How Are You Going to Stay on Top of Your Finances in 2021?

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How are you going to stay on top of your finances in 2021?

Financially planning for retirement can feel like a lot of work, especially if you have multiple moving parts to your money. Dealing with 401Ks, IRAs, Social Security, and RMDs can become overwhelming as the year gets busier, so we recommend taking stock of your finances early and planning ahead.

The beginning of the year is a great time to review your finances but knowing where to start is challenging. So, we’ve created our retirement and financial planning checklist.

Read on to discover the nine key areas you should consider for the upcoming year. We also point out some key changes and information for 2021, so you can start this year as securely as possible.

1. Review your 401K, traditional IRA, Roth IRA, and HSA contributions

If you’re earning income, you should review your accounts and plan how much you want to contribute to each one this year. Do you have a goal for each? How much will you need to contribute to get you there?

Bear in mind that contributions may be limited, so you might need to adjust your plans and payroll accordingly. For example, the contribution limit for 401Ks in 2021 is $19,500. However, if you’re over 50 years of age, you can qualify for the ‘catch-up contribution’, increasing the $19,500 limit by an additional $6,500. This also applies to 403Bs and 457 plans.

Roth IRA accounts have a much lower contribution limit of $6,000, with an additional $1,000 for those over 50.

We’ve detailed the difference between Roth IRAs and traditional IRAs before, but to recap, the main differences are:

  • A Roth IRA is tax-free assets: contributed to after you’ve paid tax on the money – these have income limitations, so if you earn over a certain amount, you will not be able to contribute
  • A traditional IRA is pre-tax assets: contributed to before you’ve paid tax on the money – no income limitations

To learn more about the pros and cons of Roth IRAs vs traditional IRAs, read this post.

Once you are aware of your accounts’ limitations, we advise you plan your contributions for the year. This way, you can ensure you’re on track to achieving your long-term money goals without having to continually review your accounts’ statuses.

2. Update your beneficiaries

Life sometimes moves so fast that it can be hard to keep up. New grandchildren, marriages, or other life changes may affect who you want as a beneficiary.

It’s important to stay on top of your different accounts and which beneficiaries are associated with them. Your accounts and associated beneficiaries should align with your overall estate plan and life insurance to avoid confusion.

Updating beneficiaries can be easily done online or with a signature on a form. It should only take a few minutes and is something we highly recommend putting in order while you have the time.

3. Consolidate your accounts

If you’ve previously changed employment, you may well have more than one 401K plan open. We often speak to clients who have two, three, or four 401Ks with past employers, that they’ve completely forgotten about – and that have substantial balances in them!

Moving existing 401Ks into a traditional IRA is a fantastic way to consolidate your accounts. It’s completely tax-free, with no risk, penalties, and typically no fees. If you hold multiple traditional IRAs, we also advise consolidating these into just one account.

By reducing the number of unnecessary accounts, managing your money will become more straightforward and less stressful.

4. Assess your mortgage rate

It’s very unlikely that mortgage rates will reduce further, so we recommend taking advantage of them while you can. Now is a great time to refinance your house or any investment properties you have a loan on. An advantageous rate could lower your payments, giving you greater monthly cash flow, or help you pay off the loan faster.

We spoke to a Loan Officer with 15 years’ experience about the benefits of refinancing in our podcast episode ‘Tammi Rowe – Planning Your Mortgage and Retirement’. To find out more about what refinancing could do for you, listen to the episode.

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5. Plan for emergencies

You might be faced with a financial opportunity, for example, paying off your mortgage, but it’ll leave you with less cash in the bank than you’d like. Should you do it? Or should you build up your ‘emergency fund’ first?

Having cash reserves in case of emergencies is necessary. But you don’t always have to choose between keeping lots of cash in the bank or paying off a substantial loan.

One tip we give our clients is to open an equity line of credit. There can be a minimal fee to open it, but there’s no interest if you don’t have any balance. This means that if you spend your cash reserves on something like paying off a mortgage, you have easy access to cash, as an equity line of credit comes with either a debit card, a checkbook, or both.

An equity line of credit is only available to those still working, so if you want an emergency fund for the future, we urge you to set one up while you still qualify. You won’t need to make any payments, and it won’t gain any interest, so long as the balance is zero.

6. Consider how and when you’ll take your RMDs

If you’re turning 72 in 2021, pay close attention. RMDs or Required Minimum Distributions were optional in 2020, however, the rules are changing for 2021, and if you turn 72 this year, you will have to take your RMDs this year and every year going forward.

