for a Backdoor Roth.
  • The total balance in your traditional IRA before conversion is now $15,000.
  • When you convert the entire $15,000 to a Roth IRA, the pro-rata rule kicks in because you have both pre-tax and non-deductible contributions.
  • In this scenario, the non-deductible contribution makes up one-third ($5,000) of the total balance ($15,000). So, one-third of the conversion (or $5,000) would be considered tax-free from your non-deductible contribution.
  • The remaining two-thirds ($10,000) of the conversion would be considered a taxable distribution from your pre-tax contributions. However, since you already paid taxes on this money when you initially contributed it, you wouldn’t owe additional income tax, but you would owe taxes on any earnings those pre-tax contributions generated within the IRA.

Minimizing Tax Implications

For individuals with substantial traditional IRA balances, exploring options to mitigate tax implications, such as rolling over funds into an employer-sponsored 401(k), might be advisable. However, for those without existing IRA balances, the Backdoor Roth presents a compelling opportunity for tax-efficient retirement savings.

Don’t Underestimate Tax-Free Growth

Despite the contribution limits on Roth IRAs, the benefits of tax-free growth shouldn’t be downplayed. Even if contributions are capped, every dollar invested in a Roth IRA has the potential to grow tax-free, providing a valuable asset for retirement. Prioritizing tax-efficient investment vehicles like the Roth IRA can significantly enhance your financial security in retirement.

Seeking Professional Guidance

Navigating the complexities of retirement planning and tax optimization can be overwhelming. Talking to a CERTIFIED FINANCIAL PLANNER™ ( CFP®) about a Backdoor Roth IRA can be really beneficial:

Eligibility and Tax Implications: A CFP® can confirm your eligibility for a Backdoor Roth IRA. There are income limits for directly contributing to a Roth IRA, and the Backdoor method is a work-around. A  CFP® can ensure it makes sense for your income level and tax situation.

Pro-Rata Rule: This rule gets tricky. If you already have pre-tax money in a traditional IRA, converting to a Roth triggers taxes on some of it. A  CFP® can help you calculate the tax impact and navigate the pro-rata rule to minimize any tax burden.

Optimizing your plan: The Backdoor Roth might not be the only option. A CFP® can look at your entire retirement picture and suggest the best strategy for your goals. This might include maximizing contributions to other accounts like a 401(k) before considering a Backdoor Roth.

Avoiding Errors: The Backdoor Roth IRA process involves specific steps. A  CFP® can ensure you complete them correctly to avoid issues with the IRS. While you can research the Backdoor Roth IRA yourself, a CFP® brings their expertise and experience to personalize the strategy for you. They can ensure it fits your specific financial situation and helps you reach your retirement goals.

Next Steps

At Bonfire Financial, we specialize in guiding individuals through the intricacies of financial planning. We help you chart a course from your current financial position to your desired retirement lifestyle. Whether you’re exploring the Backdoor Roth or seeking comprehensive financial advice, we’re here to assist you every step of the way.

Let’s schedule a call to discuss your specific situation!  Book here now! 

Streamlining Retirement: Insights into Retirement Account Consolidation

Posted on by Brian Colvert

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Do you have a bunch of old retirement plans scattered around? Do you have multiple different IRAs and 401(k)s from past employers? If you are nodding your head yes, then this is for you! In the most recent episode of The Field Guide Podcast, Brian Colvert, CFP®  dives into the world of retirement account consolidation. We’ll explore the pros and cons of streamlining your accounts, the factors to consider when making a decision, and some key strategies when juggling multiple retirement accounts. 

Why Consolidate Your Retirement Accounts?

It is important to acknowledge the bureaucratic burden of scattered retirement accounts. Imagine the frustration of receiving statements from each past employer’s plan,  trying to decipher fees, and wondering if your investments are aligned with your goals. Here’s how consolidation can help:

  • Simplicity: Having everything in one place makes tracking your progress and managing investments a breeze. No more scrambling through multiple statements.
  • Control: Consolidation empowers you to make informed decisions about your investments with a holistic view of your retirement savings.
  • Reduced Fees: While fees might not be the deciding factor anymore, with some consolidation options, you may find lower expense ratios in your target investment choices.

