Tax Strategies to Lower RMDs in Retirement

Is there a way to limit the impact of required minimum distributions (RMDs)? If you’ve built substantial savings in your tax-advantaged retirement accounts, you may become a victim of your own success. Proactive planning can help you avoid penalties and minimize taxes as you pull money out of your 401(k) or IRA.

Retirement plans offer an array of benefits, from smarter savings strategies to lower taxes. But eventually, Uncle Sam makes you pay for these benefits by requiring you withdraw money from your account whether you need it or not. And as a result, your savings fall victim to much higher income taxes than you anticipated.

So what exactly is an RMD? An RMD is an amount you must withdraw each year once you turn 72. The following retirement plans have RMDs:

  • IRAs: Traditional, SEP, and SIMPLE
  • Traditional 401(k), 403(b), and 457 plans
  • Roth 401(k), 403(b), and 457 plans
  • Profit-sharing plans

If you have tax-deferred retirement accounts, managing your annual Required Minimum Distribution (RMD) is a critical part of your financial plan. The key to avoiding a big tax bill is to start planning for RMDs well before your 70th birthday. Here are 4 tax-smart ways to help lower your RMDs in retirement.

1. Work Longer

One key reason for RMDs is that the Internal Revenue Service (IRS) wants to get paid for previously untaxed income. However, savers in a 401(k) who continue working past 72 and don’t own 5% or more of the company, can delay distributions from the 401(k) at their current workplace until they retire. Note that this only protects you from RMDs from your current employer’s retirement plan. You’ll still have to take RMDs from any employer-sponsored accounts you still have from prior jobs, and you can’t avoid RMDs from traditional IRAs this way.

Whether it makes sense to continue working to delay RMD taxes depends on a variety of factors, including your health, retirement goals and overall financial picture. If you enjoy your job and have no serious health issues that prevent you from doing it, delaying retirement might make sense for you.

2. Donate to Charity

If you make contributions to a charity or not-for-profit, you have the option with IRA’s to direct all or a portion of your RMD directly to these organizations. In doing so, you satisfy your RMD but avoid having to pay income tax on the distribution from the IRA…

A distribution from an IRA that is donated to charity is called a Qualified Charitable Distribution (QCD) and is not taxed as income. However, QCDs are not eligible to claim as a deduction if you itemize your tax deductions. You can also donate part of your required minimum distribution to charity and withdraw the rest as income.

3. Exploring Roth IRAs

There is one type of retirement plan that lacks RMDs: the Roth individual retirement account.

Allocating some of your retirement savings in an after-tax Roth account could set you up for tax-free investment growth and tax-free withdrawals in retirement. There are numerous factors regarding when and how much to convert to a Roth IRA. You have to do an analysis to make sure the benefits outweigh the cost to convert.

Be aware, though, that moving pre-tax money from a retirement account into a Roth IRA means you have to pay taxes all at once on those funds. Roth conversions can be expensive, whether you’re moving money from a 401(k) or a traditional IRA. Investigate your options in detail with your tax advisor.

4. Consider QLAC Annuities

A qualified longevity annuity contract (QLAC) is a multipurpose retirement-planning tool which can provide you with a guaranteed stream of income in retirement. You can fund a QLAC using money you’ve saved in your 401(k) or an IRA, and the annuity starts paying you back at the year of your choosing before you turn 85—when you must begin taking payments. Any money you move into a QLAC is excluded from RMD calculations.

If you’re interested in a QLAC, it’s important to understand what you’ll pay and what you’ll get in return, and the amount of retirement savings you can place in a QLAC is limited. For the 2021, you can contribute up to 25% of your retirement asset balance or $135,000, whichever is less. For example, if you have an IRA with a balance of $160,000, you can elect to contribute $40,000 to your QLAC, thus excluding $40,000 from your RMD.

Conclusion

If you have tax-deferred retirement accounts, your financial plan should always include managing your annual Required Minimum Distribution (RMDs). With some careful planning there may be ways to reduce what you owe.

If you’d like more resources on how you can minimize (or even prevent) unexpected retirement expenses, contact the retirement income advisors at Agemy Financial. Our firm exists for the purpose of helping people achieve their personal and financial goals. Our philosophy is to deliver quality financial programs and teach principles for successful living.

