Archive for month: October, 2021

Tax planning and financial planning go hand-in-hand. As you near retirement, avoiding tax planning could create major hurdles for your financial future. Here’s what you need to know about the potential impending tax hikes and what they could mean for your golden years.

There’s a common misconception that when you retire, your tax bills shrink, your tax returns become simpler and tax planning is a thing of the past. While that might be true for some, others find that the combination of Social Security, pensions, and withdrawals from retirement accounts increase their income in retirement and therefore may push them into a higher tax bracket.

With speculation about taxes possibly going up in the near future, your best course of action may be to incorporate tax strategies in your financial plan geared toward retirement. How much of your income will be taxable in retirement? What will your tax rate be after you retire? It’s important to remember that today’s rates are low by historical standards, and the Tax Cuts and Jobs Act expires after 2025. Here’s a couple ways to plan accordingly.

Open a Roth IRA or Roth 401(k)

Based on the premise that taxes will be higher in the future, a wise move is making contributions that can grow tax-free. Two vehicles toward that goal are a Roth IRA or Roth 401(k). Contributions are made after taxes, meaning your taxable income isn’t reduced by the amount of your contributions when filing your taxes. But the benefit is in retirement, as earnings can be withdrawn tax-free starting at age 59½.

Three differences between the Roth IRA and Roth 401(k):

1. Roth 401(k)s have a higher contribution limit. Employees can save up to $19,500 in 2021, and workers older than 50 have a maximum limit of $26,000 per year. Roth IRA contributions are limited to $6,000 annually, while workers older than 50 can contribute $7,000.

2. There is no required minimum distribution for a Roth IRA. However, there is an RMD for the Roth 401(k) beginning at age 72. You can avoid that RMD by rolling it into a Roth IRA when you retire.

3. Investors in a Roth IRA have more control over their accounts than they do in a Roth 401(k). In a Roth IRA, investors can choose any type of investment – stocks, bonds, etc. – but in a 401(k), they are limited to the funds offered by their employers.

Consider the timing of Social Security benefits

You can begin receiving Social Security benefits as early as age 62 or as late as age 70. The later you start, the larger the benefit amount — so, if you don’t need the money right away, putting it off may be a good investment. Also, benefits are reduced if you start them before you reach full retirement age and continue to work.

Keep in mind that if your income from other sources exceeds certain thresholds, your Social Security benefits will become partially taxable. For example, married couples filing jointly with combined income over $44,000 are taxed on up to 85% of their Social Security benefits. (Combined income is adjusted gross income plus nontaxable interest plus half of Social Security benefits.)

Make Qualified Charitable Distributions

You’re required to begin RMDs from tax-deferred retirement accounts once you reach age 72 (up from 70½ for people born before July1, 1949) though you’re able to defer your first distribution until April 1st of the year following the year you reach age 72. RMDs are generally taxed as ordinary income and you must take them regardless of whether you need the money. As previously noted, a large RMD can push you into a higher tax bracket.

One strategy for reducing the amount of RMDs, at least if you’re charitably inclined, is to make a qualified charitable distribution (QCD). If you’re 70½ or older (this age didn’t increase when the RMD age increased), a QCD allows you to distribute up to $100,000 tax-free directly from an IRA to a qualified charity and to apply that amount toward your RMDs.

The funds aren’t included in your income, so you avoid tax on the entire amount, regardless of whether you itemize. In addition, the income-based limits on charitable deductions don’t apply. Any amount excluded from your income by virtue of the QCD is similarly excluded from being treated as a charitable deduction.

Final Thoughts

Making smart tax decisions can have a big impact on the amount of money someone has in retirement. Strategic withdrawals from Roth accounts can help retirees from creeping over income thresholds that cause these higher taxes and premiums.

At Agemy Financial Strategies, we have an array of will and retirement planning solutions to guide you through the entire process all with the help of our trusted financial planners.

If you have any questions on our company, services, values and more, contact the team at Agemy Financial here today. Our highly experienced financial advisors in both Denver, Colorado and Guilford, Connecticut are waiting for your call!

Are you ready to retire earlier than anticipated? The dream of leaving the workforce earlier in life may have hidden pitfalls. Here’s what you need to know. 

