10 Tips for Catching Up on Retirement Savings
Need to get your retirement savings back on track? Start with these 10 tips.
The post 10 Tips for Catching Up on Retirement Savings appeared first on Discover Bank – Banking Topics Blog.
Need to get your retirement savings back on track? Start with these 10 tips.
The post 10 Tips for Catching Up on Retirement Savings appeared first on Discover Bank – Banking Topics Blog.
Although enduring the pandemic has been stressful to say the least, I have learned a multitude of lessons Iâll never forget. One of the biggest is that, like it or not, Iâm not cut out to homeschool four kids while trying to work at home. Most of all, though, the pandemic has reinforced my feeling […]
The post FIRE: How to Find Your Aha Moments and the Key to Achieving FIRE appeared first on Good Financial Cents®.
Although investing in the stock market can feel intimidating at first, it could be the key to achieving your financial goals. Short of hitting the lottery or building a thriving business that you can sell, buying securities that increase in value over time is usually the easiest path to wealth. After all, the average savings […]
The post How to Start Investing in the Stock Market appeared first on Good Financial Cents®.
Jana S. asked this question recently about Roth IRAs:
I just listened to your podcast about what to do if you overcontribute to a tax-advantaged account, especially when you earn too much to qualify for a Roth IRA. I’m interested in how to do a backdoor Roth. What are the rules that apply for transferring funds from a traditional IRA to a Roth?
If you’re a regular Money Girl reader or podcast listener, you’ve heard me discuss the fantastic tax benefits of a Roth IRA. The problem is, as Jana mentioned, the door to a Roth IRA gets slammed in your face if you make too much money.
But sometimes when you can’t get in the front door, the backdoor is wide open! In this episode, I'll explain a strategy known as the backdoor Roth or Roth conversion. We’ll cover how high earners can have a Roth IRA without breaking the rules.
A Roth IRA is a retirement account for individuals that’s never taxed after you make contributions. Instead of getting an upfront tax deduction (like you do with deductible contributions to a traditional IRA), you can withdraw Roth IRA contributions and earnings entirely tax-free as long as you’ve had it for at least five years and reach age 59.5.
You can make IRA contributions as long as you have earned income and no matter your age, although you can’t contribute more to an IRA than you earn. To contribute the maximum for 2021, which is $6,000 or $7,000 for those over age 50, you must make at least that much.
For 2021, single taxpayers must have an adjusted gross income of $125,000 or less to make a full Roth IRA contribution.
But, as I mentioned, not everyone qualifies for a Roth IRA. For 2021, single taxpayers must have an adjusted gross income of $125,000 or less to make a full contribution. And married couples who file joint taxes must earn $198,000 or less. If your income exceeds these annual limits, you can keep an existing Roth IRA, but you can’t make new contributions.
Note that if you have a Roth at work, such as a Roth 401(k) or 403(b), there are no income limits to qualify. Unlike a Roth IRA, you can max out these accounts every year no matter how much you earn.
RELATED: Can Minors and Seniors Have a Roth IRA?
A backdoor Roth isn’t a type of retirement account, it’s a method for high earners to fund a Roth IRA even when they don’t qualify for regular contributions. If your income is below the annual Roth IRA threshold, you don’t need a backdoor Roth because you can make regular "front door" contributions.
In addition to tax-deductible contributions, you can also make nondeductible, taxable contributions to a traditional IRA. Interestingly, the IRS allows you to convert nondeductible IRA contributions to a Roth IRA, which is the “backdoor” concept. It's a clever and legitimate way to move money into a Roth IRA, even if you earn too much to qualify for one.
A backdoor Roth isn’t a type of retirement account—it’s a method for high earners to fund a Roth IRA even when they don’t qualify for regular contributions.
To create a backdoor Roth IRA, you must make a nondeductible (taxable) contribution to a traditional IRA and file IRS Form 8606, Nondeductible IRAs. Then you roll over those funds into a Roth IRA. You won't owe taxes, except on any investment growth in the account earned between the time of your traditional IRA contribution and the Roth conversion. If it was a short period, your earnings and resulting tax should be small. Once your funds are in a Roth IRA, the earnings can grow and be withdrawn tax-free in retirement.
As I mentioned, there’s no income limit for traditional IRA contributions. So, converting nondeductible contributions from a traditional IRA to a Roth IRA allows anyone, regardless of income, to fund a Roth IRA.
Though sneaking into a backdoor Roth IRA sounds great, it doesn’t always work as planned.
If you already have pre-tax money in a traditional IRA, tax must be prorated over all your IRAs.
