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Apache is functioning normally

June 7, 2023 by Brett Tams

The maximum monthly Social Security benefits a person can get in 2023 is $4,555 if they wait until age 70 to claim their benefits. The maximum amount of benefits a married couple can receive would be $9,110 if both of them are separately able to claim the maximum amount of $4,555. But there are a lot of caveats and other things to understand about maximizing your Social Security benefits—let’s take a deeper dive. If you’d like personalized assistance preparing for retirement, consider working with financial advisor.

What Are Social Security Benefits?

The Social Security Administration provides retirement income to most American workers as well as benefits to qualifying disabled people. Qualifying retirees can begin their Social Security benefits between the ages of 62 and 70. The longer you wait, the higher your monthly payments will be.

For instance, a single person born in 1970 that made $70,000 in annual income would get $27,588 in annual Social Security benefits if they started taking their benefits when they turned 62. If that same person waited until the age of 70 to claim Social Security, their annual benefits would be $48,993. You can get an estimate of what your annual Social Security benefits will be at different ages and different average incomes with SmartAsset’s free calculator.

How Do Benefits Differ for Single People and Married Couples?

First, it’s helpful to know how Social Security benefits are calculated. There are two main elements to figuring out how much money you’ll get each year from Social Security.

  • Averaged indexed monthly earnings: The Social Security Administration will take a look at the amount you earned each month over up to 35 years of employment. They’ll identify the years where you earned the highest amounts, then average your monthly earnings.
  • The age at which you retire: As discussed above, the longer you wait to receive your Social Security benefits, the larger your payments will be. You can receive your benefits as early as 62, but by waiting a few years you will see larger amounts.

In many cases, married couples will collect two separate Social Security checks based on their own earnings record and the age at which they decided to claim their benefits. Rather than having a maximum married benefit limit, the maximum amount they would receive would be double the maximum benefits for a single person.

This is different in the case of a spouse that didn’t work or didn’t work long enough to qualify for Social Security benefits. These people will often qualify for spousal benefits instead, which max out at half of the working spouse’s Social Security benefit amount. Again, the maximum amount of the benefit will be determined by when you choose to begin claiming benefits and, in this case, your spouse’s average earnings over their lifetime. 

What’s the Maximum Social Security Benefit Married Couples Can Receive?

In 2023, if you retire at your full retirement age, the maximum monthly Social Security retirement benefit would be $3,627. For a married couple who are both receiving the maximum amount and both retired at full retirement age, that amount would be $7,254. That amount would be less for a person who retires at age 62 ($2,572) and more for a person who retires at 70 ($4,555).

So for example, if a married couple both qualified for the maximum amount and both held off on claiming their Social Security benefits until age 70, they could receive $9,110 in monthly benefits in 2023. A married couple in which one spouse didn’t work and instead qualified for spousal payments would max out at $6,832.50—the maximum benefit for the working spouse and half that for the spouse that didn’t work.

 How Can I Get the Maximum Social Security Benefit?

To ensure that you qualify for the maximum benefit of $4,555 a month, you’ll need to work for 35 years earning a salary that is equal to or greater than the wage cap for that entire time. In 2023, the wage cap is $160,200.

However, only a very small percentage of workers will qualify for the maximum amount. In 2021, the Congressional Research Service reported that only about 6% of workers earned more than the wage cap amount, a percentage that has remained “relatively stable” over time.

To earn the highest benefit possible as a married couple, both partners should try to earn as much as possible during their working years and put off claiming their benefits until as close to age 70 as possible.

The Bottom Line

The maximum monthly Social Security benefit of $4,555 is only available to high earners who wait to claim their benefits until the age of 70. The maximum benefit a married couple could collect would be twice that—$9,110—and require both of them to earn $160,200 or more over 35 years of work. Stay-at-home spouses who haven’t worked enough to qualify for their Social Security benefits can claim spousal benefits of up to half of their spouse’s monthly benefits.

Retirement Planning Tips

  • A financial advisor can offer advice on any of your Social Security, Medicare or retirement savings needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re not sure you’ve saved enough for retirement, our retirement calculator can help. Use it to determine your estimated Social Security benefits, how much money you need to retire and how much annual income you’ll need in retirement.

Photo credit: ©iStock.com/kiattisakch, ©iStock.com/ljubaphoto, ©iStock.com/yacobchuk

Source: smartasset.com

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Apache is functioning normally

June 6, 2023 by Brett Tams

How to Get Started Investing and Saving Money

How to Get Started Investing and Saving Money

You want to started investing but aren’t sure what steps to take.  No worries.  Let me walk you through the basics and you’ll soon be on your way.

Before we start, you should know that the stock market offers a great way to grow your wealth. However, with the reward of earning 5%, 8%, or even 12% per year on your investments comes with the risk of losing money.

That means the value of your investments may drop one year.  It may also take several years to recover from that loss.  If you aren’t ready for the risks, then investing is not for you.

Think about These Issues Before You Start Investing

Investors are urged to invest for long term gain.  This is due to changes in the market (those gains and losses you will see).

If you will not need your money for a minimum of 5 – 7 years, then you are the perfect candidate for investing. The between now and when you need your money is called the time horizon. For example, if you are investing toward buying a small cabin on the lake in 15 years, then your time horizon is 15 years.  However, if your child will be heading off to college in 4 years, your time horizon would be 4 years.

Your time horizon is not the only thing you should know.  Ask yourself a few other questions as well:

  • Am I investing for retirement, education, or another purpose?
  • How much do I have to invest, and is that money available in a lump sum, a regular monthly amount, or both?
  • Am I wanting to spend my time managing these investments?
  • How much money do I want to spend in investment fees?
  • What amount of fluctuation from the U.S. stock market performance am I willing to accept?

