With the increasing likelihood that Social Security and Medicare benefits may be reduced in the future, it’s more important than ever to use every technique available to maximize your retirement savings. These three outside-the-box strategies could make an enormous difference in your retirement readiness. The sooner you start, the more you may save.
(BPT) - Individuals who rushed to prepay property taxes after the passage of the Tax Cuts and Jobs Act may have saved some money in 2018 — but that’s pennies compared to the long-term tax savings taxpayers should take advantage of before the TCJA’s individual tax provisions are expected to expire in 2026, according to Robert Fishbein, vice president and corporate counsel at Prudential Financial.
Also expected to expire in 2026? According to trustees for Social Security, that’s when Medicare’s main trust fund will run out of money. With the increasing likelihood that Social Security and Medicare benefits may be reduced in the future, it’s more important than ever to use every technique available to maximize your retirement savings.
Three outside-the-box strategies could make an enormous difference in your retirement readiness. The sooner you start, the more you may save.
Fund an HSA for retirement health care
Estimates suggest even a healthy 65-year-old couple will need at least $275,000 to cover retirement health care costs. A Health Savings Account, or HSA, provides a way to save that money without paying a dime in taxes. An HSA account is available to individuals enrolled in a high deductible health insurance plan.
First, these individuals can fund their HSA through a tax-deductible contribution or pre-tax payroll deduction. Second, any interest and investment gains are tax-free. Finally, the funds can be withdrawn tax-free to pay for qualified medical expenses— a triple tax advantage over a traditional savings account.
The best part? There is no requirement to use HSA funds in the year of contribution, which means funds can grow on a tax-favored basis for future health care expense needs.
For 2018, family contribution limits are $6,900, or $7,900 if you are 55 or older, and those amounts are indexed for inflation in future years. If you start contributing the maximum even as late as age 55, and earn 3 percent per year, you could have more than $90,000 to pay for your retirement health care by age 65. If you start contributing the maximum as early as age 40, you could have saved almost $270,000. These funds will continue to grow tax-free in retirement until you need them.
If you don’t use HSA funds in full before you die, excess funds are subject to income tax, but will be otherwise available for your heirs.
Consider a Roth IRA conversion
The typical dogma says that converting an IRA or traditional 401(k) to a Roth IRA does not make sense if you expect your tax rate in retirement to be lower than at the time of conversion. However, lesser known benefits of a Roth IRA may make it worthwhile to have at least part of your retirement assets in Roth IRA form.
Start with no required minimum distributions. With a Roth you aren’t forced to draw down your funds once you attain age 70½ and can continue to benefit from the tax-free growth, thereby maximizing the after-tax funds eventually available for you or your heirs.
Another significant benefit of a Roth IRA or Roth 401(k) is tax diversification. For example, you may choose to take taxable distributions up to a certain amount and then tax-free distributions to avoid a higher income tax bracket.
If you are a high-income taxpayer, Roth IRA distributions are not considered income when determining thresholds for increased Medicare premium charges or the 3.8 percent income tax surcharge on investment gain. If your income is more modest, Roth IRA distributions are not considered income when determining whether you are subject to income tax on Social Security benefits.
If anything, a conversion is more attractive now since you have an opportunity to convert and pay income tax with marginal rates that are generally lower than under prior law. Since individual tax law changes are temporary and tax rates will revert to the former higher amounts starting in 2026, you have an eight-year window to benefit from lower rates.
Make “backdoor” Roth IRA contributions
The tax law prescribes income limits so high-income individuals may not make a direct contribution to a Roth IRA. However, there are no income limits on converting traditional IRA funds to a Roth IRA.
Any person under age 70.5 who has earned income by year-end can make an IRA contribution. While income limits may prevent you from making a pre-tax contribution, you can make this contribution even if you have fully funded a 401(k) or another employer plan.
Once you have made your contribution to a traditional IRA, simply convert that amount to your Roth IRA. As long as this is your only traditional IRA and you have made an after-tax contribution, then an immediate conversion will have converted a tax-deferred asset into a potentially tax-free asset. If you have multiple IRAs, the IRAs are aggregated to determine how much is taxable upon conversion.