The IRS requires you to lump all your IRAs together when you make a distribution and doesn’t allow you to cherry-pick one account to convert. So, if you already have pre-tax money in a traditional IRA, tax must be prorated over all your IRAs.
For example, let’s say you have $5,000 in a nondeductible IRA that you want to convert into a Roth IRA, and you also have $15,000 in a deductible IRA. Since you have a total of $20,000 in IRAs, the $5,000 nondeductible portion is 25% ($5,000 / $20,000 = 0.25 or 25%) and the taxable portion is 75% ($15,000 / $20,000 = 0.75 or 75%).
You must pay the same ratio of tax on the conversion. In other words, 75% of $5,000, or $3,750, would be subject to tax. It’s up to you to weigh the upfront tax liability against the future benefits of getting tax-free withdrawals from a Roth IRA.
However, if you don’t have any pre-tax IRA funds, you could convert the full $5,000 from a nondeductible IRA into a Roth IRA with no tax due. Yes, this gets complicated. Just remember that if you have a substantial amount of pre-tax funds in a traditional IRA, doing a backdoor Roth IRA doesn’t help you avoid additional tax. Unfortunately, you can’t convert just nondeductible funds and forget about your pre-tax amounts.
If you really want to do a backdoor Roth IRA, and you have a retirement plan at work, you can use it as a workaround solution. You could remove your pre-tax IRA money from the equation by rolling it over into your 401(k) or 403(b). That would leave you with just nondeductible, after-tax IRA money to convert to a Roth.
High earners who fund a backdoor Roth IRA still won't qualify to make new contributions to the account, but the converted funds grow tax-free, which could save a bundle.
This strategy only works if your workplace plan allows incoming IRA rollovers. Plus, make sure you're happy with the plan's investment choices and fees because you don't have as much control over a 401(k) as you do with an IRA. If you're self-employed, you could set up a solo 401(k) that allows roll-ins and move your pre-tax IRA money into it.
Remember that high earners who fund a backdoor Roth IRA still won't qualify to make new contributions to the account. However, the converted funds grow tax-free, which could save a bundle in taxes. Additionally, Roth IRAs don't have required minimum distributions (RMDs), which means you can keep them indefinitely.
Doing a backdoor Roth can be worthwhile if you can afford to pay a potentially significant tax bill on your converted balance.
Consider that your converted funds count as income for tax purposes, which could move you into a higher tax bracket for that year. Plus, it's a transaction that you can't undo if you change your mind later on. So be sure to speak to a tax or financial advisor about the pros and cons of a backdoor Roth before crossing the threshold.
One of the most common retirement questions I receive is what to do with a retirement account when leaving a job. Knowing your options for managing a retirement plan with an old employer is essential because most people change jobs many times throughout their careers. And millions of Americans remain out of work during the pandemic.
When you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave.
Fortunately, when you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave. It doesn't matter if you quit, get fired, or get laid off, the same rules apply.
This post will cover five options for managing your retirement account when your employment ends. You'll learn the rules for handling a retirement plan at an old job and the best move to create a secure financial future.
Investing money using one or more retirement accounts is wise because they come with terrific tax advantages. They defer or eliminate the tax on your contributions and investment earnings, which may allow you to accumulate a bigger balance than with a taxable brokerage account.
Investing money using one or more retirement accounts is wise. If you have a retirement plan at work but aren't participating in it, now's the time to enroll!
So, if you have a retirement plan at work but aren't participating in it, now's the time to enroll! Contribute as much as you can, even if it's just a small amount. Make a goal to increase your contribution rate each year until you're putting away at least 10% to 15% of your pre-tax income.
FREE RESOURCE: Retirement Account Comparison Chart (PDF)—a handy one-page download to see the retirement account rules at a glance.
Don't make the mistake of thinking that once you leave a job with a 401(k) or a 403(b) you can't continue getting tax breaks. Doing a rollover allows you to withdraw funds from a retirement plan with an old employer and transfer them to another eligible retirement account.
When you roll over a workplace retirement account, you don't lose your contributions or investment earnings. And if you're vested, you don't lose any money that your employer may have put into your account as matching funds.
The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process.
The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process. If you miss this deadline and are younger than age 59½, the transaction becomes an early withdrawal. That means it is subject to income tax, plus an additional 10% early withdrawal penalty.
If you're a regular Money Girl podcast listener or reader, you know that I don't recommend taking early withdrawals from retirement accounts. Paying income tax and a penalty is expensive and reduces your nest egg.
If you complete a traditional rollover within the allowable 60-day window, you maintain all the funds' tax-deferred status until you make withdrawals in the future. And with a Roth rollover, you retain the tax-free status of your funds.