Your responses will guide your investing decisions, not only for the types of investments but also the brokerage firm you choose.

Consider Investing for Retirement with Low-Cost Index Funds

Let’s say you are investing for retirement, have an initial investment of $3,000. The plan is to add $100 each month to your account.  You goal is to spend little time managing your investment.   In addition, you would like to closely match U.S. stock performance (either the S&P 500 or the entire market).  What should you do?

You can open an IRA with an online brokerage firm such as E*Trade, Fidelity, Schwab, TD Ameritrade, or Vanguard. To get started investing, you will need to fund your account.  Funding is how the money moves from your account to your investment accounts.

In most cases, funding is arranged by setting up a link between your checking account and the brokerage account, and making transfers. The initial process can take a few days but after the connection is established, you can move funds to purchase shares of stocks, mutual funds, or ETFs.

Next, purchase either commission-free, market-index exchange-traded funds (ETFs) or no-load, no-transaction-fee market-index mutual funds. For example, you can buy shares in Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) for a minimum initial investment of $3,000 and additional investments of at least $1.  You will want to make sure you sign up for paperless statements so you can get the $20 account fee waived.

Or, you could purchase shares in commission-free Schwab U.S. Broad Market ETF (SCHB) for $1,000 (or any multiple of its market price, which is about $50 at this writing); and make additional minimum purchases that equal the fund’s share price.

Buy Individual Stocks If You Are Comfortable with Greater Risk

Alternatively, you may be interested in growing your wealth more aggressively and are willing to accept risks (and losses) associated with potentially greater rewards. You have plenty of time to spend evaluating and selecting individual stocks plus you don’t mind paying transaction fees associated with the purchase and sale of stocks (or sector or specialty mutual funds or ETFs).

Again, you could open a regular brokerage account with any of the online brokerage firms.  You might look at investing with Acorns, E*Trade, Schwab, or Fidelity. Keep in mind that each on-line firm has minimum investment thresholds that you will need to meet. You could choose stocks on your own or find ones using screening tools available on each firm’s website.

After determining what you’d like to buy and the approximate quantity, you’ll want to set a price to indicate how much you are willing to pay for shares and then place your order. Fees to place orders typically run about $9.99 or less.

Decide Whether Innovative Brokerage Firms Are Right for You

You might also consider investing with a newer firm, such as Betterment, Motif Investing, or Loyal3; these companies all have unique approaches to serving customers that may or may not meet your needs.

Betterment makes investment decisions on your behalf and charges an account management fee rather than individual transaction fees; you may like this approach if you don’t have time to invest on your own. Motif Investing offers fee-free investing through its Horizon Motifs, which are comprised primarily of market index ETFs, along with its specialty motifs that trade for a flat $9.95 fee. Loyal3 has a totally fee-free platform in which you can buy shares (or even fractional shares) of certain stocks with an investment of as little as $10.

If you are ready, now is the time to get started in investing, regardless of whether the market is up or down today. The sooner you start, the more your money can grow.

Julie Rains is a freelance writer specializing in personal finance, mortgages, and investing. She writes for her own blogInvesting to Thrive as well as other media outlets including Wise Bread and Loans101. 

Julie holds a Bachelor of Science in Business Administration with a concentration in Finance from The University of North Carolina at Chapel Hill. Julie started investing soon after graduation and has continued to invest and learn over the past 20+ years. In her free time, she enjoys cycling with friends and spending time with her husband and nearly grown sons.

Source: pennypinchinmom.com

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Apache is functioning normally

June 6, 2023 by Brett Tams

Once upon a time, retirement in America was referred to as “a three-legged stool.” The first leg was your expected Social Security benefits, the second leg was your own personal savings and the third was something old-timers called a pension.

A financial advisor can help you create an income plan for retirement. Find a fiduciary advisor today. 

A pension – also called a “defined benefit plan” – is a payment from a former employer that was (and sometimes still is) offered as a benefit with no contribution from you. The payment amount is based on years of service with that company. Once you’ve worked long enough to become “vested,” your benefit is guaranteed at a certain age and doesn’t end until you die. In many cases, a surviving spouse can receive a reduced benefit.

In 1975, there were 103,346 pension plans in the United States, a number that started to decline in the early 1990s and dwindled to just 46,577 plans by 2020. In many cases, the companies that promised those pensions have been sold, merged or gone out of business. However, many workers who are still entitled to receive those benefits lack any details about their pensions, including how to go about collecting them.

Unclaimed pensions are waiting to be claimed by at least 80,000 people, according to the Pension Benefit Guaranty Corp. (PBGC), the federal agency that oversees retirement security for Americans. In some cases, the people entitled to those pensions don’t even know they’re eligible to receive payments.

Resources For Locating an Unclaimed Pension

If you’re looking for a missing pension – or want to find out if you qualify to receive one, try these resources:

Previous employers. Keep your contact information updated with the benefits administrator at the companies where you worked or their successors.

Legal assistance. The Pension Rights Center is an information resource that also runs Pension Counseling and Information Programs in 31 states. These programs provide free legal assistance for help with pensions, profit-sharing and retirement savings plans.

In states without counseling and information programs, the Pension Rights Center’s Pension Help America offers assistance in finding counseling projects, government agencies and legal service providers.

Meanwhile, the National Pension Lawyer’s Network, an affiliate of the Pension Rights Center, is a free service that can refer you to lawyers who take pension cases, sometimes pro bono.

Employee Benefits Security Administration. The EBSA is part of the U.S. Department of Labor and has free counselors who can answer pension questions. The E-Fast feature on the agency’s website can find pension plan annual reports going back to 2010, which explain how to file a pension claim. The Abandoned Plan Search Tool is also on the agency’s website.

