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OVERCOMING THE 5 RETIREMENT CHALLENGES
While saving for a retirement is important, so is your plan of action once you retire.
While saving for retirement is an important topic, it’s at least as important as what comes next: Your plan of action once you get there. No matter how well you save during the accumulation phase, it’s critical to plan how you convert those assets to income.
Other than Social Security, many retirees have no source of guaranteed income other than retirement savings. Plus, unlike previous generations, you may not be covered by a pension plan at work, so chances are you’re going to have to rely on your own efforts to overcome the following five challenges:
Challenge #1: Longevity
According to the Society of Actuaries, a man in his mid-50’s today has about a one-in-three chance of reaching age 90, while a woman of the same age has a roughly 50% chance.1
What this means is that you may very well spend as many years in retirement as you did during your career. That means generating enough income to meet day-to-day expenses for possibly 30 years, or more—an especially daunting challenge in an environment where few sources of guaranteed income are available to you.
Challenge #2: Volatility
Market swings and “Black Swan” events are always a possibility. Black Swan events are best described as 9/11, the real estate bubble that led to the Financial Crisis and the coronavirus pandemic. In short, Black Swan events are those that defy our ability to predict them.
When they occur, they can have a profound impact on financial markets. These days, trading is often conducted electronically at lightning-fast speeds among numerous participants around the world. In addition, trading doesn’t stop when the market closes, and the advent of social media has accelerated the speed at which decisions are made. Put it all together and the climate is conducive to greater volatility than we’ve experienced in the past.
Challenge #3: Inflation
Inflation is the rate at which the prices of goods increase on an annual basis. It’s hard to believe, but on January 1, 1981, the U.S. inflation rate was a whopping 13.9%. Fortunately, in recent years it’s been hovering between 0.5% and 2.5%.2 But, even today’s relatively low rate can have a harmful effect on your purchasing power over time.
For example, $1,000 today will only be able to purchase $552 in goods 30 years from now with a 2% annual inflation rate. With a 3% rate, that $1,000 will only buy you $412 worth of goods. And if inflation goes up to 5% or 6%, the results could be far more drastic.
For many retired people, higher inflation is especially difficult because they may be living on a fixed income that can’t support rising costs. In addition, many of the goods and services most often used by retirees are already experiencing greater-than-average price inflation.
Health care costs, for instance, can be particularly onerous. On average, a 65-year-old couple in good health who retired in 2019 with Medicare Parts B and D and supplemental insurance coverage could expect to pay $387,644 for healthcare costs for the remainder of their lives, according to HealthView Services.3
Challenge #4: Taxation
If you’re in a high tax bracket, you have to be especially aware of how your assets are invested. Many hedge funds and mutual fund managers, for example, fail to consider taxes when they’re seeking profits. Portfolio turnover can be high and short-term capital gains, which are taxed as ordinary income, are often generated in abundance.
Mutual funds may also throw off what is sometimes called “phantom income.” These are distributions of dividends and/or capital gains that are reinvested in additional fund shares. You never really see them, but you’re taxed on them anyway. In fact, many investors find themselves paying taxes on capital gains distributions even while their fund shares have declined in value for the year.
Challenge #5: Leaving a Legacy to Loved Ones
For many Americans, even if they have enough income to comfortably meet retirement expenses, leaving a legacy is still a primary concern, particularly as it relates to estate taxes. Federal estate tax alone can reduce the bequest you hope to leave someday. Depending on which state you live in, erosion can be even more profound.
What to Do in Retirement
Years ago, once retired, an oft-used strategy was to reallocate your portfolio from mostly equities to mostly fixed income and to live on the interest generated by these holdings. With today’s interest rates near record lows and life expectancies expanding, this strategy may no longer be viable.
One potential strategy is the “4% rule of thumb.” By withdrawing 4% a year from your retirement assets, you aim to avoid depleting your nest egg for approximately 25 years. The 4% comes from a statistical analysis technique called Monte Carlo simulations. This strategy, however, is not foolproof. There’s always the chance that you could live longer than 25 years after retiring and run out of money at age 90 or so.
In a time when guaranteed retirement income for most people is limited to Social Security, this 4% rule may not be viable for every investor. Certainly, it offers a number of benefits. You can invest in whatever you want and withdraw more than 4% on occasion, if your investments are performing well. But will you have the discipline to reduce withdrawals in years when the market declines? And will you be lucky enough to avoid losses in the early years of your retirement?
Identify Sources of Guaranteed Income
Another idea that might make sense for at least part of your retirement nest egg is variable annuities. Issued by insurance companies, variable annuities offer a variety of professionally managed investment options. Like a 401(k) plan or IRA, assets in a variable annuity grow tax-deferred until they are withdrawn by the contract owner. When the time comes to retire, you can elect to receive life contingent income distributions. Depending on the specifics of the rider you select, you may be able to receive income that is guaranteed to last for as long as you live.
Consider How You’ll Pay for Care
Nobody wants to think about having to rely on others for care, but it’s essential to plan ahead for such a possibility, especially for later in life. The cost of long-term care services—whether provided in the home, at a community facility or in a nursing home—may not be covered under major medical plans or Medicare and often exceeds what the average person can pay from income and other sources, particularly in retirement. One alternative to paying entirely out of your own pocket is long-term care insurance. By paying an annual premium, you can transfer the risk to an insurance company and help protect your assets from rising health care costs. Life insurance or annuities with a long-term care rider are another option for helping cover these expenses.
