IRA Basics

You are probably already well aware that it is important to start saving for retirement as soon as possible. This is advice that gets drilled into our heads…but, unfortunately, it is also advice that not a lot of us know how to actually follow. The good news, however, is that planning for retirement isn’t all that difficult, especially not if you take out an IRA.

IRAs, in case you have not heard of them, are individual retirement accounts. They offer people an easy way to save money for retirement by putting funds into an account that limits how often and how much you can deposit and access.   

The money that you put into your IRA is put to good use by being applied to various investment types of your choosing. These might include stocks, mutual funds, bonds, and various other types of assets.

Hopefully, now you understand general IRAs a bit better, but you should also realize that there are various types of IRAs to choose from and that it’s important to pick the right type to meet your needs and goals.

Traditional IRAs

To start off with, the most common and basic type of IRAs is the traditional IRA. With this account, you are asked to pay taxes on the money you put in the IRA, but only when you withdraw funds from the IRA. Any money you put in and do not withdraw is tax deferred.

You will have to start making withdrawals once you reach the age of 70 and a half, but, if you want, you can start much earlier, at age 59 and a half, without incurring a penalty. If you make any withdrawals from your IRA before this age, however, you will have to pay a penalty, as well as taxes on the funds.

When you do start making your withdrawals, this can often help to lower your income, thereby potentially putting you into a lower tax bracket and causing you to pay less in taxes.

With traditional IRAs, there are limits placed on your contributions based on how much you earned and your age. Your financial adviser can help you to determine the limits that you must obey if you open one of these accounts.

Other Types of IRAs

In addition to traditional IRAs, there are also various other IRA types to choose from, including:

·         Roth IRAs (Require you to pay taxes on initial investments and make future withdrawals tax free)

·         SEP IRAs (Are used by business owners with employees, the self-employed, or those with freelance income)

·         Simple IRAs (Allows employers an easy way to contribute to and match their employees’ retirement funds)

·         Self-Directed IRAs (Allows you to control your own investments)

The best way to determine if an IRA is the right fit for you, and, if so, which type, is to seek help and advice from a financial planner.

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Small Business Owners Need Retirement Plans

Do you own a small business? If so, then you already know, all too well, how challenging it can be to run your business and look out for yourself too. One important way that you should be “looking out” for yourself, if you’re not doing so already, is by taking some of your money and putting it into a retirement plan.If you’re not doing that, then you’re missing out in some major ways.  

Missed Tax Benefits

One of the big ways in which you miss out if you don’t have a retirement plan is by not getting the resultant tax benefits. Most plans open to business-owners, such as 401(k) plans designed specifically for them, come with a great many tax benefits…benefits you don’t get if you don’t sign up for a retirement plan. Such benefits include, in many cases, tax-deductible contributions to your retirement plan, which is basically like free money, and who would turn that down?

Missed Savings and Emergency Cash

Another problem with not having some kind of retirement plan in place is that this can make it much harder to save money for the future. And, when you don’t have money saved and retirement rolls around, what are you going to do? You don’t want to be one of those people scrambling to make ends meet in retirement and never truly enjoying what should be this golden time in your life.

Furthermore, many retirement accounts, including 401(k) plans, give you the option to borrow from your account if you need to, such as in an emergency situation. It’s nice to have that built-in safety net, a safety net you don’t have without a retirement plan, in case you or your business fall on hard times.

As you can see, you miss out on all kinds of things- and these are just a few- when you don’t save for the future. So, make sure you have a retirement plan and that you make full use of it to get and enjoy these awesome benefits.

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Tips for Making the Most of Your 401K

In recent years, thanks in large part to pensions becoming less widely available, 401(k) plans have become the option of choice for those planning for their retirement. These plans, while beneficial, can sometimes cause confusion. Most people don’t know how much to put into these accounts or whether they should even have one, but with a little advice from us and your financial advisor, you can make smart decisions about how much to contribute.   

Busting the Match Myth

Most employers are willing to match 401(k) contributions but only up to a certain amount, usually around 6%. Thus, many people who have these plans only contribute up to that 6% mark and then stop.

It’s important to know, however, that it’s usually best to contribute more than that. In most cases, the IRS allows up to $18,000 in elective 401(k) deferrals. Those who are 50 or older can even contribute more if they wish, currently a whopping $6000 more!

Know Your Contribution Limit

While you do want to contribute more than 6% if you can, it’s important that you do know the limits the IRS has put in place for contributions. Do bear in mind, however, that though these limits apply to most people in the respective categories, it’s always best to check with your investment advisor as there may be special considerations in your case:

Elective Deferrals Limit: $18,000

Total Contribution Limit for 50+: $59,000

Total Contribution Limit with employer contributions: $53,000

As mentioned, an investment advisor really is your best bet for making the most of these tips and for making the most of your 401(k) in general.