Once you're no longer employed by a company that sponsors your retirement plan, there are four options for managing the account.
Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option. As I mentioned, taking an early withdrawal means you must pay income tax and a 10% penalty.
Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option.
Let's say you have a $100,000 account balance that you cash out. If your average rate for federal and state income taxes is 30%, and you have an additional 10% penalty, you lose 40%. Cracking open your $100,000 nest egg could mean only having $60,000 left, depending on how much you earn.
Note that if your retirement plan has a low balance, such as $1,000 or less, the custodian may automatically cash you out. If so, they're required to withhold 20% for taxes (although you may owe more), file Form 1099-R to document the distribution, and pay you the balance.
Most retirement plans allow you to keep money in the account after you're no longer employed if you maintain a minimum balance, such as more than $5,000. If you don't have the minimum, but you have more than the cash-out threshold, the custodian typically has the authority to deposit your money into an IRA in your name.
The downside to leaving money in an old retirement account is that you can't make additional contributions because you're not an employee. However, your funds can continue to grow there. You can manage them any way you like by selling or buying investments from a set menu of options.
The downside to leaving money in an old retirement account is that you can't make additional contributions.
Leaving money in an old retirement plan is certainly better than cashing out and paying taxes and a penalty, but it doesn't give you as much flexibility as you you would get with the next two options I'm going to talk about.
I only recommend leaving money in an old employer's retirement plan if you're happy with the investment choices and the fund and account fees are low. Just make sure that the plan doesn't charge you higher fees once you're no longer an active employee.
Another reason you might want to leave retirement money in an old employer's plan is if you're unemployed or have a job that doesn't offer a retirement account. I'll cover some special legal protections you'll get in just a moment.
Another option for your old workplace retirement plan is to roll it into an existing or new traditional IRA. If you have a Roth 401(k) or 403(b), you can roll it over into a Roth IRA. The deadline to complete an IRA rollover is 60 days.
Your earnings in a traditional IRA would continue to grow tax-deferred, just like in your old workplace plan. And earnings grow tax-free in a Roth IRA, like a Roth account at work.
Here are a couple of advantages to moving a workplace plan to an IRA:
Here are some downsides to rolling over a workplace plan to an IRA:
If you want more control over your investment choices, think you'll need to make withdrawals before retirement, are self-employed, or don't have a job with a retirement plan to roll your account into, having an IRA is a great option.
If you land a new job with a retirement plan, it may allow a rollover from your old plan once you're eligible to participate. While the IRS allows rollovers into most retirement accounts, employer plans aren't required to accept incoming rollovers. So be sure to check with your new plan administrator about what's possible.
Once you initiate a transfer from one workplace plan to another, you must complete it within 60 days to avoid taxes and a penalty.
Here are some advantages of doing a workplace-to-workplace rollover:
Some downsides to transferring money from one workplace plan to another include:
If you left a job to become self-employed, having an IRA is a great option. However, there are other types of retirement accounts that you might consider, such as a solo 401(k) or a SEP-IRA, based on whether you have employees and on your business income.
Read 4 Ways to Start a Retirement Account as a Self-Employed Freelancer or 5 Retirement Options When You're Self-Employed for more information.
For a rollover to be tax-free, you must use a like account. For example, if you have a traditional 403(b), you must rollover to another traditional retirement account at work or to a traditional IRA.
If you move traditional, pre-tax funds into a post-tax, Roth account, you must pay income tax on any amount that wasn't previously taxed. That could leave you with a massive tax liability. If you want a Roth, a better move would be to open a Roth account at your new job or to start a Roth IRA (if your income doesn't make you ineligible to contribute).
The best place for your old retirement account depends on the flexibility and legal protections you want. Other considerations include the quality of your old plan, your income, and whether you have a new job with a retirement plan that accepts rollovers.
The best place for your old retirement account depends on the flexibility and legal protections you want.
The goal is to position your retirement money where you can keep it safe and allow it to grow using low-cost, diversified investment options. If you have questions about doing a rollover, get advice from your retirement plan custodian. They can walk you through the process to make sure you choose the best investments and don't break the rollover rules.
You asked, so here’s the answer. Let’s breakdown my investment accounts, asset class choices, and why I make those choices.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
This weekâs Mint audit introduces us to Selena, 48, a mom of two living in San Antonio, Texas. She is a community college director and her husband, 51, is a full-time graphic designer who also manages a booming side hustle…
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If you’re thinking about how much is enough for retirement, you’re probably contemplating a retirement and need to know how to pay for it. If you are, that’s good because one of the challenges we face is how we’re going to fund our retirement. Determining then how much retirement savings is enough depends on a …
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