Your individual RMDs are based on your IRAs’ combined balance, so there isn’t one set figure for everyone. You can spend your RMDs, or you can reinvest them into another brokerage account, but they must leave your IRA and cannot go into another IRA.

Bear in mind that money in a traditional IRA is pre-tax. So, when it leaves the IRA as an RMD, it’s treated as income and will be taxed.

There is no rule when you should take your RMDs, but you must start taking them before December 31st from the year you turn 72. Some people choose to take it monthly, like a paycheck, and others take it as a lump sum at the beginning or end of the year.

If you don’t need to take your RMD and don’t want to pay tax on the money you don’t need, you can make a qualified charitable deduction once you’re aged 70 and a half. This is where you direct your RMD straight from your IRA to a charity of your choice. This way, your RMD leaves the IRA but isn’t claimed as income, making it tax-free.

You can also do this with a portion of your RMD. For example, if your RMD is $10,000, and you want to instruct $5,000 to a charity and keep $5,000 for yourself, you only have to pay tax on the $5,000 you keep.

7. Apply for Social Security

If you’re planning on taking Social Security in 2021, it can be a long process. Right now, there are thousands of people applying every single day, so we advise applying two to three months ahead of when you want to start receiving your Social Security benefits.

You can apply as early as three months before the date that you want to start receiving them, so if you’ve already decided it’s part of your financial plan for 2021, don’t wait. Plan ahead, make the phone calls, and fill out the paperwork as soon as you can so that you can receive your benefits when you need them.

8. Research your Medicare options

Health insurance has never been more vital, so putting a plan in place as soon as possible is recommended. There’s a lot to think about with Medicare, from how your income affects your premiums to when the open enrollment periods are. If you’re turning 65 or going to be receiving Medicare, we encourage you to research your options.

We spoke to Medicare Specialist, Lorraine Bowen, on our podcast, and she answered all of our Medicare questions, including what it covers and how to find out if you’re entitled to it. To learn more about Medicare, listen to this episode.

9. Understand your income plan

When you stop working, you might find it more challenging to keep track of your income. There can be many moving parts in retirement with different income streams and RMDs, and it could leave you with an unnecessarily high tax bill or with fewer cash reserves than you’d like.

Now is the perfect time to adjust your income to ensure that you’re not taking too much or too little. We use a couple of different software programs that help us automatically track income on a month-by-month basis to find a monthly income figure that’s best suited to you. If you want to learn more about how we do this, reach out to us.

Those are our nine key points for preparing your finances for retirement in 2021. By completing this checklist, you’ll be giving yourself peace of mind that you’re on track to achieving your financial goals throughout the year.

We’re going to delve deeper into more of these topics as the year progresses, but if you have any urgent questions about any of the subjects we discussed in this post, please get in touch. You can contact us, or if you want to discuss your retirement goals with a member of our team, we invite you to schedule a 15-minute complimentary call with us.

Fixed Index Annuities: How They Work and Things to Consider

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You may never have considered a fixed index annuity, but is it something you should look at for your retirement plan?

Many people think annuities are too complicated. That’s why throughout our “Annuities – Why Ever Use Them” series, we’ve tried to answer the questions which may have led you to dismiss them in the past.

In this post, we’re focusing on fixed index annuities, specifically how interest is credited on them. We’ll also recap some general advice on annuities, so you can stay informed about how they work and what they can offer.

What are annuities? A quick recap

If you’re unsure what annuities are, how they work and the benefits they offer, be sure to go back to part one and two of our “Annuities – Why Ever Use Them” series. It’s worth understanding the basics before we launch into the more complex areas of deferred fixed index annuities, which we’ll cover in this post.

As a quick recap, here are some key points to be aware of:

  • Annuities are generally used for one of two reasons: as a safe money alternative or as a fixed source of income in retirement.
  • There are two main types of annuities: immediate and deferred.
  • Immediate annuities are when an insurance company sets up an income stream based on your retirement assets.
  • A deferred annuity is used as both a safe money alternative and an income stream.
  • Deferred annuities have two types: fixed and variable. We wouldn’t recommend variable, as there’s a risk you could lose money.
  • Instead, we always suggest declared rate or fixed index deferred annuities.
  • A declared rate annuity offers a fixed rate of return over a set period; it’s often compared to a bond or a certificate of deposit (CD).
  • A fixed index annuity is when the rate of interest you earn varies in line with an index, such as the SMP500. This is a great option because you can benefit from upswings in the market without the risk of losing money.