Located in Denver, Colorado and Guilford, Connecticut, we work hard to deliver a dependable retirement income strategy, in any market, so that our clients can enjoy the “best” of their lives during retirement. We look forward to working with you soon.

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Catching up on Retirement After COVID

The pandemic has had a big impact on saving for retirement, but things are starting to change now. With the economy rebounding, it’s a good time to get your retirement back on track with Agemy Financial. 

Since the pandemic started 16 months ago, hundreds of thousands of Americans have lost their lives, millions have lost their jobs and practically every family in America has endured online classes or work from home for months on end. We’ve changed how we work, how we shop and how we socialize.

In addition to everything else, the COVID-19 pandemic may have put a real dent in your retirement savings progress by hindering those who hadn’t started saving for retirement, the number of workers taking withdrawals from their 401(k)s last year jumped, and some companies cut their 401(k) matching contributions.

Regardless, it was probably the right move at the time, and you did what you had to do. But things are starting to change now. With the economy rebounding, it’s a good time to get your retirement back on track. To assist with that effort, here are three ways you can shore up your retirement plan for a financially secure future.

1. Reassess your plan

If you’re currently working and saving for retirement through a 401(k) or similar plan, it’s smart to stay the course, even if your employer, like many, temporarily suspended its match as a result of the pandemic. According to a November 2020 survey by the Plan Sponsor Council of America, nearly 95% of employers indicated they had not changed their retirement plans. That’s a much better outcome than what went down during and after the Great Recession.

If you had to take a 401(k) loan or withdrawal, empty an IRA out or dig into your Roth, there are ways you can get back on track without it greatly affecting your retirement goals. The first thing you need to do is take a look at where you are today and where you need to be in order to accomplish your goals.

Adding a little extra each month above your normal contribution and setting a calendar reminder every couple of months to nudge your contribution a bit higher are great ways to ramp up on saving opportunities. Big change is hard, but commit to small incremental changes to get your plan back on track. Consult with a financial advisor or planner to conduct a retirement income analysis, the results can guide you on the right path.

2. Revisit your investment portfolio

The COVID-19 outbreak has put tremendous pressure on stock prices, prompting some investors to blindly and indiscriminately sell positions at a time when the entire market is trending lower. As the world adjusts to a new normal after coronavirus, it’s time for associations to consider whether they need a new normal for their investment portfolios.  It’s important to ensure your asset allocation remains appropriate for your goals, risk tolerance, time horizon, or length of time you have to invest before reaching retirement, and rebalance as necessary.

When stock prices are trending lower, some investors can second-guess their risk tolerance. But periods of market volatility can be the worst times to consider portfolio decisions. A retirement strategy formed with a financial professional has market volatility factored in. As you continue your relationship with that professional, they will also be at your side to make any adjustments and help you make any necessary decisions along the way. Their goal is to help you pursue your goals.

3. Having a back up plan

As always, it’s important to have a backup plan. Many advisors suggest doing so to protect yourself from unexpected events, like say, a pandemic. Pulling from retirement accounts should be your last resort. A backup plan can combat the need to access funds earmarked for retirement during future financial crises.

Establishing an emergency fund is critical — most Americans cannot cover an unexpected expense of $1,000. Having savings set aside for emergencies means you don’t need to tap your retirement accounts for financial surprises. Most advisors suggest three to six months of living expenses. Others suggest you can start smaller, with a goal of building your emergency fund up to $500, and add to it over time.

Final Thoughts

While the pandemic has changed our outlook on a lot of things, one thing has remained the same: It’s never too late to start saving for retirement. And while COVID has thrown a curveball to so many Americans who have worked their entire lives to retire comfortably, we are a resilient people – and now is a good time to regroup, reassess your retirement situation and establish a plan based on your goals and your needs.

No matter what your view, there are a number of questions and concerns that should be addressed to help you prepare for retirement living.  For more information on how you can best prepare for retirement, contact the trusted financial advisors at Agemy Financial here today. 

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How to Have Enough Money for an Early Retirement

The road to retiring early isn’t easy. It takes time and discipline to earn, save, and invest as much as you possibly can.

Many Americans dream of having more free time in their later years. Perhaps you want to relocate some place warmer. Or maybe you feel led to do volunteer work, or even set off on a brand new business venture. Whatever the reason, the question is the same: What would it take for me to retire at 60? Or even younger? Unfortunately the reality of quitting work can be far different from the fantasy.