There’s More Than One Way to Overcome Challenges
Indexed annuities, long-term care and other forms of insurance may be valuable tools, but they aren’t always the right ones for every retiree. Talk to your Advisor about what options can be an integral part of your retirement planning.
1. Society of Actuaries, 2019: www.soa.org/globalassets/assets/files/research/age-wise.pdf
2 Consumer Price Index (CPI), U.S. Department of Labor Bureau of Labor Statistics, 2020
3 Retiring this year? How much you’ll need for health-care costs,” CNBC, July 18, 2019: www.cnbc.com/2019/07/18/retiring-this-year-how-much-youll-need-for-health-care-costs.html
Variable annuities are sold by prospectus only. The prospectus contains the investment objectives, risks, fees, charges and expenses, and other information regarding the variable annuity contract and the underlying investments, which should be considered carefully before investing. Prospectuses for both the variable annuity contract and the underlying investments are available from your Financial Advisor. Please read the prospectus carefully before you invest.
All guarantees are based on the financial strength and claims paying ability of the issuing insurance company.
Indexed annuities are long-term investments designed for retirement purposes. They offer the opportunity to participate in market gains, while eliminating exposure to market risk.
Withdrawal and distributions of taxable amounts are subject to ordinary income tax and, if made prior to age 59½, may be subject to an additional 10% federal income tax penalty. Early withdrawals will reduce the death benefit and cash surrender value.
If you are investing in an annuity through a tax-advantaged retirement plan such as an IRA, you will get no additional tax advantage from the annuity.
Under these circumstances, you should only consider buying an annuity because of its other features such as lifetime income payments and death benefit protection.
Tax laws are complex and subject to change. Mattix Wealth Management, LLC and its affiliates do not provide tax or legal advice. Individuals are urged to consult their personal tax or legal advisors to understand the tax and legal consequences of any actions, including any implementation of any strategies or investments described herein.
Mattix Wealth Management, LLC
2021 CRD# 226648 ... See MoreSee Less
WHAT IS AN EXCHANGE TRADED FUND?
An exchange-traded fund (ETF) is a basket of securities that may consist of stocks, bonds, commodities, real estate, or other financial assets. By design, ETFs strive to offer more liquidity and trading flexibility than other investment vehicles. That is because they are bought and sold on an exchange, much like individual stocks, where supply and demand continually dictate share prices. Investors can make trades during normal market hours in response to new market conditions or changing expectations.
ETFs also serves as a versatile asset. They are structured in a way that lets investors target a specific category of investment, such as an asset class, sector, or geographic region. Many ETFs track a specific index focused on a market segment, such as the Standard & Poor’s 500 Index for U.S. large-capitalization stocks. Such funds are considered “passive investments” because they simply mirror the composition of a particular index.
Actively managed ETFs, on the other hand, offer the opportunity to beat the returns of an index because an investment manager selects which securities to own in the portfolio. Even if the fund focuses on a particular market segment, the manager has the discretion to determine which securities to own.
Many investors are drawn to the structural characteristics of ETFs:
• Tax-advantaged design: Because of how they are structured, ETFs generally do not issue the annual taxable capital gains distributions that mutual funds do.
• Portfolio transparency: ETFs report their underlying securities on a daily basis, which means investors immediately know what they are holding.
• Low turnover: Since some ETFs track indexes or baskets of securities, the internal turnover of securities in the portfolio is generally lower than the turnover rate for actively managed mutual funds.
• Targeted exposure: Investors can use ETFs to dial up or down their overall portfolio’s exposure to different markets, styles, sectors, themes, or strategies.
• Liquidity/flexibility: Investors can buy and sell shares on exchanges throughout the trading day, while also implementing different strategies such as buying on margin, short selling, and placing various order types.
• Accessibility: ETFs provide access to asset classes, such as certain types of commodities, that were previously available only to institutional investors.
• Lower ownership cost*: Passive investments, which track an index or sector, may have lower expense ratios because simply mirroring an index in less costly than having a team of investment managers evaluate and select securities.
Investors should be aware of the material differences between mutual funds and ETFs. ETFs generally have lower expenses than actively managed mutual funds due to their different management styles. Most ETFs are passively managed and are structured to track an index, whereas many mutual funds are actively managed and thus have higher management fees. Unlike ETFs, actively managed mutual funds have the ability react to market changes and the potential to outperform a stated benchmark. ETFs can be traded throughout the day, whereas, mutual funds are traded only once a day. While extreme market conditions could result in illiquidity for ETFs, they are typically still more liquid than most traditional mutual funds because they trade on exchanges. Investors should talk with an adviser regarding their situation before investing.
Mattix Wealth Management, LLC does not offer tax advice. Please consult your own tax advisor for information regarding your own tax situation. There is no guarantee that a Fund will not distribute capital gains to its shareholders.
* Since ordinary brokerage commissions apply for each buy and sell transaction, frequent trading activity may increase the cost of owning ETFs. ... See MoreSee Less
The SECURE Act changes the rules for your IRA and 401k beginning in 2020. The pros and cons:
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was attached to a broad appropriations bill at the end of 2019, ushering in the largest retirement planning bill since the Pension Protection Act of 2006.
The SECURE Act has three main areas of impact for Americans:
1. To help reduce costs associated with setting up retirement plans for small employers.
2. Increase access to lifetime income options (annuities) inside retirement accounts.
3. Lastly, and perhaps most importantly, in the short term, the SECURE Act made major required minimum distribution (RMD) rule changes around retirement accounts.
