If you want to protect your assets from excessive taxes and be certain that they are distributed according to your wishes, a simple will simply isn’t enough.

Comprehensive estate planning ensures that your hard work doesn’t end up in the hands of the IRS.

More importantly, your estate plan includes instructions for handling your health-related decisions, in case you have a situation in which you are unable to make your preferences known.

This guide will help you get you started with planning your estate, so you can:

• Protect your life savings
• Transfer your assets to your chosen beneficiaries, and 
• Live your final days the way you see fit

Make A Will vs Estate Planning

Having a will is an important first step in managing your estate, but it is just one part of your comprehensive plan.

Your will offers instructions on how your assets are to be distributed, but your estate plan makes sure the process is smooth and stress-free for your beneficiaries.

When possible, your estate plan is specifically designed to keep taxes and fees to a minimum, so more of your assets are transferred to your beneficiaries. For example, a skilled estate planner might leverage financial products like trusts to manage gifts to children and grandchildren. Some people even use trusts to make sure beloved pets get the care they need.

In addition to covering the financial aspects of your estate, a comprehensive estate plan includes documents critical to your care at the end of your life. For example, your estate planning professional might work with you on a Power of Attorney to give a trusted friend or relative the ability to make health and financial decisions on your behalf if you are unable to do so.

You may also choose to complete a Living Will, also known as an Advanced Directive, to outline your wishes in certain health-related scenarios.

These documents reduce the burden of making decisions when your loved ones are going through a difficult and emotional time.

>> What Is a Springing Power of Attorney?

The Purpose of Estate Planning

Chances are, you have reliably paid the taxes due on your income year after year. Unfortunately, that doesn’t exempt your assets from estate taxes.

Estate tax regulations apply on top of other taxes and fees. They are assessed in addition to probate fees, generation-skipping taxes, and other charges your estate might incur.

One of the biggest issues that your loved ones could face comes from the fact that estate taxes are assessed on all of your assets after your death.

The total includes the value of real estate and businesses. The full tax payment is due within nine months of your death, even if you aren’t leaving cash to your heirs.

If you don’t account for this situation with an estate plan, your beneficiaries may be forced to sell your assets. In some cases, that means letting go of family homes and businesses to cover the final estate tax bill.

Fortunately, there is good news when it comes to estate planning. You may not have to worry about large tax bills if you are married. Assets left to your spouse are exempt from estate taxes.

Better still, assets under a certain threshold can be passed to any of your beneficiaries tax-free. The threshold is reviewed annually and subject to change, but for 2019 it stands at $11.4 million per individual – an increase from $11.18 million in 2018.

Assets in excess of the threshold can be taxed at surprisingly high rates if left unprotected – perhaps as high as 40 percent of their net value. That doesn’t include death or inheritance taxes assessed by individual states. Clearly, estate planning is an important move to ensure the financial security of your beneficiaries.

Of course, minimizing taxes is just part of your comprehensive plan. Your financial services professional will work with you on a variety of other essentials, such as instructions for your end-of-life care.

Deciding now makes it easier for your loved ones as you approach your final days.

>> What Is A Living Trust?

What Documents are Needed for Estate Planning?

Keeping up with constant changes in estate-related regulations is a full-time job for financial services professionals.

It isn’t practical to try and manage all of these details yourself. Work with an estate planning expert, and be prepared to review the following aspects of your situation:

The Value of Your Estate

After your death, an appraiser will be responsible for determining the fair market value of your assets.

This report will be used to calculate the total value of your estate and subsequent tax liability. However, you can provide your estate planner with enough information to make informed estimates by documenting each of your current assets.

Include any paperwork related to the purchase or current value of items like real estate, business interest, cash, securities, insurance, trusts, and annuities.

If applicable, provide details on other assets that have intrinsic value, such as fine jewelry, antique furniture, and artworks.

Your estate planner will also need a clear understanding of your liabilities, as some of your debts and expenses will be deducted from the total value of your estate. Collect documentation related to mortgages, charitable contributions, and similar before you meet with your financial services professional.

With this information, your estate planning expert will be able to recommend the best possible solutions for transferring your assets to your beneficiaries.

Your Family, Your Beneficiaries, and Your Decision-Makers

You don’t have to know exactly how you want to distribute your assets when begin the estate planning process.

However, it is helpful to have certain details available, like the names, ages, and contact information for your family members and other potential beneficiaries.

This information helps your estate planner recommend appropriate products to protect your assets and to get them to your beneficiaries intact.

You should also begin thinking about who you can rely on to make decisions for you if you are no longer able.

• Who do you trust with your medical care?
• Who do you trust to manage urgent financial matters?

Keep in mind that your first choice may not be willing or able when the time comes, so you should always include a second option in your estate documents.

How To Get Started with Estate Planning

If you already have your financial documents in one place, you are ahead of the game. However, even if you don’t, there is no reason to put off planning your estate.

Today’s estate planning professionals are leveraging advanced technology to make the process simple and efficient. For example, Gentreo offers an online platform that guides you through estate planning step-by-step for a fraction of what you would pay to a traditional financial advisor.

The Gentreo service offers a comprehensive suite of state-specific estate-planning documents that carry the same legal weight as documents you complete in an attorney’s office.

Through this site, you can complete your Health Care Proxy, Power of Attorney, and Will.

In addition, you can make use of Gentreo’s digital vault to store critical estate-related documents, and you can take advantage of the site’s unique Emergency Card program in case you find yourself in need of medical care unexpectedly.

Gentreo is a great way to get started with estate planning. You can get all of the basics covered, so that your assets are protected for your beneficiaries once you have passed.

Learn more about Gentreo at Gentreo.com.

The article Estate Planning for Seniors was originally posted on Investormint

Is it better to allocate money to your employer-sponsored 401(k) or your self-directed traditional IRA or Roth IRA?

Depending on whether your employer matches contributions to your 401(k) and when you max out contributions to each plan, you may be best served not exclusively by the 401(k) or the IRA but instead a combination of both.

In a 401(k) retirement plan, pre-tax dollars are invested on a tax-deferred basis until retirement when withdrawals are taxed. It is similar for a traditional IRA, albeit that the traditional IRA is a self-managed account while the 401(k) is employer-sponsored, and typically has fewer investment options available to you than an IRA.

The Roth IRA differs from both the 401(k) and traditional IRA because after-tax dollars are contributed upfront and invested tax-deferred until withdrawn during retirement years. Unlike the traditional IRA and 401(k) accounts, the Roth IRA has no mandatory withdrawal requirements associated with it when you reach retirement.

Given the similarities between the 401(k) and traditional IRA, how do you choose between funding one or the other, and in which order should you begin allocating money to each? Below we highlight a step-by-step guide for how to select when you contribute to each.

Contribute First To Your 401(k) If Your Employer Matches Funds

If your employer has a 401(k) matching program, it is generally best to choose a 401(k) over an IRA because matched amounts are essentially free money, and they don’t count towards the annual 401(k) contribution limit.

Many employers match the contributions you make to your 401(k), so take full advantage of this “free money” if it is made available to you.

While some employers match only a fraction of each dollar you contribute, others will match your contributions dollar for dollar, which is about as sweet as any employment benefit available.

If your employer does offer 401(k) matching, it is generally only up to the first 6% of your gross earnings.

The combined total of your contributions and your employer’s matched contributions can still amount to a sizeable chunk of change each year. For example, an employee earning $100,000 could enjoy $6,000 of additional money from their employer’s matching program each year for a total 401(k) contribution of $12,000.

And best of all, the funds contributed by an employer are excluded from the annual contribution limit. In 2019, the contribution limit is $19,000 ($25,000 if over the age of 50).

The drawback of a 401(k) compared to an IRA is that your investment choices are fewer and the fees are generally higher.

If your employer does not offer matching it may be best to rollover your 401(k) into an IRA or if you have not yet contributed any funds to a 401(k) plan, invest first in an IRA.

When Employer 401(k) Matching Limit Is Reached, Invest In Your IRA

After you’ve taken full advantage of the contributions your employer is willing to match, allocate funds to either a traditional IRA or a Roth IRA. If you are younger and in a lower tax bracket, the Roth IRA is generally a better choice than a traditional IRA. For individuals closer to retirement or in a higher tax bracket, the traditional IRA is usually the better choice (compared to the Roth IRA).

When you have reached the limit of employer matching available to you in your 401(k), consider allocating new contributions to your IRA. You will have to choose between a traditional IRA and a Roth IRA. If you are unsure which to select, view the pros and cons of a traditional IRA versus a Roth IRA.

A traditional IRA has similar features to a 401(k):

• Contributions are deductible from income-taxes; and
• Earnings on investments are tax-deferred.

A Roth IRA differs from both a traditional IRA and a 401(k) because contributions are made with after-tax dollars, though in all accounts earnings on investments grow tax-deferred.

Because contributions to a Roth IRA are taxed upfront, the Roth IRA is better for individuals who expect their tax rate to increase over time; it is better to lock in a lower tax rate now than risk paying a higher tax rate in the future.

Younger investors in a lower tax bracket are generally better off choosing a Roth IRA while older investors closer to retirement age in a higher tax bracket will be better served with a traditional IRA.

Discover >> How Much Can I Contribute To My Roth IRA?

401(k) And Traditional IRA Contribution Limits

After your employer has matched your 401(k) contributions up to the maximum threshold level, and you have reached the limit of permissible contributions to your IRA plan, consider then contributing further to your 401(k) if you haven’t already reached its contribution limit.

The contribution limit to a 401(k) plan is a lot higher than it is to a traditional IRA. For a 401(k), $19,000 may be contributed annually ($29,000 if over the age of 50). The limit is comparatively smaller for a traditional IRA, just $6,000 ($7,000 if over the age of 50).

Because of the high 401(k) limit, it is possible that you may still have room to contribute further to your 401(k), even after reaching the limit of matching dollars contributed by your employer and after reaching your IRA contribution limit.

For example, an employee under the age of 50 earning an annual salary of $100,000 who enjoys employer matching contributions to a 401(k) plan up to 6% of salary could follow the following strategy to optimize for employer matching contributions from a 401(k) and lower fees and greater investment choices from an IRA:

1. Contribute first to 401(k) plan an amount of $6,000, which employer matches
2. Next, contribute to an IRA account up to its contribution limit of $6,000

At the end of step one, $12,000 is contributed to the employee’s 401(k) account and, at the end of step two, $6,000 is added to the employee’s IRA account.

Employer matching funds don’t count towards the 401(k) contribution limit. So, it is possible for the employee to add even more money to the 401(k) even after maxing out the matched funds from the employer and maxing out IRA contributions.

If the employee were to max out the 401(k) also, an additional $13,000 would need to be contributed to the 401(k); this is calculated as the annual contribution limit minus the amount the individual (not the employer) contributed ($19,000 minus $6,000).

The total annual amount the employee could allocate to tax-deferred retirement investments is the sum of all 401(k) contributions ($19,000), employer matching 401(k) contributions ($6,000), and IRA contributions ($6,000), for a total of $31,000.

When Should You Choose An IRA Over A 401(k)?

Contribute first to your IRA if your employer doesn’t have a 401(k) matching program in place. After you have reached the IRA contribution limit for the year, then begin contributing to your 401(k).

Choosing to contribute to a 401(k) makes a lot of sense when your employer matches your contributions, because those matching funds equate to free money that can grow tax-deferred until retirement.

But when your employer offers no matching program, it is better to begin allocating funds to your IRA and only start allocating funds to your 401(k) after you have reached your IRA contribution limit.

Even though both the 401(k) and IRA plans facilitate tax-deferred growth, 401(k) plans generally have more restrictive investment options and higher fees.

You enjoy greater investing flexibility, lower fees, and more control with an IRA plan. In a 401(k) plan, you may be restricted to a limited number of mutual funds with high expenses ratios, but in an IRA you will generally enjoy a broader selection of investments, including exchange-traded funds with lower fees.

When your IRA is fully funded, contributing to your 401(k) makes sense in spite of the more restrictive selection of investment choices and higher fees because contributions are tax-deferred and investments grow tax-free.

If 401(k) fees turn out to be excessively high or your investment choices are few and of poor quality, it may be worth considering a Roth IRA, which won’t have the same upfront deductions as a traditional IRA, but still allows for tax-free growth of investments until withdrawals are taken in retirement years.

Compare 401(k) Vs. IRA Retirement Plans

Both 401(k) and IRA plans allow investments to grow tax-deferred. Where 401(k) and IRA plans mainly differ is in contribution limits, fees, tax breaks and investment options.

Contribution limits in a 401(k) plan are higher than in a traditional IRA or Roth IRA account. The range of investment options is generally limited in a 401(k) employer-sponsored plan compared to a self-managed IRA. Roth IRA contributions are not deductible and qualified distributions are not taxed. Contributions to a traditional IRA or 401(k) are tax-deductible but qualified distributions are taxed as ordinary income in retirement years.

The breakdown of how traditional IRA and Roth IRA plans compare to each other and to 401(k) plans is shown below. If you decide upon an IRA, compare among the best IRA providers.

Discover >> Find Out How To Rollover a 401(k) To An IRA Account

401(k) Vs. IRA: The Good, The Bad & The Ugly

401(k) plans allow participants to contribute higher amounts, allow employers to match participant contributions, and permit higher deductibility limits than IRAs. However, IRAs are more flexible because they can be transferred from one broker to another, generally have lower fees, and have a greater selection of investments.

The pros and cons of 401(k) and IRA accounts are displayed below but to cut to the chase the best way to optimize contributions is as follows:

1. Contribute to a 401(k) as much as the company will match
2. Fund your IRA until you reach the contribution limit
3. After maxing out your IRA contributions, contribute further to your 401(k) until you reach its contribution limit

If your employer does not match contributions then the path below is best:

1. Contribute first to your IRA, either traditional IRA or Roth IRA until its contribution limit is reached
2. Then fund your 401(k) until you reach its contribution limit

	Traditional IRA	Roth IRA	401(k)
	Large investment selection compared to 401(k)	Large investment selection compared to 401(k)	Income level and tax filing status do not impact permissible contribution amount
	Contributions are tax deductible	Tax-free withdrawals in retirement years	Contributions are tax deductible
	Lower fees than a 401(k)	Lower fees than a 401(k)	Greater protection from creditors than IRAs
	Greater control over investment choices	Greater control over investment choices	Employers match your contributions
	More severe tax impact on early withdrawals compared to a Roth IRA	Contributions are not tax-deductible	Higher fees than a traditional IRA or Roth IRA
	Lower contribution limits than a 401(k)	Lower contribution limits than 401(k)	Less control over investment choices
	Full deductions dependent on income and filing status	Ineligible to contribute if income above a certain threshold	Fewer investment choices
	No employer matching contributions	No employer matching contributions	No flexibility to move assets to another brokerage account while working for the company

Discover >> Which IRA is best for you, a traditional IRA or a Roth IRA?

Which IRA Provider Is Best?

IRA investors who prefer to manage their own retirement accounts should consider online brokerage platforms that feature research, tools, analyzers, back-testing capabilities and fast order execution, while hands-off IRA investors will find robo-advisor firms, such as Betterment and Personal Capital,  that offer automated investing services to be a better fit.

The first step in choosing an IRA provider is figuring out whether you want to be involved in the management of your retirement assets or prefer to be hands-off. If you would prefer your money to be invested without needing to worry much about it, a robo-advisor might be a good solution for you. On the other hand, if you enjoy researching stocks, exchange-traded funds, mutual funds, and other securities then a self-managed account at a brokerage firm would be a better fit.

BEST IRA ROBO-ADVISOR: BETTERMENT

Betterment is a robo-advisor firm that uses a computer model and a team of investment experts to manage client funds. Betterment has low fees (compared to traditional financial advisors) that range from 0.25% to 0.40% and offers both a purely automated investing service as well as a higher tier service that includes access to human financial advisors.

Betterment caters to a range of IRA account types, including traditional IRA, Roth IRA, SEP IRA, and Rollover IRA. For taxable account holders, Betterment provides a free tax-loss harvesting service.

Betterment offers clients a retirement calculator, RetireGuide, which monitors your progress towards retirement goals, highlights shortfalls along the way, and is designed to get you back on track.

BETTERMENT SPOTLIGHT
InvestorMint Rating 1 2 3 4 5 5 out of 5 stars	Promo: Up to 1 Year Free Management Management Fee: 0.25% - 0.40% Account Minimum (Betterment Digital): $0 Account Minimum (Betterment Premium): $100,000 Get Started via Betterment secure site

BEST IRA ROBO-ADVISOR: PERSONAL CAPITAL

Personal Capital goes beyond offering a purely automated investing service as most robo-advisors do by pairing clients with dedicated financial advisors.

