I want to put you to the test. It’s time to take a hard look at your financial life and figure out what habits you need to change.

Remember, sitting on a pile of cash does not equal a successful retirement. Here’s where most people go wrong:

You Have No Idea What You’re Doing.

This can be hard to admit. Put yourself to the test, do you resonate with any of these?

1. You are constantly stressed and don’t know if your money is working for you.
2. You don’t know your numbers, have a budget, or understand your cash flow.
3. You don’t have a plan. Or maybe you did put together a financial plan at one point, but that old binder has become a decoration on your bookshelf. Plans need to be updated as life changes.

You Make Bad Choices.

Bad choices come in all shapes and sizes and can be extremely detrimental to your financial health and future. Here are a few examples:

1. Bad investments. Think of it this way: the turtle always wins. Chasing the next winner seldom works.
2. Life happens and how you react impulsively to your needs and wants can make your budget hurt you in the long run.
3. Reacting Emotionally. This is simply an effect of not having a plan or budget in place to give you peace of mind.

Your Plan Is Not Working for You.

Most people tend to stand in their own way.

As a famous boxer once said, “Everyone has a plan until they get punched in the mouth.” Or to paraphrase a former US president, “Plans are of no particular value, but planning is indispensable.”

It’s not enough to have a plan on paper. You need something that can adapt to unforeseen circumstances. And you need someone who can help you to update the plan and carry it out. That is what a financial advocate can do for you.

You can do better. Hope is not a strategy.

It’s time to master your money and take back control. If you effectively manage your finances to make your money work for you, you can enjoy life today and in the future.

Remember it’s not about how much money you make, it’s about how much of it you actually keep.

The post What If $1,000,000 Is Not Enough? appeared first on AWM.

Vacations can cost more than expected, especially if you have a large family or an exotic destination in mind. Several of my clients love to treat their entire extended families to a variety of family trips.

Some of my best memories are vacationing with my family. I’m sure yours are too. That’s why I advocate for every family to set aside time and money to vacation together. But the key is planning.

Big price tag purchases can change your tax bracket, hurt your investment strategy, or even postpone your retirement date.

If you want to plan for an elaborate family trip without wrecking your retirement plan, here are a few tips to get you started.

1. Start planning & saving early.

I recommend estimating the total cost of the trip, and then add a 10% cushion. This should cover possible inflation or unexpected costs.

Next, start a savings schedule. Open a separate account and contribute to it every month. Little by little you’ll reach your goal and be able to track your progress.

Planning early can also provide opportunities for early booking specials and discounts when reserved a year or more in advance.

2. Set expectations and communicated them.

Another, equally important aspect of logistical planning is setting expectations with those who are going.

If you are going to pay for the trip, it’s even more important to communicate your expectations. Who is going? How will you deal with boy/girlfriends? What activities or meals should the group participate in? Will there be a family photo with coordinating outfits?

It’s also important to be clear about costs. There are both “upfront” costs such as flights and hotels, but also “on the ground” costs like meals and excursions.

These might seem like small details, but I promise you, that if you’ve saved for months for a trip, you will have expectations (spoken or unspoken) about what the trip will be like. To avoid any hurt feels or frustrations, sit down with everyone who’s going and figure out what this vacation should look like.

3. Set yourself up for success.

Vacation is all about making memories and spending time with those we love and cherish most.

But don’t let it hurt your retirement. Start planning and saving early, set proper expectations, and check with your trusted Financial Advisor to make sure your retirement is still on track.

With these few simple tips, your next family vacation can be both fun and financially feasible!

Start Planning!

The post How to Plan a Family Vacation without Hurting Your Retirement appeared first on AWM.

1. Act Now.

Did you know you can contribute for 2020 until the tax filing deadline? That means you have until April 15^th to make your last contribution.

If you’re planning to contribute, get it done sooner rather than later. Avoid any last-minute problems and let your IRA grow faster.

2. Talk to Your Advisor About a Roth IRA Conversion.

If you have a traditional IRA, you can convert part of it to your Roth IRA.