Since the RMD rule changes have the biggest impact on the near term, I put together a short review of what is changing and what you need to do now in order to be prepared.
3 Major RMD Changes
1. Bad News for Inheritors: Removal of Inherited “Stretch” Provisions
As part of the new rules, some taxpayers are about to take a hit. The single biggest tax revenue generator in the SECURE Act comes from the removal of the so-called “stretch” IRA provisions.
In the past, a non-spouse beneficiary of an IRA or defined contribution plan like a 401(k) could stretch out RMDs from the plan over their own life expectancy. However, starting on Jan. 1, 2020, if an owner of IRAs and 401(k)s passes away and leaves the accounts to a beneficiary other than their spouse, the beneficiary will only have 10 years after the year of death to distribute the entire retirement account unless the beneficiary is a qualified eligible beneficiary as defined in the SECURE Act.
Exempted from the 10-year stretch provisions are surviving spouses, minor children up until the age of majority, individuals within 10 years of age of the deceased, the chronically ill and the disabled.
Bottom line: Many beneficiaries will now see higher taxes and a shorter distribution period for inherited retirement accounts under this change.
2. Good News for Savers: Removal of Age 70.5 IRA Contribution Restriction
Under previous law, those working past age 70.5 could not contribute to a traditional IRA. Starting in 2020, the SECURE Act will remove that restriction.
This means that those working past age 70.5 can contribute to an IRA — either deductible or non-deductible — depending on other factors around IRA contributions like income, filing status, earned compensation, and active status in a qualified plan. As such, someone after age 70.5 could now contribute up to $7,000 as a deductible contribution to an IRA and so could a spouse, totaling $14,000 as a couple per year, if they meet certain requirements.
3. Good News for Retirees: New Required Beginning Date for RMDs at 72
In the past, the mandatory beginning date for most retired individuals was age 70.5 to begin taking RMDs from their retirement accounts. If you have not yet reached age 70.5 by the end of 2019, your new required beginning date for RMDs will be age 72. However, if you reach age 70.5 by the end of 2019, your required beginning date is set, and the SECURE Act does not change the requirement for you to begin taking out RMDs at 70.5.
So, what do we do now that the RMD rules have changed?
No matter who you are, take the following five steps to check in on your financial plan.
1. Review Your Beneficiaries
Because the SECURE Act changes the outcome for many inherited retirement accounts to be distributed in a shorter time period, now is the time to review your beneficiary designation. Beneficiary designation on IRAs and 401(k)s determines who the accounts will pass to once the owner dies. Take the time and make sure all your beneficiary designations are in order and that they still match up with your intended goals.
If the goal of the original retirement account owner is to give lifetime income to a child, they might want to reconsider the strategy or the beneficiary designation. As an alternative, a charitable remainder trust could be used as a beneficiary with the child as the lifetime income beneficiary to provide them with a lifetime income.
This is just one example of how changing a beneficiary designation might make sense to better align with your goals after the SECURE Act’s passing.
2. To Avoid Disaster, Take a Close Look at Your Trust
If you were using a trust as a beneficiary of an IRA or 401(k) in order to achieve creditor protections and take advantage of the stretch provisions through a “pass-through” trust, there could be a huge issue with your plan now that the SECURE Act passed. Most of these conduit or pass-through stretch trusts for IRAs were set up to pass through RMDs to the beneficiary.
However, if the trust language states that the beneficiary only has access to the RMD each year, under the new rules, there is no RMD until year 10 after the year of death. This means the IRA money could be held up in the trust for 10 years and then all be distributed as a taxable event on year 10.
This is nothing short of a disaster for trust planning, so review your trust documents if you were using one as an IRA beneficiary.
3. Perform a Tax Review
The RMD rules are expected to be a huge tax revenue generator for the federal government. As such, review your tax situation and how the new rules will impact the true amount of legacy and wealth you are passing over to your children.
In some cases, it might make sense to leave your IRA to a charity and purchase life insurance for your children or a charitable remainder trust to maximize legacy benefits. The SECURE Act should put everyone on notice that the government is looking to raise tax revenue in new ways, so do a tax review of your estate and retirement income plans.
4. Consider Doing Roth Conversions
While Roth IRAs are subject to RMDs when inherited, they typically do not cause a taxable event when distributions are taken by a beneficiary. As such, it can make a lot of sense (with lower tax rates under the Tax Cut and Jobs Act) before the owner of the IRA passes away to strategically do Roth conversions to move money from an IRA to a Roth IRA. The benefits here are threefold, as it can help a retiree:
1. Maximize their wealth
2. Lower taxes in retirement, and
3. Be a huge benefit for heirs under the SECURE Act’s 10-year distribution rule.
5. Execute RMD Planning
Lastly, if you have an IRA or retirement account, you need to get a retirement income plan in place. This means understanding your RMDs, when they will begin, which accounts you need to withdraw from, and how the withdrawals will impact your taxes and other retirement benefits, like Social Security or Medicare.
Prior to retirement, it might make sense to do Roth conversions or to roll money into an IRA to better manage RMDs. Additionally, strategies like Qualified Charitable Contributions — where you give money directly from an IRA to a qualified charity (thus reducing RMDs) — can be powerful planning strategies with the new RMD age of 72.
Because so many of these changes are complex and involve long-term financial and tax planning strategies, it is important to consider how the act will impact your overall plan and to speak with a qualified tax and financial professional about what is best for your situation. ... See MoreSee Less
WHAT FEES ASSOCIATED WITH A 401(K) PLAN?