Clients with large account balances are assigned two dedicated financial advisors. The drawback is that Personal Capital commands higher fees than many other robo-advisors on account of providing a higher level of service.

For IRA account holders who want a little extra hand-holding and a more personal investing experience, Personal Capital is a good solution.

It has higher minimums to open an account compared to many robo-advisors but any user can freely download Personal Capital’s excellent mobile app which tracks spending, net worth, investments, as well as any debts or loans you may have outstanding.

Simply link your third-party bank, brokerage or credit card accounts to the app, and you will be set to go.

BEST IRA PROVIDER FOR TRADERS: TASTYWORKS

Active traders who fell in love with the extensive screening, back-testing, and charting tools at Tom Sosnoff’s former firm will find similar capabilities at tastyworks, with an added benefit: no commissions costs when closing options contracts, and low fees overall.

For IRA account holders, no maintenance fee is applied. Plus active traders will enjoy fast order executions, industry-leading customer support (the CEO sometimes helps out on the support desk), advanced tools, screeners and analyzers, as well as advanced order execution, including complex options spreads.

tastytrade SPOTLIGHT
Investormint Rating 1 2 3 4 5 4.5 out of 5 stars	Commissions: Closing trades for Stocks & ETFs and Options are commission-free Account Balance Minimum: $0 Commissions: $0 flat rate for stocks Get Started via tastytrade secure site

The article 401(k) or IRA: Which Is Better? was originally posted on Investormint

Figuring out how much should be in your 401(k) could quickly cause you to start scratching your head. Factoring in life expectancy, inflation, spending, income and earnings is no mean feat.

But it can be simplified quite easily when you step back and look at the big picture plan you have for retirement. The goal of retirement for most people is to maintain at least the same standard of living enjoyed during their working careers.

So, if you earn $50,000 as an employee, you will want to estimate how many years you expect to enjoy retirement and multiply it by $50,000.

To keep the math simple for now, you could estimate that a 30 year retirement period would require $1,500,000 in savings ($50,000 x 30 years).

This easy calculation allows us to put a stake in the ground, but alas, it’s not quite that simple. We will need to factor in a few other items to get a more accurate projection of how much should be in your 401(k).

How Much Should Be In My
401(k) After Factoring In Inflation?

The straightforward analysis above ignores the impact of inflation, which is significant. But it does at least allow you to estimate the very minimum amount you will need excluding increases in the costs of goods and rising prices due to inflation.

Inflation is defined as the general increases in prices and loss in purchasing power as time goes by.

Most people think of inflation as prices rising, but there is more to inflation than meets the eye, literally!

How to Spot Inflation When Prices Don’t Rise

When you go to the store and buy a pack of chips these days, you may reminisce fondly on how much cheaper it was when you were a few decades younger.

But inflation has a more sinister way of creeping into your life.

For example, a sneaky trick cereal manufacturers learned long ago is to charge you the same amount this year as last year for a box of cereal, so it seems like the price did not rise.

The trick is that they sometimes reduce the amount of food inside the box.

In essence, you are paying more this year for the same amount you bought last year – it’s just not so obvious because you don’t see it affect your wallet right away.

What Is The Average Rate Of Inflation?

According to InflationData.com, the average annual inflation rate has been 3.22%.

The number seems so small that it could almost be ignored – until you realize that the compounded effect of this seemingly small annual increase is for prices to double every 20 years!

If you are 45 years old and plan to retire at age 65, then inflation will eat up half your purchasing power over that time frame. That means if you require $50,000 to live today, you will need $100,000 in 20 years to live the same lifestyle.

So, in our example, a 30 year retirement requires not just $1,500,000 but $3,000,000 to live a similar lifestyle as today – yikes!

But can you save that much when restricted by 401(k) contribution limits?

How Much Should Be In My
401(k) With Contribution Limits?

The most you are permitted to contribute to a 401(k) each year when under the age of 50 is $19,000 and $25,000 when aged 50 or older.

If you are 45 years of age, and max out savings for the next 20 years, the total principal contribution you could make is $470,000 (5 years * $19,000 + 15 years * $25,000).

Generally, the limit increases regularly so if you max out contributions, the total may end up being closer to $500,000 or more.

But both of these numbers are a long way from $3,000,000. So what can you do?

>> Related: 401(k) or IRA: Which Is Better?

How To Increase Your 401k:
Max Out 401(k) Employer Matching

If you are working for an employer who matches your 401(k) contributions already, it is financially wise take full advantage of this benefit.

At the low-end, the 45 year old employee in the example above can save $470,000 if they max out 401(k) contributions, and perhaps they can contribute closer to $500,000 or more if limits continue to rise.

When your employer matches your 401(k) contributions, you basically get ‘free’ money.

Every dollar you contribute, your employer contributes one dollar also. Some employers will match a lower amount, say 50% of each dollar you contribute. Whatever the % contribution match, it’s money you otherwise wouldn’t have in your pocket.

By 65, the employee who takes advantage of a 1:1 matching employee 401(k) contribution program has an extra $450,000 → $500,000+ in their nest-egg!

But that’s not where it ends, it gets better…

How Much Should Be In My
401(k) If I Earn 7% Annually?

The amount you have at retirement is not just the principal you invest but also includes the earnings on investments.

The average annual return of the stock market from 1950 to 2009 when factoring in inflation and dividends was 7.0%.

Now here’s where the power of compounding comes to your rescue.

In year 1, if you max out your contributions of $19,000, your principal will turn into $73,524 after 20 years growing at an average annual rate of 7%.

The key is to start investing earlier. The difference between 19 years of growth and 20 years of growth is almost $5,000!

Every year you delay investing, you lose out on the power of compounding working in your favor.

It turns out that investing $19,000 each year for the next 20 years and earning 7% per year on average results in a nest-egg of almost $1,000,000!

With employer matching, that’s closer to $2 million!

And those amounts are even higher for the employee over age 50 who gets to contribute $25,000 annually.

Keep Portfolio
Management Fees and
Fund Fees Low

What is even more interesting is how your 401(k) grows with and without fees.

If you invest your money in actively managed mutual funds that have high expense ratios, your portfolio may end up hundreds of thousands of dollars lower than if you avoid high fees.

Let’s imagine you pay a financial advisor 1.25% each year and pay 0.75% in expense ratios to your mutual fund managers on average, for a total fee cost annually of 2%.

It turns out that 30 years later, you end up with $550,338 when you start with $100,000 compared to your non-fee paying neighbor, who ends up with $1,006,266.

By paying seemingly small fees of just 2% each year, the power of compounding hurts your retirement nest-egg very significantly; you end up with just over half what you would have if you had paid no fees.

Most 401(k) plans are quite restrictive and require you to invest in only a certain limited range of mutual funds.

But when you move on to another employer, you have flexibility to rollover your 401(k) into an IRA, and invest your retirement portfolio in a much broader range of lower fee exchange-traded funds, or ETFs.

>> Related – Should I Choose A Traditional IRA or Roth IRA?

The Amount You Need Is Lower if You Receive Social Security

About 62 million people in the United States receive benefits from the Social Security Administration SSA). According to SSA, 80% of those people are retired workers, dependents, and aged widows.

If you qualify for SSA benefits, then you don’t need to invest as much in your 401(k) to fund your retirement. Instead, you can use the benefits to help you maintain your lifestyle during retirement.

On average, retirees got $1,413 per month in 2018. The amount of money that people get from Social Security varies significantly. The more money you put into the system while you worked, the more benefits you will get after you retire.

If you’re not sure how much Social Security you can expect, use the SSA’s calculator to get an estimate of your benefits.

It’s unlikely that you can count on Social Security to pay for everything during retirement. Still, the more money you get from SSA, the less money you need to invest in your 401(k). Knowing how much Social Security you can expect will help you decide how much money you need to put into your 401(k) account now.

Inheritance Coming? You’re in Luck

If you’re fortunate enough to receive an inheritance, then you don’t need to invest as much money in your 401(k). Instead, you can use your inheritance during retirement.

Keep in mind, however, that you might not inherit as much money as you think. Even if your parents have plenty of money, they may need to spend a lot of it on medical services as they get older.

On average, American retirees say that they expect to leave $177,000 to their families. That’s a fair amount of money, but it might not last long when you don’t have any other sources of income. Most people still need to contribute to their 401(k) accounts even when they plan to get inheritance money.

You also have to consider the possibility that you won’t get the inheritance that you expect. Don’t assume that your parents or other relatives will leave you everything they own. Talk them to now to make specific plans.

Otherwise, you might discover that they left a significant portion of their money to charities. If that happens, you might not have enough money to retire.

How Many Years Will I Be Retired?

Without getting too morbid, you should make an approximate calculation for how many years you will live after retiring to make sure your savings cover your financial needs.

In the example above, we used 30 years as a benchmark. But all sorts of factors play a role in life expectancy from health to environment to genetics. You will be able to make a more informed guess based on your own personal circumstances.

More generally, the average life expectancy in the US is 76 years for men and 81 years for women, with an average of 78 years.

That means instead of covering 30 years of retirement from the age of 65, our avatar retiree would need to cover approximately 11 years if male and 16 years if female.

This means that the 45 year old maxing out their 401(k) contributions and taking advantage of employer matching while growing their nest-egg at approximately 7% on average annually in an environment with approximately 3% annual inflation could just about cover their retirement needs if they want to maintain a similar lifestyle as when earning $50,000 annually in employment earnings.

Key Lessons

• If you are starting younger you can afford to save a lot less to end up with a similar sized nest-egg due to the power of compounding.
• If you start saving at 45 and expect to live longer than average, you will need to save more than the $1,500,000 calculated above.
• If you earn half the amount calculated, say $25,000, or double the amount, say $100,000, and plan to live a similar lifestyle upon retiring, you will need to halve or double the amounts calculated respectively.

>> What Are The Rules For Roth IRA Withdrawals?

>> View The Best Retirement Plans For Independent Contractors

>> Find Low Fee Funds With Vanguard

The article How Much Should Be In My 401(k)? was originally posted on Investormint

Many people dream of early retirement, but few know how to reach that goal. In fact, a surprising percentage of Americans over 50 don’t have nearly enough money to retire within 15 years.

There is no magic to figuring out how you can retire early but it will require you to commit financially to your vision to more freedom and relaxation.

In fact, the reason most people struggle to retire quickly is that they don’t have a plan or clear steps to retire by a certain date.

By following the early retirement strategies outlined below, you can plan for early retirement and enjoy the flexibility to kick back with your slippers on or explore the world as you wish.

So, what are the best ways to retire early?

Step 1: Define Your
Retirement Vision

The most important step is to define your retirement vision. It’s also the easiest one to gloss over but do so at your peril.

For some, retirement means lazy mornings with a cup of coffee reading the paper. For others, it means whisking off to Nepal to climb Mount Everest.

If you are looking to retire early and travel extensively in your golden years, the cost of retirement will be significantly higher than if you were content to stay close to home.

Once you have a general idea about how you plan to spend your retirements years you can create your retirement vision, such as: I want to retire in 10 years.

Or if you are in your twenties, and purchased cryptocurrencies, like Ethereum or Litecoin, in the early days on and sold them when they spiked higher, your vision might be about how to retire at 35.

No matter what age you are, your retirement vision will influence your next retirement steps, which begin by creating a retirement budget.

Step 2:
Create A Retirement Budget

No matter how much money you have saved up in your nest-egg, retiring early is a pipe dream if you spend too liberally.

Even world famous actors like Nicholas Cage, who amassed a career fortune reputed to be over $100 million, ran into financial difficulties by spending too much.

Athletes like Mike Tyson also earned and lost millions of dollars by not controlling expenses carefully.

So, it doesn’t really matter how much money you have saved if you fritter it away, which is why the next most important step is to create a retirement budget.

Estimate How Much Money You Need

Early retirement requires a lot of financial planning. Before you can start setting your goals, you need to know how much money it takes to retire.

The specific amount of money that you will need depends on several factors, including your lifestyle and health. Most people assume that they need at least $1 million to retire at age 67. Since you plan to retire early, though, you will probably need more than $1 million to pay for basic needs like:

• Housing
• Healthcare
• Food
• Utilities

Plus, you want to enjoy your retirement, so you will need enough cash to take vacations and pursue hobbies.

Calculate How Much You Spend

If you don’t have a good handle on where your money goes, check out the Personal Capital mobile app, which is free and syncs to your bank accounts automatically.

It will show you how much you spend and in what categories, whether food, utilities, insurance, debt, travel, rent, mortgage, gifts, and so on.

Once you have a clearer view of how much you spend now, you will need to estimate whether your expenses will rise or fall during retirement.

When you retire, you will have much more time on your hands, which means much more opportunity to spend money.

If your retirement vision includes travel and adventures, your spending may actually increase.

On the other hand, if you plan to cut back on big purchases during retirement, such as a new car, and expect to have all your debt paid off then you may have find your retirement costs will be significantly lower.

Either way, run the numbers using Personal Capital or Mint, or some other budgeting tool and you’ll have a better idea of whether you can afford to retire early.

Step 3: Calculate Your
Retirement Income

If you have squirreled away a chunk of savings into your retirement accounts over the years, your next step is to calculate your retirement income.

Can You Retire Early With A 401k or IRA Only?

It’s normal to wonder whether your retirement account can cover your costs during your retirement years.

The good news is even if an IRA or 401(k) doesn’t fully get you to where you need to be, social security income may provide the cash flow boost to support a comfortable retirement.

Even in a low interest rate environment it may be possible to earn an annual yield of 4 → 5% on your retirement savings. When interest rates are higher, much higher savings rates are possible.

During the 1980s for example, some savers were able to lock in 30-year government bonds that paid annual yields of over 14% at one time. These days, bond investors can only dream about such returns!

After you have made an estimate of the income you can receive from savings and added it to your expected social security income, see if any other income is on the horizon.

Include Other Income Sources

For example, are you due to receive an inheritance? Do you plan to rent out a room in your home on Airbnb for extra income? Have you plans to do part-time work, which would boost your monthly income?

The bottom line is you may have many income sources to sustain your retirement lifestyle that include:

• 401(k) or IRA
• Social security income
• Inheritance
• Passive income from Airbnb or other assets
• Working part-time

Max Out Your Retirement Contributions

The more you contribute to your retirement vehicles, the more money they can accumulate over the years. For the best results, you should max out your retirement contributions.

In 2019, you can add:

• $19,000 to your 401(k)
• $6,000 to your Roth IRA nor IRA

If you’re 50 or older, you can put even more money into your retirement accounts. For your 401(k), you can contribute an extra $6,000. You can put an additional $1,000 into an IRA.

Remember that the interest compounds on the money that you put into your retirement savings. If possible, start maxing out your contributions while you’re young. It will make a big difference in the amount you have when you retire.

Step 4: Invest To Retire Early

After you run the numbers between what retirement will cost and how much money you need for retirement to cover those costs, you will probably discover a financial gap exists.

In order to close that gap, you will need to save and invest to retire early.

How To Save For Early Retirement

You are not alone when it comes to saving for retirement. Dozens of great budgeting tools, like Tiller Money and Status Money, can help you to budget smarter.

You can set spending limits and receive notifications in many budgeting apps like Mint and YouNeedABudget (YNAB) to alert you when you have spent too much on say entertainment, groceries, or clothing.

The most important step when saving for early retirement is setting a monthly and yearly goal to deposit a fixed amount in order to close the financial gap that will help you reach your financial goals.

If you find it difficult to stay on track, put up a sticky post-it note to remind yourself of the opportunity cost of not saving.

Here’s a statistic that should make you perk up and pay attention to every dollar you spend.

If you saved $10,000 by buying a used car versus a new car and invested those savings over 30 years at an 8% rate, your money could grow by about 10x.

For every $1 you spend, think about the real cost of it being 10 times higher and ask yourself would you still buy it?

Is the $100 pair of shoes today really worth foregoing $1,000 of retirement savings in the future?

If you still find it difficult to save regularly, check out some of the microsavings apps like Acorns or Digit that help you to squirrel away extra savings each year every time you buy something.

How To Invest To Retire Early

Investing for early retirement is simpler than you might think.

What makes investing challenging for most people at the outset is the endless list of possibilities.

But don’t let all the choices flummox you. For example, should you buy stocks or bonds or options or futures? If you buy equities, what are the best stocks to buy now? And should you invest for the long-term or trade short-term in order to keep your portfolio liquid during stock market crashes?

Unless you have the investing skills of Warren Buffett, follow the wise advice from the Oracle of Omaha, which is to invest regularly in a diversified portfolio.

Shark Tank’s Mr. Wonderful aka Kevin O’Leary is also a highly successful businessman and investor, and he recommends a mix of dividend-paying stocks and corporate bonds.

If you are trying to figure out how to retire now then you will probably choose more bonds than stocks. However, if you plan to retire in 30 years, you can probably own a higher percentage of stocks.