Because tax laws are constantly changing, a conversion that didn’t make sense last year might do so in 2021.

While it might not be a great option for everyone, it is worth discussing with your tax specialist.

3. Know How to Move Your Money.

I can’t stress this enough. Know how to move your IRAs.

If you’re wanting to consolidate retirement accounts, make sure to roll over them to a like-titled account.

This will also avoid the 60-day and once-per-year rollover rule.

Do not accept a check in your name. Otherwise, you will owe taxes on that account immediately.

4. Update Your Beneficiary Designation.

Make sure your hard-earned money will be left to the right people. Family and friend dynamics change often.  Be sure to keep your beneficiary designation form up-to-date.

Recent changes like the SECURE Act could also impact your current beneficiary form. Spend some time making sure your wishes are accurately documented.

5. Use QCDs and Other IRA Tax Breaks.

IRA rules can be overwhelming, but make sure that’s not keeping you from options you might benefit from.

If you’re over 70 ½ and charitably inclined, you might consider a Qualified Charitable Distribution (QCD). First-time homebuyers might be able to use a portion of their IRA to help fund their down payment.

Take some time to learn what options you have available to you.

6. Plan for the Unexpected.

Our tax laws and IRA rules are constantly changing. I think we should expect more change in 2021 than in previous years.

Remember, IRS guidance on recent rule changes and a new administration and Congress could have a big impact on your IRA.

The bottom line? Plan ahead and work closely with a fiduciary professional who will seek out the best solutions to fit your situation.

The post How Can I Ramp Up My IRA in 2021? appeared first on AWM.

Contributing to your IRA by April 15^th could lower your tax bill for 2019.

The annual contribution limits for IRAs (both traditional and Roth) for 2019 is $6,000 for any working individual under the age of 50. Those over the age of 50 can contribute up to $7,000 each year.

These contributions might lower your taxable income if you have earned an income. Here are a couple examples:

Let’s assume you are single and earn an adjusted gross income (AGI) of $60,000. If you contribute the maximum of $6,000, you will only pay taxes on $54,000 of your income.

If you’re married, filing jointly and have an AGI of $98,000, you can both contribute up to $12,000 ($6,000 each) for 2019. You will pay taxes on $86,000, assuming you make the maximum contributions allowed under the law.

Traditional IRA contributions are non-itemized deductions, which means you can claim them on your return.

However, there are limits for who can deduct their IRA contributions based on a few different factors:

1. If you make too much income, you might still be able to contribute to your IRA, but might be limited or disallowed deductions.
2. If you’re married and not covered by a retirement plan, your AGI limits are higher. It’s always good to check with your financial advisor or accountant for clarification on these limits.

For more information, you can visit irs.gov. I encourage you to speak with a fiduciary financial advisor and your tax specialist. They can help you maximize the deductions you qualify for and make the most of your tax returns for 2019.

Schedule Appointment

The post Contributing to Your IRA by April 15 Could Lower Your 2019 Tax Bill appeared first on AWM.

Traditional IRA contributions increased by $500, now totaling $6,000 for anyone under 50. If you are turning 50 or older this year, you can contribute up to $7,000 to your IRA.

1.    IRS Increases IRA Limit

This is the first increase to the annual contribution limit since 2013. For the past five years, anyone under the age of 50 was able to contribute a maximum of $5,500, or $6,500 for those 50 and older. IRA contribution limits are adjusted periodically to keep up with the cost of living. These contributions are only increased in $500 increments, so they don’t necessarily increase each year we experience inflation.

2.    Rules to Remember

A word of caution as you plan out your contributions for the year: not everyone is eligible to contribute the full amount. Here are some rules to remember:

• IRA contribution limits are per-person, not per-account
• You can make IRA contributions anytime during the calendar year, or in the following calendar year up to the regular tax deadline (April 15).
• You must be earning an income
• Taxable income might not be considered earned income (i.e. social security/investment income)
• Anyone 70 ½ or older cannot make traditional IRA contributions. However, if you are still working and your employer offers a 401(k), you might be able to participate in the plan. Talk to a fiduciary advisor to see if you are eligible.
• You might make too much money to contribute to a traditional IRA
• You might have limits on your deductions for traditional IRA contributions

Also, keep in mind that the higher limit applies to contributions made for 2019, not necessarily all contributions made in 2019. If you are planning to make a 2018 contribution in 2019, you will be limited to the 2018 amount of $5,500 ($6,500 if you are over 50).