Typically, 401(k) plans have three types of fees: Investment fees, administrative fees, and fiduciary and consulting fees. Some of these 401(k) fees are charged at a plan level for the management and administration of a plan, while others are related to the investments made by employees within the plan. Sometimes, the fees paid in a 401(k) are taken directly from plan assets by your service provider and then paid out to the various vendors working on the plan. In other cases, the investments themselves will carry fees, which are taken out of the money invested in that specific investment. All considered, fees in a 401(k) plan can go to many places, including:
• Investment Managers, who oversee the investments in a fund;
• Administrators, who handle things like the transfer of assets in and out of a fund;
• Recordkeepers, who keep detailed records of a 401(k) plan’s transactions;
• Lawyers, who draft legal documents and oversee regulatory compliance;
• Accountants, who may perform audits of a 401(k) plan’s activities;
• The Government, which collects any applicable taxes related to a fund’s activities.
WHAT IS A 401(K) EXPENSE RATIO?
Investments like mutual funds and index funds have an “expense ratio,” which refers to the percentage of an investor’s assets used to cover expenses associated with the mutual fund. Expense ratios are determined by dividing the total expenses for a mutual fund by the dollar amount of its average assets. For example, if a mutual fund has an expense ratio of 1%, that means that 1% of your employee’s total investment into that fund will be taken each year in fees.1
One type of fee to look out for if you’re examining the costs covered by the expense ratios of your 401(k) plan’s investments is the “load,” which represents a commission paid to a broker for buying and selling shares of a fund. Some loads are paid when a share is purchased; and others are paid when a share is sold.
The money paid in an expense ratio generally covers investment fees for the management and marketing of the fund, but the expense ratio of an investment can sometimes also contain some often overlooked fees which are often spread among the many partners involved in running a 401(k) plan in a process called “revenue sharing.”
WHAT IS THE AVERAGE RANGE FOR 401(K) FEES?
Typically, 401(k) plans cost somewhere between 1% and 2% of the plan assets, or the money saved in the account. Some outliers can see fees as high as 3.5%, but these high fees can have a significant impact on your employees’ ability to retire and should be avoided if at all possible.2 There are many factors which can impact the cost of a plan, from the amount of money in the plan, to the investment options you choose to include, to the level of service you receive.
401(K) FEES PAID BY EMPLOYERS
Of the three different types of 401(k) fees, employers can choose to pay either administrative or fiduciary and consulting fees, pay both, or have all fees paid by employees who participate in the plan. Investment fees are almost exclusively paid by employees. Employers who do choose to pay some of these fees often do so in order to keep costs as low as possible for their employees, so that more of their money is saved and invested for retirement. However, only 17.8% of employers fully pay administrative fees. A further 19.5% share these expenses with employees.3 The rest have set up their plans so that these fees are paid out of the plan’s assets or, in other words, by anyone who participates in the plan.
Additionally, some employers choose to work with specialized 401(k) advisers who will charge their own fiduciary and consulting fees. These providers can offer help in the form of fiduciary services to share in the employer’s legal liabilities, or things like employee engagement and education assistance. Advisory fees like this are typically charged quarterly and are asset-based, which means they will be based on a percentage of the total assets in the 401(k) plan. Employers can choose to pay these expenses or, as we’ll touch on later, this cost can be passed on to employees.
401(K) FEES PAID BY EMPLOYEES
Employees participating in a 401(k) plan can pay any of the three types of fees, but most commonly pay investment and administrative fees. Investment management fees are associated with what employees invest in within their 401(k) accounts, like mutual funds. As discussed above, the expense ratios tied to the funds your employees invest in may also go towards covering administrative costs for the plan.
Finally, fiduciary and consulting fees that are charged by 401(k) advisers for things like fiduciary services or employee education might be taken directly from plan assets, effectively meaning the employees and not the employer are covering those expenses.
READING 408(B)(2) FEE DISCLOSURES TO UNDERSTAND 401(K) FEES
When you’re working to understand exactly what fees you and your employees are paying, your best tool is the fee disclosure document, which is required by section 408(b)(2) of ERISA. You can request one of these from your 401(k) provider at any time to get a clear look at:
• All services provided by your 401(k) provider and their affiliates or subcontractors;
• Each service provider’s fiduciary status;
• And all compensation expected to be paid to any of these providers.
Your 408(b)(2) disclosure will also tell you both about “direct” and “indirect compensation,” so you will be able to see if any of your providers are being paid through revenue sharing. This will help you understand if the expense ratios being paid by your employees contain any revenue sharing and give you a better understanding not only of the true cost of your 401(k) plan, but also whether or not your plan may be subject to any potential conflicts of interest.
KEEPING FEES REASONABLE IS YOUR FIDUCIARY DUTY
The goal of protecting your employees’ retirement savings is worthwhile in and of itself, it’s also a fundamental part of your legal responsibility as a fiduciary to your company 401(k) plan. The Employee Retirement Income Security Act of 1974 (ERISA) requires that employers who sponsor a 401(k) plan take a personal, legal responsibility to make good decisions on behalf of their employees. Managing fees and ensuring employees don’t pay more than they should for their retirement plan is a key element of this responsibility.
This fiduciary responsibility is ultimately why it is so critical for you to understand exactly how much your employees are paying in fees, who is being paid, and how. For example, the presence of a load in an expense ratio signals that an investment may be handled by a broker, and not a 401(k) fiduciary. That in and of itself is not a problem, however it can be problematic if the broker who makes a commission on an investment also advised you to include that investment in your lineup. Since they stand to make additional money whenever an employee buys or sells that investment, their advice may be biased. As you review cases like these, as well as the rate of fees being paid by your employees, it’s important to look into potential conflicts of interest in order to choose service providers and investments that don’t cost more than they should just because a service provider stands to make more money.