The rule of thumb is to subtract your age from 100 to arrive at the percentage of equities you should hold. So, if you are 30 years old then a ratio of 70% equities and 30% bonds would be reasonable but contact your financial advisor who can better understand your entire financial situation.

When it comes time to invest in a diversified stock fund, Vanguard may be your best bet. It is famous for its low cost equity funds like VFIAX and VTSAX that will give you broad exposure to the major market

Or if you prefer a hands-off approach to investing, Betterment and Ellevest are robo-advisors who can automate the investing process.

Step 5: Plan For Hidden Costs

With your budget created, your retirement income calculated and your retirement investing under control, you might think you are done but there is one more thing to consider: hidden costs.

When you retire early, health insurance costs can come as a shock.

The costs are multiplied for adventurous explorers who travel internationally, and may need to buy extra insurance coverage.

Before you hand in your resignation letter and jet off to the Maldives, build in the cost of annual health insurance, which may be as low as a few hundred bucks per month.

If you haven’t purchased life insurance to provide for your family, now might be a good time to do that too, especially as your income from salary is going to disappear.

For health conscious individuals, Health IQ provides lower rates to reward your lifestyle choices. Or simply shop online at Policygenius to find competitive insurance quotes from top-rated providers.

For each person, hidden costs may differ but it is wise to take some to think about what other expenses may crop up when you are planning to retire early.

Not sure whether you can retire early? Check out this piece: Can I Retire Yet?

The Super Simple Math to Retire Early

If retirement still feels like an impossibility, then you need to take a look at the simple math.

Start by thinking about two things:

1. How much money you earn (post-tax) each year
2. How much money you need to live

When you look at these two factors, you realize that you can prepare for retirement by saving more of the money that you make.

More likely than not, your savings rate will change throughout your life. During your 20s and 30s, you will probably spend a lot of money on things like repaying student loans, buying a house, and raising children. Even if you can only set aside 10% of your income, though, you will inch toward your goal.

As you get older, you can save a higher percentage because you own your home, you earn more money, and your children don’t need as much help from you. During this time, save as much as possible. The money will continue to grow even after you retire.

You can retire early as long as you make the right decisions. Set a goal and work toward it. You’ll get there before you know it.

The article How To Retire Early In 5 Simple Steps was originally posted on Investormint

Among retirement accounts, the Roth IRA is considered one of the most attractive for its tax advantages. Roth IRA contributions are made with after-tax dollars so qualified distributions are not taxed but what are the withdrawal rules for Roth IRA accounts?

Roth IRA Withdrawal Rules

Roth IRA account holders over the age of 59.5 are permitted to withdraw earnings as long as the account has been held for at least 5 years. Under that age, withdrawals are permitted upon death, when disabled or when using up to $10,000 to build a first home.

Qualified withdrawals from Roth IRA accounts begin when you are aged 59.5 or older. For Roth IRA account holders under that age, withdrawals are permitted in certain circumstances, such as:

• When the Roth IRA account holder becomes disabled;
• When the Roth IRA account holder dies; and
• When building a first home, the Roth IRA account holder is permitted to withdraw up to $10,000 over a lifetime.

Roth IRA accounts must be held for at least 5 years before earnings withdrawals are permitted. Earnings may otherwise be subjected to a 10% penalty in addition to taxes owed.

Discover >> Best IRA Providers

What Is The Required Minimum Distribution For A Roth IRA?

Roth IRA account holders are not subject to minimum required distributions, unlike 401(k) and traditional IRA account holders, who must begin taking distributions at age 70.5.

Unlike 401(k) and traditional IRA retirement accounts, Roth IRA account holders are not subject to required minimum withdrawals. The reason for this is that you already paid taxes to the IRS when making Roth IRA contributions whereas 401(k) and traditional IRA distributions are tax deferred and so the IRS mandates a withdrawal minimum at age 70.5 in order to ensure they receive tax payments.

The benefit of no required minimum withdrawal is that Roth IRA contributions can grow for as long as you wish. And if you choose to pass on the account to your heirs without ever taking withdrawals that too is permitted.

When Are The Rules When Taking Roth IRA Distributions?

Roth IRAs give you excellent benefits that can help you maintain your lifestyle during retirement. Some times, though, people want to take Roth IRA distributions before they reach 59½. Before that age, you may face a penalty for withdrawals.

Know the rules before you take a Roth IRA distribution. Otherwise, the government may force you to pay a fine that lowers your investment’s opportunity for growth.

Pay Taxes Today to Avoid Taxes in the Future

Unlike some retirement investment vehicles, you have to pay taxes on the money you contribute to your Roth IRA. By paying taxes today, though, you avoid taxes when you make withdrawals from your account.

Tax-free withdrawals mean that you can grow your money without getting penalized by the government. The benefits become obvious when you look at the numbers.

For example, if you start contributing $5,000 per year at age 30 with an expected 7% rate of return, you will pay taxes on the $175,000 that you pay into the account by the time you turn 65. Your Roth IRA, however, will have a value of about $740,000. That means you avoid taxes on $565,000.

Even if tax rates increase over the next few decades, you will not have to pay taxes on the money that you earn from your Roth IRA.

You can use an online Roth IRA calculator to determine how much tax-free money you will get from your contributions.

Withdrawing Money Before Retirement

You can withdraw money from your Roth IRA before you turn 59½, but you will pay a 10% penalty in most cases. The penalty should encourage you to leave your money alone so it can help fund your retirement years when you will have little or no income.

Still, the opportunity to withdraw before 59½ exists. Consider, though, that you end up losing more than the 10% penalty.

If you withdraw $20,000, you will pay a $2,000 fine. You will also lose the compound interest that the $20,000 would have earned.

Depending on the specific investments that you choose for your Roth IRA portfolio, withdrawing $20,000 will likely mean that you lose thousands of dollars in interest.

Unless you have to access your Roth IRA money, let it accumulate interest. Keep in mind that the interest you earn this year will become part of your Roth IRA balance. The interest, in other words, will earn interest, leading to exponential growth.

When You Can Withdraw Money Without Paying a Penalty

The government prefers that you leave your Roth IRA alone, but it recognizes that some situations deserve penalty-free withdrawals. You can avoid the 10% penalty as long as you:

• Become too disabled to work.
• Inherit the Roth IRA from someone else, such as a spouse or parent.
• Need to withdraw up to $10,000 to cover the closing costs or down payment of your first home.
• Have medical expenses that exceed 10% of your adjusted gross income.
• Are an active duty member of the military.
• Need the money to pay for health insurance during unemployment.
• Use the money to pay for qualified education expenses for you, your spouse, or your child.

You can also withdraw penalty-free money from your Roth IRA to pay federal taxes. In this situation, though, you can only avoid the penalty by letting the IRS issues a tax levy and takes the money from your account.

If you withdraw the money independently, then use it to pay the government, you will pay the penalty.

Although you can withdraw money from your Roth IRA without paying a penalty, you should talk to an accountant or tax professional before doing so. Make sure you understand the rules, or you might get hit with an unexpected fine.

The Bottom Line

The rules when taking Roth IRA distributions follow a strict order, beginning with direct contributions, then money converted to the Roth IRA account, and finally earnings on contributions.

The Internal Revenue Service has stipulated rules that follow a certain order when taking Roth IRA distributions. When money is withdrawn, the order begins with contributions made directly.

Any money that has been rolled over from another Roth account, such as a Roth 401(k) or that has been converted from a traditional IRA is next. Earnings on contributions are counted last.

Roth IRA account holders who have built up a large nest-egg can take withdrawals tax-free and without penalties but those who started accounts recently and have not contributed much may be penalized.

How Do I Avoid Roth IRA Penalties?

Exceptions to Roth IRA early distribution penalties include distributions due to disability, death, a first home, qualified education expenses, health insurance premiums when unemployed, unreimbursed medical expenses, and when substantially equal payments are taken.

Although a Roth IRA account holder must generally be held for five years to avoid 10% penalty fees on earnings, the Internal Revenue Service has a list of exceptions which permit withdrawals without incurring the penalty.

Beyond the exceptions listed above (disability, death, and building a first time home), other withdrawals which don’t trigger the 10% penalty include:

• Health insurance premiums when unemployed;
• Qualified education expenses;
• Unreimbursed medical expenses greater than 10% of your adjusted gross income;
• When substantially equal payments are taken that lock you into a minimum of one distribution each year for at least five years or until you are aged 59.5, whichever comes later.

Discover >> Roth IRA Rules And Limits

The article What Are The Rules For Roth IRA Withdrawals? was originally posted on Investormint

The best retirement plan for an independent contractor depends largely on how many, if any, employees work for them. If you work as a solo independent contractor, retirement plans are generally simpler and less costly than if you have employees. Once you hire employees, you may be obliged to contribute to their retirement plans as well as to your own, placing additional burden on your company financials.

It is standard practice at large corporations to provide 401(k) plans to full-time employees, but as a small business owner, the cost of providing retirement plan benefits may be a large portion of revenues or profits. Before selecting one plan over another, think carefully about the ongoing financial commitments to contribute to a retirement plan or plans of many employees and what the financial liability will mean not just for your personal finances, but for your company’s finances too.

Solo 401(k) Retirement Plan

Owning a business or working as a freelancer can make it difficult to find retirement plans that accumulate value.

Many employees can take advantage of an employer-matched 401(k) plan. When the employee makes a contribution, the employer matches a percentage of the contribution.

That option doesn’t exist for self-employed people. Solo 401(k) plans give individuals an opportunity to invest in their retirement funds. While no one matches their contribution funds, they can still benefit by investing in a solo 401(k).

Are You Eligible for a Solo 401(k)?

The IRS only allows business owners without employees to open solo 401(k) plans. Freelance workers without employees also fall into this category.

If you have any employees, then you cannot contribute to a solo 401(k) plan. Business owners with employees should consider retirement investment options such as regular 401(k) plans, SIMPLE IRAs, and SEP IRAs.

Benefits of Contributing to a Solo 401(k)

Although you don’t get matching contributions from a solo 401(k), starting an account does give you several benefits that makes retirement planning easier.

Most people start solo 401(k) plans because they want to take advantage of tax benefits. The government lets you deduct your solo 401(k) contributions from your annual income, which means you don’t pay any taxes on your contributions. Instead, you pay taxes when you remove money from the account.

Alternatively, you can choose to get taxed on your 401(k) contributions and avoid taxes when you withdraw money after retirement.

Regardless of the option you choose, you can give your spouse access to your solo 401(k). Even if your spouse participates in your business, effectively acting as an employee, you can still open and contribute to a solo 401(k).

How can you decide which option works better for you?

If you expect your income to decline after you retire, then you will get more benefits by avoiding taxes on your contributions.

If you think that your income will increase or stay the same after you retire, then paying taxes on your contributions could benefit you because it lets you avoid higher taxes in the future.

Solo 401(k) Contribution Limits

The Treasury Department sets solo 401(k) contribution limits just like it sets limits for regular 401(k) plans. For 2019, you can contribute up to $56,000 to your solo 401(k). The amount that you can contribute, however, depends on how much money you earn in 2019.

No matter how much money you make, you can automatically contribute up to $19,000 to your solo 401(k). People 50 and older can contribute an extra $6,000.

The rest of your contribution cannot exceed $37,000 or 25% of your net self-employment income, whichever is lower. If you earn $280,000 in 2019, then 25% of your income will max out your $37,000 contribution.

Opening a Solo 401(k) Account

Most brokers will let you start a solo 401(k) account with them. Before you can open a plan, though, you will need an Employer Identification Number. You also need an Employer Identification Number to file your taxes.

Your 401(k) account lets you invest in a variety of vehicles, including index funds, mutual funds, stocks, and bonds. For the most part, you’re only limited by what services your broker offers.

Many self-employed people find retirement saving a challenge. With a solo 401(k), you get a straightforward way to accumulate interest and avoid taxes so you can afford to retire.

Pro Tip: Other names for the same plan include solo-k, uni-k, and one-participant k plans.

Solo 401(k) Example

As the business owner, in addition to contributing as much as $19,000 (or $25,000 if over age 50), you are also entitled to choose employer non-elective contributions of up to 25% of your earned income.

To highlight how this works, consider a business owner with $100,000 of earned income. The business owner can defer the first $19,000 (or $25,000 if over the age of 50) directly into the solo 401(k) retirement plan. And the business owner can contribute up to an additional 25% of salary ($25,000) for a total contribution of $44,000.

For a business owner over the age of 50 who is earning $50,000 in W-2 wages, it is possible to defer the first $25,000 and an additional 25% of salary ($12,500) for a total contribution of $37,500.

The maximum contribution permitted annually for a solo 401(k) plan is $56,000 for those under the age of 50 and $59,000 for those over the age of 50. What makes the solo 401(k) so attractive is that you don’t need to earn as much as other plans, such as the SEP IRA, to contribute the same amount to your retirement plan.

While the solo 401(k) is attractive in allowing you to contribute a large amount in a short period to your retirement nest-egg, it is more administratively burdensome than other retirement plans. Once you accumulate $250,000, you will be obligated to file annual report Form 5500-SF with the Internal Revenue Service to declare assets in the plan.

How To Finance Your Business From Your Solo 401(k) Plan

A business owner looking to grow their business can finance expansion by borrowing the lesser of $50,000 or 50% of contributions from their solo 401(k) plan.

An added benefit of the solo 401(k) plan is the opportunity to borrow from plan contributions to finance your business. The most you are permitted to borrow is $50,000 or 50% of your contributions, whichever amount is lower.

For solopreneurs who need money to grow their business, this is an attractive financing choice because interest rates are reasonable. The fly in the ointment is that you must repay borrowed funds within 5 years, so make sure to crunch the numbers for the business before electing this financing option.

SEP-IRA Retirement Plan

A SEP-IRA has a high contribution limit, no requirement to make annual contributions, and all contributions are made with pre-tax dollars. Business owners are required to contribute the same percentage of pay to employee SEP-IRA plans as they contribute to their own SEP-IRA plan.

Similar to a solo 401(k), a SEP-IRA has a high contribution limit. The limit is $54,000 in 2017 ($53,000 for 2016). However, the most that can be contributed annually is the lesser of 25% of annual compensation or $54,000. So if the business owner earns $100,000 annually, then no more than $25,000 may be paid into his or her SEP-IRA retirement plan.

Another attractive feature of the SEP-IRA is that contributions do not have to be made every year, so if your business encounters cash flow issues you are not required to continue making contributions. A further advantage of the SEP-IRA is that all contributions are made with pre-tax dollars, so you benefit from the inherent tax advantages.

Where the SEP IRA has drawbacks for the small business owner without abundant cash flow is employees must receive the same percentage of pay into their SEP-IRA plans as the percentage the business owner contributes to their own plan.

Consider a small business owner earning $100,000 annually who has three employees and wishes to direct 10% of earnings ($10,000) to a SEP-IRA plan. If each of the three employees earns $50,000, the business owner must contribute 10% of $50,000 ($5,000) to each employee SEP-IRA plan, for a total of $15,000.

For a business owner with employees, you can see that choosing a SEP-IRA can quickly becomes costly. If the business is growing and plans are in place to hire more employees, careful evaluation of projected costs should be made before electing the SEP-IRA.

SIMPLE IRA Retirement Plan

A SIMPLE (Savings Incentive Match Plan for Employees) IRA allows independent contractors to contribute more to a retirement plan than is possible through a traditional IRA. For business owners with employees, the SIMPLE IRA gets more complicated: an employer must select the amount of contribution matching, notify employees of periods when contribution levels may be changed and keep election periods open for at least 60 days.

Independent contractors without employees will find the SIMPLE IRA to be an attractive retirement plan option. While contributions to a traditional IRA are restricted to $5,500 annually (or $6,500 over the age of 50), contributions to a SIMPLE IRA of up to $12,500 annually (and $15,500 for those over age 50) are permitted.

For business owners with employees, the IRS mandates that the employer must select one of the contribution methods below and inform employees which one is chosen for the following year.

1. 2% non-elective contribution: contribute 2% of each employee’s compensation to the employee’s plan, irrespective of whether the employee contributes; or
2. 3% matching contribution: match each employee’s contribution on a dollar-for-dollar basis up to 3% of the employee’s total compensation.

It is permitted to reduce the 3% figure to a lower amount provided it is above 1%. Over a 5 year period, a selection amount below 3% is permitted in only two calendar years.

The SIMPLE IRA is more administratively burdensome than some other plans because employees must be notified when they can change their contribution amounts during the plan’s election period, which must be at least 60 days long. The IRS stipulates that at least one election period between November 2 and December 31 is made available to employees, though the employer can open up additional election periods if they wish.