Many Americans plan to retire early, depending on your profession, early retirement may be as young as 65.  A healthy savings portfolio and debt-free living can potentially give you a solid retirement platform. The opportunity to spend decades of your life in leisure pushes you even closer to taking the plunge. Like any choice in life, early retirement involves trade-offs.

For what you gain in rest and relaxation, you pay in opportunity costs. As you evaluate your financial stance for an early retirement, how will these pros and cons weigh in on your final decision? Pros of retiring early include health benefits, opportunities to travel, or starting a new career or business venture. Cons of retiring early include the strain on savings, due to increased expenses and smaller Social Security benefits, and a depressing effect on mental health.

Let’s dive a little deeper…

Pros of Early Retirement 

Putting the brakes on your full-time career doesn’t mean slowing down completely. More retirees than ever are working throughout their retirement. Many take on part-time jobs in a completely new field while others stay sharp with consulting roles in their native industry.

Early retirement affords you the opportunity to work because you want to work, not because of financial obligations. Your fresh start may lie in a new industry or with a new educational degree. In either case, personal accomplishment becomes the motivator, not the compensation.

• Investing time in family and personal relationships

If you’re in the position for an early retirement, chances are your hard work will cost you time away from loved ones and family. Retiring in your early fifties may allow you to spend more time with your family and better parent children throughout their teens and early adulthood. You can reconnect with a spouse who ran the household while you pulled long hours at the office. Investing extra time in loved ones pays dividends for the entire household.

• The opportunity to travel 

What is a retirement plan that doesn’t include at least some form of travel? Whether your vacation style involves calming beaches or active adventure, both time and opportunity abound. An early retirement often comes with good health, agility and stamina. Adventure-based vacations and bucket list experiences such as rock climbing, extended hiking, white water rafting and more are approachable – and potentially safer – at an earlier age.

Cons of Early Retirement

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 anEmployee Benefit Research Institute (EBRI) survey.

There are key aspects of an earlier retirement that shouldn’t be overlooked. For instance, Medicare coverage doesn’t kick in until age 65. If you’re approaching retirement age in good health, you’re fortunate. However, you can’t forgo health insurance coverage without assuming serious risk to your nest egg. Few employers are providing post-retirement health plans. Even if you’ve been promised retirement coverage, continued coverage is not always guaranteed.

• Penalties for accessing funds early

Using tax-advantages accounts to save for retirement can be a smart move but tapping into those funds early can cost you. A 401(k) typically carries a 10% penalty for early withdrawals before the age of 59 ½. If you leave your company at age 55 or older, the IRS will allow you to make withdrawals penalty-free.

Those with traditional IRAs face a 10% withdrawal tax on distributions taken before the age of 59 ½ unless they agree to adjusted periodic payments based upon life expectancy. Similar 10% early withdrawal penalties may be applied to funds converted into a Roth IRA depending on the composition of the account. Know the costs associated with accessing your own money and how they affect your early retirement budget.

• Benefit Packages

Be aware that the earlier you access benefits packages the less benefit you’ll receive. The Social Security Administration will reduce your benefit for drawing benefits prior to the full retirement age of 67. Drawing early means you’ll forgo up to as much as about 30% of your benefits (or more if you’re drawing as a spouse).

Employer-paid pensions aren’t immune either. Civil servants face a 2% reduction per year for any retirement annuity payments (Civil Service Retirement System Annuity) drawn under the age of 55. Private pensions are typically designed to make full payments at the age of 65; earlier payment typically means a reduction in retirement payments.

• Sacrificing the Power of Compounding

Compound interest is a big deal in retirement income: any interest that you make on an invested amount will itself earn interest in the future. Say you invest $100 at 3% interest a year. That means that by the second year, you’ll have $103 invested. Assuming interest remains the same, in the third year you’ll have $106.09 and the year after that you’ll have $109.27 and so on and so forth. But let’s say you work 10 more years and retire at 65. The real growth comes from another 10 years’ worth of interest earned not only on all the principal you contributed but also the interest earned on the interest that has compounded for four decades.

Final Thoughts

For many of those who do take the plunge, the reality of an early retirement can turn out to be far different than the fantasy. An early retirement requires careful planning and professional help. Having a clear vision of your retirement needs can help you build a sturdy and personalized strategy.

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.