Other resources. Pension Benefit Guaranty Corp. (PBGC) can help with claiming a pension. You can call for assistance toll-free at 800-400-7242.

Meanwhile, the National Association of State Treasurers runs the National Association of Unclaimed Property Administrators, a network of to help locate unclaimed assets. Additionally, the National Registry of Unclaimed Retirement Benefits is run by PenChecks, the largest independent processor of retirement benefit distributions in the U.S.

Bottom Line

As defined-benefit pension plans have been phased out in favor of 401(k) and similar accounts, workers may not know that they qualified for a pension many years ago. In addition, as older companies have been sold, merged or closed pension plans can lose track of vested employees. Even when a company has declared bankruptcy, pension benefits may be protected by the federal Pension Benefit Guarantee Corp. (PBGC)

Tips for Claiming Your Pension

  • There are a number of resources, as listed above, for locating a missing or unclaimed pension. If you think you once qualified for a pension, don’t assume that you’ll be contacted to claim it. Remember, just because you once worked at a company that offered a pension plan you may not have worked there long enough to become vested. In that case, your pension benefits would have been forfeited when you left the company. To see how any pension income might figure in your retirement plans, try SmartAsset’s retirement calculator. This free tool will estimate how much you’ll have when the time comes to retire.
  • In most cases, an old pension likely won’t pay enough benefits to live on. You’ll still need to figure out when and how to claim your Social Security benefits and maintain your own savings to support yourself in retirement. A financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you.

Photo credit: ©iStock.com/AsiaVision, ©iStock.com/shapecharge, ©iStock.com/tumsasedgars

Source: smartasset.com

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Apache is functioning normally

June 1, 2023 by Brett Tams

As unemployment numbers continue to rise, many employees are stressed about whether they’ll have a job next week or not.  Some have already, some have already lost their jobs and are scrambling to find new employment.   In this time financial planning is crucial.  This is a time when people are feeling and are desperately in need of guidance.  If you think that you are about to encounter a layoff,  you need to be focusing your attention on what can be controlled:  cutting expenditures, figuring out emergency funds, evaluating how to replace lost benefits, and making a game plan for the job search.

1. Save Emergency Cash

For those that are still employed but the future of their job is uncertain, I would encourage them to have at least 12 months of savings in cash.  Unfortunately many will not have enough.  But if they’re still employed and the emergency funds are not there, tapping into their 401(k) might be a viable option.  I know what you’re thinking.  Tapping into your 401k usually goes against all that I stand for.  And with this dismal market,  it might be a dangerous move, but;  if they become unemployed that option might now be available to them.

Typically if you’re still employed you’re allowed borrow up to half of your 401(k) balance, up to a maximum of $50,000.  Running these numbers you can guesstimate the period of how long you think it will take you to find a new job and then how much you would need to borrow to get you by until the new job is made.  If you borrow from your 401k while you are still employed then you avoid the 10% withdrawal penalty.  Sure there is some speculation in this move, but if you’re in a high demand field you may be able to use this move to your advantage.

Warning: If you do this, be sure to double check with your employer when you are due to pay it back.  It tends to vary from employer, but it could be due back immediately, within 60 days or some period greater.

2. Don’t Pay Off Debt

Another common misconception of after being laid-off is that most people want to take their savings or take their retirement savings and pay off debt, such as credit cards or even the 401(k) debt.  But in this type of market, paying off debt should not be the priority especially if you are unemployed.  The priority is to keep get your savings intact and making sure that you have plenty of cash on hand.  Sure credit card debt is bad, but just focus on making the minimum payment until you get your job situation in check.

3. Focus On Crisis Budgeting

If you’re used to going to shopping every weekend or eating out every other night at fancy restaurants, then most likely those changes are just around the corner. You need to sit down and seriously hammer out a budget of things that you need and things that you don’t need.

You may even consider working out two budgets, one for while you’re working and one for when you’re not working, so that way you can truly see how much you’re spending per month. And then, you can contemplate whether you can go on a cheaper cell phone plan, or cut your cable bill services. Sometimes adding that extra payment per month might not seem like a big deal, but $50 here and $50 there will surely add up, especially on a limited budget. Also, too, knowing which expenses you absolutely must be covered will help you realistically search for your future job.

4. Replace Lost Benefits

In the aftermath of a job loss, people should take stock of what benefits have been lost, which ones you are entitled to by law, and which ones may be portable.  how to continue health care coverage, especially if there are dependents.

Typically, employees are eligible to keep the same coverage through COBRA for at least 18 months. But, they may have to pay 102% of the cost of their insurance premium. If there premium have been subsidized by their employer, then that cost will be a rude shock.  COBRA can often be a good bridge choice, but it ends up being a health benefit. Families paying $200 a month for insurance under COBRA, it could be $1,000.  Luckily, the government just passed new law concerning COBRA benefits that qualifying period will be only responsible to pay for 35% of the benefit.  This comes at a time that should be very helpful to many that are facing layoffs ahead.

Many employers offer life insurance, long-term care insurance, disability policies and they may be portable as well. For another person or one who is not in good health, ability to take over the payments on existing $100,000 life insurance policy may save the worry of having to find another carrier. It’s better to keep it for a few months, although make sure they don’t need it, and drop it later.

5. Consider a Career Transition

Many people will be forced by an unforeseen job layoff to reassess what they want in their lives and what is meaningful to them. They may have to craft resumes, cover letters for the first time in years, and feel at a loss especially if they are switching to a new career path, which is an unfamiliar field.