Traditional IRA & Roth IRA Retirement Plans

Traditional and Roth IRA retirement plans have lower annual contribution limits than other retirement plan options but are a good choice for those early in their careers or unable to contribute more than the threshold limits each year. The Roth IRA is generally the better choice if you believe your tax rate will increase over time. Plus, the Roth IRA has greater flexibility because contributions (not earnings) may be withdrawn tax-free and penalty-free.

In a traditional IRA, pre-tax dollars are contributed while in a Roth IRA after-tax dollars are contributed. In both cases, contributions are limited to $5,500 annually ($6,500 over the age of 50). Although the cap is lower compared to other plans, traditional IRA and Roth IRA plans are good starter options for independent contractors who don’t have the means to set aside a larger amount for retirement.

The Roth IRA has the edge over the traditional IRA in two ways:

1. If you expect your tax rate to increase over time, the Roth IRA is the better choice because you pay lower taxes upfront than you would otherwise in retirement years with a traditional IRA.
2. You can withdraw your contributions without paying taxes or penalties at any time – because after-tax contributions were made, the IRS has already received tax payments. However, investment gains are subject to Roth IRA withdrawal rules, including a minimum five year period that the account must be held.

No matter which retirement plan you choose, the power of compounding gains over long time periods can significantly increase the size of your retirement nest-egg, so find the best IRA provider to meet your needs and get started.

Discover >> Find The Best IRA Providers

The article Best Retirement Plans For Independent Contractors was originally posted on Investormint

A power of attorney gives another person wide-ranging powers over your financial and medical affairs, but what is a springing power of attorney?

A springing power of attorney is often called a conditional power of attorney. It “springs” into effect only when certain conditions have been met, such as when a person becomes incapacitated.

Both general powers of attorney and healthcare powers of attorney can be made into springing powers of attorney. For example, if you wanted someone to have control only over your medical decisions in the event you became disabled, you could create a springing healthcare power of attorney.

Springing vs Durable Power Of Attorney?

If you are trying to decide what power of attorney is best for you, a springing vs durable power of attorney may leave you scratching your head. Which should you choose?

The primary difference is that a durable power of attorney takes effect immediately after executing legal documents. A springing power of attorney, on the other hand, takes effect only when conditions are met, such as if you became mentally incompetent.

A durable power of attorney might be a good idea for someone who, for example, has been recently diagnosed with dementia, still has their wits about them but expects to become less cognizant over time. They might decide that an adult child can better manage their finances in the future so, while compos mentis, choose to take legal steps to hand over control.

Power of Attorney Rights And Limitations

A power of attorney is not a legal document to be taken lightly by any means. A healthcare power of attorney hands control over medical decisions to another person while a durable power of attorney empowers someone with control over your finances too.

If you have any concern over the financial responsibility or ethical behavior of the person, be very careful and reticent to transfer power to them because they have broad jurisdiction over your bank accounts, brokerage accounts, real estate assets, and most any other assets you own too.

Springing Durable Power Of Attorney Language

Should you decide to create a springing durable power of attorney, be very specific about the definitions and language used.

A very clear legal distinction should be made so the power of attorney only takes effect when certain triggers are met, for example mental incapacitation.

A power of attorney hands over so much control that you should be fully confident you can trust the person to whom you are handing the authority. If you are having second thoughts about a full power of attorney, you could begin by selecting a springing power of attorney.

However, if those niggling thoughts about signing a power of attorney form are because you don’t fully trust the person who will be entrusted with control over your financial and medical affairs, then you may be wise to not proceed period.

CREATE A POWER OF ATTORNEY

Do you have a better understanding of the different types of powers of attorney and how a springing vs durable power of attorney compare? Share your tips about smart estate planning below, we would love to hear from you.

>> What Is A Living Trust?

>> How To Make A Will

>> How To Retire Early

The article What Is A Springing Power Of Attorney? was originally posted on Investormint

The financial industry is laden with jargon that’s hard to understand for people who work in other areas. Annuities and IRAs fall squarely into that category of being difficult to compare when it comes to fees, expenses, returns, pros and cons.

What’s the difference between a traditional IRA vs Roth IRA vs 401(k)? How do you choose between an annuity vs IRA account?

It’s all quite complicated at first glance, which is why we broke it down and made it easy so you can quickly gauge annuity vs IRA differences in order to give yourself the best chance at a more comfortable retirement.

What Is An Annuity Account
And How Do Annuities Work?

An annuity is a financial product issued by an insurance company that pays a guaranteed fixed income amount on a regular basis, typically each month or quarter.

The way annuities work is:

Step 1: You fork over a lump sum all at once or you make regular contributions over time.

Step 2: The insurance company then invests those premiums and gambles that it can earn more money from its investments than it commits to pay you.

Annuities come in various shapes and sizes. You could choose to be paid a fixed income stream for the rest of your life, a set time period, or a fixed number of years.

Below we’ll compare fixed annuities vs variable annuities vs equity-indexed annuities.

What Is An IRA?

An IRA or Individual Retirement Account is nothing more than a type of account set up at a brokerage firm or some other financial company.

Different types of IRA accounts exist, including traditional IRA, Roth IRA, and SEP IRA accounts.

The main attraction of an IRA is that contributions grow tax-deferred. That means if you invest in stocks, bonds, mutual funds, or other asset classes, your gains are not subject to taxes while the money remains in the accounts.

It is not until you withdraw money from a traditional IRA that you pay taxes however you never have to pay taxes on gains from a Roth IRA.

You might be wondering then why not put all your money into a Roth IRA if gains are never taxed?

The catch is your contributions to a Roth IRA are made with after-tax money while your contributions to a traditional IRA are made with pre-tax money.

>> Learn more about traditional IRA vs Roth IRA accounts

Even if you wanted to put all your money into a particular IRA account, contribution limits are in place so you can’t deposit more than a certain amount.

And the withdrawal rules for IRAs and Roth IRAs may vary too, so it’s worth checking them before picking one retirement account over the other.

>> What Are The Rules For Roth IRA Withdrawals?

IRA Rules: Snapshot View

Keep in mind that any traditional IRA withdrawals you make before the age of 59.5 years old will be penalized and you must take mandatory withdrawals by age 70.5 if you haven’t already done so.

For Roth IRA accounts, you must take minimum withdrawals by the age of 70.5.

Annuity vs IRA: 3 Major Considerations

Depending on three primary factors, you will probably find yourself naturally leaning more towards either an annuity or IRA account.

Control, fees, and certainty are the biggest considerations when choosing between an IRA and an annuity.

Control & Certainty: How Your Funds Are Managed

If you are a self-directed investor who actively manages a portfolio in a brokerage account, an IRA will probably be a better fit for you.

In an IRA, you have control over how to invest your money. Want to bet it all on Amazon, Facebook, Google, or Netflix? You can and nobody will stop you – however, it may not be the wisest way to allocate your retirement money!

For retirement-focused individuals who want to offload the responsibility of managing money, an annuity may be more attractive because the responsibility of the insurance company is to invest your contributions.

What makes fixed annuities attractive is the insurance company guarantees you a fixed payout irrespective of how your investments perform.

So, if the stock market crashes, you still receive your fixed income payment.

Equally, if the stock market soars, you don’t receive more than the specific amount the insurance company agreed to pay you when you selected your annuity.

The bet the insurer makes is that they will earn more on the investments than they commit to paying out to you.

Fees: Annuities vs IRAs

The certainty of a fixed income stream for a defined time period promised by insurance companies when you select an annuity comes at a cost.

Annuities are famous for their lack of fee transparency, so it is always best to ask an insurance company for a full breakdown of all fees associated with the annuity.

If you have a financial advisor, ask them how much they get paid. You might be surprised to discover financial advisors often get paid a hefty fee for referring customers who purchase annuities to insurance companies.

A 5% fee paid to a financial advisor may not seem like a massive amount until you figure that could be $50,000 on a $1,000,000 annuity sale!

>> 17 Questions To Ask Your Financial Advisor

Are Annuities A Good Investment?

Although annuity fees can be hefty, the peace of mind they bring may be worth the upfront cost to many retirees.

Annuity Pros

If you are worried about outliving your nest-egg or running out of money, an annuity can bring certainty that you will always receive a fixed income.

Annuities come in all sorts of shapes and sizes too. You could pick one that pays you until you die or both you and your spouse die.

And you can choose from different types of annuities to ensure that your kids or other beneficiaries receive payments from any unpaid funds via a death benefit.

Annuity Cons

Beyond fees, the biggest reason to think twice about annuities is the hidden factor of inflation.

Today it might seem like a good idea to purchase an annuity that pays $5,000 per month for the rest of your life.

But in 30 years the same $5,000 may not go nearly as far as it does today because inflation erodes the purchasing power of money over time.

Evaluate how much money you will really need to pay your bills not just this year and next year but perhaps in 20 or 30 years time too.

Annuities often include terms and conditions that you should research before signing. For example, surrender charges may apply if you were to close your policy early.

And in many (though not all) annuities you won’t benefit from investments that soar in value.

Types Of Annuity: Payouts & Fees

By now you know an annuity is a type of insurance policy that pays out fixed premiums, but which annuity option is best?

The basic types of annuities include:

Annuities are famously hard to decipher when it comes to total fees charged.

Clients usually receive thick booklets full of financial jargon and it can be challenging to find out precisely what you are paying in annuity fees and expenses.

While your financial advisor should have your best interests at heart, it’s probably wise to compare the best annuity rates in order to create a shortlist of the best annuities for retirement before meeting with your advisor.

>> 7 Financial Goals To Live A Better Retirement

Annuity vs IRA Pros and Cons

When comparing annuities vs IRAs, you have lots of factors to consider but perhaps the most important of all is peace of mind.

For seniors especially, the idea of running out of money later on in life can weigh heavily as a concern.

While an annuity may be costly when it comes to fees and expenses, it can provide a certainty that is virtually unparalleled: a guaranteed payment for life.

For younger individuals or those who can tolerate more risk and want greater control over how their retirement money is invested, IRA accounts offer tremendous flexibility.

You are not restricted to investing in different types of stocks or bonds. Real estate and other asset classes are options too.

Companies like Fundrise, Roofstock, and Rich Uncles all offer ways to gain exposure to real estate without getting your hands muddy with day-to-day management.

>> How To Rollover a 401(k) To An IRA Account

>> The Best Retirement Plans For Independent Contractors

>> Retirement For Dummies

The article Annuity vs IRA Pros and Cons was originally posted on Investormint

“Can I retire yet?” is one of the most popular questions that financial advisors receive from clients. And while the answer isn’t always clear cut, you can make some educated guesses based on the size of your nest-egg, social security income, tax bracket, and living expenses.

One of the most important factors needed to gauge whether you can afford to retire is your cost of living. If you live like a king and have daily expenditures to match, you will need a treasure chest of savings to keep your standard of living similar during retirement years.

On the other hand, if you live comfortably or below your means, it may be possible to hang up the work boots and hit the beach with less savings.

But before you buy the sunscreen and beach umbrella, let’s see what the most important factors are that you need to consider.

Why You Don’t Need A
“Can I Retire Calculator”

You don’t need a retirement calculator to get a ballpark estimate of whether you can afford to retire now. But you will need to be able to closely approximate your daily spending habits to figure out how much money goes out the door each year.

Rather than sitting down on a Sunday afternoon with a pen and pencil, check out Personal Capital, LearnVest or Mint, which have excellent budgeting tools that can quickly, automatically, and freely identify how much you spend and where your money is allocated.

Once you have identified how much you spend each year in total, you will have a better idea of how much income you need to earn to be able to retire.

One factor you should not underestimate is how much extra time you will have on your hands when you decide to close the door behind you on your professional career. With more time on your hands, you may be more likely to spend more and so you should budget accordingly.

When you look over your shoulder at your past career, most of your waking hours were probably spent earning income but, when you retire, most of your time may be allocated to enjoying the fruits of your labors, which cost money.

Can I Retire Early?
Get Paid A Fixed-Income

Once you have a good handle on how much you spend each year, you can make a better estimate of whether you can retire early.

The simple way to answer the question “when can I retire?” is to start by calculating your estimated annual income streams after quitting your job.

Start by jotting down how much you have in savings and investments.

Let’s say your combined nest-egg is $800,000. As a retiree, you won’t be rolling the dice in Vegas or even the stock market.

As much fun as it was to bet the farm on Facebook, Alphabet, or Amazon in your younger years, so too is it generally regarded as irresponsible to be heavily invested in equities during retirement years.

At many brokerage firms like Schwab, you can buy government bonds, municipal bonds, and corporate bonds for income.

Well renowned companies like Apple, Comcast, Disney, and others pay an annual yield when you purchase corporate bonds. It is not uncommon to find annual yields in the 4 → 5% range on good quality A-rated corporate debt.

While interest rates remained low for many years following the 2008-9 stock market crash, Fed rate hikes inevitably occur from one decade to the next, which is a good thing when you are retiring.

You want to earn higher yields from your savings. And if we assume that you could earn about 5% annually on average on your nest-egg of $800,000 that would translate to $40,000 per year in gross income.

If you discover that this $40,000 per year is insufficient to cover your living expenses calculated earlier, fear not because another income stream may be able to help pay the bills.

When Can I Retire? Social Security Can Help

You may be wondering after calculating your costs and income from savings “can I retire now?” and feeling a little a disappointed if your income falls short of covering your costs.

But don’t fret yet because you may have other income streams that you can tap.

The most obvious is social security income. If you are aged 62, you can start drawing on social security.

However, keep in mind that you will not be able to draw the maximum amount of social security at this age, and you will be locked into the lower amount if you choose it.

If you can hang on until age 70 before taking social security, you will receive the maximum benefit.

But the calculation is a little tricky to know whether you should elect to receive social security early.

SOCIAL SECURITY CALCULATION

For example, if you could receive $2,000 per month from age 62 or $2,800 per month by waiting 5 years, which is a better choice?

For five years, you would receive $24,000 per year, which amounts to $120,000.

If you waited 5 years to receive the extra $800 per month, it turns out that to get to breakeven on that $120,000, you will be waiting an extra 12.5 years from the time you start receiving the higher amount (because you would receive an extra $9,600 per year).

You should factor in that if you start drawing the higher amount at age 67, then it won’t be until you are almost age 80 that you will reach breakeven in terms of the total income received from social security.

If you believe that you will live beyond age 80, and you can financially afford to wait in order to receive the higher social security amount, it is generally wise.

However, if you have a family history of ill-health, you may elect to choose the lower amount sooner.

For now, let’s assume you take the $2,000 per month, so you end up with an extra $24,000 per year from social security.

When you combine the $40,000 from your nest-egg earnings with the $24,000 from social security, you end up with $64,000 in annual income.

How Can I Retire? Lower Your Tax Category

If the combined income from social security and earnings on savings and investments doesn’t quite get you over the line in terms of covering your annual costs, an x-factor that may help you retire could stem from an inheritance.

But you don’t want to rely on an inheritance to get you over the hump to retirement. Besides, you should explore other avenues first.

For example, your spouse may be eligible for social security benefits too, provided he or she has reached the eligible age of 62.

If you both receive $24,000 in income per year from social security for a combined total of $48,000 and add that to the $40,000 earned from savings and investments, you would enjoy a gross income of $88,000 per year without eating into your nest-egg.

Another factor that may be in your favor – which often flies under the radar in calculating when you can retire – is that your tax bill may be lower during your retirement years.

It is common for most people during retirement years to earn less income per year than when working full-time and so the amount you pay Uncle Sam will be lower.

What you care about is not so much your gross income as much as it is your net income or how much you take home after paying taxes.

You may even find that taking home less money overall during retirement years compared to when you were working full-time does not not significantly affect how much money you receive each month thanks to a lower tax rate.

What If I Can’t Retire Yet?

If you do the math and discover that you can’t quite get over the hump in annual income from investments, savings, social security, and from a lower tax bill to offset your expenditures, then you have a few options.

The first step may be to lower your cost of living.

If you find yourself visiting the Starbucks each day and add up your total spending on entertainment and fun, you might be surprised at just how much could be squirreled away by eliminating some of those day-to-day costs.

Another possibility is to move from full-time to part-time work, which would allow you to draw less on your savings until you have accumulated enough money in your retirement accounts.

However, if you find that you are still a long way from being able to afford retirement, you may need to simply set a timeline goal to keep your sleeves rolled up and your head down at work for another few years until you can comfortably afford to give up the W-2 income once and for all.

What Are The Next Steps?

Visit Personal Capital or Mint to get started calculating your spending. Once you have a good handle on your cost of living, you can figure out how much income you can earn from your assets.

The Personal Capital mobile app can connect all your bank and investment accounts, so it is easy to get a holistic view of your full financial situation.

With a clear idea of your spending, savings and investments, you can make more accurate income projections based on conservative income estimates.