While we spend much time on our investment strategies to help gain an extra percentage or two of investment yield, these tax planning strategies can be a more reliable way of maximizing your after-tax retirement income and wealth for your family — no matter how Social Security and Medicare turn out.
Prudential Financial, its affiliates, and their financial professionals do not render tax or legal advice. Please consult with your tax and legal advisors regarding your personal circumstances.
Here are four steps to take today to spruce up your money management process and get yourself on the path to financial health.
(BPT) - Are you feeling good about your finances? Or do phrases like “account balance,” “credit score” and “retirement savings” give you a twinge of anxiety?
Don’t worry, you’re in good company. Only 24 percent of millennials have basic financial literacy, according to the National Endowment for Financial Education. When it comes to getting their financial house in order, most millennials would prefer not to set foot in that proverbial house in the first place. Getting yourself out of debt and building enough savings to cover your expenses in an emergency is a marathon, not a sprint. Small, incremental changes in your financial habits today can make a big difference in your financial health months or even years from now.
Take these steps today to spruce up your money management process and get yourself on the path to financial health.
* Check your credit score. Before you start the work of realigning your finances, you should check your credit score and review your credit report. It helps to know where you stand financially, and the good news is, even if your credit score is not as high as you’d like it to be, you can take steps to improve it. Establishing a history of on-time payments and maintaining a healthy credit utilization ratio are two things that could improve your credit score quickly. One way to access your credit score without any cost is to find out if your bank or lender offers your VantageScore through their website.
* Knock down your debt. Track down all your accounts — checking, savings, investment, credit cards and other loans — and do the math to find out your net worth. That’s your benchmark to help you track your progress. In the beginning, the truth can hurt, however, knowing how much you have in savings and knowing how much you owe gives you a valuable blueprint for where you need to direct your energy. From there, put together a household budget, and figure out where you can trim expenses, so you can pay ahead on your debts, one account at a time.
* Automate your savings. You’re much more likely to accumulate savings when you make the decision once and let the rest happen automatically. Log onto your bank account and set up an automatic transfer from checking to savings, starting with a small amount, preferably timed with your regular pay day. If you can manage to set aside $85 a month, in a year’s time, you’ll have set aside a full $1,000. That’s a decent emergency fund for things like car repairs and doctor bills.
* Open a retirement account. Here’s another way to automate savings. If you haven’t done so already, start contributing to a retirement plan. Even better, if your employer makes a plan and a match available to employees, sign up as soon as you can. If you can’t afford to contribute the full amount to get the full match, start with a small percentage, and slowly add on.
Taking the first steps to gain control of your finances isn’t easy. Setting up good financial habits today can leave you in a better place tomorrow. Test your credit score knowledge at CreditScoreQuiz.org, and be sure to visit VantageScore Solutions to learn what things influence your score, and what you can do to improve it.
(BPT) - It's happened to almost everyone: you leave a job and have a retirement account that you are no longer actively contributing to. It sits there for months — maybe years — because you're not sure exactly where to move it or what the process is like to roll it over. You know that money could probably be better invested, but moving accounts is intimidating, so it sits.
"It's common for people to be nervous about transferring retirement accounts like IRAs and 401(k)s," says Nick Holeman, a financial planning expert at Betterment.com. "Moving accounts shouldn't be something you fear or put off because you think it's too complicated."
Holeman says three main causes for concern are potential taxes, excessive fees and process complexity. However, these concerns are often based on misconceptions, and he wants to set the record straight to empower investors to take control of rogue retirement accounts.
Many people worry about potential tax concerns when moving retirement accounts. They've heard about the high penalties for early withdrawal and figure the best way to avoid them is to let the account be.
"A rollover is not equivalent to a withdrawal," says Holeman. "When you transfer retirement accounts through the appropriate processes, you're still keeping it in the same categorization. It just now lives in a different place."
A rollover can also help facilitate better control of your money. For example, if you roll over an old 401(k) into an IRA account, you are no longer limited to the investment options selected by your employer. This freedom of choice can help you make more customized investment decisions based on your personal goals. Of course, it's important to remember that investing in securities always involves risk and there is the potential to lose money.