If you haven’t jumped on the social media bandwagon, it’s time.  Consider Facebook, LinkedIn, Twitter and other social media sites to reconnect with old networks and also create new ones.  The more people that know your situation the better.   Also, consider starting a blog to showcase your talents. Need a good blog for inspiration?  Guess what, you’re already here.

by Steve Rhodes

Source: goodfinancialcents.com

Posted in: Retirement, Starting A Family Tagged: 2, 401k, About, All, balance, Benefits, big, Blog, Borrow, bridge, Budget, budgets, Cable, Career, cents, choice, cost, Credit, credit card, Credit Card Debt, credit cards, Crisis, Debt, Disability, double, Eating, eating out, Emergency, employer, Employment, existing, expenses, facebook, Financial Planning, Financial Wize, FinancialWize, funds, future, good, government, health, Health care, helpful, How To, in, Inspiration, Insurance, job, Job Search, jobs, Law, Layoffs, Life, life insurance, life insurance policy, long-term care, long-term care insurance, Make, making, market, Media, More, Move, new, new job, offer, or, Other, Pay Off Debt, Paying Off Debt, payments, plan, Planning, policies, premium, restaurants, retirement, retirement savings, rise, running, save, savings, search, shopping, Sites, social, Social Media, speculation, Spending, stock, time, Twitter, under, Unemployment, Unemployment numbers, will, withdrawal, working

Apache is functioning normally

June 1, 2023 by Brett Tams

What is a vesting schedule?

A vesting schedule is a way for your employer to give you some incentive to stay with them.

To be 100% vested means to be able to take all of your retirement benefits with you if you leave or have been fired.

Depending on what type of plan you have- pension or 401k- will determine your vesting schedule.

Let me make something clear.  What you contribute is always yours.  The vesting schedule pertains to what your employer contributes e.g.; the 401k match.   Here’s a look at the two different vesting schedules:

Defined Benefit (Pension) Plan

Pension plans are a dying breed but some people still have them.  Defined benefit plan must vest at least rapidly as one of the following two schedules, assuming the plan is not top-heavy. Top-heavy has to do with making sure that each employee receives a fair share of retirement benefit as it relates to their salary.

  1. Five-year cliff vesting, no vesting is required before five years of service.  100% vesting is required at five years of service.  Referred to as a five-year cliff.
  2. Three to seven-year graduated or graded vesting.  The plan must provide vesting that is at least as fast as the following schedule:
Years of service Vested Percentage

3 20%

4 40%

5 60%

6 80%

7 100%

So in the example above, if the employer uses the graded vesting schedule and you have been employed for 5 years, then you’ll be able to take 60% of the employer’s benefit with you.

At my previous firm, I was offered a small retention package to stay (not nearly what the boys at Merrill got) and it had a 7 year vest attached to it.  Needless to say, I gave it up and started my own firm.

401k Vesting Schedules

Defined contribution plans must vest at least as rapidly as one of the following two schedules  for all employers non-elected contributions and matching contributions:

  1. Three-year cliff vesting.  No vesting is required before three years of service, 100% vesting is required upon the completion of three years of service.
  2. Two to six-year graduated or graded vesting.

The plan must provide vesting at least as fast as the following schedule.  Note: These are the same vesting schedules used to top-heavy defined benefit plan.

Years of service Vested Percentage

2 20%

3 40%

4 60%

5 80%

6 100%

The employer may choose a vesting schedule that is more favorable to the employee, but not less favorable than the cliff.

Example: ABC Company offers a 401(k) plan that has an employer match.  The company has the following vesting schedule with respect to matching contributions: 25% vested after one year, 50% vested after two years, and 100% vested after three years.

Although the vesting schedule does not exactly match the vesting schedules posted above, it is acceptable because it’s more favorable to the employees than the vesting schedule listed above.

All years of service must be counted with few exceptions.   Two of the more common exceptions are:

  1. Years prior to the implementation of the plan.
  2. Years prior to the age 18.

Both years prior to the implementation of the plan and years prior to age 18 may be considered at the choice of the employer, but it must be in the plan documents.

Employer contributions are 100% vested when:

  • Plan termination.  Benefits become 100% vested in the event of a plan termination.
  • SEP, SARSEP, and SIMPLE IRA’s. All contributions to these are fully vested.
  • Attainment of normal retirement age. In the event of an employee attaining normal retirement
  • Under a 401(k) plan, elected deferrals, qualified non-elected contributions, and qualified matching contributions are 100% vested at all times.
  • Safe Harbor contribution is to a Safe Harbor 401(k) plan.
  • Plan requires two years of service for eligibility.

It’s very important to understand your vesting schedules when you start with a new employer.  That could make the difference of walking with a good chunk towards your nest egg or walking away with nothing.  Be sure to check your benefits manual and ask your human resources department the right questions.

Source: goodfinancialcents.com

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Apache is functioning normally

June 1, 2023 by Brett Tams

You might be asking yourself what the Jackson Five has to do with the Roth IRA five year rule for qualified withdrawals? I’m sad to say, “Absolutely nothing”. Other than then number “five”, of course. I just thought it was fitting with all the recent tributes to the King of Pop to have my own. Now that I have your attention…..

The basics of the Roth IRA include the phrase “Tax Free Money”.   That phrase makes the Roth IRA the most attractive retirement planning tool of our time.  When it comes to the intricacies of the Roth IRA, in regards to how it works, some confusion can set in.   One provision of the Roth IRA that can leave many scratching their heads is the Roth IRA Distributions Rules For Withdrawals: 5 year rule.

The Five Year Rule pertains to when you can take qualified distributions from your Roth IRA tax and penalty free. Nobody wants to pay tax and penalties, right?  That’s why it’s important to know how the Roth IRA withdraw rule works.   Just to add more fun to the mix, you need to first know that there are two  sets of Five Year rules.  One pertains to Roth IRA contributions and the other pertains to Roth IRA conversions.  We’ll begin with Roth IRA contributions.