For a complete financial picture that factors in your revised tax rate, consider speaking with a financial advisor or tax attorney, who can drill down into your budget and gauge precisely how much money you will take home after paying Uncle Sam and how much income you will need to pay for your expenses during your retirement years.

Have you calculated whether you can retire yet? Did you consider other income streams or expenditures? Share your thoughts with us in the comments section below.

>> What Is A Living Trust?

>> Retirement Planning For Dummies

>> How Much Should Be In My 401(k)?

The article Can I Retire Yet? was originally posted on Investormint

If you ever had a niggling thought in the back of your mind that perhaps your financial advisor was charging you too much, or worse, not acting in your best interests, the Fiduciary Rule is designed to better protect you.

The idea behind the Fiduciary Rule is simple: advisors should act in the best interests of clients.

You might naturally assume it is the duty of your financial advisor to act in your best interests already but the reality is financial advisors can, if they wish, conceal commissions and fees from clients, leading to conflicts of interest.

The Suitability Standard
For Financial Advisors

Previously, financial advisors, insurance agents and brokers had to abide by the suitability standard which did not preclude them from pocketing hefty commissions. The Fiduciary Rule requires financial professionals to put clients’ best interests first.

Before the fiduciary rule took effect on June 9, 2017 financial advisors were required to meet the suitability standard, a lower level of accountability.

As long as clients’ needs and objectives were being met, financial planners, insurance agents and brokers could declare that the suitability standard for clients had been met.

With the new ruling, financial professionals serving clients must now abide by a higher standard that legally requires them to put their clients’ best interests first.

As opposed to simply finding “suitable” investments that could still earn advisors, brokers or agents sizeable commissions, financial professionals must now choose the best investments for clients – not simply suitable ones that could secretly line their pockets.

Any financial professional who wishes to still earn a commission will be required to disclose to clients any conflicts of interests via an agreement called the Best Interest Contract Exemption, or BICE.

How Financial Advisors
Could Act In The Past

Financial advisors could previously recommend products that met clients needs while simultaneously pocketing large commissions and still remain compliant to the suitability standard. With the Department of Labor’s fiduciary rule, financial advisors must disclose commissions received on financial products, such as annuities and IRA rollovers.

The suitability standard and the new fiduciary rule seem to be similar at first glance. If an investment is suitable for you, surely your financial advisor is acting in your best interest?

They very well might be. But when they had to comply only with the suitability standard they might also be acting largely in their own best interest.

Take the example of a retiree who seeks predictable income forever more. The retiree’s financial advisor recommends an annuity that pays an ongoing fixed monthly amount to the client.

According to the suitability standard, the financial advisor has met the needs and objectives of the client, so why is the fiduciary rule needed?

What the retiree may not have known is that the financial advisor may be taking a large commission and lining his or her own pockets.

A financial advisor who puts a client in a $1,000,000 annuity may pocket as much as $50,000 in sales commissions without the client knowing it.

According to the fiduciary rule, the financial advisor will need to disclose the $50,000 commission prior to the sale of the annuity product.

The financial advisor will be forced to think twice about commission-based products because acting in the best interest of clients is a matter of law.

>> Related: Retirement Planning For Dummies

Which Accounts Does
The Fiduciary Rule Cover?

Retirement accounts are subject to the fiduciary rule but brokerage accounts, even those intended for retirement, are not.

If you have a brokerage and a retirement account managed by a financial advisor, only the retirement account is subject to the fiduciary rule.

The accounts covered by the fiduciary rule, include:

• Individual Retirement Accounts (IRA)
• 401(k) Retirement Plans
• Simplified Employee Pension Plans
• 403(b) Plans
• Simple IRA Plans
• Employee Stock Ownership Plans
• Defined Benefit Pension Plans

If you request that your financial advisor invests in a specific product on your behalf, the investment selection is not covered by the fiduciary rule.

Any brokerage accounts that you plan to dip into for your retirement are not covered by the fiduciary rule; savings for retirement must be in an actual retirement account to be eligible for fiduciary rule coverage.

Plus, if you happen to call your financial advisor to request information or the advisor educates you on different investments, securities or products, such general advice is not categorized as financial advice subject to the fiduciary rule.

>> More: What Are The Best Brokers For Beginners?

Why The Fiduciary Rule
Is So Important

The fiduciary rule is important in spotlighting obscure fees in addition to transparent fees, such as management fees.

The fiduciary rule shines a light on fees and commissions that may otherwise be concealed from clients.

Most clients pay attention to management fees paid to financial advisors. These fees are generally well disclosed and easy to spot on monthly or quarterly financial reports.

Less apparent to clients are the hidden fees they incur on an ongoing basis. Mutual funds charge fees to fund investors but these fees are taken out at the fund level.

Because the fees are not visible on regular financial statements, it’s easy to miss them. Yet over time, they do stack up.

For example, a client starting with a $100,000 paying total fees of 0.5% on a portfolio earning on average 8% annually will amass over $300,000 more than if they were paying 2% fees annually.

So, what seems like a small hike in annual fees can amount to a substantial loss in portfolio wealth over time due to the power of compounding.

Indeed, the Economic Policy Institute claimed that a 60 day delay in enacting the fiduciary rule would cost retirement savers $3,700,000,000 over a thirty year period.

What The Fiduciary Rule Means
For Financial Advisors

Financial advisors must make appropriate disclosures and be especially vigilant to avoid misleading statements.

A temptation for financial advisors is to nudge fees charged to clients a little higher. The magic of compounding means every extra 0.1% charged to clients annually adds up to a large amount over a long time time period. However, such fee hikes directly hurt clients’ investment returns (and have spawned a robo advisor industry intended on disrupting them).

Financial advisors who charge higher fee schedules and deliver low investment returns to clients are at risk of losing retirement accounts and being confined to managing only brokerage accounts.

Financial advisors who have historically enjoyed hefty commissions from rolling over IRAs, selecting high fee mutual funds or selling annuities are especially at risk.

Financial advisors must be especially careful going forward to make appropriate disclosures, such as the Best Interest Contract Exemption, and avoid making misleading statements.

The fiduciary rule is still under scrutiny but since its enactment, financial advisors must comply with the “reasonable compensation” conduct standard.

What The Fiduciary Rule
Means For Clients

The fiduciary rule holds financial advisors, brokers and insurance agents to a higher legal standard, but is no substitute for your own due diligence.

By January 1, 2018, any fiduciary rule exemptions are expected to end. When they do, clients should still be careful when evaluating financial advisors.

Financial advisors generally have different specialties and preferences in how they serve clients.

Some will invest your money in a limited number of model portfolios while others will customize investment portfolios to your needs. Others, such as Betterment, offer you an automated, hands-off approach.

Certified insurance agents may invest client funds in insurance products, while others will lean towards options hedging on stock portfolios.

As a client, you can take comfort in the extra layer of consumer protection afforded by the fiduciary rule but should still be diligent when evaluating financial advisors to ensure their services and specialties match your own financial needs and goals.

Just because the fiduciary rule holds financial professionals to a higher standard does not mean opportunities to earn sales commissions have disappeared. Unscrupulous financial advisors will always be around to capitalize on the naivete of unsuspecting clients, so while the legal provision raises the standard for advisors, it is no substitute for your own due diligence.

If you are not sure where to begin, check out the best robo advisors, who generally have low management fees and choose low-fee index funds.

Have you experienced any fee or commissions conflicts with a financial advisor? How did they resolve themselves? We would love to hear from you in the comments below.

>> Find Out How Much Should Be In Your 401(k)

>> Discover How To Diversify Your Portfolio Investing In Bonds

>> What Are The Rules For Roth IRA Withdrawals?

The article What Is The Fiduciary Rule? was originally posted on Investormint

A living trust, also known as a revocable trust, is a legal document that facilitates the smooth transition of your assets to your beneficiaries upon death or mental incapacitation.

Along with a will, a living trust forms part of a smart estate planning strategy to sidestep the legal hassles and costs that could otherwise be suffered.

When you care about your privacy, incapacitation, or want to avoid probate, a living trust can help you to achieve your estate planning goals but it does not allow you to reduce your estate taxes and is not a substitute for a will.

Do I Need A Living Trust?

A living trust is valuable when you want to avoid probate, maintain privacy, or are likely to be incapacitated. It is not a useful tool to lower estate taxes.

Whether you need a living trust depends on your financial situation and estate planning goals. In certain circumstances, a living trust can save you time and avoid legal hassles that would otherwise crop up.

AVOID PROBATE WITH A LIVING TRUST

If you own property, a living trust can be especially valuable to avoid probate court hassles.

You can deed your property into your living trust. And because the living trust is revocable, you still have full control over the property assets.

Without a living trust, property that you own is generally subject to a legal process called probate upon your death.

During probate, the executor of your will is instructed by a court to divide your estate among your beneficiaries per your wishes after you will has been authenticated.

Without a will, the probate court divides your property among your beneficiaries as the court sees fit.

If you are in the fortunate position of owning property in more than one state, a living trust is even more valuable. Without the living trust, property held in your personal estate is subject to probate in multiple states.

The legal costs, time and hassle of probate can be avoided by setting up a living trust and deeding your property into it.

CREATE A LIVING TRUST TO MAINTAIN PRIVACY

To avoid snooping neighbors or relatives from seeing what personal assets you are transferring to your beneficiaries, consider setting up a living trust.

Because a living trust makes it possible to sidestep the probate process, your assets can transfer to your beneficiaries privately; the probate process is public so, without a living trust, asset transfers are open to public scrutiny.

Keep in mind, however, that a will is part of the public record. A living trust is not a substitute for a will, but rather the two legal documents are complementary.

SET UP A LIVING TRUST WHEN INCAPACITY IS EXPECTED

Some health conditions lead to a slow deterioration of mental capacity that can be anticipated over time.

If a parent is suffering from the onset of dementia for example, a living trust can form part of an estate planning process that allows for a smoother transition of assets upon death or when legally incapacitated.

The living trust cannot be set up when a person is already mentally incapacitated, so the person must be in compis mentis (in full control of their mind) at the time of signing.

The way it works is that you retitle assets you own into the name of the trust. While you are alive, you act as the (co-)trustee and a successor trustee becomes responsible upon death or when deemed legally incapacitated.

CREATE A LIVING TRUST IF YOU EXPECT YOUR ASSETS TO BE CONTESTED

When you expect someone might contest your assets, you should strongly consider setting up a living trust.

A living trust holds up better than a will when the distribution of assets to beneficiaries is contested.

How To Set Up A Living Trust

A living trust must not only be written but funded. Your living trust is not established by simply creating a legal document. You must also fund the trust by transferring assets to the trust.

A living trust is a more complex legal document than a will. It is not sufficient to simply draft a living trust. You must “fund” the trust by transferring assets, including:

• Bank accounts
• Brokerage accounts
• Any stocks, bonds, mutual funds, index funds, and certificates of deposit
• Personal property
• Retirement accounts, such as 401(k), IRA and Roth IRA accounts

You may also need to transfer the beneficiary name to the trust on any life insurance policies.

If you acquire any assets after setting up your living trust, and want to ensure they are automatically transferred to the trust also, you can set up a “pour-over will” that covers any assets which might otherwise have been inadvertently excluded.

Is A Living Trust Right For You?

Younger individuals and couples with no children and few assets may not necessarily benefit from a living trust.

As a general rule of thumb, if you fall into any of the following categories, you probably do not need a living trust:

• Young married couples with no children
• Young married couples or individuals with few assets

Living trusts are somewhat costly to set up and it takes a considerable amount of time to establish, maintain and modify them.

If you are young and have acquired a high net worth, or you own a successful business, you may want to set up a living trust earlier than most in order to provide for the smooth transfer of your assets, even if the chances of dying anytime soon are slim.

Does A Living Trust Lower Taxes?

If your estate value is greater than the Federal threshold, you will be obligated to pay estate taxes to Uncle Sam. You should look at your state estate tax threshold to see whether state taxes need to be paid also.

Tax savings are generally possible when you set up an irrevocable trust or bypass trust (though you should consult a tax attorney to explore your individual financial situation).

Because a living trust is a revocable trust, the assets of the trust remain in your estate and so it is not an efficient legal means of reducing your estate’s tax burden.

Federal taxes of 40% are applied to estates worth over $5,490,000 in 2017, otherwise a tax exemption applies. When you examine how much the top 1% make, you can see that few Americans fall into this category of wealth so most people enjoy a tax exemption.

Estate and inheritance taxes in certain states often have lower thresholds, so if reducing estate taxes is your top priority then it is best to consult with a tax attorney in your state.

Do I Need A Will
If I Have A Living Trust?

A living trust is complementary to a will not a substitute for it. To ensure none of your assets are inadvertently excluded, a will or a pour-over will is an important part of estate planning.

A living trust is no substitute for a will. Instead, the two are complementary and serve different purposes.

Think of a will as an all-encompassing expression of your wishes and a living trust as a more specific legal document that covers certain assets.

If you happen to inadvertently exclude a specific asset from your living trust, your will can act as a catch-all to ensure your wishes are fulfilled.

What retirement planning tips do you have that you can share? We would love to hear your retirement plans in the comments below.

>> How To Make A Will?

>> Your Retirement Planning For Dummies Guide

>> How Much Does The Top 1% Make?

The article What Is A Living Trust? was originally posted on Investormint

If you are like most people, the size of your retirement nest-egg is probably some hazy number that you don’t have a precise handle on.

Looking far out to the future it can be hard to picture what amount you need to retire comfortably. After all, how do you build up a retirement account large enough to support your golden years when it feels like a struggle day-to-day to squirrel away a few nuts for a rainy day?

It turns out you can take some simple steps to automatically build up your retirement accounts so that you can be confident you will have enough and still not have to give up your daily coffee.

Save Today, Spend Tomorrow

The good news about retirement planning is that you might not need quite as much as you think you do.

One reason for this is that when you earn an income, you pay taxes that will generally be lower in retirement years.

You probably also allocate money to savings for retirement, which you no longer need to put aside for the future.

Plus, many costly expenses, such as paying for kids or education, tend to be in the past.

So, when you think about how much you need to live on in retirement to enjoy a similar lifestyle, it’s probably not the same amount you earn annually today.

A good rule of thumb is that you will need 75-85% of your annual salary to keep your quality of life similar.

SAVINGS GOAL

Just because you might not need the same amount in your retirement years to live a similar lifestyle as you do today doesn’t mean you should rest on your laurels when it comes to savings.

The most important step is to create a retirement savings goal. You want a number to aim at which you can target as part of your smart retirement planning strategy.

If you are not sure how to do that, this article on how much you should have in your 401(k) is a good primer.

When you arrive at a savings goal number, you might have the sinking feeling that it seems out of reach because it is so large, but hang tight!

This retirement planning for dummies guide is designed to find easy ways to build up a nest egg, so you don’t have to fret (at least not yet!).

When you break down the savings goal into monthly savings targets, retirement planning becomes a whole lot easier.

Pay Yourself First

An unavoidable fact of life as a hardworking employee is the government pays itself first. Perhaps the largest “expense” you pay out of pocket each year is payroll taxes.

But after the government has taken its “pound of flesh”, you control how you allocate the remainder of your money.

The simpler way to allocate money is to first start with your bills: rent or mortgage, food, phone bills, utilities and so on.

At the bottom of most people’s lists is: save for retirement. But what if you reversed the order?

What if saving for retirement became the first thing you allocated money to each month, and everything else came afterwards?

A common objection from most people is that there is not enough money to pay for bills and fund retirement.

But what if you had no choice? By forcing yourself to commit to saving for retirement first, your mind is obligated to think of creative ways to pay the other bills if your current salary is not sufficient.

To make sure you are growing your retirement nest egg monthly, you have two choices:

1. Grow your income
2. Cut your costs

GROW YOUR INCOME

Some ways to make money over and above your salary include:

• Take a job in the sharing economy – think Uber, Lyft, Fiverr
• Grab a weekend or part-time job to save an extra few bucks for retirement
• Start a part-time business selling goods on Amazon or Ebay, or any other home business that you can do after work
• Rent out the spare bedroom on AirBnb to make a little extra income
• Sell unused goods around the home on Craigslist or LetGo

CUT YOUR COSTS

Increasing your income takes some ongoing effort usually but cutting costs can be done quickly and easily. Here are some ways to save money right away.

• Negotiate lower bills with cable, phone, insurance and utility companies
• Make smart rather than dumb purchases – get the new phone when you need one, not when the latest version is released
• Use Google Maps to scan your local area for the cheapest gas prices when needing to refill
• Lower your credit card costs by transferring balances
• Unplug unused electrical devices
• Get rid of the club memberships you don’t use actively
• Eat at home more often and indulge less in eating out

Growing your income and cutting your costs may not make a big difference in any single month but over time the small changes compound into a large amount.