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How to Choose an IRA

For a lot of people, retirement seems like something way in the future, something they don’t have to think about right now. In truth, though, retirement comes sooner than people think, and it’s something they need to start planning for pretty much as soon as they start working. While there are many options to save for retirement, such as 401(k)s, IRAs are a lot more accessible for most people and offer more diverse savings options as well.   

But, what, exactly is an IRA? This is a question many newcomers to the working world have but are afraid to ask for fear of sounding stupid. First of all, IRA stands for “individual retirement account.” These accounts can be opened by anyone who works and/or who has taxable income, providing that the person is not yet 70.5 years in age. People who have IRAs can put tax-deferred investments into them and then later use that money when they retire.

Not all IRAs work exactly the same, however, and it’s important to choose the one that’s right for you. While there are all kinds of IRAs available, most people, especially when they’re just starting out, are going to open either a traditional IRA or a Roth IRA.

Traditional IRAs Vs. Roth IRAs

Traditional IRAs offer a way for people to invest money toward retirement without having to pay taxes on the money they set aside. However, they will have to pay these taxes when they retire and withdraw money from the account.

Roth IRAs work in the opposite way. The money that is put into them is taxed, but account holders do not have to pay taxes when they retire and wish to make withdrawals.

So, thinking about whether you want to be taxed now or later is one way to help make the decision between Roth and Traditional IRAs. Also keep in mind that if you already have a work-sponsored retirement plan, you might not be entitled to the tax deductions typically offered by a traditional IRA, which would make a Roth a better choice for you.

Another thing to keep in mind is that the Roth IRA does have some limitations on who can contribute and how much. For example, the only people who are allowed to contribute the full amount to their Roth IRAs are people who file on their own and who have an adjusted gross income of under $114,000 or people who file jointly and have an income of under $181,000. If you wouldn’t be eligible to contribute as much as you want with a Roth, then a traditional may work better for you.

On the flip side, though, traditional IRAS require account holders to meet minimum distribution requirements one year after they turn 70.5 years of age, but Roth IRAs don’t have any minimum distribution requirements.

Obviously, there are benefits and drawbacks, give and take, with either option. Your best bet is to consider your choices carefully, weigh the pros and the cons, and speak with a financial advisor about which option would work best for you and your particular situation. With all that work and help, it should be easy to determine which IRA is the best fit for you and your needs.

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What You Need to Know about Your 401K

401(k) plans are a wonderful investment. However, in order to make the most of them, you really need to understand a few things about how to manage them.    

To begin with, you should know that just because you leave your job doesn’t mean your 401(k) is over and done with. That’s a common misconception. You can always transfer your 401(k) to an individual retirement account (IRA) when you leave your current place of employment. That’s known as a “rollover,” and, best of all, it comes without taxes or penalties. You can even take several 401(k) plans from past jobs and consolidate them into a single IRA for convenience and maximum profit.

Secondly, you should know whether or not your 401(k) comes with a stable value fund option. If it does, then it’s probably a very good idea to take advantage of this investment opportunity. Stable value funds come with good interest rates, which are usually higher than those offered by a bank, and as the “stable” part of their name implies, they don’t fluctuate. In other words, they’re a source of safe money! Set aside as much as you’ll need for the first year or so of retirement; that way, you’ll have it there just in case.

Another thing that’s important to understand is that you really shouldn’t be touching your 401(k) for anything except retirement. The money within it is a fully protected asset, which means that creditors can’t touch it no matter what. Since you don’t know what will happen in the future- you could lose your home to foreclosure and not have that asset or be forced into bankruptcy- it’s good to have money that you know will always be there, no matter what, and that can see you through retirement.

Also keep in mind that if your 401(k) offers a stock ownership plan for employees, it can be smart to buy up at least some of that stock. If you do end up owning a lot of company stock, however, understand that you may be subject to the net unrealized appreciation tax rule. What this means is that, when you retire, you’ll be able to distribute the company stock that you hold and then only have to pay income tax on the stock and its cost basis. You’ll also be able to pay taxes on your gain when you sell the stock back, but the taxes you pay will be at a special, lowered rate. To determine if this tax law will apply to you, and if so, how to get the most benefit from it, working with a financial advisor is smart.

As you can see, 401(k) plans are complex, but when you know the ins and outs of them, they can be a lot easier to understand and deal with. If you have other questions about your 401(k) or about 401(k) plans in general, you can always talk to a financial consultant.

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After 55: A Guide to Later Life Retirement Planning

Retirement is one of those things that sneaks up on you. One second, you’re 25 years old, young and free. The next thing you know, you’re past 50 and still have a lot of planning (and living!) left to do. If you’ve found yourself in this situation, don’t worry. There are still things you can do, later on in the game of life, to help you get ready for retirement.

Start Saving (Seriously!)