MONITOR AND MANAGE 401(K) FEES FOR YOUR EMPLOYEES’ SAKE
It’s critical that employers understand exactly how much their employees will pay in 401(k) fees. These fees can add a lot of cost to your employees, and that’s not good. Even an extra 1% in annual fees can reduce an employee’s 401(k) account balance by about one-third after 35 years, meaning the average American household will pay $155,000 in 401(k) fees over a lifetime!4 Review statements like your 408(b)(2) disclosure with your provider and ask them to benchmark your plan’s fees against other, similar plans. Benchmarking can shine a light on any parts of your plan that may not be in line with your expectations of service or price, as you’ll get a chance to see what other companies like yours are getting in terms of service—and what they pay. If it turns out your plan includes high-cost funds, ask if you have lower-cost options that could work just as well. After all, every dollar saved is a dollar that can grow and secure your employees’ futures—and that’s what your 401(k) plan is all about.
3 www.shrm.org/…/ben…/pages/401k-fee-benchmarking.aspx ... See MoreSee Less
Strategies to Maximize Your Social Security Benefits
The choice of when to retire and collect Social Security can impact your retirement for years into the future. Because people are generally living longer today than in previous generations, they are choosing to work longer and delay retirement to accumulate additional savings. However, according to the Center for Retirement Research at Boston College, although the proportion of people signing up for Social Security at age 62 (the earliest age you become eligible for benefits) has steadily declined since the mid-1990s, more than 40% of men and women still choose to claim their benefits as soon as they become eligible.
While no single age or method is appropriate for everyone when it comes to claiming Social Security benefits, certain strategies can be employed to optimize your benefits, boosting your income in retirement and potentially reducing the risk of outliving your savings.
Delay claiming Social Security benefits until your Full Retirement Age (FRA) or older. Certain circumstances may require you to sign up for Social Security before reaching full retirement age (FRA). For example, you may need the extra income to offset expenses, or you may not be healthy enough to continue working. Unfortunately, if your FRA is 67, and you choose to start receiving your retirement benefits at age 62, your monthly benefit amount may be reduced by as much as 30%
The percentage by which your benefit amount is reduced decreases each year until you reach your FRA, at which point you are entitled to full, or unreduced, benefits. However, if you can delay signing up for Social Security beyond your FRA, you will earn delayed retirement credits that increase your monthly benefit amount each year until you turn 70, at which point you are eligible to receive your largest benefit.
Take advantage of spousal benefits. If you are married and your spouse has earned a larger Social Security benefit than you can claim on your own record, you are entitled to receive a spousal benefit based on your spouse’s earnings—without changing the amount they receive. Ex-spouses can also collect benefits based on the higher earner’s record if they were married for at least ten years and have not remarried, and widows and widowers can collect 100% of the higher earner’s benefits instead of their own.
You can claim a spousal benefit as early as age 62—as long as your spouse has already filed for Social Security (this requirement is slightly different for ex-spouses in that they need only be eligible to file for Social Security). With spousal benefits, you can collect 50% of your spouse’s benefit amount as calculated at their FRA. If you file before you reach your FRA, keep in mind that this amount is reduced based on how far you are from full retirement.
For some married couples, it may be beneficial for the spouse with the lower lifetime earnings record to file for Social Security first on his or her record and delay collecting the higher-earner’s benefits. This strategy allows the couple to collect some income early in retirement and then collect larger monthly benefits later.
Avoid filing for benefits during high-income years. You can file for Social Security while you are still working, but if you have not yet reached FRA and your earnings exceed the yearly limit—in 2020 this limit is $18,240—your benefits will be reduced. Once you reach FRA, you are entitled to full benefits with no limit on your earnings. However, those with other sources of income often must pay taxes on their Social Security benefits. For the highest earners—individuals who earn more than $34,000 annually and married couples who earn more than $44,000, as of 2019—up to 85% of Social Security benefits may be taxable. Delaying your benefits until after you have stopped working may allow you to keep a larger portion of your Social Security income, especially if you have not yet reached FRA.
How and when you choose to collect your Social Security benefits ultimately depends on your unique circumstances, including your financial situation and family dynamics, health, longevity expectations and retirement savings. Social Security can be a meaningful component of your income during retirement, and understanding the various claiming strategies can help maximize the benefits you have earned. Because there are many nuances to claiming Social Security, reviewing these strategies within the context of your overall retirement plan with a financial advisor is essential and can make a significant difference in the income you collect during your retirement years.
You’ve paid into Social Security with every dollar that you’ve earned. To assure that you receive your maximum benefit, call us for a free consultation to plan the best strategy for your personal situation! ... See MoreSee Less
Roth IRA Beats Traditional IRA For Young Workers; Here's How
Roth IRAs are best for workers who expect their tax rate to rise in retirement. And the younger you are, the more likely that is to be true. So, if you're a young investor, remember: a Roth IRA is a savings tool whose benefits tilt in your favor.
Roth IRA Is A Hedge Against Rising Taxes
And by "young," Slott means anyone up to about age 50.
"People think their tax rate will be lower in retirement," said Ed Slott, founder of IRAHelp.com. "But you can't go wrong betting on your tax rate going higher in the future. The U.S. just topped $1 trillion in federal debt. The only way to reverse a deficit is to bring in more revenue. So tax rates are at their lowest right now."