If increasing your income and cutting costs seems like uphill sledding, you should seriously consider companies that make automatic savings and investing easy.

Save And Invest Automatically

One of the easiest ways to pocket a little extra money each month is to save on every purchase you make.

How do you do that?

Simple. Link your credit cards to companies that specialize in automatically rounding-up purchases you make to the next dollar and then auto-deposit the loose change in an investing account.

SAVE AUTOMATICALLY

Among the most successful companies who allow you to squirrel away money without having to hardly lift a finger after setup is Acorns.

ACORNS SPOTLIGHT
InvestorMint Rating 1 2 3 4 5 4.5 out of 5 stars	Management Fee (up to first $5,000): $1 monthly Management Fee (above $5,000): 0.25% Acorns Deal: Free to college students for up to 4 years Get Started via Acorns secure site

Acorns is free for college students, no deposit is required to set up an account, savings are made automatically and if you want to add to your nest-egg through lump sum deposits you can. Plus, fees are generally low and in line with what many robo advisors charge.

INVEST AUTOMATICALLY

Squirreling away loose change will add money to your retirement nest egg that may otherwise have been spent elsewhere on goods and services without you even noticing. But you will probably need to invest more each month to have enough for retirement.

In this retirement planning for dummies guide, easy wins are our goal and one that makes a lot of sense is called Smart Deposit from one of the leading robo advisors, Betterment.

BETTERMENT SPOTLIGHT
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The Smart Deposit feature allows you to sweep unused cash from your bank account into an investing account that targets a financial goal.

The way it works is that you specify how much you need to pay for monthly expenses and unused cash above that threshold is automatically invested on your behalf.

Betterment has accumulated billions of dollars in assets as a leading robo advisor, and offers customers lots of benefits designed to pay off over the long term too, such as:

• Tax loss harvesting to help lower your tax bill
• Tax coordinated portfolios to view your portfolio holistically
• Human advice available to clients of higher tier services
• Low deposit and account minimums to get started

Max Out Your 401(k) And IRA

If you are not putting money into a 401(k) or IRA, the best advice for the long term is to start right away!

The reasons are simple. You get to lower your tax bill and you get to build your nest egg right away.

For example, if you put $10,000 into an IRA or 401(k) account, you get to lower your adjusted gross income by that same amount.

If you were taxed on $100,000 in earnings beforehand, now you will be taxed on $90,000.

ANALYZE YOUR 401(k) PLAN FREE

401(k) plans are often restrictive in limiting your investment options. Sometimes you can only invest your money in a select range of mutual funds or index funds as opposed to a broader range of securities.

IRA plans generally allow you more flexibility to invest your money as you might wish. A universe of lower fee index funds and stocks can be chosen to avoid the high expense ratios that often come along with mutual funds.

To figure out what fees you are paying in your 401(k) plan, Blooom can help you.

Blooom automates investment management for employer sponsored retirement plans. For a low monthly fee, Blooom assesses your 401(k), rebalances it automatically, and manages your nest egg on your behalf.

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If you have the flexibility to rollover your 401(k) to an IRA, it’s well worth your time to explore that option.

But even if you cannot rollover your 401(k), ask your employer’s HR department whether you can split up your direct deposit so that some portion goes to your IRA and some goes to your bank account – the net result is to mirror your 401(k) contribution.

What savings tips do you have to prepare for retirement better? Share your tips below, we would love to hear from you.

>> Find Out How To Rollover A 401(k) To An IRA

>> How Much Should Be In Your 401(k)?

>> What Are The Best Retirement Plan For Independent Contractors?

The article Retirement Planning For Dummies 2020 was originally posted on Investormint

The Illinois pension crisis is among the worst in the nation. Rating agencies, such as Moody’s and Fitch, have rated Illinois credit the lowest nationally.

So what has caused the Illinois pension crisis and what does it mean for you and your money?

Illinois Pension Funds 101

Over 1 million government workers and retirees rely on over 660 government pension funds in the City of Chicago and municipalities. These include police pensions, state university employee pensions, firefighter pensions, and pensions for other state employees.

Government-worker pension funds are defined-benefit retirement plans set up to pay government employees annual benefits during retirement. Workers contribute to these funds during their careers in exchange for promises to receive a certain annual payout upon retiring.

The pension funds invest the collective contributions of workers in the stock and bond markets; workers don’t have individual retirement accounts the way private sector workers who contribute to 401(k) plans do.

As a result, politicians can dip into the funds for political purposes, leading to budget shortfalls. Plus, liabilities are increasing because cost-of-living-adjustments automatically increase a retiree’s yearly benefit by 3%.

The problem in a nutshell is that the pension funds don’t have enough money to meet future payment obligations.

>> Related: How To Invest Money Wisely

7 Deadly Causes Of
The Illinois Pension Crisis

The reasons the Illinois pension crisis have spiralled to unsustainable levels stem from fundamental flaws in their design, including:

1. Defined Benefit Plan Flaws

Defined benefit plans are promises that government makes to retirees based on various assumptions, including mortality rates, cost of living increases, and investment returns.

If mortality rates increase or investment returns are lower than projected, shortfalls occur. And that’s exactly what has happened in the largest Illinois pension fund, the Teachers’ Retirement System, which is underfunded by about 60%.

The City of Chicago’s firefighters and police are also heavily underfunded. For each $1 they owe in future obligations, they have approximately $0.25 in assets.

2. Cost-Of-Living-Adjustments

Unlike private sector employees who contribute to IRA, Roth IRA or 401(k) retirement plans, many government employees who contribute to defined benefit plans in the State of Illinois receive guaranteed cost of living adjustments.

The automatic adjustments increase the annual payout to retirees by 3% annually. In some rare cases, the annual increases to retirees are so large that they rival the average annual social security payments received by private sector retirees.

3. Early Retirement Age

Unlike private sector employees, who are restricted from withdrawing contributions to retirement accounts until they reach their 60s, government worker retirees can fully draw from their defined benefit plans in their 50s.

The data shows that over 63% of retirees withdraw funds before the age of 60.

4. Higher Payouts Compared To Private Sector

Private sector retirees who rely on social security income during their retirement years receive approximately $400,000 in lifetime benefits.

The average teacher retiring in Illinois who has worked for 30 years will receive 5x more than the average private sector retiree during their retirement years.

5. Political Slush Funds

To increase their likelihood of getting elected, politicians often make promises that result in short-term voter satisfaction at the expense of long-term discontent. For example, politicians in Chicago created a virtuous cycle that has amplified the capital shortfall in the Teachers’ Retirement System fund by redirected billions of dollars of contributions from the pension fund to teachers’ salaries.

Higher salaries now result in even greater obligations later, thereby increasing the shortfalls down the road.

6. Skewed Benefit To Contribution Ratio

Some Illinois retirees earned over $500,000 in pension payments annually. You might think that retirees have contributed large amounts during their careers to justify these high payouts but as it turns out most retirees contribute between 4% and 8% of their retirement benefits.

This means for every $1 contributed, government worker retirees receive between $12 to $25 in retirement benefits.

7. Pension Costs Weigh Down Budget

On average, pension costs amount to 4% of state budgets. In the state of Illinois, 25% of the budget is attributable to pension costs.

As time goes by, increases in pension obligations will hurt districts relying on state funding, causing state lawmakers to consider tax hikes to finance ongoing expenses.

Related: How Much Should Be In My 401(k)?

The Fallout From Illinois Pension Reform

With payment obligations unsustainable, pension reform will be needed in Illinois.

State politicians may choose pension reform that segregates retirement accounts – similar to 401(k)s – as opposed to pooling them as happens now. Retirement age may increase and cost of living adjustments may be reduced.

Increasing taxes is an easy and obvious choice politicians may elect too. However, doing so will likely cause a migration exodus out of the state, thereby reducing tax revenues further, and exacerbating the Illinois pension crisis.

Investing in state and municipal debt is increasingly risky when budget shortfalls are so severe as they are in Illinois.

Although a worst case outcome, bankruptcy and some level of default on pension promises is a foreseeable scenario.

If you have invested in municipal or state debt, examine carefully your exposure with a financial advisor or connect with a company like Blooom, which specializes in retirement plans.

BLOOOM SPOTLIGHT
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>> Find Out How To Rollover A 401(k) To An IRA

>> What Are The Rules For IRA Withdrawals?

>> Find Out The Best Retirement Plans For Independent Contractors

The article The 7 Deadly Causes Of The Illinois Pension Crisis was originally posted on Investormint

You probably know you need a will – a document that states your final wishes – but you may not realize quite how important and necessary it is or how to make a will to ensure your assets are passed on as you intend.

It is important to write a will to ensure your assets are divided up and allocated to your beneficiaries as you wish. Whether you are young or old, rich or poor, a will ensures your assets are not held up in legal limbo after you die.

If you don’t make a will, your assets could quite easily end up in the hands of family members or beneficiaries you don’t care for much. Without a will, your assets will be divided according to state laws, called intestacy laws. These laws spell out who gets what if no will has been created. To protect your intended beneficiaries from such hassles, the following steps will show you how to make a will.

Creating A Will:
List Of Personal Assets

The first step in creating a will is to create a personal balance sheet with a list of your personal assets, both tangible assets and intangible assets.

When you are creating a will, the first step is to gather a list of personal assets. This asset list includes everything from the home you may own to the pocket watch you might have inherited from your great-grandfather, and everything in between. Generally, your assets will fall into two categories: tangible assets and intangible assets. To make sure you don’t miss anything as you build your list of personal assets, create a checklist to account for everything you own, including:

After you have taken stock of what you own, the next step is to assign a value to each of the items. Calculating how much your intangibles are worth is easy – simply look at your account balance statements. For your tangible assets, such as your home, an outside appraisal may be needed.

Who Gets What

A will allows you bequeath assets to your loved ones as you intend. Pay heed if you have joint bank accounts, or family members listed on life insurance policies or retirement plan accounts because these take priority over the wishes expressed in your will.

After you have accounted for your assets, the next step is to figure out who gets what. It is not quite as simple as assigning certain assets to certain people in your will. If you have a joint bank account with a spouse or a child, for example, those beneficiary designations take priority over how you allocated who gets what in your will. So, if your children are fully grown yet still listed on bank accounts that you intend your spouse to receive in full, consider removing their names on the accounts so your assets are divided up as you wish.

When you are deciding who gets what, you may wish to include your family members in the process. Some family members may have a special attachment to say an heirloom you plan to pass on while another may have no interest in it. By inviting your family members to share their preferences, you can better assign your assets to the beneficiaries who value them most.

How To Write A Will

If you are unsure how to write a will, it is best to hire an attorney, especially if you foresee any unusual circumstances after death, such as a family member challenging your will. However, you are not legally required to hire a legal professional – you can write a will yourself without legal consultation.

A will is a legal document but you don’t necessarily have to hire a lawyer to write your will. You should write the will in clear, unambiguous language. It is generally best to steer clear of emotions or reasoning in your will. For example, you don’t have to explain why one person is being willed an asset over another person.

Some things you may wish to include in your will are:

• The names of executors
• The names of guardians for children and property
• A new trust for children under the age of 18

Although it is not necessary to hire an attorney, it is good practice to ensure your will is in good order, especially if you anticipate any unusual circumstances, such as:

• Family members who may challenge the will
• Controlling tangible assets, such as real estate, after death
• The cost to beneficiaries of estate taxes
• Disinheriting a spouse or child

Who Is The Executor Of A Will?

The executor of a will has responsibilities to pay expenses and debts, as well as to distribute property and assets. The will executor has a big responsibility so make sure a family member selected has the time to carry out the duties of an executor or consider hiring a neutral third-party, such as an attorney or financial institution.

The person(s) you choose as executor of your will can be a family member, a beneficiary or someone unrelated who acts as a neutral third-party, such as an attorney. An executor is granted the power to distribute the deceased person’s property and arrange for the payment of debts and expenses. It is both a powerful role and a time-consuming one, so you should select your executor carefully. It can be a heavy burden on a family member at a difficult time so it is important the executor has the time and capability to carry out their duties.

The benefit of choosing a family member is that they are more likely to carry out their duties pro bono whereas a third-party will charge fees for performing their duties. However, if you suspect that a family member won’t be efficient or responsible in carrying out the duties of an executor then a professional may be the better choice.

How To Pick An Estate Attorney To Make A Will

To make sure your will in good order, hire an estate attorney from a reputable firm, such as LegalZoom, who can walk you through the steps of making a will official. High net worth individuals should also consider hiring an estate attorney, especially if the estate value exceeds thresholds that result in federal estate tax liabilities.

The type of attorney you should select to make a will or act as an estate executor is an estate attorney. To save on costs, it is a good idea to get started writing a will yourself. List your assets and how much they are worth, and put pen to paper to figure out who you want to get what. If you want to make sure everything is in order, you can then consult an estate attorney.

Online legal companies, such as LegalZoom, have estate attorneys who are very familiar with writing wills for clients and charge affordable rates. You can schedule a consultation to discuss your unique financial situation and ensure your assets are divided as you wish among your intended beneficiaries.

High net worth individuals would be especially well advised to consult with an estate attorney. In 2017, the threshold estate value which results in federal estate tax liability is $5.49 million. If your estate value lies above this level, an estate attorney will be especially valuable to help ensure a tax-efficient transfer of assets.

Verify Your Will With A Notary

Verify your will with a notary and make sure at least two witnesses are present when signing your will.

After making a will, it is important to verify it is in good legal standing by signing it in the presence of at least two witnesses. A notary can verify your will also.

Be sure then to let either your beneficiaries or the executor of your will know where you plan to store your will. It is generally advisable to store it somewhere safe, such as a safe deposit box to ensure it is not damaged by say a water leak or some other natural disaster.

After going to the trouble of creating a will, the last thing you want is for the will to be lost or destroyed needlessly due to inclement weather or because it was stored haphazardly.

How To Change Your Will

To change your will, simply update your current will to reflect your new financial changes and make sure at least two witnesses are present when signing.

If a first spouse passed away, and you have re-married or perhaps you have sold a home and bought a new one or acquired more assets or simply opened new bank accounts, it is best to change your will to reflect your financial changes. Changing your will is as simple as updating the original document and having at least two witnesses present when signing the revised will.

By updating your will, your beneficiaries get to avoid any ambiguity during the probate process which might otherwise tie up assets for an extended time period in legal wranglings.

>> Find Out Which Is Better: A 401(k) or an IRA?

>> Discover How To Rollover A 401(k) Into A Roth IRA

>> Who Are The Best IRA Providers?

The article How To Make A Will was originally posted on Investormint

A 401(k) is an employer sponsored retirement plan that gives employees tax breaks on invested savings. Automatic deductions are taken from your paycheck and contributed to your 401(k) retirement account where they can grow tax-deferred until distributions are taken in retirement years. You are eligible to withdraw funds above age 59.5 and are required by the IRS to take distributions above age 70.5 if you haven’t already taken any before then.

The best part of a 401(k) plan is that the amount you contribute to your individual retirement account is often matched by your employer in part or in full; yes, it’s free money so take advantage! Some employers will match each dollar you invest while others will match some fraction of each dollar.

The types of 401(k) plans available include traditional 401(k) retirement plans and Roth 401(k) retirement plans. The difference between them is a traditional 401(k) plan offers tax breaks when money is contributed while a Roth 401(k) plan offers tax breaks when money is withdrawn in retirement years.

How Does A Traditional 401(k) Work?

Contributions to a 401(k) retirement plan are made with pre-tax dollars, which boosts the amount of savings you begin with compared to an after-tax investment or savings account and compounds earnings over time to amplify the size of your nest-egg upon retirement.

In a traditional 401(k), contributions are made before taxes are applied, which allows you to save more money than would otherwise be possible. The catch is that while pre-tax contributions can grow tax-free up until your retirement years, taxes must be paid when distributions are then made.

By choosing a traditional 401(k), you don’t need to earn as much to invest an equivalent amount as you would if you were investing after-tax dollars. For example, if you were looking to save $500 per month you might ordinarily have to earn say $750 per month because Uncle Sam takes $250. But with a 401(k) plan you get to save the full $750 and invest that higher amount for years or even decades until withdrawals are mandated at age 70.5.

How A 401(k) Lowers Your Tax Bill

Contributions to a traditional 401(k) retirement plan reduce your taxable income because they are shielded from tax until distributions are made.

When you contribute to a traditional 401(k) retirement plan, you lower your taxable income for the year. The amount you contribute to your 401(k) is shielded from tax, at least until retirement.

Take for example an employee earning an annual salary of $100,000. Ordinarily, the employee would be taxed on the full $100,000. But if the employee contributes $10,000 to a traditional 401(k) plan, then that $10,000 is shielded from tax, and so the employee’s taxable income is just $90,000.