3.    Other Limits Increased

The IRA raised limits on other retirement accounts as well. Salary deferrals into 401(k) plans have increased to $19,000 and $25,000 if you are 50 or older. Other increased limits include the eligibility to make a Roth IRA contributions and limits for deductibility of traditional IRA contributions for active participants. For more information on the new 2019 limit changes, visit the IRS website.

I encourage you to seek out professional advice when planning out your annual contributions. A fiduciary financial advisor can help you maximize your contributions and answer any question along the way. Strategically placing your retirement savings is vital to your future and we would love to help guide you on your journey.

Schedule Appointment

The post You Can Save More to Your IRA in 2019 appeared first on AWM.

The start of a new year is the perfect time to set new goals and save more. In 2019, you can contribute more than ever into your retirement accounts. Total contributions increased by $500, now totaling $19,000. If you are expecting a raise, bonus, or are able to sock away a little extra, consider upping your contributions this year to take full advantage. Don’t forget that even the little increases can have a large impact in the long run.

2.    Make catch-up 401(k) contributions

Anyone over or turning 50 years old this year can make catch-up-contributions. That means you can add an extra $6,000 to your 401(k), maxing out at $25,000. If you are turning 50 in 2019, it doesn’t matter when your birthday is, you can start making these catch-up contributions anytime. Think of it as a birthday present to yourself—you’ll be thankful you took full advantage later on.

3.    Go Roth 401(k)

There can be great benefits in contributing to a Roth 401(k) vs. a traditional 401(k). Traditional accounts are pretax and grow tax-deferred until retirement. Then, they are subject to taxation. Roth contributions have no immediate tax break – but once they are rolled into a Roth IRA, you won’t pay taxes on your distributions.

Roth 401(k)s have no required minimum distributions (RMDs) once you hit age 70 ½. Another thing to keep in mind is that Roth IRAs have limited contributions, whereas a Roth 401(k) will not. If most of your savings are in a traditional 401(k) or IRA, consider diversifying and making your 2019 contributions to a Roth 401(k). Ask your employer about switching contributions – it’s an increasingly more common option.

4.    Don’t forget after-tax 401(k) contributions

You might be able to make after-tax contribution to your 401(k). Many plans, both traditional and Roth, allow for the contributions to help you reach the $62,000 limit

HR departments often don’t mention this option because not many people are able to take advantage of it. If you earn a large bonus or commission checks or are living within your means, this might be a good fit for you. Then, once you retire or separate from service, you can roll over most of this money into a Roth IRA.

5.    Take the time to review

It’s a good idea to review your 401(k) investments with your fiduciary financial advisor each year. They can help to make sure your contributions are still in line with your goals, evenly distributed, your risk is frequently re-evaluated, your cash flow needs, etc. Even if you have a rebalancing feature on your portfolio, it never hurts to double check. Most people don’t think about this as part of their annual review, but we review our clients’ 401(k)s in our annual meetings. Many things can influence your 401(k) contributions, like the economy, investment options, or changes in your own life.

6.    Do you have a side hustle?

If you have multiple sources of income, consider various retirement plans, a SEP plan or a cash balance profit-sharing plan. SEP plans could allow you to contribute up to $255,000 each year, depending on your age and income. You have lots of options, but they can quickly become complicated. Ask your financial advisor to go over your options if you are earning multiple incomes.

7.    Max out your IRA contributions

Don’t forget your annual IRA contributions! As long as you or your spouse are earning an income, you can contribute $6,000 into a traditional or Roth IRA. Anyone over the age of 50 can contribute up to $7,000. Ask your financial advisor about building out your Roth IRA – either by meeting the income requirements or making a “back door” Roth conversion.