Things to Consider When Consolidating Accounts:

While consolidation offers clear benefits, it’s not a one-size-fits-all solution. Here are some crucial aspects to consider before diving in:

  • Investment Options: Compare the investment choices available in your existing accounts with those offered by your target consolidation location (current employer’s plan or IRA). Does the new platform provide the flexibility you need to achieve your investment goals?
  • Fees: While expense ratios have become more competitive, don’t overlook potential fees associated with the consolidation process itself, such as transfer fees or rollover penalties.
  • Tax Implications: Traditional and Roth accounts have different tax implications. Depending on your income level and future tax plans, consolidating into a Roth IRA might not be an option (Brian mentions “backdoor Roth” strategies, but these can be complex and require consulting a financial advisor).

Retirement Account Consolidation Strategies: Choosing the Right Path

Now that you understand the pros and cons, let’s explore some common consolidation strategies:

  • Rollover to Your Current Employer’s Plan: If your current employer’s 401(k) allows rollovers and offers a good selection of investment options with low fees, this might be your best bet. It simplifies your life and potentially reduces fees.
  • Consolidate into an IRA: An IRA offers a wider range of investment options compared to most employer-sponsored plans. This flexibility can be valuable if you have specific investment goals or want to explore alternative asset classes not typically available in a 401(k).

Taking Action: Streamlining Your Retirement Savings

Here are some steps to guide your retirement account consolidation journey:

  1. Gather Information: List all your retirement accounts, including account types (401(k), IRA), current balances, and investment details.
  2. Research Options: Review the investment options and fees associated with your current employer’s plan and potential IRA custodians.
  3. Run the Numbers: Consider potential transfer fees and any tax implications of the consolidation. There are online calculators available to help with this step.
  4. Make a Decision: Based on your research and risk tolerance, choose the consolidation method that aligns best with your goals and financial situation.
  5. Seek Professional Advice: For complex situations or if you’re unsure about any aspect of the consolidation process, consulting with a CERTIFIED FINANCIAL PLANNER™  is highly recommended.

Beyond Consolidation: Building a Personalized Financial Roadmap

 Consolidation is just one piece of the puzzle.  Developing a comprehensive financial plan that considers your income, expenses, retirement goals, and risk tolerance is crucial for a secure financial future.

The Takeaway: Consolidation Can Be Powerful, But Knowledge is Key

Consolidating your retirement accounts can simplify your life and potentially improve your investment returns.  However, it’s important to understand the various factors at play, the potential fees involved, and any tax implications.  By carefully considering your options and potentially seeking professional guidance, you can make an informed decision that empowers you to achieve your retirement goals.

Remember:

  • Consolidation might not always be the best solution.
  • Always consider fees, tax implications, and investment options before making a move.
  • A personalized financial plan goes beyond consolidation and provides and puts your entire financial life under one roof and gives you the confidence you need to move towards retirement.  

Have questions or need help with retirement account consolidation?

Schedule a FREE consultation with one of our  CERTIFIED FINANCIAL PLANNER™

The Power of Catch-Up Contributions

Posted on by Brian Colvert

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The benefit of aging: Catch-Up Contributions

In the most recent episode of The Field Guide Podcast, Brian Colvert, CFP®, takes a fresh look at aging – not as a decline, but as a time brimming with opportunities, especially when it comes to building a secure retirement. Brian dives into the often-underutilized benefits of increasing contributions to retirement accounts as you get older, demonstrating how these seemingly small tweaks can significantly impact your financial future.

Leveraging Catch-Up Contributions: A Detailed Look:

One of the perks of aging is the ability to contribute more to retirement accounts like IRAs, 401(k)s, and HSAs. Let’s break down the specifics and explore why maximizing these contributions is crucial.

IRAs and Roth IRAs:  The standard contribution limit for both Traditional and Roth IRAs for 2024 sits at $7,000. However, individuals aged 50 and above are eligible for Catch-up contributions, allowing them to add an extra $1,000, bringing their total contribution to a substantial $8,000. Don’t let high income discourage you; strategies like the backdoor Roth conversion can help you take advantage of these benefits, even if your income exceeds the Roth IRA contribution limits. Here’s a deeper dive into the backdoor Roth conversion:

Backdoor Roth Conversion: A Backdoor Roth is a strategy that involves contributing to a traditional IRA and then converting those funds to a Roth IRA. There are tax implications associated with this conversion, but for those who wouldn’t qualify for a direct Roth IRA contribution due to income restrictions, it can be a valuable way to access the tax-free growth benefits of a Roth IRA in retirement.