A maximum annual contribution of $18,000 is permitted for individuals unless over the age of 50 in which case the threshold increases to $23,000.

401(k) Earnings Grow Tax-Free

When your 401(k) nest-egg grows, you do not pay taxes each year on earnings. Instead, your earnings, dividends and interest on savings grow tax-free until you begin withdrawing funds.

For traditional 401(k) and Roth 401(k) accounts, the tax shield surrounding contributions remains in effect until withdrawals are taken. For example, if you contribute $10,000 into your 401(k) account in the first year, and it grows each year by $1,000, you do not pay taxes on the $1,000 earnings each year; in fact, you don’t pay taxes on the sum of all your earnings until you start taking withdrawals.

The downside of investing in a 401(k) is that most plans have limited investment options. You cannot simply pick a favorite stock, mutual fund or exchange-traded fund and allocate your savings to it; you are restricted to investing only in the investment options offered by your plan.

Fees can also be hefty in 401(k) retirement plans. Each fund in in which you invest has an expense ratio, a charge levied to manage and operate the fund. These expenses are taken at the fund level so it is not initially evident that they detract from your returns, but they do lower your long term returns.

When Does Uncle Sam Get Paid?

Contributions grow tax-deferred up until age 59.5, when penalty-free distributions can be made; distributions made before then are subject to a 10% penalty. If no withdrawals have been made by age 70.5, the IRS mandates that you take a minimum withdrawal amount, which ensures they get paid.

A 401(k) plan allows you defer taxes to some point in the future. You are eligible to withdraw funds starting at age 59.5; withdrawing funds before then results in a penalty of 10% on funds withdrawn.

If you have not taken any distributions by the calendar year you turn 70.5, the IRS mandates that you begin taking distributions, and charges income taxes on contributions and investment growth that hitherto had accumulated tax deferred.

Roth 401(k): How To Avoid Mandatory IRS Withdrawals?

A Roth 401(k) enjoys the same tax shield on investments as a traditional 401(k) while the investments are in your account. The difference is that you contribute pre-tax dollars to a traditional 401(k), which upon retirement has a minimum mandatory withdrawal requirement, and after-tax dollars to a Roth 401(k), which has no such requirement.

A Roth 401(k) allows you to withdraw funds without paying any taxes, and still you get to enjoy tax-deferred growth of your contributions up until the time distributions are taken. So what’s the catch?

The IRS gets paid one way or the other, and in the case of a Roth 401(k), the government gets paid upfront when you first make contributions. Instead of contributing pre-tax dollars as you would to a traditional 401(k), you contribute after-tax dollars to a Roth 401(k). In both cases, the tax shield on investments applies when they are in your account.

If a traditional or Roth 401(k) is not available to you, consider a traditional or Roth IRA account, which also facilitates tax-deferred growth up until retirement.

How Do I Calculate How Much I Need For Retirement?

To calculate how much you need for retirement, consider connecting your accounts to Betterment or Personal Capital, both of which offer free tools to assist you.

Betterment has a great retirement calculator called RetireGuide that helps you to figure out how much you need for retirement. You can connect third-party accounts, including your 401(k) account, to analyze fees.

Another option is to download a free mobile app from Personal Capital that lets you connect your bank and investment accounts to track savings, spending, investments and net worth.

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The article What is a 401(k)? was originally posted on Investormint

Individual Retirement Accounts (IRAs) allow you to grow earnings on invested savings tax-free until your retirement years. But which one should you choose, the traditional IRA that permits tax deductions on contributions or the Roth IRA that has no mandatory withdrawal requirements?

Both can be used to supplement retirement savings in addition to what you might be able to squirrel away in an employer-sponsored 401(k) retirement plan. And if you don’t have a 401(k) plan, you should certainly look to set up either a traditional IRA or a Roth IRA account.

What Is A Traditional IRA?

A traditional IRA account allows you to shield income from taxes by deferring tax payments until withdrawals are made in retirement years. Contributions are tax-deductible, lowering your taxable income upfront, and allowing you to compound investment earnings until distributions are taken.

A traditional IRA lets you shield your income from taxes by providing you with a tax break on account contributions from the get-go. When you put savings into your traditional IRA account, the amount you contribute is tax-deductible, meaning that your taxable income is reduced by the amount you deposit into your IRA account.

For example, if an employee earns $100,000 annually and chooses to contribute $5,500, the maximum permitted annual contribution, to a traditional IRA, they will receive a deduction of $5,500 on their taxable income. Instead of the IRS applying taxes to the gross income amount of $100,000, the IRS will tax just $94,500 ($100,000 minus $5,500).

The contributions made are invested on a tax-deferred based until your retirement years when distributions are made – at which time the payments made are subject to taxation at ordinary income tax rates.

A traditional IRA is subject to IRA withdrawal rules that limit your ability to dip into your nest-egg before age 59.5. Upon reaching that age, you are not obligated to take distributions (until age 70.5 at which time mandatory withdrawals are imposed), but you can do so penalty-free if you wish.

Before age 59.5, early withdrawals are penalized to the tune of 10% and taxes must still be paid on withdrawals at ordinary income tax rates. It is possible to withdraw funds without penalty if certain conditions are met, such as when:

• Buying a first home
• Paying for qualified higher education expenses
• Withdrawing substantially equal payments
• Paying for unreimbursed medical expenses after losing a job
• Paying for health insurance premiums when unemployed
• Disability or death

WHY CHOOSE A TRADITIONAL IRA

A traditional IRA is a good fit for you if you believe your taxes will not be higher when you reach retirement. If you expect your tax rate to increase between now and then, a Roth IRA may be a better choice.

The traditional IRA is also a good retirement account choice if you do not have an employer-sponsored plan, such as a 401(k). By contributing to the IRA, you get to enjoy deductions on contributions made, tax-free growth of earnings, and defer tax payments until retirement just as you would with a 401(k) plan.

An IRA generally has the added benefit of lower fees and more investment choices than a 401(k) employer-sponsored plan. If you left a job and have money sitting in a 401(k) whose value is suffering from higher fees, consider moving your funds to a self-managed IRA account via a 401(k) to IRA rollover.

What Is A Roth IRA?

A Roth IRA allows you to benefit from tax-free growth of earnings on investments. No mandatory withdrawal requirements are imposed by the IRS. However, contributions are not tax-deductible as they are when contributing to a traditional IRA because after-tax dollars are contributed.

Just as investment earnings grow tax-free in a traditional IRA, so too do they grow tax-free in a Roth IRA. In this way, a Roth IRA is similar to a traditional IRA, but where the two differ is the tax treatment of contributions. In a Roth IRA, you receive no tax break when contributing to your retirement account, unlike when contributing to a traditional IRA. But don’t give up too soon on the Roth IRA, it is worthy of your consideration in many other ways.

A primary benefit of a Roth IRA is that you are not obligated to withdraw funds when you reach a certain age. The IRS imposes no mandatory distribution requirement on a Roth IRA as they do on a traditional IRA. If you wish, you can keep your money fully invested and growing tax-free even after you become eligible to take withdrawals at age 59.5.

The reason the IRS is not stringent about mandating withdrawals from a Roth IRA is that they already received tax payments upfront when you first contributed after-tax dollars to your Roth IRA account. However, the government doesn’t get paid until you reach your retirement years when you choose a traditional IRA, and if you haven’t taken a distribution by age 70.5, they will mandate that you do so as a traditional IRA account holder.

Another benefit you enjoy as a Roth IRA account holder is that you don’t have to ever take distributions if you don’t want to; you can pass your account on to a beneficiary in time.

Plus, if you wish to dip into your Roth IRA, it is easier to do so without incurring tax liabilities because your accessing after-tax dollars, as opposed to withdrawing funds from a traditional IRA that is funded with pre-tax dollars.

An early withdrawal penalty on earnings still applies, unless certain exceptions are met, such as when funds are used for:

• Qualified higher education expenses
• Medical insurance when unemployed
• Unreimbursed medical expenses

WHY CHOOSE A ROTH IRA

If you believe your tax rate will be higher in the future than it is now, a Roth IRA makes a good deal of sense. You can lock in a lower tax rate now than you would otherwise have to pay in the future.

If you think tax rates will rise in the future, a Roth IRA is also a good choice because the taxes you pay today are lower than what you would otherwise have to pay later.

A Roth IRA is advantageous too if you want the option of continuing to grow investments tax-free without the hindrances of mandatory withdrawal requirements, such as those associated with a traditional IRA.

Traditional and Roth IRA Income Limits

The same income limits apply to both traditional and Roth IRA account holders.

Individuals earning an adjusted gross income of up to $118,000 are permitted to contribute as much as $5,500 to a traditional IRA or a Roth IRA ($6,500 if over the age of 50).

Individuals earning between $118,000 and $132,999 are eligible to contribute a lower amount while adjusted gross income levels above $133,000 render you ineligible to contribute to a traditional IRA or a Roth IRA.

Discover More About >> Traditional IRA and Roth IRA Retirement Accounts

Which IRA Provider Is Best?

Depending on whether you wish to self-manage your retirement nest-egg or prefer a more hands-off approach, you will find an IRA provider to meet your needs; traditional brokers will serve you better if you wish to be more involved while robo-advisors will serve you well if you prefer to be less hands-on.

Individuals who wish to be more proactive in managing their retirement accounts should consider a broker who caters to self-directed investors. Schwab and Scottrade lead the pack of best all-round IRA providers.

BEST IRA BROKER: CHARLES SCHWAB

Schwab made its name as a pioneer of low-cost trading that made it easier for retail investors to take control of their retirement accounts. Along with industry-leading research, competitive commissions costs, an easy-to-use platform, and fast and comprehensive customer support, Schwab also caters to active options traders.

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BEST IRA BROKER: SCOTTRADE

Having already acquired one of the leading options trading platforms bolstered its status as one of the best brokers when demonstrating its intent to acquire Scottrade also.

For IRA account holders looking for a little extra hand-holding than is available through many of the online brokerage firms, Scottrade is a good fit. Thanks in part to its extensive network of local branch offices, Scottrade can deliver stellar customer support and caters well to both novice and experienced investors.

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IRA investors who are less keen on taking the reins of managing their retirement accounts may be better served by choosing from a list of the best robo-advisors for IRAs.

BEST ROBO-ADVISOR FOR IRA ACCOUNTS: BETTERMENT

Betterment is a robo-advisor that relies on computer algorithms to automate retirement investing. As one of the early leaders in the industry, Betterment has quickly accumulated billions of assets under management, rivaling robo-advisor industry goliaths, such as Schwab Intelligent Portfolios.

Along with other robo-advisors, Betterment has won market share from traditional financial advisors, who charge substantially larger fees. As Betterment has grown it has added a human dimension, live advisors, to its services offering for account holders with larger balances.

Betterment supports numerous IRA account types, including:

• Roth IRA
• Traditional IRA
• SEP IRA
• Rollover IRA

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BEST ROBO-ADVISOR FOR IRA ACCOUNTS: PERSONAL CAPITAL

Personal Capital began as a hybrid robo-advisor, offering not just an automated investing service, but also access to human financial advisors. Each client is assigned to a dedicated financial advisor and account holders with large balances are assigned two dedicated financial advisors.

Personal Capital also offers one of the best mobile apps of any robo-advisor or brokerage firm. If you are looking to track spending, loans, net worth, investment performance and other personal finance items, the Personal Capital app is a must-have addition to your list of mobile device apps.

Like Betterment, Personal Capital caters to multiple types of IRA accounts, including:

• Traditional IRA
• Roth IRA
• SEP IRA
• Rollover IRA

Discover >> How To Rollover a 401(k) To An IRA Account

Find >> The Best Retirement Plans For Independent Contractors

The article What Is An IRA? was originally posted on Investormint

A traditional IRA allows you to save and invest pre-tax dollars, which can grow tax-deferred until distributions are taken in retirement years. Above age 59.5, you are eligible to withdraw funds to support or supplement your retirement lifestyle. Unlike a Roth IRA, which has no mandatory minimum distribution requirement, a traditional IRA comes with strict withdrawal rules: by age 70.5 you are obligated to start taking distributions if you haven’t already done so.

The reason you can escape mandatory distributions when holding a Roth IRA but not when holding a traditional IRA is that after-tax dollars are used to contribute to a Roth IRA, so the government receives tax payments upfront. In a traditional IRA, the government doesn’t receive tax payments until withdrawals are made, and so to ensure they do eventually get paid, they require you to take distributions by age 70.5, though you are eligible to do so starting at age 59.5.

Between age 59.5 and 70.5, you are free to take withdrawals if you wish or continue to enjoy the benefits of tax-deferred investing. If you begin to take payments, you will be taxed but not penalized. If you wish to receive payments prior to age 59.5, you will be charged a 10% penalty on withdrawals in addition to taxes unless certain withdrawal exceptions are met.

Traditional IRA: How To Avoid Early Withdrawal Penalties

Early withdrawals penalties of 10% plus taxes may be avoided when certain conditions are met when buying a first home, electing to take substantially equal payments, paying for unreimbursed medical expenses or health insurance premiums when unemployed, and upon permanent disability or death.

For the most part, penalty charges of 10% plus taxes will be applied to any withdrawals before age 59.5. However, the IRS does stipulate certain exceptions to the rules which permit you to withdraw funds penalty-free, such as those listed below.

BUYING A FIRST HOME

The IRS is lenient when it comes to its definition of a first home. If you (or your spouse) has not owned a principal residence in the past two years, the IRS allows you to apply money withdrawn from your traditional IRA to the purchase of a home within 120 days. Because of the risks inherent when closing on the purchase of a home, it is best to err on the side of caution when you withdraw funds to ensure you don’t miss the time window.

A maximum of $10,000 can be applied towards the purchase of a new home, or if you are a married couple, you can each contribute up to $10,000 for a total of $20,000. It is permissible to use this IRA withdrawal exception not just for you (and your spouse) but also for other family members, including children, grandchildren and parents.

HIGHER EDUCATION EXPENSES

Withdrawals from a traditional IRA may be made for qualified higher education expenses without incurring penalty charges. The IRS defines qualified education expenses broadly, including:

• Room and board, when a student is attending more than half time
• Books
• Fees
• Tuition
• Supplies

The IRS is lenient in who can enjoy the benefits of penalty-free withdrawals. You can apply withdrawn money to pay for qualifying higher education expenses incurred not just by you but also your spouse, children and grandchildren too.

EQUAL WITHDRAWAL AMOUNTS

As morbid as it seems, the IRS calculates your life expectancy and uses that projection along with your account balance and other factors to assess the amount of distributions you may receive when you elect to take substantially equal payments prior to age 59.5.

It might seem counterintuitive that on the one hand the IRS penalizes you 10% for taking distributions prior to age 59.5 and on the other you are permitted to take withdrawals as long as they are substantially equal. The catch is that if you elect to take distributions that are substantially equal prior to age 59.5, you cannot change your mind: you must continue taking payments at least once per year according to the schedule you first chose.

After 5 years or when you reach age 59.5, whichever comes later, you are allowed to modify your payments schedule, but given how onerous this stipulation is you should carefully evaluate the pros and cons before electing it.

UNREIMBURSED MEDICAL EXPENSES

When unemployed, your IRA may be tapped penalty-free to pay for unreimbursed medical expenses that exceed 10% of your adjusted gross income. A caveat to this exception is that no distributions are permitted 60 days after the time you begin a new job.

To better understand how this exception works, consider this example where your adjusted gross income is $50,000 annually and you incur unreimbursed medical expenses of $7,500. Based on the 10% rule, you may use your traditional IRA to pay for any unreimbursed medical expenses over $5,000 (10% of your $50,000 AGI). So in this case, you may dip into your IRA for $2,500 ($7,500 total minus $5,000).

HEALTH INSURANCE PREMIUMS

You are also permitted to take a distribution when unemployed to pay for health insurance premiums not only for yourself but also for your spouse and children. The 60 day rule applies here also whereby distributions must be made within that timeline after you start a new career role.

DISABILITY OR DEATH

No penalties are applied by the IRS when dipping into IRA funds following a permanent disability.

Upon death of a traditional IRA account holder, the named account beneficiary is provided penalty-free access to funds.

When Are You Required To Take IRA Distributions?

IRA distributions must be made by Dec 31 each year. If you turn 70.5 this year, you are obligated to take a first payment (if you haven’t previously) by April 1 next year.

By December 31, you are required to take minimum required withdrawals after age 70.5. If you are close to age 70.5, you might end up paying the government twice in a year if you are not careful. Here is how that might happen:

The government requires you to take a required minimum distribution by April 1 of the year following the year when you turn 70.5 and once you start taking distributions you are required to continue taking them each year by Dec 31. So if you turn 70.5 this year, but don’t take a first payment until the first quarter of next year, you will still be obligated to make another payment by Dec 31!