8.    Include a health savings account

Do you have a health savings account (HSA)? These are not well known or utilized, but have triple tax-free benefits. Basically, you can take tax deductions when funding the plan, the money grows tax-free and is not taxed on withdrawals when used for health care expenses.

In 2019, a family can contribute $7,000 towards an HSA and individuals can make $3,500 in contributions each year. An HSA acts as a Roth IRA for health care costs—the money is tax-free after the age 65 when used for medical care. If you don’t use this money for medical care, then it is taxed similarly to a traditional IRA. But you will most likely have more and more medical expenses as you grow older, so this should not be a concern

You cannot contribute unless you have a high deductible medical plan and only before the age 65. If you are contributing to an HSA, make sure they match your time horizon and focus on the account is you plan to use it for medical expenses in retirement.

9.    Consider Roth conversions

Especially when the market drops or in low-income years, Roth conversions can be a really good idea.

Roth conversions allow you to convert all or some of your traditional IRA into a Roth – tax-free growth in the future with no RMDs. Just a reminder, the 2018 tax law eliminated the ability to “recharacterize” a Roth IRA. So, no do-overs if you change your mind. Roth conversions are best left for the end of the year once you have a better idea of what your income will look like.

10.    Roll old 401(k)s into IRAs

Are your old 401(k)s consolidated and rolled into IRAs? If not, it might be time to roll them over. Not only is it easier to track your performance, you might even have more investment options and be able to avoid some fees if your new balance exceeds a certain threshold. Talk to your financial advisor to see if this is the right option for you.

11.    Design a comprehensive financial plan

Are you on track to reach your retirement goals? Do you need to make any changes? The ups and downs of the market are easier to manage if you have a solid plan to follow. If you are unsure, it might be a good idea to review your portfolio with a financial advisor annually. We encourage all of our clients to put together a plan that reflects their family goals and priorities and is achievable and measurable.

You have the potential ability to contribute up to $69,000 + $7,000 to an HSA in 2019. If you have multiple sources of income, there are even more options for you. The markets will always be uncertain, but you can always get ahead and have some peace of mind by designing a financial plan with your fiduciary advisor.

Schedule Appointment

The post 11 Retirement Planning Strategies to Jumpstart 2019 appeared first on AWM.

Walking my clients through this process helped me to narrow down 10 things you need to know about your RBD.

10 Things to Know About RBDs:

1. The first minimum distribution (RMD) must be taken by your required beginning date (RBD).
2. Your RBD will always be April 1^st of the year following your 70 ½ birthday. This is a standard date for all IRA owners and no exceptions apply.
3. That said, there are two exceptions to the April 1 RBD for what we call “plan participants”. First, the “still working” exception. This is for anyone still working for an employer plan. Second, the “old money” exception, which is for 403(b)s. These exceptions do not apply to IRAs.
4. You are allowed to delay your first RMD until April 1^st of the following year but are not delayable for any future RMDs. Your required minimum distributions are always held to the December 31^st deadline of that same calendar year. Beware, by delaying until April 1^st of the next year, will require that you take double RMDs that year—which is more taxable income.
5. If the IRA owner passes away before their RBD, there is no RMD due for the year following their death—even if they reached the age 70 ½.
6. Additionally, beneficiaries are able to stretch the distribution requirements over the life expectancy or use the five-year rule.
7. If the IRA owner passes after their RBD, their beneficiary(s) must take the year-of-death RMD if it was not already taken. Otherwise, the beneficiary(s) will face penalties.
8. In this situation, the five-year rule is not an option.
9. If the IRA owner passes on or after their RBD, the beneficiary(s) can take the RMDs over their own life expectancy or the IRA owners, whichever is longer.
10. Roth IRAs do not have required beginning dates because Roth IRA owners are never subject to required minimum distributions during their lifetime.

Closing Thoughts:

Following these 10 rules is a great place to start if you are an IRA owner or a listed beneficiary. You can also check out our post on IRA accounts and charitable distributions for more information. However, individual retirement accounts and RMDs are complicated and intricate.