In additional to the federal government's need for revenue and budget balancing, taxpayers often get pushed into higher brackets by unexpectedly high income during retirement.
"Many people don't realize how large their required minimum distributions (RMDs) will be," said Slott, referring to the withdrawals that people must start to take from retirement accounts after reaching age 70-1/2. "Some RMDs are larger than their salaries before they retired. They can easily push you into a higher tax bracket."
TRY IT FREE!
How does a Roth IRA help young investors?
The bottom line of its benefit is that a Roth IRA is going to leave you more money after taxes than a traditional IRA once you start taking withdrawals, in any normal scenario if your tax rate rises in the future.
That's the case because of timing. When you pay taxes with each type of IRA makes all of the difference.
Roth IRA Vs. Traditional IRA: Timing Is Everything
With a traditional IRA, you get an upfront tax deduction for your contribution, that year. The money you put in does not count as part of that year's taxable income. You delay paying income tax until you take money out.
That can be years or even decades later.
The opposite occurs with a Roth IRA. You do not get an upfront tax deduction. But once your money is inside the account, earnings grow without being taxed year by year. That's the same treatment that earnings get inside a traditional IRA.
The key difference is that your withdrawals are typically tax-free. If you use a Roth IRA properly, money you take out does not get taxed.
That difference — taxing you at the outset of the process rather than at the tail end — saves you a lot in taxes.
When Do Withdrawals From A Roth IRA Become Tax-Free?
Exactly what does "use a Roth IRA properly" mean? You can always withdraw your contributions tax-free. In addition, you can withdraw your earnings tax-free and free from any early withdrawal penalty once the account is at least five years old and once you're over age 59-1/2.
Why does the timing matter? Basically, it matters because you'll typically get taxed on a smaller amount of money — just the money that you stuff into the Roth IRA, before earnings have built up.
Equally important, you're being taxed at a stage of your career when your income, and tax rate, is likely to be lower.
Combined, those differences mean that your tax bill is smaller in most scenarios. And if your tax rate is lower, the amount of after-tax money that you pocket is greater.
A Roth IRA Is Exempt From RMD Rules
A Roth IRA has additional benefits too.
For one thing, you can commonly keep your money at work, growing tax-free, inside a Roth IRA longer than you can with a traditional IRA.
That's because a Roth IRA is exempt from the RMD rule that dictates that you begin to take withdrawals by April 1 of the year after you turn age 70-1/2 from a traditional IRA or usually any type of 401(k) account.
With either type of 401(k) — a traditional or a Roth 401(k) — you can delay the start of RMDs until April 1 of the year after you retire.
But that's the case only if you meet two conditions. First, you must still be working for the company where you have that account. Second, you must not own more than 5% of that company.
If you do meet those conditions, your money can keep growing without being nibbled by taxes inside the Roth. But that right to postpone RMDs applies only to 401(k)s. There is no such exemption from RMDs for traditional IRAs.
In plain English, here's what that means: with a Roth IRA, you can keep contributing and protecting your money no matter what your age is. With a traditional, you cannot contribute past age 70-1/2 under normal circumstances.
Taxing Sooner Vs. Taxing Later
Let's take another look at why taxing you sooner with a Roth IRA is better than taxing you later with a traditional IRA. After all, intuitively, delaying a tax seems like a better idea.
Here's why it does not work out that way.
Delaying the income tax means that you end up being taxed at a time in your life when, odds are, your income is higher.
Higher pay is likely to put you into a higher tax bracket. That means you get hit with a higher tax rate.
It can also have costly ripple effects. Rising into a higher tax bracket can lead to taxation of Social Security benefits that otherwise would not be taxed.
Roth IRA Helps Your Heirs
One more edge that Roth IRAs have versus traditional IRAs involves heirs. Basically, with an inherited traditional IRA, the heirs will pay taxes on any money they withdraw from the account.
With an inherited Roth IRA, your heirs don't pay taxes on distributions, Slott says.
Your heirs will thank you.
But what about the risk that Congress will kill or cut the tax-free status of withdrawals from Roth IRAs and Roth 401(k)s?
Congress has made adverse moves against other IRA rules. The U.S. House voted to pass the Secure Act, which would radically change the rules for so-called stretch IRAs.
To raise cash for a strained federal budget, will Congress end tax-free withdrawals from Roth accounts? "Congress tipped their hand with the Secure Act," Slott said. "You can't trust them to keep their word about long-term retirement planning."
Not knowing if Congress will mess with a key Roth IRA rule creates uncertainty. "It creates uncertainty for decisions that people have to make about financing their retirements for decades in the future," Slott said. "That's a big problem."
PAUL KATZEFF Investors Business Daily 9/30/2019 ... See MoreSee Less
An HSA account lets you use pretax funds to pay for qualified medical expenses. But using a health savings account can help build long-term wealth too. First, the money you put into a health savings account is tax-deductible, at least at the federal level. (States' tax treatment of HSAs vary.) Then if you don't use all the funds in your HSA, it accrues interest tax-free. Longer term, HSA accounts can grow even more if you invest some of your funds.
A health savings account can be a good addition to your financial plan whether you're new to the workforce, well along in your career with other savings plans in place, or nearing retirement. If you're a millennial just starting out with an HSA, you probably don't need to cover many medical expenses. So look for an HSA with low fees and decent interest rates. If you've had your account a few years and have a sizable balance, think about investing the money in stocks, mutual funds or ETFs. Look for HSA providers that offer a nice choice of investment options.