                        

Most of us make valiant attempts to save throughout our lives...attempts that often get bogged down by the cares and concerns of real life. Once you hit 55 or so, however, there’s no more time for procrastinating.

If your savings are looking a little slim in your later working years, increase your contributions all around. In fact, it’s not a bad idea to increase contributions to some, or even all, of the following:

l  401(k)                     

l  403(b)

l  IRA

l  Keogh

l  SEP-IRA

The more you can increase your contributions without harming your current financial status, the better, especially if you’re making up for lost time.

Seek Professional Help

Chances are, if you’re worried about your financial status at age 55, you’re probably not the most money-savvy person in the world. Don’t beat yourself up over that fact, however. Instead, take action.

If you’re still struggling with financial matters later in life, there is no better reason to hire an expert. Professional financial advisors can take a look at where you are and where you want to be and find a way to reconcile the two.

Be Realistic

There is a major tendency among people to over or underestimate the amount of money they will actually need to live comfortably once they retire. Whether your plans are too big (sailing around Europe) or too small (living off of senior-citizen priced fare), there is no better time than the present to get them in check.

Sit down and think about what you plan to do in the future, where you plan to live, and what assets you will have working for you. Then, make realistic plans and budgets based on those factors. If you find that you really can’t live on what you’re currently socking away, the nice thing is that you still have time to change it.

In fact, nothing is set in stone until the day you die, so even if you’re past (or well past) the 55 age mark, it’s never too late to start planning for retirement and just life in general sensibly.

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Early Retirement Distributions

A taxpayer may choose, or be forced into choosing, early retirement. A retirement before age 59½ creates income challenges for the retiree. The retiree is not yet eligible to receive retirement benefits from Social Security. The retiree may or may not have a monthly pension to generate income.

In many situations, the retiree will need to generate income from his or her assets. Often, the retiree has most of his or her assets in a retirement plan through a 401(k) plan at his or her employer or in an individual retirement arrangement (IRA). Withdrawals of earnings and pre-tax contributions are subject to ordinary

income tax. In addition, taxpayers may be subject to the 10% early withdrawal penalty tax on distributions taken before the taxpayer reaches age 59½.

Tax Summary

•    Withdrawals of earnings and pre-tax contributions from an IRA are subject to ordinary income tax.

•    Unless an exception applies, taxable withdrawals from an IRA prior to age 59½ are subject to a 10% early withdrawal penalty.

•    Taxpayers who take a series of substantially equal pe-riodic payments from an IRA are not subject to the 10% additional tax.

Tax Planning Strategy

One strategy to generate income from retirement accounts for taxpayers under age 59½ is to take periodic distributions from those accounts. If structured properly, the 10% additional tax will not be assessed on the distributions. Taxpayers can take distributions from various retirement accounts such as 401(k) plans, 403(b) plans, and IRAs.

Possible Risks

•    The rules for distributions using the Internal Revenue Code provide very little flexibility. Once the distribution begins, taxpayers need to exert extreme caution in making any changes to the distribution amount and frequency.

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Your Guide to Getting Retirement Ready

According to the United States Department of Labor, fewer than half of all Americans are aware of how much they’ll need for retirement. When you consider that the average American spends as much as 20 years in retirement, that’s pretty scary.

Obviously, that’s where you need to start- by figuring out how much you will need to retire. Take your current living expenses and add a little extra for inflation and possible new expenses, such as medications. While you can come up with a fairly good “guesstimate” on your own, a retirement planning professional can help you with calculating a more accurate figure of how much you’d need for a comfortable retirement.

Either way, you’ll likely be surprised at the figure facing you, and that should provide plenty of motivation for you to spring into action and start saving. That- saving money- is really the first step toward preparing for retirement.

Non-Stagnant Saving

If you’re smart with your money, then you’re already putting a small percentage of your paycheck in your savings account each month. Word to the wise- if you’re not doing that, you should start!

The key, however, is not to get stagnant with your savings. Strive to increase the amount you save each month, even if it’s just by a dollar or two. Also, make sure you increase your savings amount each time you get a pay raise or come into extra money. Again, a retirement savings professional can be a vital tool for determining how much you should be saving and the progress you’re making toward your retirement savings goals.

Get on a Budget

The number of people who spend without a plan in mind is staggering. If you’re just spending your money as you wish and hoping against hope that everything evens out, then you’re not approaching spending correctly.

Work with a financial planner to develop a budget for each month. The budget should include how much you have to spend on bills, how much you have for “fun” purchases, and how much you are putting into savings accounts and other “future funds.” Then, stick to that budget!

The bottom line is that you have to see the big picture. When it comes to spending money, you can’t just approach a month as a month. It’s more than that- it’s a period of time during which you are inadvertently making decisions about your future. If you spend frivolously now, you’ll pay for it later, but if you budget your money and keep the big picture in mind, you’ll eventually reap the benefits.