Seek out professional help to make sure you understand each aspect of your requirements and to avoid any penalties or hefty fees.

Start the Conversation

The post 10 Things You Need to Know About the Required Beginning Date (RBDs) for IRAs appeared first on AWM.

Here are 10 things you should know about QCDs:

1. Under the new tax reform, you have more opportunities to maximize your deductions. Most taxpayers take a standard deduction on their tax forms. If you take a standard deduction, the option for charitable giving is eliminated. Ask your fiduciary advisor how best to make charitable distributions from your IRA(s).
2. A QCD might add to your standard deduction. Donations made directly from your IRA can help lower your adjusted gross income (AGI) by excluding all donations made from your IRA from your income. It just takes a bit of planning.
3. If you own an IRA or are a beneficiary and have reached age 70½ years old, you can make qualified charitable distributions. Check with your fiduciary financial advisor(s) before jumping into a decision.
4. Should you choose to make a QCD, it must be a direct transfer from your IRA account to your selected organization. Any distributions you take cannot be given to the charity for a deduction. That said, you can request a check, payable to the organization, mailed to you and then you can deliver it in person. It’s usually easier for our clients to just set up a direct transfer.
5. To qualify for a QCD, you cannot receive anything in return for your donation. That means no free tickets, mugs, or services in exchange for your contribution. Make sure your gift is actually a gift, not a trade. It’s also important to note that gifts to donor advised funds or private foundations do not meet the requirements for a qualified charitable distribution.
6. QCDs are limited to $100,000 per year, per individual. If you are married and your spouse also qualifies, you can each give the full $100,000 annually. Talk with your tax advisor to review your best options.
7. Any amount transferred from your IRA to a charity as a qualified charitable contribution can count towards your 2018 RMD. If you don’t need additional taxable income, this is a great way to keep your tax bracket lower.
8. Qualified charitable distributions can only be made from an IRA, Roth IRA or inactive SEP or SIMPLE IRA. Other employer plans, such as a 401(k) or 403(b), do not qualify for QCDs. Your financial advisor can help you choose the best account to make donations from. If you still have a corporate plan and want to make a QCD, talk to your fiduciary advisor to potentially transfer funds from your plan to an IRA.
9. With regards to #8, QCDs only apply to the taxable amounts in your IRA. Only the taxable amounts in a Roth IRA will qualify. This can get very complicated. Please seek out your fiduciary advisor’s recommendations.
10. Make sure you keep the communication with your accountant open and consistent during this process. Your accountant should know about any QCDs you make or plan to make for that calendar year. Otherwise, when your custodian submits your 1099-R form, there will no be information about your qualifying charitable distributions. Don’t make this mistake by making sure your accountant is aware of any IRA transactions you make, especially QCD’s.

Planning out your finances can be tricky and complicated. If you need help with tax-planning or charitable donations, consider working with a fiduciary financial advisor to guide you. Ambassador Wealth specialized in tax-planning services. We would love the opportunity to meet you.

Schedule Appointment

The post 10 Things to Know About Qualified Charitable Distributions (QCDs) appeared first on AWM.

However, many people struggle with the transition into retirement.

What is the Honeymoon Phase of Retirement?

According to Dr. Joseph Coughlin, there are four phases of retirement.

The first being the honeymoon phase. If you pay any attention to advertising, you might be expecting your retirement years to be filled with beaches, bike riding, golf, and whatever else strikes your fancy. Once you stop working, it’s true that you will have more time on your hands to do the things you love.

But those romantic advertisements neglect to tell you something.

Once these activities become a routine, they might not continue to provide the happiness you were hoping for.  Instead of being stressed in your working years, you might find yourself bored and restless in your retirement years.

The Honeymoon Will Not Last Forever

Retirees will experience different levels of financial, cognitive, physical, and social resources throughout their retirement years. The longer you are in retirement, the more these resources will diminish.