In order to retire from your job early entails finding a way to replace the income it provides, or produce enough income to fund your lifestyle. which is why unfortunately, early retirement isn’t for everyone. In fact, it isn’t for most people. Just 11 percent of today’s workers plan to retire before age 60, according to an Employee Benefit Research Institute (EBRI) survey. For many of those who do take the plunge, the reality of early retirement can turn out to be far different than the dream. But it’s not impossible.

5 questions to ask yourself before retiring early include:

  • Can I really afford to stop working?
  • Do I need to get a part-time job to make ends meet?
  • How will I get health insurance?
  • What will I do to occupy my time?
  • Are my plans in sync with my spouse/partner’s?

Here are three moves to help make the early-retirement fantasy a reality.

1. Making Adjustments to your Current Budget

You can get by with less if you’ll have other sources of income. Retiring early means making some changes to how you earn and spend money, so in the future you get to relax. For many people, that means cutting their budget to the bare minimum. To learn to budget is a very important life skill. Here are some tips you can use to budget successfully.

  • Write down all your expenses: what you spend and what you have to pay back on loans.
  • Work out your income minus your expenses.
  • Work out a budget you can stick to.
  • Use a financial calculator
  • Check at the end of the month if you have spent what you budgeted for. If not, decide:
    − Where you can reduce your expenses on unnecessary items.
    − Whether your budget is perhaps unrealistic.
    − Whether you have to adjust your budget.

2. Calculate your Annual Retirement Spending

Living on a small portion of your income translates into needing less money for retirement. To do that, take a look at your current monthly spending and consider what will go down, what could go up, and what might be added or eliminated altogether. Add your final monthly expense estimates up, multiply by 12 and you have the magic number: your annual retirement needs. Most financial advisors recommend increasing it by 10% to 20% so you have some wiggle room.

There are a few exceptions to the early distribution rules. One popular among early retirees is to start a series of substantially equal periodic distributions, which are allowed by the IRS provided you follow specific protocol. Working with a financial planner to develop a strategy for tapping your investments while ducking taxes — where you can — and avoiding penalties.

3. Invest for Growth

When it comes to investing, there’s no shortage of ideas. At the risk of stating the obvious, retiring early means (1) you have a shorter period during which you can save, and (2) you have a longer period during which the money you’ve saved needs to support your spending.

Both of those mean investment returns are going to be your best friend. And to achieve the best returns, you need to invest in a balanced portfolio geared toward long-term growth. We recommend low-cost index funds, with an allocation that is tilted toward stocks for as long as you can stomach it. Here are5 smart investing strategies to follow when investing for growth.

  • Don’t time the market
  • Asset allocation
  • Investment selection
  • Dollar-cost averaging
  • Rebalance your financial portfolio

And remember, you can’t control all the risks associated with early retirement, but what you can control is having a plan. Work with a financial advisor that is knowledgeable in early retirement planning to develop a customized portfolio, and help you manage your finances before and during retirement.

Summary

It takes planning and discipline to retire early. The earlier you start investing, the more you can benefit from compounding. That’s why you need to get going as soon as possible!

Not all financial advisors have the same level of experience or will offer you the same depth of services. So when contracting with an advisor, do your own due diligence first and make sure the advisor can meet your financial planning needs.

If you have any questions on our company, services, values or more, contact the retirement income experts at Agemy Financial here today. Our trusted advisors in both Denver, Colorado and Guilford, Connecticut are waiting for your call.

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How Retirement Planning and Life Insurance go Hand-in-Hand

Life insurance, first and foremost, is about protecting loved ones after you’re gone. But some insurance types can actually help you in retirement as well.

Most people think of life insurance in terms of the payout it provides beneficiaries after the policyholder dies. But did you know that certain life insurance policies can financially assist you through your lifetime and into your golden years?

Why Life Insurance is Vital

Life insurance plays a significant role in protecting you and your family during your primary income-earning years. Ultimately, striking the right balance between investing for your future so you can retire when and how you want to, and purchasing the right amount of life insurance to protect your interests today is ideal.

What’s more, insurance transfers the financial risk of life’s events to an insurance company, and a sound insurance strategy can help protect your family from the financial consequences of those events. A strategy can include personal insurance, liability insurance, and life insurance.

The Retirement Planning Connection

For many of us, life insurance is something to worry about “later.” Or, if provided by an employer, just another part of the employee benefits package. But life insurance can and should be an important aspect of retirement planning.