If you're considering opening a new HSA account, check out this overview of how a health savings account works and the annual list of the Best HSAs based on low fees, investment options, interest rates and user experience.
10 HSA providers made IBD's list:
10 Best HSA Account Providers
UMB Healthcare Services
Your HSA account will let you set aside pretax income to cover health care costs that aren't paid by your insurance. A health savings account is only available to people who have a qualifying, high-deductible insurance plan. HDIPs are defined differently from state to state, but generally they are health care insurance plans with an annual deductible of more than $2,700 for a family and $1,350 for an individual.
Health Savings Account Growth
The total number of HSA accounts grew to 25 million at the end of 2018, up 13% year over year, according to Devenir, an HSA consultant. HSA holders had $53.8 billion in their accounts at the end of 2018, a 19% year-over-year increase. Devenir expects this number to grow to $75 billion by the end of 2020.
HSA account holders contributed more than $33 billion to their accounts in 2018, up 22% from the year before, according to Devenir. Employers who offer HSAs also boosted their contributions to employee accounts in 2018. The average contribution amount by employers rose to $839 from $604.
Despite rocky stock market performance, HSA investment assets reached $10.2 billion in 2018, up 23% from 2017. The average investment account holds a $14,617 total balance.
The top HSA account providers offer a wide selection of investment options at low cost. Some of the best providers allow "no minimum" account balances to invest health savings account funds.
What's New For HSAs In 2019?
HSA contribution limits have gone up a tad. For 2019, the contribution limit is $3,500 for individuals and $7,000 for families.
Fidelity, already among the top health savings account providers, has taken its offerings up a notch. Fidelity HSAs used to be available only through employer-based plans and mainly through large companies. The company now offers HSA accounts directly to individuals too.
"One of our goals is to expand access to HSAs," said Begonya Klumb, Fidelity Investments' head of HSA, Workplace Solutions. "We are also expanding our presence in the workplace, as we are now working with smaller clients as well."
Klumb says Fidelity strives to make the cost of having an HSA account as low as possible. But while more people are opening HSA accounts and making saving for health care a priority, a recent Fidelity report shows that more than 90% aren't taking advantage of one of the HSA's most valuable benefits — investing.
"We're trying to remove as many barriers as possible, especially transaction fees," she told IBD. "That's why (Fidelity HSAs require) no minimum balance, no fee to open the account, no minimum to invest. This is key. We want clients get the most out of their account."
HSA Accounts: Best Of 2019
To arrive at our list of the best health savings account administrators, IBD looked at dozens of providers. We took into account customer ratings as well as input from industry experts.
All 10 providers on the list offer solid HSAs. To highlight exceptional strength in particular areas, we also named award winners in five categories: Investment Options, Investment Quality, Low Fees, Interest Rates and Easy Access.
Category winners for Easy Access to a health savings account have consistently positive online customer reviews for user experience. They give HSA account holders access to their funds through online banking, debit cards and checks. And their websites are easy to navigate.
Six of the 10 providers earned recognition in this Best HSAs category: HealthEquity (HQY), Optum Bank, HSA Bank, Fidelity, Further and HealthSavings Administrators.
Best HSAs For Investing
The choice of Investment Quality category winners was based on Morningstar ratings and interviews with financial advisors. Among the best health savings account providers, Fidelity, Optum Bank, HSA Bank, UMB Healthcare, Further, HSA Authority and HealthEquity offer plenty of high-quality options. See our full Best HSAs list for details.
Some providers are standouts for the breadth of Investment Options they offer. Saturna's offerings are expansive, for instance, and include the option of a self-directed brokerage account. But be prepared to do some research. Its focus is on sophisticated investors who need little assistance.
Other top providers in this category are Lively, HSA Bank, Fidelity, Further and HealthSavings Administrators.
Best HSAs: Fees And Interest Rates
What remains most elusive for all except a few providers is keeping fees to a minimum. In fact, it has become increasingly difficult for consumers to easily figure out exactly how much it will cost to maintain a health savings account.
But notable providers for Low Fees include category winners Lively, Fidelity, UMB Healthcare and HSA Authority.
Also, HealthSavings Administrators spokesperson Ginny Latham told IBD in an email that the company "offers a primary lineup of institutional-grade funds featuring low expense ratios for our account holders, which has contributed to account balances that are five times more than the industry average."
And the leaders in the Interest Rates category? The three health savings account providers recognized by IBD are HealthEquity, Further and Fidelity. At HealthEquity, you can earn up to 1.5% depending on your account type and balance. ... See MoreSee Less
Save More For Retirement, Delay Tax: How 'Secure Act' Would Help Workers
Changes are coming to your retirement savings accounts. The recent U.S. House vote to let workers protect investments longer from income tax inside their IRAs and 401(k)s got the headlines. That bill — known as the Secure Act — calls for additional, important moves that would turbocharge retirement planning by workers inside their 401(k) accounts in particular.
Among the key changes in the Secure Act are several that can make it easier for workers to save for retirement, boost the amounts they save or create income streams once they retire.
Those changes would open the way for certain employers to start to offer 401(k) plans — especially smaller employers. Another change would encourage plans of all sizes to offer annuities to plan members. The bill also would make it easier for workers to save up to 15% of their pay.
Retirement Planning Help
Understanding how the legislation's key provisions are poised to change rules for retirement accounts can help you in your own retirement planning. You might want to pay more attention to some aspect of your retirement savings.