Company Plans: Similar benefits exist for company-sponsored plans like SIMPLE IRAs and 401(k)s. Catch-up contributions are available for those over 50, allowing them to significantly increase their contributions and accelerate retirement savings. Let’s explore some additional considerations for company plans:

Employer Matching: Many employers offer matching contributions on employee contributions to retirement plans. This essentially translates to free money for your retirement. Be sure to contribute at least enough to capture your employer’s full match. It’s like leaving free money on the table if you don’t!

Investment Options: Company plans often offer a variety of investment options within the plan. Understanding your risk tolerance and investment time horizon is crucial when choosing how to allocate your contributions within the plan. We recommend seeking guidance from a CERTIFIED FINANCIAL PLANNER™ regarding your best investment options.

The Power of Compounding Interest with Your Catch-Up Contributions

Here’s where the magic truly happens: compounding interest. Even seemingly small additional contributions can snowball into a significant sum over time. Consider this: a $1,000 extra contribution to an IRA each year, consistently invested for 15 years with a moderate 6% rate of return, could grow into over $23,000. This is the magic of compounding interest working in your favor. Let’s delve a little deeper into the concept of compounding interest:

Exponential Growth: Compound interest allows your money to grow exponentially over time. Your earnings not only come from your initial contributions but also from the interest earned on those contributions. This creates a snowball effect, accelerating the growth of your retirement savings.

Time is Your Ally: The longer your money is invested, the greater the impact of compounding interest. Starting to contribute to retirement savings early and taking advantage of catch-up contributions later allows you to maximize the power of compounding interest.

HSAs: A Tax-Advantaged Powerhouse – Unveiling the Benefits

The benefits extend beyond traditional retirement accounts. HSAs (Health Savings Accounts), often overlooked in retirement planning, offer additional avenues for saving.  Individuals aged 55 and above can contribute an extra $1,000 on top of the standard limits as of 2024.  Let’s explore the unique advantages of HSAs:

Triple Tax Advantage: HSAs boast a unique “triple tax advantage.” Contributions are tax-deductible, investment earnings grow tax-free, and qualified medical withdrawals are tax-free. This makes HSAs a powerful tool for saving for future medical expenses while minimizing your tax burden.

Portability: HSAs are portable, meaning the funds belong to you, not your employer. You can retain your HSA even if you change jobs, providing long-term financial security for healthcare costs.

Embrace the Silver Lining:

Growing older comes with its challenges, but it also unlocks valuable opportunities to solidify your financial future. By maximizing catch-up contributions and strategically utilizing retirement accounts, you can pave the way for a secure and comfortable retirement. Remember, you’re not alone in this journey. If you have any questions or need guidance on your retirement planning path, don’t hesitate to reach out to The Field Guide. Your financial security is our top priority.

Taking Action:

Catch-Up Contributions are just the start.  Here are some actionable steps you can take today:

  • Schedule a consultation with a CERTIFIED FINANCIAL PLANNER™: Discuss your retirement goals and explore personalized strategies to maximize catch-up contributions and retirement savings.
  • Research retirement account options: Understand the contribution limits, tax implications, and investment options for IRAs, Roth IRAs, 401(k)s, and HSAs.
  • Review your current contributions: Analyze your current contributions to retirement accounts and consider increasing them to take advantage of catch-up provisions.
  • Automate your contributions: Setting up automatic contributions ensures you’re consistently saving towards your retirement goals.

By taking these steps and embracing the opportunities that come with age, you can transform your retirement from a distant dream into a fulfilling reality.

When can I retire? Navigating Retirement

Posted on by Brian Colvert

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Are you contemplating retirement? Are you wondering when you can retire?

In the most recent episode of The Field Guide Podcast, Brian Colvert, CFP® of Bonfire Financial, dives into the complexities of retirement planning and addresses the question we often get asked… When can I retire? From financial considerations to psychological readiness, Brian offers insights to help you navigate this significant life transition.