Let me explain. Financial resources tend to be the highest in the honeymoon phase of retirement because retirees have just started to spend their savings. Aging, for the most part, hasn’t taken its toll on the body and mind at this point either. Because of this, your lifestyle and health can feel similar to life during your working career.

How You Can Survive – and Thrive – in the Retirement Honeymoon

The first stage of retirement is often the hardest to adjust to. Recent retirees have to re-establish their routines, roles, and relationships.

1. Breaking your life-long Routine.

   Get up. Get ready. Eat breakfast. Go to school or work. Come home. Eat. Go to bed.

   Sound familiar? We’ve all been doing this since kindergarten. Retirement can break this routine since there is nothing forcing you into this habit anymore. You now have so much time on your hands. All this freedom can sound enticing, but if you’re not sure what to do with it, boredom can set in very quickly.

2. Roles will Change.

   Your career probably gave you a sense of pride, purpose, and self-fulfillment. Once you retire, you might miss that identity and sense of accomplishment. If you are not prepared for this big change, you might feel under-appreciated and lost in a world without structure.

   Your family might also have assumptions about your new life. They may want more of your time and energy. Set boundaries for yourself as you re-discover your new identity as a retiree.

3. Relationships will change.

   Once you stop working, you might miss the socialization, intellectual stimulation, and sense of accomplishment from the career you built.

   In the honeymoon phase of retirement, you will likely spend less, if any, time with co-workers and more time with your spouse. This is a big adjustment, especially if you and your significant other don’t share similar interests or social groups. If you haven’t thought through this transition, sharing chores, how to spend leisure time, and managing the household can also turn into conflicts.

   You should also think through the amount of assistance you are able to provide for family members, like aging parents. If they need financial support, this can cause stress on your relationships if you have little flexibility in your retirement budget.

Tips for a Smoother Transition:

1. Plan your new routine – How do you plan to spend your time? What are your hobbies? What actives will fill your day? Take some time and plan out your new routine. Think about your long and short-term goals. Moving towards these goals can be very fulfilling and could give you a sense of purpose.
2. Do some soul searching – Retirement is a big change and requires a new identity. Maybe you will get involved with a local non-profit or learn a new skill like woodworking.
3. Develop new relationships – Look for ways to replace your work relationships with new ones. Maybe take a class or work part-time to meet new people.
4. Give yourself time – You might not find your retirement groove right away, and that’s okay. It can take six to twelve months to really adjust to a new situation and way of life.
5. Seek out clarity about finances – Before, during, or after you retire, it’s a good idea to seek out professional advice from a fiduciary financial advisor. They can help you understand your financial situation and create a retirement income plan.

Thriving in Retirement Still Involves Work!

Defining your new role, routine, and relationships will take time, planning, and effort. You might even be pushed out of your comfort zone, but it’s so worth it. Think of the alternative—a boring and lonely retirement.

As you near retirement, it’s easy and understandable to feel anxious for all the change. You will have a smoother transition if you have a proper plan in place and know what to expect.

Rather than viewing retirement as a single “life stage”, you might benefit from having a conversation with your financial specialists to reflect on all the phases of retirement and plan accordingly.

Start the Conversation

The post Don’t Get Stuck in the Honeymoon Phase of Retirement appeared first on AWM.

Roth IRA vs. Traditional IRA

The primary way the IRS differentiates between a Roth and Traditional IRA is when you pay taxes: now or later. Let me explain:

For a Traditional IRA, anyone under the age of 70 ½ and who is earning income, can contribute $5,500 each year to their individual retirement account. Those who are over 50 can contribute $6,500 per year. These contributions are often tax-deductible – depending on your income and other various factors. When you take distributions from this account, it will be taxed as ordinary income.

The exact opposite is true for a Roth IRA. All contributions to a Roth IRA are made after taxes are paid on your income. It’s important to remember that Roth contributions are not tax deductible. That said, when you’re ready to take distributions, most withdrawals are not taxed.