Withdrawal Rules on Roth IRA Contributions

In order for you to take money from the Roth IRA tax and penalty free, it has to be considered a “qualified distribution”.   We’ll get to what the rules on qualified distribution are in one moment.  First thing I need to remind you is that all contributions can be taken at any time, tax and penalty free.   That means what you put into the Roth IRA (contribution) can be taken out the following day without consequence (not factoring sales charges and market risk).Let me illustrate:

Example 1

You open a Roth IRA at your bank and decide to put $5000 into a money market account inside the Roth.   A month goes by and something happens where you need to withdraw your money.   You can withdraw the original $5000 tax and penalty free.   What has to stay is the earnings or, in this case, the interest that you made off the $5000 (which should be minimal considering you didn’t have it that long).   Now keep in mind, the bank may charge you some cancellation fee of some kind, so read the fine print.  But as far as the IRS is concerned, you are in the clear.

Example 2

Just to illustrate another side of the first example, let’s say this time you decide to invest at a brokerage firm and choose an investment more tied to the stock market.   After a month goes by, your original $5000 investment now plummets to $3000. (I think a lot of people can relate to that).  All you are allowed to withdraw is the $3000.  That’s it!  Sometimes that gets overlooked.  Also, if you paid a sales charge or commission on that investment, that’s not being refunded to you either.

What is the Rule For Qualified Distributions on a Roth IRA?

What’s so important about a qualified distribution?  If it’s deemed qualified, you then avoid taxes and the 10% early withdraw penalty.  Taken directly from IRS pub 590 this defines what qualified distribution is:

A qualified distribution is any payment or distribution from your Roth IRA that meets the following rules. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and the payment or distribution is:

  • Made on or after the date you reach age 59½
  • Made because you are disabled
  • Made to a beneficiary or to your estate after your death, or
  • One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

Remember that you have until April 15 of the following calendar year to make a Roth IRA contribution for any tax year. But the five year window begins January 1st of the actual tax year.  Also, the five year window is based on when you made your first deposit.  Meaning that a new five year window does not begin with each additional deposit.  Is your head spinning? Let’s look at another example:

Example 3

You open a Roth IRA but don’t actually make your first contribution until April 10th, 2006.  Your five year window would then begin on January 1st, 2005.   If you didn’t make another deposit until 2008, your five year window is still based on the January 1st, 2005 date.   Don’t forget that it’s Five Year rule plus one of the other factors (most likely 59 1/2) to get the money tax and penalty free.

Roth IRA Conversions

The Five Year Rule works a bit differently when it pertains to Roth IRA Conversions.   The major difference is starting of a new five year window with each new conversion.  Once you reach the age of 59 1/2 this isn’t much of an issue, but you still need to aware of this. Especially, if you haven’t had a Roth IRA open for at least five years.  If so, the conversion amount will come out tax free, but the earnings are still subject to a five year holding period. Let’s look at another example:

Example 4

If you started a Roth IRA at age 50 with a contribution and then decide to convert at ages of 58, 59, and 60 respectively,  you are immediately eligible to take all funds out tax and penalty free (even earnings) since you satisfied age and “any or “a” five year holding period in a Roth.

The above example is one what I wrestled with trying to find the answer and as it stands right now, that is the best interpretation of the rule that I’ve found.

Similar to Roth IRA contributions, the five year clock begins on January 1st of the year that you convert.  The key difference is that the you must convert in the calendar year and not the tax year: before December 31st.

Converting has been difficult to qualify for a conversion since your adjusted gross income has to be less than $100,000.  But as I’ve written about on more than one occasion,  Roth conversion rules change slightly and the income limit is removed in 2010.  Expect many to take advantage of this next year.

Keep it in Order: Rules For Taking out of Roth IRA

You have made it thus far- congratulations! We’re almost there.   The last step that we have to address is the ordering rules for taking out withdrawals from your Roth IRA.  This is important because of, once again, the taxes and penalties that might occur.  According to the IRS, the order of a distribution from a Roth IRA is:

  1. Regular Contributions – by considering the first money withdrawn from the account “regular contributions,” and not earnings, the IRS allows account holders to remove a portion of their accounts before the five-year rule applies.
  2. Conversions – this is on a first-in, first-out basis.  So the money placed into an account because of a conversion that occurred in 2008 would be removed before a conversion that occurred in 2009.
    1. Taxable – the taxable portion of the conversion is removed first.  This is the amount claimed as income because of the conversion.
    2. Non-Taxable – this is the portion of the conversion not included in gross income.
  3. Earnings – finally, the last money to be removed from an account are the earnings on the assets placed in the account.

Logically, it makes sense.  The monies that you have paid taxes on will come out first tax and penalty free.   After the contributions are taken out, just work down the list to see what you can or cannot take.   Still confused?   This is where a CPA or a Certified Financial Planner can assist you computing the numbers for you.

Required Minimum Distributions and Roth IRA

One last note when doing conversions and you are over the age of 70 1/2.   Since you are the IRS magic age to begin required minimum distributions, those distributions can’t be converted to a Roth IRA. In the year you wish to convert, you must first withdraw your required distribution, and then you can convert any or all remaining funds to a Roth. This is only if you do a full conversion.  If you are looking to do a Roth IRA conversion at the beginning of the year, but postpone your RMD; then you’ll want to do a partial conversion and leave at least the amount of the RMD in the IRA.  Be sure to double check with your IRA custodian to see what their policy is on the matter of RMD’s and converting.  Keep in mind that in 2009 RMD’s are suspended, so that would not apply.  It will continue as scheduled in 2010.

Source: goodfinancialcents.com

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Apache is functioning normally

June 1, 2023 by Brett Tams

In recent years, the use of Deferred Compensation Plans has grown considerably. This is largely due to the current job market … employers are looking for new ways to appeal to and retain skilled employees. Looking at new ways to approach employee benefits is one way to work toward accomplishing that.  Make sure you read your employee handbook and completely understand the rules of your deferred compensation plan.