Psychological Preparedness:

One of the key factors in determining when to retire is psychological readiness. Many individuals tie their identity to their careers, making the prospect of retirement daunting. Brian emphasizes the importance of having a plan in place to alleviate anxiety and uncertainty. Whether it’s traveling, pursuing hobbies, or spending time with loved ones, having a structured schedule can enhance the retirement experience.

Financial Considerations:

While psychological preparedness is crucial, financial planning is equally important. Brian acknowledges the variability in retirement lifestyles, from extravagant globetrotting to simpler pleasures like hiking and local gatherings. Understanding your current expenses provides a baseline for retirement preparedness. Contrary to the popular notion that retirees spend significantly less, Brian suggests that initial retirement years may involve increased spending due to travel and leisure activities.

The 4 Percent Rule:

To estimate retirement income needs, Brian touches on the 4 percent rule—a widely used guideline in financial planning. By dividing the desired income by 4 percent, one can determine the required investment portfolio. While this rule provides a starting point, Brian emphasizes the need for flexibility and ongoing financial planning.

Beyond the Basics:

Retirement planning extends beyond simple calculations. Brian highlights the importance of accounting for factors like healthcare costs, inflation, and unexpected expenses. Collaborating with a financial advisor ensures a comprehensive strategy tailored to individual needs and goals.

Final Thoughts:

Answering the question of “When can I retire?” requires a blend of financial prudence and lifestyle considerations. While the prospect may seem daunting, proactive planning can pave the way for a fulfilling retirement experience.
If you’re seeking personalized guidance or additional resources, don’t hesitate to reach out to us. Our team is dedicated to helping individuals like you achieve their retirement aspirations.

Remember, retirement is not just about reaching a financial milestone—it’s about crafting a life that reflects your values and passions. Start planning today to embark on a retirement journey that’s as rewarding as it is fulfilling.

Get started with your Financial Plan today!

Financial Plan Bonfire Financial

401k Contributions for Pilots

Posted on by Nick Coleman

The landscape of retirement savings is complex, particularly for United Airlines pilots who face unique choices with their 401k in planning their financial future. The recent introduction of the Market-Based Cash Balance Plan (MBCBP) offers an additional avenue for retirement savings complementing the existing 401k plans.

Today we’ll take an in-depth look at these choices, focusing on how United Airlines pilots can best navigate their 401k contributions in light of the new MBCBP. We will examine contribution limits, potential tax benefits, and the strategic implications of different savings approaches, all designed to assist pilots in making well-informed decisions for their long-term financial well-being.

Should United Airlines Pilots Maximize Their 401k Contributions with the new Market-Based Cash Balance Plan Available?

Many United Airline pilots fund their allowable 401k contribution along with receiving the 17% contribution to their 401k from United.

The most an employee can contribute to their 401k in 2024 is:

  • $23,000 if under 50 years old

  • $30,500 if 50 years old or older

United will also contribute to your 401k, whether you are contributing or not. An employee is only limited to contributing the above numbers, however, the 401k has a separate total limit that includes all contributions; both from you and from United. That 401a maximum is called the 401a Limit.

In 2024, the 401(a) Limit is set at:

  • $69,000 if under 50 years old

  • $76,500 if 50 years or older

Once that limit is hit, United’s 17% contribution does not stop. It must flow into a different bucket. Previously, the 17% went into the Health Reimbursement Account (HRA), which many pilots did not find beneficial. Many pilots we worked with wanted to reduce the spillover, so more company dollars went into their 401k, rather than spillover. However, the new Market-Based Cash Balance Plan, a retirement plan similar to the 401k, is a much more beneficial account that many pilots are wanting to take advantage of.

Now, pilots want to get as much spillover as possible, so this account gets funded more.

Why is the Market-Based Cash Balance Plan (MBCBP) a good option?

  1. The contributions from United are not taxed in the year of the contribution. They are deferred until you take the money out. You can also roll the funds into an IRA when you retire and manage the account by yourself or have a retirement planner like us manage it for you. Much like the 401k.