It might show you that you need to boost your contribution rate. It can also show that you need to think more about how you'll convert your savings into retirement income.
Understanding the new rules in the Secure Act could also highlight changes you'd like to ask your plan administrator to consider implementing.
Here's how each key change proposed by the Secure Act would work:
Secure Act Would Delay Your RMD
The House voted to delay the age at which a worker must start to make withdrawals from their IRAs and 401(k)s to 72. The current starting age is 70-1/2. These withdrawals are known as a required minimum distribution (RMD).
The delay would apply to regular IRAs. It would also apply to 401(k) accounts, unless you are still working and don't own 5% or more of the company.
Secure Act: A Green Light For MEPs
An MEP is a multi-employer plan, which is a plan run for the employees of two or more separate businesses. "Today you can have an MEP, but they are closed MEPs," Spence said. "The employers have to have something in common, like belonging to a certain trade association."
The Secure Act would let a plan be run for the workers of totally unrelated businesses, which do not do anything together.
The idea is to make it easier and less costly for businesses, especially small businesses, to join forces to offer workers a 401(k) plan. It would enable businesses to share costs and administrative efforts. "This should let a lot more small companies offer 401(k)s," Spence said.
Remove Annuity Roadblock
A key step in retirement planning is figuring out how much income you'll receive in retirement. Yet few 401(k) plans offer tools for converting savings into income, critics say. Nor do plans do enough to help you forecast how much income you can expect from your 401(k).
The trouble is that many employers are afraid of lawsuits, under current rules. Employers are concerned that in their role as fiduciary for the plan, they would be held responsible for problems in any annuity offered by their plan, even though they don't run the annuity or decide how its money gets invested — an outside insurance company does that.
But the fiduciary is supposed to monitor the provider. The Secure Act proposes letting employers off the hook. It would do that by offering a trade. In exchange for providing a needed service, an annuity, the new law would grant employers what's known as safe harbor status — an exemption from being sued.
In fact, the Secure Act would expressly shift the liability onto insurers and, to some extent, onto state insurance regulators.
Spence said, "This is what plan sponsors have been looking for."
Boost Your Contribution Rate
Many Financial Advisors agree that workers should save 15% of their pay to build a big enough nest egg. Yet few workers save that much. So the Secure Act would let auto-enrollment plans increase the cap on automatically rising worker contributions to 15% from the current cap of 10%.
If you'd resent having the government dictate how much of your pay gets sidetracked for retirement savings, relax. This only applies to the auto-default amount of contributions in auto-enrollment plans.
If you pick your own rate of contribution, this would not apply to you. That's a benefit of good retirement planning.
Besides, the 15% would be a cap. Your plan could decide to pick a lower amount.
If you have questions or concerns about your retirement plan, call for a free consultation with a qualified advisor to help you navigate the options within your plan. Mattix Wealth Management - 678 580-2643 ... See MoreSee Less
How much of your Retirement Account is yours to keep...After taxes? Find out how to set up tax-free retirement income. Click here to learn more >
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Your CPA Firm: Proactive or Reactive?
Given the complexity of the tax code, it has become inconceivable for any CPA to be an expert in all areas of tax and business planning.
There is growing demand among small business owners and entrepreneurs for CPAs to offer more comprehensive planning services. Many accounting firms that are offering only reactive or compliance related services such as bookkeeping, payroll, and tax form preparation, are finding it increasingly more difficult to maintain or grow their client base. In fact, many are losing clients to more proactive accounting firms.
Today’s business owners expect more of an advisor type of relationship whereby their accounting firm is guiding and directing them with strategies and solutions to their tax and business planning issues. In a survey completed by the Sleeter Group, 72 percent of small business owner respondents have changed their CPA or accounting firm in the past, at least in part because the firm “did not give proactive advice, only reactive service.”1
The challenge, for many CPAs, is that they are expected to remain current and competent on tax law changes, maintain proficiency on numerous bookkeeping software platforms, manage the daily workflow, all while keeping their prices competitive. In addition, many are managing an ever-growing list of third party referrals for clients with planning needs that are outside of the realm of services offered by the CPA.
Perhaps the real problem is the inefficiency of the business model that many accounting firms are using. This model is typically built on billing client’s hourly fees or charging on a flat fee basis.
Consider the fact that a tax attorney will charge as much as $10,000-$30,000 per engagement for tax reduction work. Surprisingly, few clients complain. They’re happy to pay the fee, in exchange for the reduced tax liability.
The CPA Team Based Model is a very efficient approach that allows the CPA to expand the planning services offered, adding value to client relationships. The focus is to elevate the overall client experience and level of satisfaction. This model integrates the services of the CPA and those of a Registered Investment Advisory firm providing a team of exceptional financial professionals. Based on a much more proactive approach, this model utilizes advanced tax planning and business strategies and implements solutions in a timely and efficient manner. The benefits to the CPA are enhanced client service, improved client retention, and substantially increased revenues without increasing workload or overhead.
To explore the value that this model can add to your accounting firm, feel free to contact us to discuss the details.
All the Best,
Bradley A. Mattix
MattIx Wealth Management
3905 Harrison Rd. Ste 500, Loganville, GA 30052
Ph: 678-580-2643 Fax: 678-957-6284 Email: Service@MattixWealth.com
Advisory services offered through Mattix Wealth Management LLC., Registered Investment Advisor. Brad Mattix is the founder and Managing Member of Mattix Wealth Management LLC. ... See MoreSee Less
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