What are Deferred Compensation Plans?

In the simplest terms, a Deferred Compensation Plan allows an owner or an employee to set aside a portion of their income to be paid out at a future date. These plans are broken down into two basic categories: Qualified and Non-Qualified plans. Each type of plan holds certain advantages, but the major difference between them is in the way the plans are taxed by the IRS.

Non-Qualified Plans

In a non-qualified plan, the employer does not receive tax deductions until the time when the employee’s benefits have been paid out … and at that time the benefits are taxable to the employee. On the plus side, setting up a non-qualified plan is generally less expensive. Also, employer contributions are not limited and these plans do not have substantial reporting or filing regulations.

Qualified Plans

In a qualified plan, reporting requirements are more significant, highly paid employees may be prohibited from participating, and the amount an employer may contribute is limited. However, qualified plans include benefits that are allowed to mature tax-deferred until they are dispersed. Additional tax deferral may be possible as well, because qualified plans are commonly eligible for rollover to an IRA or other (qualified) plan.

Which Deferred Compensation Plan is Best?

Well, that’s a tricky question. Although tax deferral is generally thought of as a benefit, it could be a disadvantage if an employee’s tax rate has increased before compensation has been paid out. However, if tax rates do not rise (or if they drop), a well-compensated employee is almost always likely to benefit by deferring a portion of their income.

Tax rates are a major factor to consider when contemplating a Deferred Benefit Plan, and there are other aspects to consider as well. The best thing to do is speak with a qualified financial professional who can take a look at your unique situation and help you to determine if setting up a Deferred Benefit Plan will be a good move for you.

Vesting

Most deferred compensation plans will have some sort of vesting schedule.  I once had a very attractive deferred comp plan, but the only hitch was that it had a 9 year vesting schedule.   This is commonly referred to as “golden handcuffs“.  It’s a nice benefit, but makes it a much tougher decision if you are ever faced with a attractive offer elsewhere.   Be sure you understand all the rules when it comes to your deferred comp plan.

Source: goodfinancialcents.com

Posted in: Retirement, Starting A Family Tagged: All, basic, before, Benefits, best, categories, cents, Compensation, contributions, decision, deductions, deferred compensation plans, employee benefits, employer, expensive, Financial Wize, FinancialWize, future, good, in, Income, IRA, irs, job, job market, Make, market, More, Move, new, offer, or, Other, plan, plans, rate, Rates, retirement, rise, rollover, Side, tax, tax deductions, tax rates, taxable, time, unique, will, work

Apache is functioning normally

May 31, 2023 by Brett Tams

The Traditional IRA and its offshoots (SEP, SIMPLE, rollover and Roth IRAs) play a leading role in helping millions of U.S. taxpayers invest for retirement.  However, many IRA owners are unaware of the opportunity they have to consolidate their multiple IRAs by using a “Super IRA” strategy (most common is a rollover 401k).

An IRA consolidation strategy can lead to reduced fees and increased buying power.  I’ve had several instances where an individual has had several old retirement plans from previous employers.  That has included defined benefit plans, 401k’s, TSP’s, 403b’s and Keough plans.   The paperwork alone was cumbersome, and consolidating has made tremendous sense.

If you like this article, please be sure to also check out 401k Tips: What Not To Do, Rollover IRAs Offer a Wide Range of Benefits, 7 Things To Know About The 2010 Roth IRA Conversion

IRA Consolidation Case Study

The following is a common scenario involving a worker (Patrick) who has changed jobs several times throughout his career.  He has been diligent about saving for retirement, but his assets are scattered.  An IRA consolidation strategy is suggested, and the section concludes with a three-step action plan for investors like Patrick.

Patrick’s Profile:

  • Frequent job changer, age 62, is approaching retirement.
  • He has lost track of his numerous retirement savings arrangements.
  • He turns to his advisor for help with simplifying his financial affairs.

During his career, Patrick has accumulated various retirement accounts but has lost track of the status of each.  He is 62 years old and is thinking of retiring from his current job.  He has three retirement plans with former employers [a profit sharing plan, a target benefit plan and a 403(b) plan], four Traditional IRAs, a SIMPLE IRA, two Roth IRAs, an Individual(k) plan he established when he owned his own business, and a Thrift Savings Plan he now has as an employee of the federal government.

He is also the beneficiary of his deceased wife’s nonqualified deferred compensation plan and her Traditional IRA.  In an effort to simplify his life, he turns to his financial planner for help.  This is a strong case for implementing the “Super IRA” consolidation strategy.

How to implement the Super IRA Consolidation strategy

Step 1:  Understand the Rules

  • A person who owns multiple SEP IRAs and Traditional IRAs can combine them into one “Super IRA” at any time.
  • If the person also owns a SIMPLE IRA, he or she can transfer or roll it to a “Super IRA” after participating in the SIMPLE IRA plan for at least two years.  The two-year period begins when the first SIMPLE IRA plan contribution is made to the individual’s SIMPLE IRA.
  • A “Super IRA” can receive ongoing SEP plan contributions and annual Traditional IRA contributions.
  • Ongoing SIMPLE IRA plan contributions must first be contributed to the participant’s SIMPLE IRA.  If the individual has participated in the SIMPLE IRA plan for at least two years, he or she can transfer or roll over the SIMPLE IRA into one “Super IRA.” (Note: special rollover rules may apply.)
  • A “Super IRA” can receive rollovers of eligible assets from all types of qualified retirement plans [e.g., 401(k) plans, profit sharing plans, defined benefit plans, etc.], 403(b) plans, 403(a) plans and governmental 457(b) plans.
  • A Roth IRA cannot be transferred or rolled over into a “Super IRA.”  Multiple Roth IRAs can be combined to create a “Super Roth IRA.”  Under the Pension Protection Act of 2006, effective in 2008, participants in qualified plans, 403(b) plans and governmental 457(b) plans can directly roll over eligible plan assets to Roth IRAs if conversion rules are satisfied.
  • Spouse beneficiaries of qualified plans and SEP, Traditional and SIMPLE IRAs generally can consolidate their inherited accounts into their own “Super IRA.”