  2. It will allow you to save even more for your retirement. Many pilots that want to save more for retirement, or are nearing retirement and want to maximize savings, will find this account to be very useful.

  3. Your money will be invested for you, and aims to have a reasonable return of 5-6% per year.

With that being said, you may decide that you want to maximize what United “spills” into your new retirement account (MBCBP). But how can you do this?

Best way to maximize your savings:

The best way to maximize your savings is by maximizing your employee 401k contribution. If you are 50 years old, you can contribute $30,500 into your 401k. United, at 17%, will contribute up to the total limit of $76,500, meaning they will fund the rest at $46,000. Once United has funded $46,000, you have hit the max. From there, United’s 17% will fund the MBCBP. If you are under 50, your contribution max is $23,000 and total max is $69,000. So United still has a contribution of $46,000 to reach your $69,000 limit/

According to our math, if you maximize your 401k contributions, your 401k will max out once your salary reaches approximately $270,000. 17% of all dollars above that will flow to the MBCBP. For example, if your salary is $370,000, you will receive $17,000 into your MBCBP ($100,000 x 17%). In total, you would have added $93,500.

This is a better option than not contributing to your employee contribution. If you decide not to contribute at all, United will have to contribute up to 17% of your salary up to $345,000 into your 401k before it spills over (See 401(a) Limit). For example, if your salary is $370,000 that means your total retirement additions will only be $62,900.

Why Should You Maximize Your 401k Contribution?

In the past, United Airlines Pilots were hesitant to overfund their 401k’s because they did not want excess funds funding the RHA or the HRA. Going forward, pilots can now have the spillover continually fund a retirement account. The other reason to maximize your 401k is that you will be saving an additional $30,500 per year for retirement (50+), plus you can write it off as a tax deduction if you are funding the traditional 401k.

When we do a quick math calculation, we can see the major impact that saving $30,500 can have just on a 10 year timeline. Let’s say you contribute $30,500 per year, for 10 years, and you earn a reasonable return of 8%. How much money will you have after 10 years? When you include compounding interest, your total would be $441,840. Close to half a million dollars in additional retirement savings in just 10 years!

Which should you choose, the HRA or the MBCBP?

From initial discussions, it looks like pilots will only be allowed to choose one option or the other. Should you choose the HRA or the MBCBP?

HRA:

  • Benefits:

    • Tax-Free reimbursement for most medical, dental, and vision expenses, including copays and premiums

    • Good option for paying medical expenses in retirement

  • Cons:

    • Non-portable. Meaning you cannot move this account at any time. It stays at a trust at United

    • If you and your spouse pass away without using the entire amount, the balance get reverted back into the trust

MBCBP:

  • Benefits:

    • Can move the account to an IRA at 59 ½

    • Contributes and grows tax-free

    • Helps you save more for retirement above traditional limits

  • Cons:

    • Investment is controlled by a third-party committee

    • Cannot be used until retirement age of 59 ½

    • Pay income tax when you use the money

 

Want to maximize your financial plan?

As a CERTIFIED FINANCIAL PLANNER™, I’ve had the privilege of working with over 50 pilots, just like you, to help them chart a course toward a secure retirement and a prosperous financial future. My specialization in United pilot benefits helps equip me to guide you in maximizing your career earnings and benefits. There are many accounts and benefits that we want to help you get the most out of, before you are forced into retirement by current FAA laws. By working with us, we can help you get on the right track to the retirement and financial future you deserve. Let’s get started today. 

2024 United Pilot Plan Updates: Cash Balance Plan

Posted on by Nick Coleman

2024 United Pilot Plan Updates: Understanding the Cash Balance Plan

If you’re a United pilot, the dawn of 2024 likely brings with it an exciting prospect—the new contract set to take effect this year. Among the changes, the introduction of the Market-Based Cash Balance Plan (MBCBP) has piqued the interest of many United pilots. As a CERTIFIED FINANCIAL PLANNER™, I’ve had the privilege of working with over 50 pilots, just like you, to help them chart a course toward a secure retirement and a prosperous financial future. My specialization in United pilot benefits helps equip me to guide you in maximizing your career earnings and benefits.