During retirement, it is well advised to financially prepare for unexpected expenses. Did you know that medical bills are the leading cause of bankruptcy in America? This disturbing fact is that over half of those who are forced to file for bankruptcy have health insurance. Without an emergency cash fund, where will you come up with the money to pay the doctor if your health insurance is denied?

You may be able to cover income shortfalls by using your life insurance for retirement income.

Using Life Insurance for Retirement Income

First things first, you need to understand the different types of life insurance and how they can assist your cash flow in retirement. Unlike ‘term’ life insurance, which covers only a set number of years, ‘permanent’ life insurance is meant to be for life. Permanent life insurance can provide a source of supplemental retirement income, which include whole life, universal, and variable life insurance policies. Here’s a breakdown of the differences you should be aware of:

  • Term insurance is the least expensive, so you can afford to purchase higher amounts of coverage. You can layer term life insurance on top of permanent life insurance to have protection during those high-need years when the loss of your income would be the most devastating to your family. It pays “if you die” during the set term period.
  • Permanent (or cash value) life insurance is an important foundation to establish protection over your lifetime. It pays “when you die.” The two primary types of permanent life insurance are whole life and universal life.
    • Whole Life Insurance offers consistency, with fixed premiums and guaranteed cash value accumulation.
    • Universal life insurance gives consumers flexibility in the premium payments, death benefits, and the savings element of their policies.

Determine a Retirement Plan That’s Right for You

Before deciding on an insurance plan, you should decide what you want your golden years to look like. Some key questions to consider include:

  • Do I have enough coverage now?
  • Is it the right type of coverage?
  • How much coverage will I need later?
  • What are expectations for the financial markets in the short and long term?
  • Which type of insurance will best meet my future needs?
  • How can insurance be integrated with other retirement assets?
  • Should I buy a term or permanent policy?
  • If I choose permanent, what type?
  • Which provider should I choose?

Since choosing a life insurance policy with a cash value component requires a bigger investment, it’s important to understand how this aspect of your policy works and what your options are for using it.

What Can I Do With the Cash in a Permanent/Cash Value Plan?

Permanent/Cash Value policies provide a living benefit, or a perk of your policy that you can use while you are in fact alive and well. Here’s a look at the ways you can use your life insurance to accumulate cash value:

  • Withdraw Cash: The cash value component serves as a living benefit for policyholders from which they may draw funds. But make sure to review how your policy works before you do so. Generally, withdrawing your cash value will reduce your death benefit, therefore a more tax-effective option is to withdraw only what you need each year.
  • Pay Premiums: These life insurance policies are often favored because they allow you to use the policy’s cash value to pay premiums. This strategy will only work for a short period of time if you start while the cash value is too small or if interest rates are low. Be sure to carefully monitor the cash value to make sure it doesn’t drop too far, or you may lose your coverage.
  • Exchange it for an Annuity: The IRS lets you swap your permanent life insurance for an annuity through a 1035 exchange, which is a tax-free transfer of one contract for another. This move can generate more retirement income.
  • Convert to a New Policy to Pay for Long-Term Care: If you’d like coverage for long-term care, consider converting your life insurance into another policy with a long-term care rider. You keep your life insurance, but part of the death benefit can be used to pay for long-term care expenses.
  • Use it as Collateral: The cash value is an asset that increases your chances of qualifying for a loan or mortgage from a lender. It can even serve as the loan’s collateral. Always ask your insurance expert before using cash value this way.
  • Let it Grow: Left alone, the cash value will continue to accumulate, leaving a larger inheritance for your heirs, as withdrawals and loans reduce the final death benefit.

Income Tax Advantages

While its primary function is to help protect loved ones in the event of your passing, life insurance, in particular whole life insurance, can also help you and your beneficiaries manage tax consequences. The following three advantages apply to whole life insurance and other permanent insurance policies: 

1. The death benefit is generally paid out income tax free: Life insurance policy payouts can be pretty hefty and avoiding a major tax bite can be consequential.

2. The total cash value accumulates on a tax-deferred basis: Whole life insurance builds up cash value over time as you pay premiums. This is money that grows without the IRS dipping their hands in.

3. You can access the cash value of the policy on a tax-advantaged basis: Money borrowed or taken from the cash value of a life insurance policy is not subject to taxes up to the “cost basis” – the amount paid into the policy through premiums.