Step 2:  Consider the Potential Benefits of a “Super IRA” Strategy

  • Increased buying power, which allows for more sophisticated investment strategies
  • One fee vs. multiple fees
  • Simplified investment tracking
  • Beneficiary organization and consolidation
  • Consistent service
  • Streamlined paperwork
  • Simplified retirement income planning

Step 3:  Work With Your Advisor

Investors should work with their advisors to determine whether a “Super IRA” asset consolidation strategy makes sense for them.

In our scenario, Patrick’s planner asks him the following key questions:

  • Do you have the most recent statements from each of your retirement accounts?
  • What type of investments do the plans hold?
  • Are any of your retirement plans invested in employer securities?
  • Is your goal to consolidate your accounts as much as possible?
  • How long has it been since you first participated in the SIMPLE IRA plan?

Patrick’s  goal is to consolidate as many of his retirement accounts as he can into one “Super IRA.”  He obtains copies of his most recent retirement account statements to review with his advisor.  He first participated in the SIMPLE IRA plan a year and a half ago.  He does not hold employer securities as a plan investment.

After reviewing the statements, Patrick and his planner determine he could combine the following retirement accounts into a “Super IRA”:

  • Profit sharing plan
  • Target benefit plan
  • 403(b) plan
  • Five Traditional IRAs (the four he owns outright and his inherited IRA)
  • Individual(k) plan

In another six months (two years after first participating in the SIMPLE IRA plan), he could transfer or rollover that balance to his “Super IRA” as well.  Patrick cannot combine his two Roth IRAs into his “Super IRA,” although he could consolidate them into one “Super Roth IRA.”  And he cannot roll over the nonqualified deferred compensation plan.  Although he could combine the plans as outlined above into one “Super IRA,” it would be best for Patrick and his planner to carefully examine the types of investments currently held by the various plans to see if a rollover is the wisest course of action from a taxation standpoint.

For example, special tax rules apply to distributions of employer securities from qualified retirement plans.  This would be case of NUA or Net Unrealized Appreciation.  Keep in mind, a consolidation strategy may not always be suitable.  An advisor, or a tax or legal professional, can help identify the best course of action to incorporate the best investment services.

Source: goodfinancialcents.com

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Apache is functioning normally

May 30, 2023 by Brett Tams

Over the weekend while attending my town’s Friday night football game, I struck up a conversation with an acquaintance of mine, and we started talking about the market. The fellow I was talking about was a believer in the market, and knew that the current crisis that we are in would eventually pass, and the market would continue to strive as it usually does. What he found most peculiar was with some of the sediments of his fellow co-workers, who were participating in the 401k. His co-worker’s belief was that with the market being as bad as they were, they were going to no longer defer to their 401k, and refrain from taking advantage of the pre-tax contributions into their retirement plan.  They were giving up free money! He was stunned by his co-worker’s remarks, and as equally as I, and compared that to a conversation that I had, with some other workers from another local employer.  It prompted me to write this blog in regards in to things you should not do when it comes to your 401k.

1. Do not stop contributing to your 401k no matter what.

Just because the markets are down does not mean you should not contribute. In fact if there was a time ever to contribute, this would be the time. The simplest reasons is that right now despite the market’s turmoils, currently the market is at a discount, and what that means is that there are a lot of great companies that exist out there, that are currently “on sale”. This is a time to buy stocks, at a cheap price in hopes to benefit from the appreciation in later years. This strategy can also be called dollar cost averaging, which means as long as you are contributing on a consistent or periodic basis, you’ll take advantage of buying shares at a lower price in down markets, and compare that to buying shares at a higher price in up markets, which should then all balance out for a dollar cost average.

If the market has you completely terrified, then consider changing all future contributions to short or intermediate bonds.  At least that way you’re money is making a little interest while the market tries to figure itself out.

2. Do not put all of your 401k into the money market.

While I understand the disbelief in the markets right now to where you want to shift all of your money into the money market, by doing this would be a great mistake. If you believe that making money in the market is to buy low and sell high, then by shifting your money into the money market from your other investments, it would be the exact opposite; buying high and selling low. If you’ve seen your 401k depreciate in the last several months, the only way to get that back is by staying exactly where you’re at. Now, I understand for those nearing retirement, that this can be a compromising situation, but if you visit the rule of 72, meaning that you take 72 divided by the interest rate on your investments, and that will tell you how long it will take to double your money. That also, too, will give you an indicator how long it will take you to recoup the losses that you have incurred. By shifting to the money market, chances are, you are making somewhere in the 2% interest rate, which means it would take you almost 20 to 30 years just to double your money, and to recoup your other money that you’ve lost, would be a great time.

3. Do not borrow against your 401k.

This can be said in an up market or down market, but I had to throw it in there. Borrowing against your 401k is never advisable, especially in a down market. Look to start an emergency fund of some kind so that you can have that to fall back on in case of an emergency. If you don’t have an emergency fund, start one now. There’s no sense in contributing to your 401k if you have to pull it out just pay the bills.

Source: goodfinancialcents.com

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Apache is functioning normally

May 30, 2023 by Brett Tams

How much do you need to retire? The usual suggestion provided by financial planners and retirement calculators is 75% to 85% (roughly 80%) of your pre-retirement income. But is that really enough money to retire with security? Does the 80% rule-of-thumb work under all circumstances, or is it merely a rough approximation to simplify the retirement planning process? Let’s examine these issues more closely…

Is 80% Of Pre-Retirement Spending A Realistic Budget?