How the Market-Based Cash Balance Plan works with your current plan

The Market-Based Cash Balance Plan represents an opportunity to enhance your retirement savings, working in conjunction with the Profit Sharing Retirement Account Plan (PRAP). This supplementary retirement savings account is designed for spillover contributions from your 401(k) plan. The question on many pilots’ minds is how the MBCBP operates, how it can be utilized, and whether it offers advantages over the Health Reimbursement Account (HRA).

Understanding the MBCBP involves grasping two crucial limits—the 401(a) Limit and the 415(c) Limit.

The 415(c) Limit sets the total cap on contributions to your 401(k) from both your employee and employer contributions. For individuals under 50, this limit stands at $69,000, while those 50 or older can contribute up to $73,500. Meeting this limit can occur when maximizing your 401(k) contributions, which are:

  • $23,000 for individuals under 50
  • $30,500 for those aged 50 or older

The 401(a) Limit, dictated by ERISA regulations, determines the portion of your salary that United considers when contributing to your 401(k). In 2024, this limit is set at $345,000. If your salary exceeds this amount, United’s 17% contribution will spill over into either the HRA or MBCBP. For example, if your salary reaches $445,000—$100,000 over the limit—this excess 17% translates to $17,000 as spillover. Over a decade, this could accumulate to a substantial sum.

Understanding the Market-Based Cash Balance Plan

So, what exactly is a Cash Balance Plan? It serves as a retirement account, much like your 401(k), but with the capacity to hold a more significant sum for retirement than traditional retirement accounts. While a 401(k) is constrained by an annual limit—$69,000 in 2024, for instance—a Cash Balance Plan can theoretically accommodate contributions of up to $300,000 annually. This account operates differently from a 401(k) in that it follows a “Defined Benefit” model, allowing for higher contributions to support specific benefits, such as an annual pension.

The Market-Based Cash Balance Plan is a deferred plan, meaning you don’t pay taxes on contributions or growth within the account. Instead, taxes are levied when you withdraw funds during retirement, aligning with your income tax level at that time. This structure can be advantageous, as it doesn’t increase your taxes while working, potentially leading to lower tax brackets in retirement.

Regarding investment management, Cash Balance Plans prioritize a “reasonable return” within strict ERISA and IRS guidelines to safeguard the defined benefit. As such, pilot investments in the MBCBP aren’t subject to individual choices but rather managed collectively by a committee. Upon retirement, you have the flexibility to roll over the MBCBP into an IRA. This will grant you greater control over investment decisions.

One notable advantage of the Cash Balance Plan is its portability. After retirement, you can transfer the funds to an IRA, allowing for greater flexibility and potential wealth transfer. In contrast, the HRA and RHA remain non-portable and are confined to United’s trust, accessible only for qualified health-related expenses and with limited beneficiary options.

Is a Market-Based Cash Balance Plan Right for You?

So, should you consider using the 2024 United Pilot Cash Balance Plan? If you aspire to save more for retirement, especially as retirement draws nearer, it could be a valuable tool. However, it’s essential to retain some funds for potential health expenses in retirement, considering that healthcare costs can be substantial. Fidelity estimates that a couple retiring in 2021 might spend around $157,000 on medical expenses during retirement.

Additionally, you can maximize your 401(k) contributions further by taking full advantage of your personal contribution limit:

  • $23,000 for individuals under 50
  • $30,500 for those aged 50 or older

By doing so, you not only bolster your retirement savings but also may enjoy significant tax benefits. Contributions are tax-deductible, potentially leading to substantial tax savings.

Furthermore, you may consider diversifying your retirement savings by exploring Tax-Free retirement options like the Backdoor Roth IRA Conversion. This strategy can help you build tax-free retirement income while avoiding Required Minimum Distributions (RMDs).

Next Steps

To ensure you’re making the most of your 401(k) and United pilot benefits, consider discussing your retirement goals with a professional who specializes in helping pilots. I’ve worked closely with numerous pilots to navigate the complexities of their financial plans, and I’m here to help you secure a successful financial future and retirement.

Let’s start a conversation about your financial goals and explore the strategies that can help set you on the path to financial freedom and a prosperous retirement. Set up a free consultation call today to learn more about how we can help you!

Looking for information on the Southwest Pilot’s Cash Balance Plan? Read more on that here.

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