Roth IRA Tips and Tricks

Roth IRA
Roth IRAs are powerful tools in your retirement planning arsenal.

There’s a lot that most people don’t know about Roth IRAs, as detailed in the article “9 Surprising Facts About Roth IRAs” from the balance. Some of them may surprise you.

Roth IRA contributions can be used for emergencies. In a perfect world, no one would ever need to use retirement money for anything but retirement, but because Roth contributions are not deductible, they can be withdrawn at any time, for any reason, without taxes or penalties. A Roth IRA can serve as an emergency fund. However, it needs to be noted that the funds you can withdraw do not include amounts that were converted to a Roth IRA or investment gains. Therefore, if you put $5,000 into a Roth IRA that grew to $6,000, you may only withdraw the $5,000 without taxes and penalties.

You might be able to use a non-deductible IRA to fund a Roth. If you make over a certain limit, you can’t contribute to a Roth IRA—or can you? Some people who keep other retirement money inside qualified retirement accounts are permitted to make a non-deductible IRA contribution every year and then convert that into a Roth. This is sometimes called the “backdoor Roth.” However, you’ll need to be careful, and you may need help. In some cases, you can even roll a self-directed IRA back into a company plan, so in future years you could use the backdoor Roth strategy without having to pay taxes on the converted amount. Get a professional to help you with this: mistakes can be expensive!

You may roll after-tax 401(k) contributions into a Roth IRA. Many employer plans let you make after-tax contributions and then, at retirement, these after-tax contributions can be rolled into a Roth IRA. Any investment gain on the after-tax contributions can’t go into the Roth, but the contributions can.

Roth IRAs have no RMDs (Required Minimum Distributions). There aren’t any age requirements for when you take money out, so there are no delayed tax bombs lurking. However, non-spouse heirs will have to take required distributions from an inherited Roth. The nice thing: they will be tax free.

You can contribute to both a SIMPLE IRA and a Roth IRA. As long as your income is within the Roth IRA limits, then you can contribute to both the SIMPLE and the Roth. The contributions to the SIMPLE IRA will be deductible, the Roth contributions will not be. This dual funding strategy lets you reduce taxable income now and have funds in the Roth accumulate for tax-free benefits in retirement. For the self-employed person, who is diligent about saving for retirement, this is a good plan.

Your employer plan may allow Roth contributions. Many 401(k) plans let you make Roth contributions. They are called “designated Roth accounts.” Check with your HR department to see if their plan let you choose which type of contribution to make. Some may be all or nothing, while others let you do some of each.

Age is not the key factor in determining whether or not to use a Roth IRA. The primary deciding factor here is your income bracket, your tax rate now and your expected tax rate during retirement. If your expected tax rate during retirement will be lower, the deductible contributions may be better. If your tax rate during retirement is going to be the same or higher in retirement, which is often the case for people with large IRAs or 401(k)s, then a Roth IRA may make a lot of sense, regardless of your age.

You might be able to make a spousal Roth contribution. Even if your spouse has no earned income, as long as you have an earned income, you can make an IRA contribution on their behalf. Many couples can double their tax favored retirement account savings by doing this.

Be careful about Roth conversions. As stated previously, mistakes here can become expensive, so don’t rely on online Roth calculators to manage conversions. Talk with an experienced professional who can help make sure that your numbers and your strategy fits with your personal retirement scenario. Every person and every situation is different, so planning needs to be specific to your needs.

Reference: the balance (August 13, 2019) “9 Surprising Facts About Roth IRAs”

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How Much Money Should I Provide My Child with Special Needs?

A child with special needs
It can be hard to determine how much money you should leave for the care of your child with special needs, but the first step is to create some sort of a plan.

One of the toughest things about planning for a child with special needs is trying to calculate the amount of money it’s going to take to provide while the parents are alive and after the parents pass away.

Kiplinger’s recent article asks “How Much Should Go into Your Special Needs Trust?” The article explains that it’s not uncommon for parents to have done some estate planning, but not necessarily special needs estate planning. They haven’t thought about how much money they should earmark to fund their child’s trust or which assets would be the best to use.

Special needs estate planning often involves creating a type of trust which will allow a person with a disability to continue to receive certain public benefits while avoiding complete impoverishment. Typically, ownership of assets more than $2,000 would make the individual ineligible for certain public benefits. But assets held in a special needs trust (SNT) don’t count toward this amount.

A child with special needs can generate a lot of expenses over his or her lifetime. The precise amount will be based on the needs and lifestyle of your family, as well as your child’s capabilities. When you die, this budget must be increased because the things you did for free must now be paid for.

An SNT often isn’t funded until the parents’ death. At that point, the trust would file a tax return each year and pay taxes at the higher trust tax rates. There are also legal and trust administration expenses to think about. But the public program benefits your child receives can, in many cases, offset many of the above-mentioned costs.