If you miss your required minimum withdrawal deadline, the IRS will apply a 50% penalty to the amount not disbursed, so pay close attention to the timelines!

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The article IRA Withdrawal Rules: Traditional IRA was originally posted on Investormint

A Roth IRA allows you to contribute after-tax income to a retirement plan account in which earnings grow tax-deferred until distributions are made. Unlike a traditional IRA or 401(k) account that has mandated withdrawal requirements above a certain age, a Roth IRA can be invested without any distribution requirements during your retirement years.

The reason the IRS imposes no mandatory distribution limits is that they are paid upfront when you contribute to your Roth IRA whereas contributions to a traditional IRA or 401(k) are made with pre-tax dollars, so the IRS wants to get paid when you reach retirement.

Roth IRA tax advantages are so attractive that eligibility rules and limits are imposed by the IRS. As you earn ever more income, the amount you can contribute to a Roth IRA diminishes until you are prohibited from contributing altogether.

The tables below lists the income and contribution limits for a Roth IRA.

Roth IRA Income Limits 2017: Single, Married (filing separately)

For those filing tax returns in the categories single, married but filing separately or head of household, the maximum contribution is $5,500 annually when modified adjusted gross income is below $118,000. Above $133,000, contributions to a Roth IRA are ineligible and, between $118,000 and $132,999, a reduced contribution amount is permitted.

The benchmark for determining how much you can contribute to a Roth IRA is your modified adjusted gross income. Up to $118,000, the maximum contribution of $5,500 may be made by individuals with a single filing status, as well as those who are married but filing separately, and head of households.

When modified adjusted gross income increases above $118,000 but remains below $132,999, a reduced contribution is permitted. Above $133,000, contributions to a Roth IRA are deemed ineligible.

For those over the age of 50, an additional $1,000 catch-up is permitted, which leads to a total contribution of $6,500 annually.

Roth IRA Income Limits 2017: Married (filing jointly)

For married couples filing jointly, the maximum contribution amount is $5,500 when modified adjusted gross income falls below $186,000. From $186,000 up to $195,999, a reduced contribution is permitted. Contributions are ineligible for modified adjusted gross income amounts that exceed $196,000.

If you file jointly as a married couple, you are permitted to contribute at most $5,500 provided your modified adjusted gross income is below $186,000. If over 50, an additional $1,000 contribution is allowed for a total of $6,500.

A reduced contribution is allowed for couples with a modified AGI between $186,000 and $195,999 and above $196,000 contributions are ineligible.

Roth IRA Income Limits 2017: Married (filing separately)

For married couples filing separately who have lived together at any time during the year, contributions are heavily restricted – modified adjusted gross income greater than $10,000 renders you ineligible to contribute while contributions are reduced for amounts under $10,000.

Married couples filing separately who have lived with a spouse at any time during the year with modified AGI of $10,000 or more are ineligible to contribute while those with modified AGI below $10,000 are restricted in how much they can contribute.

You are not permitted to contribute more than you earn in any case. So if you and your spouse both contribute to a Roth IRA, the total contribution must be lower than your combined taxable compensation.

Can I Open A Roth IRA If My Income Is Too High?

If your income exceeds threshold contribution levels rendering you ineligible to contribute to a Roth IRA, you can elect to convert a traditional IRA to a backdoor Roth IRA, thereby still enjoying the tax advantages of the Roth IRA – provided you pay taxes on previously deducted contributions.

If your earned income exceeds threshold limits in place, you may still be able to take advantage of Roth IRA tax benefits. By converting a traditional IRA to a backdoor Roth IRA, you can still take advantage of tax-deferred growth of contributions and tax-free distributions upon reaching retirement.

The catch is that when you convert an account from a traditional IRA to a Roth IRA, you will need to pay taxes on contributions that had previously been deducted.

How To Get Into A Lower Tax Bracket In Retirement

By contributing to a Roth IRA, Medicaid premium payments may be lower and social security payments may be higher in retirement years if you fall into a lower tax bracket (because withdrawals from your Roth IRA are free from taxation).

In your retirement years, when you withdraw money from your Roth IRA, that money is tax-free, which means you can potentially end up in a lower income tax bracket than would otherwise be the case if the income from your Roth IRA had been subject to taxation.

The benefits multiply when you factor in that your social security payments may be higher because your taxes on social security income ends up lower. As income level increases, premiums paid on Medicaid increase too.

So by contributing to your Roth IRA, even if you are ineligible to contribute the maximum amount based on your income level, you can still potentially enjoy upon retirement:

1. A higher share of your social security payments
2. A lower Medicaid premium payment
3. Tax-free income on contributions

To get started with your IRA or Roth IRA, view our list of the best IRA Providers.

The article How Much Can I Contribute To A Roth IRA? was originally posted on Investormint

When the time comes to make a career change and you need to decide what to do with your 401(k) nest-egg, consider rolling over your 401(k) account to a traditional IRA or even a Roth IRA. Once you leave your job, you will no longer be able to contribute to your 401(k) plan, so for most people it will make sense to roll it over. So how do you go about rolling over your 401(k) to an IRA and what are your options?

To Rollover Your 401(k) Or To Not Rollover Your 401(k)?

The best option when leaving one job and starting another is to rollover your 401(k) to an IRA, which generally has lower fees and more investment options than transferring to a new employer retirement plan. Leaving your 401(k) with your old employer is generally not a good idea either because ex-employees often pay higher fees and lose access to Human Resources.

The two primary choices you have when leaving a job are to rollover your 401(k) account or to leave it as is and do nothing. A third choice is to cash out but the IRS imposes a 10% early withdrawal penalty for so doing, in addition to ordinary income taxes on the amount encashed. Unless absolutely necessary, cashing out should be avoided not only to sidestep the taxes and penalties, but also because the opportunity cost of growing your nest-egg tax-free until retirement is so large.

Not every employer will allow employee 401(k) accounts to remain under their retirement plan umbrellas when an employee leaves. Even if they do, the employee will likely be inconvenienced if they choose to keep their 401(k) account in the employer-sponsored plan. Your access to the Human Resources department is typically reduced and fees charged to ex-employees are often higher.

Much better to rollover your 401(k) to an IRA account that you control or into your new employer’s retirement plan. The best option is generally to rollover to an IRA because investment options are often restricted in an employer-sponsored plan, and you can shop around for lower fees compared to those charged in an employer-sponsored plan.

Discover >> Best IRA Providers

Rollover To Traditional IRA Or Roth IRA?

Rolling over a 401(k) to a traditional IRA is generally preferable than rolling over to a Roth IRA because taxes on the rolled over amount would need to be paid when converting to a Roth IRA but a taxable event is not triggered when rolling over to a traditional IRA.

Once you have decided to rollover your 401(k) to an IRA account, the next question is which type of IRA account is best: a traditional IRA or a Roth IRA?

In a Roth IRA, after-tax dollars are initially contributed and tax-free distributions are withdrawn upon retirement. Over the age of 59.5 years, Roth IRA account holders can begin withdrawing funds, though no minimum withdrawal requirements are mandated as they are with traditional IRA or 401(k) retirement accounts.

While a Roth IRA is attractive because of its tax advantages and other benefits, certain eligibility rules and limits relating to income apply. For the most part, it doesn’t make sense to convert from a 401(k) to a Roth IRA, though technically it is feasible, because you will be obligated to pay taxes on the amount rolled over. It might make sense if you had a Roth 401(k) account to convert to a Roth IRA because the Roth 401(k) is treated the same as a Roth IRA from a tax perspective.

To avoid a taxable event when rolling over a 401(k), it is generally best to rollover to a traditional IRA. In a traditional IRA, contributions are tax deductible in the year they are made and withdrawals are taxed upon retirement. Traditional IRA accounts can be opened easily with online brokers and robo-advisor firms.

Request A Direct Rollover Of Your 401(k)

When transferring funds, request a direct rollover of your 401(k) account so that funds are transferred directly to your new account provider. An indirect rollover takes place when funds are first sent to you and then sent onwards by you to your new account provider. An indirect rollover would require you to come up with 20% of the account balance yourself and trigger a 60 day timeline to transfer funds to your account provider, or risk penalty charges.

When initiating a rollover of your 401(k) account, the most important thing to do is to request a direct rollover. Ask your 401(k) plan administrator to send your full account balance to your new account provider. A direct rollover means the funds never get sent directly to you; if they were sent to you, it would be treated as an indirect rollover, trigger a 60 day timeline to transfer funds to your new account, and require you to contribute 20% of your account balance out of pocket, or incur penalties.

When an indirect rollover is selected, your employer will send you 80% of your 401(k) balance and withhold 20% for the IRS. It is your obligation to contribute to your new account the 20% withheld. Failure to come up with the funds within 60 days triggers an early distribution penalty of 10% plus taxes.

Let’s walk through an example of a 401(k) account with a balance of $50,000. If you choose an indirect rollover, your employer will withhold $10,000 (20% of the $50,000 balance) and send you $40,000. But you are required to deposit the full $50,000 within 60 days to avoid early distribution penalties of 10%. So what can you do?

You will need to dip into savings to come up with the $10,000 deficit or pay penalties of 10% on that amount in addition to taxes owed for withdrawing funds early because the $10,000 will be treated by the IRS as taxable income. To save yourself the headache and stress of meeting the 60 day timeline, coming up with the funds, and calculating the 20% figure, simply choose a direct rollover.

Choose An IRA Account: Broker or RoboAdvisor?

Proactive investors should consider opening an IRA account at an online broker while hands-off investors may be better served at a robo-advisor.

BEST BROKERS: CHARLES SCHWAB

Retirement planning often requires some handholding, and both Charles Schwab provide excellent support not just online but through their network of local branches nationwide.

Schwab is a full-service brokerage firm featuring industry-leading research, competitive commissions, an easy to navigate platform, a world class options trading platform and fast customer service.

BEST IRA BROKERS
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BEST ROBO-ADVISORS: FIDELITY GO & BETTERMENT

For investors looking to be less proactive in managing their retirement nest-eggs, robo-advisors are a good solution. They rely on technology-powered algorithms to automate investment allocations and rebalance portfolios. And many robo-advisors, such as SoFi, Personal Capital, and Vanguard, provide live financial advisors too for a more personal touch.

Among the best robo-advisors for IRA accounts are Fidelity Go and Betterment. Fidelity Investments is the largest US retirement provider, and Fidelity Go is its robo-advisor arm that has highly competitive management fees of just 0.35%, including investment expenses – most traditional financial advisors and robo-advisors pass on investment expenses to clients in addition to management/advisory fees, but Fidelity Go bundles them together for additional fee transparency.

Along with Schwab Intelligent Portfolios, Betterment has amassed one of the largest books of business in the robo-advisory space, and with good reason. Betterment has no account balance minimum, low management fees starting at 0.25%, and for larger account balances will connect clients to human financial advisors.

BEST IRA ROBO-ADVISORS
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Regardless of which IRA account provider you select, the range of investment options will be broader than the generally restrictive lists available through most workplace retirement plans. If you choose to rollover your IRA into a brokerage account, a range of exchange-traded funds that have lower expense ratios than mutual funds will be available to keep costs low while staying diversified.

For account holders choosing a robo-advisor, investment selections will be automatically made on your behalf and most robo-advisors select low-cost exchange-traded funds that are allocated according to Nobel-prize winning research known as Modern Portfolio Theory.

The article How To Rollover A 401(k) To An IRA Account was originally posted on Investormint

A Roth IRA account is similar to a traditional IRA, except contributions to a Roth IRA are made with after-tax dollars, whereas contributions to a traditional IRA are made with pre-tax dollars. Contributions to a traditional IRA are tax-deductible but contributions to a Roth IRA are not tax-deductible, so why choose a Roth IRA?

A Roth IRA has advantages unlike most other qualified retirement plans. For example, a Roth IRA account is not subject to mandatory minimum distributions above a certain age, unlike a 401(k) or traditional IRA.

Why Choose A Roth IRA?

Roth IRA contributions are made with after-tax dollars that grow tax-free, and may be withdrawn in retirement years without paying any income tax.

Contributions to a Roth IRA are made with after-tax dollars so no initial tax benefit is enjoyed, unlike with a traditional IRA. As time goes by, a Roth IRA makes more economic sense because portfolio growth is tax-free. When you begin taking withdrawals in your retirement years, you do not pay any income tax on the principal contributed or earnings generated.

This means that the tax rate you pay today is locked in, which can be a good thing. If you expect your income and hence tax rate to increase in the future, or if you expect taxes to rise over time, contributing to a Roth IRA account makes sense; you lock in a lower rate today than you would otherwise have to pay in the future.

Discover >> Rules and Limits of Roth IRA accounts

How Much Can I Contribute To My Roth IRA?

The maximum amount you can contribute to your Roth IRA depends on your age and how much you earn. Because Roth IRA accounts are tax-advantaged, restrictions are imposed on high-income earners but individuals over the age of 50 are allowed to contribute an additional $1,000 more than those under the age of 50. And married couples both over the age of 50 who meet Roth IRA income limit thresholds are permitted to contribute an additional $2,000 annually.

Individuals under the age of 50 are permitted to contribute a maximum of $5,500 annually to a Roth IRA. Over the age of 50, a maximum $6,500 can be contributed per person.

Married couples under the age of 50 can contribute $11,000 annually while couples with both partners over the age of 50 are allowed to contribute a slightly higher annual amount of $13,000.

Because the Roth IRA is a tax-advantaged account with unique benefits, restrictions are imposed on high income earners, based on Roth IRA rules and limits. For individuals with adjusted gross income above $118,000, the permitted contribution is lower than the maximum. For married couples, the adjusted gross income threshold is $186,000, at which stage permitted contributions are lower than the maximum amount.

When Can I Take Roth IRA Distributions?

Distributions of a Roth IRA can be taken above the age of 59.5 years old.

Individuals over the age of 59.5 years who have held the account for five years are permitted to take distributions from their Roth IRA account. Because contributions to the Roth IRA were made with after-tax dollars, all distributions including earnings can be taken without paying federal taxes.

Other times when Roth IRA distributions may be taken and deemed qualified include:

• When building a first home for the Roth IRA account holder or a qualified family member, such as the Roth IRA account holder’s spouse, child or grandchild. A limit of $10,000 per lifetime is imposed.
• When the Roth IRA account holder becomes disabled.
• When the Roth IRA account holder dies, the assets may be distributed to the beneficiary of the Roth IRA account holder.

What Is The Penalty For Withdrawing Roth IRA Funds Early?

A 10% early distribution penalty in addition to income taxes is applied unless it qualifies as an exception, such as paying for qualified higher education expenses, unreimbursed medical expenses or medical insurance after losing a job.

A non-qualified Roth IRA distribution is made when it doesn’t meet the eligibility rules above, and may be subject to a 10% early-distribution penalty in addition to income taxes owed.

Certain exceptions are permitted, including paying for:

• Medical insurance when the individual has lost a job.
• Qualified higher-education expenses of the Roth IRA account holder or dependents. Tuition, fees and books qualify as eligible expenses.
• Unreimbursed medical expenses: the medical expense minus 10% of the adjusted gross income for the year of the distribution may be distributed penalty-free.

How Do I Start A Roth IRA Account?

A Roth IRA account can be opened at a qualified financial institution, such as an online brokerage firm and contributions for a tax-year must be made by April 15 of the following year.

You can establish a Roth IRA account at any time but contributions for a tax year must be made by April 15 of the subsequent year, and no tax filing extensions are permitted.

To get started, simply select a financial institution qualified to handle Roth IRA, such as savings and loan associations, federally insured credit unions, banks and online brokerage firms.

Before opening an account, it is best to research providers, such as online trading platforms, to assess investment options, such as:

• Low-cost investment funds, such as exchange-traded funds;
• Ongoing fees, such as inactivity fees; and
• Transaction costs, especially for active day traders.

Can I Rollover a 401(k) Into A Roth IRA?

You can rollover a 401(k) into either a Roth IRA or a traditional IRA, but if you roll it over into a Roth IRA, you will be obligated to pay taxes on the amount contributed.

You are permitted to rollover a 401(k) account into a Roth IRA but because contributions to a 401(k) are made with pre-tax dollars while the Roth IRA contributions are made with after-tax dollars, you will need to pay taxes on the amount rolled over into your Roth IRA. No taxes are paid when rolling over a 401(k) into a traditional IRA account.

Is My Roth IRA Insured?

The Federal Deposit Insurance Corporation offers insurance protection of $250,000 on Roth IRA accounts.

Discover >> Traditional IRA or Roth IRA?

The article What Is A Roth IRA? was originally posted on Investormint