A rollover means closing an old account and opening a new account. This process can incur fees that will be unique to each provider. Many people worry about the potential cost, which causes them to leave accounts untouched.
"Research account closing fees but be sure to keep in mind the big picture," Holeman says. "It's like ripping off a bandage. For example, a one-time $20 closing fee is better than a $100 annual fee that could be reduced when you move your account."
Holeman's advice: always know what fees you're paying. Before selecting a new financial organization for your retirement savings, research fees and consider selecting a new account with no trading costs, commission fees, or rebalancing fees. For example, Betterment’s Digital plan charges just 0.25 percent per year and that covers goal-based financial advice, tax-efficient investing, automatic rebalancing, and other smart features that help you keep more of your money.
"People tend to treat rolling over a retirement account like going to the dentist," Holeman says. "It's important but usually not urgent, so people tend to put it off."
What's more, people are intimidated by all the paperwork, lengthy forms and seemingly complex steps, so they delay rollovers. Holeman says moving accounts is typically easier than most people think, and in fact, after the process is complete, many people regret not doing it sooner.
"Often, moving retirement accounts can be done completely online thanks to advanced technology," says Holeman. "Betterment offers a '60 second rollover' for certain accounts from supported companies, and there's someone available to help should you have any questions. Moving accounts is typically easier than people imagine."
You should carefully consider whether a rollover is right for your own personal situation, including the specific fees and services associated with your 401(k). Visit betterment.com/rollover to learn more about factors you should consider when deciding whether a rollover might be right for you.
Betterment LLC distributed this article through Brandpoint.
(BPT) - Come tax time, many people work to locate tax breaks. While this is always a smart financial move, a little-known way to help build your net worth is to keep taxes top of mind throughout the entire year.
Reducing taxes means you keep more of what you earn, according to Nick Holeman, a financial planning expert at Betterment.com.
"You can't control the stock market, but you can control some of your taxes," Holeman said. "Knowing how your investments affect your tax bill can help you save money not just on April 15th, but for years to come."
Check to see whether your long-term investment strategy is running efficiently with these tips from Holeman.
Invest your tax refund: One smart place to invest your tax refund is in an IRA. Normally, investors might divert a portion of the refund into this account as part of a well-rounded investment strategy and claim the deductions for next year's tax time. Invest your refund, and you may get a portion of that back in tax savings. Stay in the habit of investing that refund if you can and watch those small returns add up over time.
Think several moves ahead: Investing is complex and from time to time you will have to sell some of your investments; everybody does. It might be to rebalance your portfolio or maybe your goals have changed and your investments no longer match their intended purpose.
Still, smart investors need to think ahead before blindly selling parts of their portfolio. This is because selling could potentially lead to taxes. By carefully choosing which investments to sell, you can help minimize that hefty tax consequence.
One way to do this is to partner with an investment company that has the tools to make this information easy to access and understand. Betterment.com, for example, offers Tax Impact Preview, which lets investors see estimated potential tax on a sale before making the trade. If you don't think the pros outweigh the cons, don't do it.
Reorganize your investments: Another way to potentially leverage even small tax advantages into long-term growth is to build your portfolio like an energy-efficient engine, built to run for more miles with less need to refuel. You can help accomplish this by reorganizing your portfolio. Move inefficient investments like international stocks and other assets that are taxed more often into a tax-deferred account, such as an IRA or a Roth IRA. That way, you can enjoy the high growth for less tax. Then, move less-taxed assets, such as municipal bonds, into taxable accounts.
Benefit from losses: Help keep your portfolio in balance by selling off the laggards and replacing them with a similar investment. You can receive a tax deduction from your losses that can help cancel out the taxes you owe on assets that have gains. This is done automatically for investors at many automated services through a strategy called tax loss harvesting. Smart investors should always remember that investments involve risk and may result in loss.
Give to a worthy cause: While it's important to secure your future, many investors see community support as an important goal. Consider donating a to a nonprofit organization in your community. Not only are you helping to improve the quality of life in your locale, you can potentially claim a deduction from your income tax. It can pay to do the right thing.
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