It’s vital to conduct a complete analysis of the future costs of providing for your child with special needs so you can start saving and making adjustments in your financial and estate planning. The Kiplinger article provides some great information about how to start thinking about the realities of your child’s future needs.

Speak with an elder law or estate planning attorney about the different types of special needs trusts.

Reference: Kiplinger (June 10, 2019) “How Much Should Go into Your Special Needs Trust?”

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Not Your Grandfather’s Senior Community

Active senior community
Seniors are seeking more active retirement communities.

One 78-year-old woman wanted to compete in a triathlon, so she headed over to the pool at her retirement community and joined a training team. Another 86-year-old woman logs 10 miles twice a week on one of the same retirement community’s spin bikes. That’s what a senior living community that also offers assisted living and skilled nursing care looks like today, reports considerable.com in the article “The rise of ‘cool’ senior living communities.”

Other communities have been created on or near college campuses, where residents can take classes, attend school concerts or sports games, hang out with students and get care if and when they need it. There are also the upscale high-rises that feel more like resorts or healthcare spas.

Active adult communities for those 55+ are transforming themselves into cool, desirable places to live a busy lifestyle. There are now two of Jimmy Buffett’s “Latitude Margaritaville” communities in Florida and another in South Carolina.

Today’s seniors don’t want a bland community, and their children don’t want to see their parents in one. Senior providers know that if they want to succeed, they must stand out from the competition. They’ve got their eye on the 76 million baby boomers who are prospective residents. They know that these prospects are radically redefining aging, just as they have every other stage of life.

An even bigger challenge — most people want to age in their own homes and not move at all.

More senior living communities are also offering opportunities for residents to interact with people of all ages. One community has programs for all ages, a Saturday pop-up café, and more than 40 organizations meet at the center regularly. The community has positioned itself as a gathering place for all members, young and old, to combat isolation and bring people together.

Some retirement communities are built on properties that are mixed-use with the same purpose of not isolating seniors. One community in Alabama will have a center for well-being, open to residents and the public, with physicians, nutritionists, wellness coaches, chiropractors and alternative therapies from salt rooms to infrared saunas. A co-working area and research space for partnerships between healthcare providers, local medical schools and universities and biotech companies will be offered.

For those with seawater in their veins, there is a cruise ship that has been retrofitted with more than 600 condo living units. For wine enthusiasts, one company in California’s Sonoma wine country is partnering with a Zen center to build a facility that will offer meditation classes, workshops and retreats, as well as independent and assisted living and memory care.

No matter what your interests are, chances are there’s a new, cool retirement community with your interests and lifestyle in mind.

Reference: considerable.com (May 24, 2019)“The rise of ‘cool’ senior living communities”

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A Solo 401(k) Works for Self-Employed

A Solo 401(k) benefits small business owners
A Solo 401(k) benefits small business owners.

Have you heard about the Solo 401(k)?

Freelancers, gig-workers or solo entrepreneurs have always had a hard time saving for retirement. It takes a tremendous amount of self-discipline to take money that would otherwise go to run a household or pay quarterly taxes and set it aside in a retirement account. Without an automatic withdrawal from a regular pay check, it’s tough. However, there is an option, says Next Avenue in the article “A Retirement Plan for the Self-Employed: The Single 401(k).”

Known as the Solo 401(k), the Self-Employed 401(k), Individual 401(k), or the Single 401(k), this is a retirement plan designed for self-employed people or sole proprietors, and if applicable, also for their spouses. With a Solo 401(k), 100% employee salary deferral of up to $19,000 is permitted in 2019, if you are under 50. If you’re over 50, that number can go up to $25,000. It also allows an employer profit-sharing contribution of up to $56,000 per year, which lets you save even more by being both the employer and an employee of your business.

Using the Solo 401(k) can save you more than $14,000 in taxes per year (that is, assuming a $56,000 contribution and a 25.7% corporate tax rate), while simultaneously offering a loan provision, just in case you need to tap your savings.

Who qualifies for a Solo 401(k)? You have to be truly self-employed, either in your own full-time small business or a part time gig. Your business can be a sole proprietorship, partnership, or corporation, but it can only have no other employees or employees who aren’t eligible to participate in a traditional 401(k). Examples of people who aren’t eligible would be people who are under age 21 or who work fewer than 1,000 hours per year.

The Solo 401(k) works well for a husband/wife partnership or a small business with only part-time employees.

It provides flexibility so that when times are good, you can put away a lot. When times are lean, you can save less. Additional benefits:

  • Reduced taxable income for pre-salary contributions.
  • Built-in profit sharing for maximum savings deductible against business income.
  • The cost of the plan is a deductible expense.
  • Investments grow tax deferred.
  • Higher contribution limits than SEPs and SIMPLE IRAs.

Small business owners don’t have an HR department to rely on, so it’s a good idea to talk with your financial advisor or estate planning attorney about how a Solo 401(k) may work for your long-term retirement and estate plan.

Reference: Next Avenue (May 3, 2019) “A Retirement Plan for the Self-Employed: The Single 401(k).”