The other major difference between these types of accounts is distributions. Traditional and Roth IRAs allow you start taking distributions at age 59½ without penalties, however, if you take a withdrawal less than five years after the first contributions were made, the Roth IRA loses its tax-free status. Traditional IRAs require you to take minimum distributions annually, starting at the age of 70½. Roth IRAs, on the other hand, have no required distributions. If you don’t need the extra income, it can stay in your account and continue to grow. This is a great strategy, especially if you want to set up an inheritance for your heirs.

Benefits of a Roth IRA

At a quick glance, paying taxes “now or later” might feel like an either/or option. However, we encourage you to take a closer look. There are potential tax and estate planning advantages that might suggest a Roth IRA is a better option. Here are three reasons why:

1.    Tax Advantages

With traditional IRAs, account owners end up paying taxes sooner or later on their contributions and on their investment returns. A Roth IRA requires the taxes to be paid up front when the contribution is made. Because of this, Roth IRA holders see tax-free growth on all their investments. Learn how you can make direct distributions to qualifying charities to save on taxes. 

2.    Penalty Avoidance Benefits

Apart from a few exceptions, distributions from a traditional IRA cannot be made before the age of 59½, without penalty (along with the taxes you will already pay). With a Roth IRA, as long as your contributions have been in the account for at least five years, the contribution can be withdrawn without taxes or penalties—even before the age of 59½. Take note, however, that early withdrawals of investment returns are still subject to a penalty through a Roth account.

3.    Estate Transfer Benefits

Annual distributions are required for all traditional IRAs after the age of 70½, even if you don’t need the extra money. On the other hand, with a Roth IRA, there are no mandatory distributions. In fact, if you never need the money in your retirement account, it could even be passed down to your heirs. They can spread out their own tax-free distributions over any length of time.

Opening a Roth IRA and Working Around the Income Limitations

Most anyone can open a Roth IRA, simply by declaring the account a Roth from the beginning. All you need to do is find an investment firm or fiduciary financial planner who offers Roth IRAs.

Unfortunately, most high-income taxpayers quickly find out this option is not available to them. Individuals with an adjusted gross income (AGI) of $135,000 or more, and married couples filing jointly with an AGI of $199,000 or more are unable to make contributions to a Roth IRA. On the bright side, there is a work around. It’s possible for these high-income clients to create a Roth IRA through an IRAconversion. We call this the “back-door method.”

There are 2 common ways to approach this method:

1. You put money into a traditional IRA, usually through a contribution. Anyone earning an income can make contributions to a traditional IRA. The only disadvantage for people with higher incomes is that their contributions are not tax deductible. Because the goal of the back-door method is a conversion to a Roth IRA, paying tax on contributions is unavoidable.
   
   
2. You transfer money from a 401(k) or another employer compensation plan. This is what we call a Rollover. Rollovers are not under the same constraints as the regular IRA contribution thresholds of $5,500 or $6,500. So, your entire 401(k) or pension fund can be transferred in one transaction. Easy, right?

Once you choose your back-door method and your traditional IRA is set up, you can convert to a Roth IRA. These conversions are no longer limited by income; current laws allow anyone to use this back-door approach. In fact, the Tax Cuts and Jobs Act of 2017 approves the use of this approach.

Potential Risks of a Roth IRAs

The primary risk that comes with a Roth IRA is the unpredictability of future investment values, tax rates, and regulations. For example, should the investments of a Roth IRA drastically drop in value, you might regret paying taxes up front. 

In the past, Roth IRA holders were able to escape this outcome through a recharacterization—basically an IRA “backspace” button. Unfortunately, under the 2017 tax reform, recharacterization was outlawed and the terms no longer apply. Since this change, many investors approach the conversion to a Roth IRA with more consideration. Talk with your fiduciary financial advisor to ensure the best possible outcome on your IRAs.

Conclusion

Looking at the facts, the tax and wealth management advantages of a Roth IRA drastically outweigh the cons. Discuss the best course of action to take with your fiduciary advisor and your accountant. While IRAs potentially might benefit you, you still ought to consider carefully which IRA will best work for you as you plan for your retirement years.

Start the Conversation

The post Retirement Planning: Roth IRAs vs. Traditional IRAs appeared first on AWM.