The basis for the 80% spending rule is that your living expenses are expected to decline once you retire thus your spending should decrease without forcing you to lower your lifestyle. For example, you’ll no longer need to purchase expensive professional clothing and your transportation costs will drop without a daily commute to work. Additionally, your children will probably be grown and out of the house, and you will no longer have to fund your retirement savings. You may even have your home paid in full thus eliminating your mortgage payment and you may be in a lower tax bracket. All these factors indicate your spending should drop during retirement.

Unfortunately, the issue is not as clear as it might appear on the surface. The analysis above assumes certain types of spending will decrease while all other spending remains the same. That is not realistic. For example, many new retirees like to hit the open road and see the world thus increasing their travel budgets. Similarly, it is the rare retiree who does not face rising health care costs.

In short, the 80% rule of thumb is a generalization designed to simplify the retirement planning process at the expense of accuracy. It makes many assumptions about your future that may not be true for you. It is no substitute for making a real budget based on your actual plans for retirement, and it could actually jeopardize your financial security. To make this point clear we will examine five reasons why your expenses may actually increase during retirement instead of decrease…

Longer And More Active Retirements

People are living longer and more active retirement lifestyles than ever before. Increasing longevity has made 60 the new 40. If you plan an early retirement so you can sail around the world or take frequent wine-tasting trips to France and Italy, the cost of those leisure activities and travel can easily offset any decrease in work-related expenses. Alternatively, if you are planning an early retirement it will mean you need more money to support a longer life of leisure. A longer retirement means you can’t spend as much investment principal each month, and a more active retirement means you need more savings and income to support a more expensive lifestyle.

Health Care In Retirement

Health care costs have risen steadily and there is every reason to believe that trend will continue. Additionally, your chances of serious illness or need for expensive medications increases with age. A single medical event can be devastating to your retirement savings if you are not prepared, and if you don’t have long term care insurance then assisted living or nursing home expenses can deplete your retirement savings.

Other Ways Expenses Could Rise

Maybe you haven’t paid off your house, or possibly you took out a home equity loan to remodel. The 80% rule-of-thumb assumes you no longer support dependents, but you may still be paying a child’s college expenses. Alternatively, you might be caring for an aging parent who is living in your home. These expenses certainly won’t go away just because you retire.

Lower Taxes May Be Wrong

The assumption that your taxes will drop during retirement could be totally incorrect. After all, if your retirement income level is similar to pre-retirement income then where will the tax relief come from? In addition, growing budget deficits at all levels of government combined with entitlement program problems indicates a greater likelihood of rising tax rates rather than falling tax rates. In short, the idea that your tax rate will decrease during retirement may turn out to be just the opposite.

Spending Statistics Misrepresent Real Spending

Many research studies have been conducted on the spending patterns of the elderly. One of the more famous studies comes from Ty Bernicke in the Journal of Financial Planning where he cites numbers from the U.S. Department of Labor’s Consumer Expenditure Survey indicating that retirees spend less as they age. A typical 75-year-old spends about half as much as the average 45-to-54-year-old. Overall, spending declines about 25% each decade from age 55 to 75.

This appears to be conclusive evidence that spending does in fact decline with age during retirement; however, there are a couple of major flaws in the research. The first problem results from these figures failing to include long term care costs. You can solve that problem with insurance but there is no solution to the next problem…

Bernicke’s analysis was based on a snapshot in time thus it only compares nominal dollar spending and does not adjust for inflation. In other words, it compares the spending habits of a 75 year old today to the spending habits of a 45 year old on the same day. It does not track a 45 year old over a period of 30 years to determine if their spending decreases with time as the study would imply. Instead, it compares the two different groups at a single point in time.

The problem with this approach is it fails to adjust spending for inflation. A mere 3% inflation will double spending in just 25 years which will more than offset the expected reduction claimed by Bernicke’s research. In fact, it could potentially cause an increase in spending – contrary to what his research would imply.

A More Accurate Approach For Determining How Much Money You Need To Retire

In summary, you would be wise to forget the oversimplified rules of thumb when trying to figure out how much money to retire. Your financial security is at stake and you deserve better. Instead, it is far more prudent to develop a realistic budget for your retirement spending based on your actual retirement plans. You don’t have to make it perfect because nobody can predict the future, but you do want to make it as accurate as you can.

A personal budget for retirement is necessary because your life situation is unique. Only you know the financial situation facing your maturing children and aging parents that might affect your budget. Only you know about your globetrotting plans to travel the world for a decade or two before slowing down. That means you will need to add that expense into your budget for a decade or two before removing it. If you have long term care insurance then add the premiums as an expense into your budget, and if you don’t then build a cushion into your savings for self-insurance. In short, develop a plan for retirement and then develop a budget to reflect your plan.

When you complete the budgeting process you may be happily surprised to learn you only need 60% of pre-retirement income making you better off than expected – or your dreams could require 140% of pre-retirement income causing a challenge. This is key to your financial security because the difference between these two numbers can either break the back of your retirement savings or make a meager nest egg look plentiful. Because the range of outcomes is so wide and the stakes are so high, the only realistic solution is to replace the rule of thumb with a carefully developed retirement budget based on your unique needs to figure out how much you really need for retirement.

It is the only prudent thing to do.

About The Author

Todd R. Tresidder is a financial coach who blogs about retirement planning, wealth building and investment strategy. He wrote the book How Much Money Do I Need To Retire teaching you how to overcome the hidden problems behind retirement calculators that threaten your financial security.

Source: goodfinancialcents.com

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