Win the Retirement Race

Eng-WEBA 401k account through your employer is one of the best tools to use for retirement savings. It’s an investment account that allows your money to grow tax-deferred or, in the case of a Roth 401k, tax-free. It can help you win the retirement race.

These retirement savings accounts make it very simple to put your saving and investing on auto pilot. It even gives you options to rebalance your investment portfolio on a regular basis.

If you’re just starting out and have less than $50,000 in your 401k, a target date retirement fund is a simple option. These funds “target” your retirement year based on your age and invest accordingly; the investment vehicle provides a diversified portfolio all-in-one fund using a variety of stocks and bonds. They’re professionally managed and therefore require very little monitoring.

As your account balance grows, you may consider adding more funds to the mix.

How many years before retirement?

Your time horizon calculates how long you will be investing and when you want to retire and begin withdrawing money from your account. It’s a key factor in how and where you invest. In general, the longer amount of time you have, the more aggressive you can afford to be and the more stock market volatility you can withstand.

Many young people believe they need to be “safe and conservative” with their retirement accounts. Really, the opposite is true. Investors in their 20s and 30s can afford to take some risk with an account they will not use for 30 or 40 years.

How comfortable are you with risk and stock market volatility?

Even if you’re young and have a long time-horizon, you may find watching your retirement account bounce up and down to be unnerving. In that case, a more conservative strategy makes sense. You can add bonds to your investment mix to help bring income and stability to your portfolio.

Either way, staying invested in the market – rather than jumping in and out, and trying to time the markets – is a key to long-term success. Think of investing is a marathon, not a sprint, if you want to win the retirement race. Even after you retire, keeping investments in the stock market will help your money continue to grow and outpace inflation.

Win the Retirement Race

 

By |2021-10-12T10:39:00-07:00October 12th, 2021|Retirement, Taxes|

Tax Term ABCs

Lupe CamargoIt’s fall and back-to-school time. As young adults enter their final years of school and begin to make more independent financial decisions, having a firm grasp of the basics will help them stay on a solid path. Several clients have recently asked for my help in educating their college-age kids about essential money matters like tax terminology. Here are some tax term ABCs to share with your kids (or to use as a personal refresher if you’re a little rusty).

Tax Term ABCs

Adjusted Gross Income vs. Taxable Income

Adjusted gross income (AGI) is your total income before any standard or itemized deductions or credits. Taxable income is what is taxed. It’s an important distinction, since many IRS provisions are based on AGI, not taxable income. Your AGI affects the size of your deductions and your eligibility for some types of retirement plan contributions.

Before-Tax vs. After-Tax

After-tax money is taxable now; before-tax (also called pre-tax) money is taxable later. It’s an important difference to understand as you save for retirement. To reduce your lifetime tax burden and make the most of your earnings, you want to shift taxes to your lower income earning years if possible. This can help you determine whether to fund a Roth (which is done with after-tax funds) or a Traditional IRA (funded with pre-tax funds).

Capital Gains vs. Ordinary Income

Capital gains tax-rates are lower than ordinary income rates; they range from zero to 20 percent. A capital gain occurs when a capital asset is sold, such as stocks, mutual funds or a house. Ordinary income comes from your job, business or retirement fund distributions. If you’re in the 32 percent income tax bracket, your ordinary income would be taxed at 32 percent, whereas a capital gain would be taxed at 15 percent.

Tax-Free vs. Tax-Deferred

Tax-free money is simply that; you never have to pay taxes on this money. Distributions from a Roth (both your contributions and earnings) are one example. Tax-deferred means you don’t have to pay taxes on that income right now, but you will in the future.

You can always reach out to your advisor for additional resources and to learn more about money matters. For now, class is dismissed!

By |2021-09-21T11:05:47-07:00September 21st, 2021|Taxes|

Early IRA Withdrawals

Larriva-WEBAs you approach retirement, conventional wisdom is to spend down taxable assets and delay IRA & 401k withdrawals until the Required Minimum Distributions (RMDs) begin at age 72. This can be an effective strategy. Yet, in many situations, it may be better to start early IRA withdrawals.

Counter-Intuitive Advice and Early IRA Withdrawals

When does this counter-intuitive strategy make the most sense? It’s relative to your marginal income tax-brackets over a seven- to 10-year period.

For example, a married couple both age 62 can earn up to combined income $106,150 (gross) before the $25,100 standard deduction and still be in only the 12 percent marginal federal tax bracket. If they have $800,000 in IRA/401ks, they can withdrawal some of that money and still be in a low marginal bracket.

If that couple waits until age 72, those retirement assets with 7 percent growth may double to about $1.6 million, and RMDs would start at $62,800 per year. That RMD income along with $57,000 per year for Social Security would put them in a 25 percent marginal tax bracket in the future. (See table.)

Another trap is related to future Medicare premiums (Part B), which typically begin at age 65. The more income you have in retirement, the more you will pay in Medicare premiums. If your adjusted gross income plus municipal bond interest is more than $176,000 for a married couple, then monthly Medicare can increase from about $148 monthly per person up to $505. Paying attention to the nuances in Medicare rules could save a couple up to $8,500 per year.

early IRA withdrawalsDetermining the best time for retirement distributions can be complicated. It’s smart to come up with a plan before you hand in your resignation. Your Perspective advisor will crunch the numbers and help you create the optimal strategy.

By |2021-08-16T13:12:45-07:00September 6th, 2021|Advisors, Health Care, Retirement, Taxes|

Giving Back in 2020

Lupe CamargoEvery day is a good day to give back to the community. In the economic wake of COVID-19, today is an especially good day to give if you’re able. Giving back in 2020 will help non-profits that have been hit hard by the pandemic. Fundraising events have been cancelled or shifted online, creating a loss of expected income. Communities of faith that were forced to halt in-person services experienced a significant drop in giving. Such challenges impact the individuals, communities and causes these organizations serve, many of whom also have been hard hit by this challenging year. It’s a circular problem, and one I’ve seen firsthand as Board Chair of Girl Scouts.

At the same time, those who’ve been able to give have been generous. Charitable giving in many areas has reached historic levels in 2020. During this season of gratitude, we certainly can give thanks for that.

Tax-Wise Charitable Giving

As 2020 draws to a close and you consider your charitable giving options, here are a few things you should know:

  • The Corona-virus Aid, Relief and Economic Security (CARES) Act created additional incentives to give this year. It allows 100 percent of itemized donations to go toward adjusted gross income versus the typical 60 percent. CARES also allows an above-the-line deduction for donations up to $300 (in addition to the standard deduction for non-itemizers).
  • You can “bunch” donations into one year. That means itemizing 2020 taxes and taking the standard deduction in 2021. Your income, tax-filing status and donation amount are variables to consider with this approach. A Donor Advised Fund (DAF) can be useful for bunching donations; DAF contributions can be made in one year and distributed to charities over several years.
  • Those age 70 ½ years and older can deduct up to $100,000 per year tax-free from their IRAs through a Qualified Charitable Distribution, which presents an opportunity to reduce future taxable income and limit beneficiary tax liability.
  • If you decide to do a Roth Conversion, the additional tax liability could be offset with a charitable contribution.

If you’d like to further explore and plan tax-smart giving to increase the impact of your gifts, call or email your advisor.

By |2020-11-16T15:55:30-07:00November 18th, 2020|Charitable Giving, Current Affairs, Taxes|

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