Conclusion

Generating income during retirement is challenging. Fortunately, your life insurance policy can be a valuable source of funds to cover retirement expenses by offering tax-free income, (be part of a tax management strategy), and enhance the overall returns from an investment portfolio. 

And don’t forget that life insurance only gets more expensive the longer you wait, so starting as soon as possible will only help you in the long run. For more information on how you can best utilize your life insurance policy in retirement, contact the trusted financial advisors at Agemy Financial here today. 

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Why Choose Agemy to Achieve Your Personal and Financial Goals?

Not working with a financial planner? You could be missing out. If you are serious about building long-term wealth, Agemy Financial Strategies offers a variety of services you aren’t getting that you may not even know about.

Deciding whether to get a financial advisor or manage your own investments is a big decision. But did you know financial planners assist in more than just managing your money? A good financial planner can organize your overall financial picture and implement strategies that will help you achieve your goals, from organizing your estate to retiring when you want.

To answer the common question of “Do you need a financial advisor?” consider the services and benefits of a financial advisor:

  • Creating an investment strategy
  • Minimizing taxes
  • Avoiding emotional decisions
  • Lowering your risks
  • Structuring withdrawals from accounts, and so much more

Whether you’re a busy executive, business owner, working parent, caretaker or even retired – the truth is, everyone can use professional advice.

About Agemy Financial Strategies

Financial advisors aren’t exactly hard to come by. But not all financial advisors are created equal. Finding the right fiduciary for your financial needs, objectives, and unique circumstances is a must when it comes to building a solid working relationship that helps you make smart financial decisions.

At Agemy Financial, our services specialize in retirement income planning, or as we like to say, “helping you make it down the mountain.” Many financial advisors and financial planners will help you to build your assets and “get up the financial mountain.” However, Mr. Agemy, “a financial sherpa,” and his team focus on helping investors who have already “climbed the wealth accumulation mountain, plan and strategize to have enough income in retirement to have a safe and pleasurable journey “back down” and enjoy the best of life. Agemy Financial’s objective is to see that our clients can retire and stay retired.

Our purpose is to educate investors – whether that be planning for retirement, legacy planning, wealth management, or just holding your hand when it’s time to leap into retirement. Celebrating 30 years in business, and we remain steadfast in our dedication to serve and educate investors.

Our Process

We understand personal finance isn’t interesting to everyone! And it doesn’t have to be. But if you’re neglecting your finances, it’s likely worth giving us a call. When we get started working with you, our initial assessment includes gathering a complete picture of your assets, liabilities, income, and expenses.

We then synthesize all of this initial information into a comprehensive financial plan that will serve as a roadmap for your financial future. Our full spectrum of financial services includes:

Estate

Manage personal affairs while you’re alive and control the distribution of wealth upon your death.

Insurance

A well-structured insurance strategy can help protect your loved ones from the financial consequences of unexpected events.

Investment

Create an investment strategy that’s designed to pursue your risk tolerance, time horizon, and goals.

Lifestyle

How to strike a balance between work and leisure is just one aspect of the wide-ranging Lifestyle matters.

Money

Managing your money involves more than simply making and following a budget.

Retirement

Steps to consider so you can potentially accumulate the money you’ll need to pursue the retirement activities you want.

Tax

Understanding tax strategies can potentially help you better manage your overall tax situation.

 

Our Core Values

Our firm exists for the purpose of helping people achieve their personal and financial goals. Our philosophy is to deliver quality financial programs and teach principles for successful living. We live, work and breathe by the following three values:

  • We Listen: We specialize in conservative retirement strategies with the goal of minimizing our client’s risk with an effective return. Our core objective is to satisfy our client’s needs.
  • We Partner: A customized approach is used with each individual situation. There are no preconceived ideas as each person has very different needs, backgrounds and circumstances. Being sensitive to each person’s situations, issues and concerns is a core value of our organization.
  • We Care: We aim to use a servant’s attitude to develop long-term relationships as we strive to treat others as we would like to be treated.

Summary

Not all financial advisors have the same level of experience or will offer you the same depth of services. So when contracting with an advisor, do your own due diligence first and make sure the advisor can meet your financial planning needs.

If you have any questions on our company, services, values ore more, contact us here today. Our trusted advisors in both Denver, Colorado and Guilford, Connecticut are waiting for your call.

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