Invest

While budgeting your money and making sure you put funds in your savings account each month is a good start, it’s simply not enough. You also need to be utilizing some type of investment strategy. Whether it’s a 401(k), a Roth IRA, or anything in between, you should be building some type of investment portfolio.

For best results, work with your financial advisor to find investment options that have low fees, taxes, and penalties. After all, you want your investments to work for, not against you.

If you can follow these basic tips, then there’s no reason you can’t enjoy a happy, comfortable retirement.

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Find the Tax Balance in Your Investment Program

As an investor, you have to juggle a lot, balancing out economic factors with your personal risk tolerance and objectives. And there’s yet another ball to throw into the mix: taxes. Their impact on the bottom line can be significant. Keep your eye on these key points.

- Generally, a sale of securities will result in a capital gain or loss. Gains and losses offset each other on your tax return. Furthermore, any excess net loss can offset up to $3,000 of ordinary income before being carried over to next year.

- The tax law generally provides a maximum tax rate of 15% for qualified dividends and long-term gains on sales of securities held longer than one year. But the maximum tax rate is reduced to 0% for taxpayers in the lowest two ordinary income tax brackets of 10% and 15%. The rate increases to 20% for those in the top that short-term gains are taxed at ordinary income rates.

- Thanks to a recent tax law change, a 3.8% surtax applies to the lesser of “net investment income” (NII) or the excess modified adjusted gross income  (MAGI) above $200,000 for single filers and $250,000 for joint filers. For this purpose, NII includes most income items like dividends and capital gains, but not others such as retirement plan or IRA payouts (although these still increase your MAGI). Thus, the effective federal tax rate on securities sales can range from 0% to 43.4% (39.6% plus 3.8% surtax). How can you tilt taxes in your favor? Consider these five principles of tax advantaged investing.

1. Add investments in tax-free municipals or other tax-exempt obligations. This is especially important to investors facing the combined 43.4% tax rate.

2. Harvest capital losses from securities sales at year-end. Those losses can be especially valuable if they offset short term capital gains.

3. Maximize favorable tax treatment for qualified dividends and long-term capital gains. When it’s available, take advantage of the 0% rate.

4. Manage tax brackets year-to-year. For instance, you might postpone high-taxed gains to next year or accelerate low-taxed gains into this year.

5. Develop a tax-sensitive portfolio. Utilize fundamentals of asset allocation and diversification while taking potential tax implications into account.

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Reasons Why an IRA Rollover is Smary

If you’re about to leave an employer behind, you may be wondering what to do with that money in your 401(k). Fortunately, you have quite a few options, and one of the best of those options is to send the fends to an IRA rollover account.   

What makes this option so great? Well, to begin with, you won’t be stuck paying the account manager fees for managing and overseeing the fund. When you do that, you start losing out on money. An IRA rollover, however, keeps you from paying all of those fees and allows your money to actually earn more money at the same time.

A rollover also makes it easier to diversify your funds since rollover plans typically give you lots of different fund types to choose from. And, also bear in mind the sheer ease and convenience of having all of your investments in one place.

If you’re interested in opening a rollover account in Naperville, contact Platinum Financial Associates, Inc. for help getting started.

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New Law Affects IRA Rollovers

People used to believe that taxpayers could roll over as many IRAs as they wanted, providing that they waited one year before rolling over the same account again. A new law put in place by the United States Tax Court, however, puts the kibosh on that theory. Now, the law clarifies, taxpayers can only engage in one tax

free IRA rollover per year. So, even if a taxpayer has eight IRAs, he can only roll over one within a one year period.

While may professionals working in the tax and financial industries argue that the new IRA rollover law will only affect very wealthy individuals and not the “average citizen,” it’s still worthwhile to understand how this law will affect you, especially if you have or were planning on opening multiple IRAs.

If you’d like more information on the new IRA law or if you’d just like to learn more about IRAs in general, contact the friendly experts at Platinum Financial Associates of Naperville.

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Understanding Your IRA Rollover Options

You might think that an IRA rollover is simple and straightforward, and in some ways, it is. However, IRA rollovers are not one-size-fits-all ventures. No, when it comes to an IRA rollover, you actually have a few different options for transferring your funds.

For starters, you may be able to keep some of your savings or even all of your savings in the plan set up by your past place of employment. Or, if you’ve already got a new job, you may be able to take your funds

from your former employer’s plan to your new employer’s plan. You may even be able to do this in the form of an IRA, or if you wish, you can actually cash out the plan and receive your funds.

While you will likely have many or even all of these options at your disposal, it’s important to choose the one that will be the most beneficial for you. Fortunately, you don’t have to make this all important decision on your own; you can seek the help and expert advice of the financial pros at Platinum Financial Associates of Naperville.

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