We appreciate that’s a lot of information to take in. If you’re at all confused by how different types of annuities work, we’d encourage you to read parts one and two of the “Annuities – Why Ever Use Them” series.

Alternatively, listen to episode 26 and episode 30 of the Securement Your Retirement podcast, where we cover these topics in detail. They’re available on your usual podcast app or on YouTube.

What is an index cap and how does it affect a fixed index annuity?

Now we’ve covered what you need to know about annuities, let’s continue our conversation about how interest is credited on a fixed index annuity.

In part two of “Annuities – Why Ever Use Them,” we talked about the annual reset and how it relates to the interest you earn. Think of this as a reset point for the interest-earning period; it varies depending on the terms of your contract but usually happens every 12 months.

The beauty of a fixed index annuity is that any interest you earn is guaranteed and will be credited to your account on the annual reset. This then becomes the starting point for the new interest-earning period.

However, there are a couple of other things to note about interest crediting on a fixed index annuity, including the “index cap”.

The index cap is the maximum amount of interest you can earn in an interest-earning period, as a percentage sum. It’s set by the insurance company who controls your annuity and is based on a range of factors, including the overall financial outlook.

To help you understand how an index cap works on a fixed index annuity, here’s a simple example:

  1. You put $100,000 into a fixed index annuity
  2. The insurance company sets a 5% index cap
  3. The index performs well over your interest-earning period and is up 15%
  4. The index cap means you’ll make 5% interest
  5. The interest is credited during the annual reset
  6. You now have $105,000, which is guaranteed and will never fall

This is just a simple example to show you how the index cap dictates the interest you earn on a fixed index annuity. Whether it’s the SMP500 or the NASDAQ; no matter how strongly an index performs, you’ll only earn interest up to the index cap.

It’s worth remembering that you can’t lose money on this type of annuity, even if the index performs poorly or goes negative. Any interest made is guaranteed, so whatever you earn is yours to keep – making a fixed index annuity a powerful way to grow your retirement fund.

What is the participation rate and why does it matter?

Something else that affects the interest you can earn is what we call the “participation rate”. This is a percentage sum, set by the insurance company, which essentially decides how much money you should make from an index. 

To show you how the participation rate works and how it affects the interest you’ll earn on a fixed index annuity, here’s a basic example.

Let’s say you pay $100,000 into a fixed index annuity with a 50% participation rate. This means you’ll earn 50% of what your index makes.

So, if an index made 10%, you’d get 5%. If it made 12.5%, you’d make a 6.25% return.

Participation rates vary widely and are one of the first things we look for when finding the most lucrative fixed index annuity deals. Insurers offer lots of different rates, with the majority falling in the 80-90% range, though they can be higher or lower based on a range of factors.

Do you want to put your money in a fixed index annuity? We can help

The world of fixed index annuities can be complicated, with lots of options and things to consider. But if you think this sounds like the right direction to take with your retirement plan, we’re here to help.

Our experts have years of experience in helping people set up and manage a fixed index annuity. And with the potential to boost your retirement assets by a considerable amount, taking advantage of our knowledge and expertise is certain to be worth your while.

We’d also like to reiterate that while annuities may sound complicated, they have been around for a long time, with billions of dollars passing through them each year. Through our “Annuities – Why Ever Use Them”series, we want to get you thinking differently about these products, so you can make an informed decision on where to put your retirement assets.

Are you ready to take the next step on your retirement plan? Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.

The Stretch IRA is Gone: What Next for Your Inheritance?

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The stretch IRA is dead, so what options do you have when it comes to inheritance planning?

At the start of 2020, new rules were introduced on how individual retirement account (IRA) holders can use the “stretch” IRA to manage their inheritance. With changes to the way beneficiaries access inheritance assets, you may have questions about what the rules mean for you and your loved ones.

In this post, we look at what happened to the stretch IRA and how it could affect your inheritance planning. We also cover some of the alternatives to stretch IRAs, including life insurance and Roth conversions.

What happened to the stretch IRA?

On January 1, 2020, the Secure Act was passed and with it came to the end of the stretch IRA. For years, this estate planning strategy was a tax-advantageous way to leave an IRA to a non-spouse beneficiary, but now it’s no longer an option.

So, which new rules were introduced under the Secure Act 2020? And what effect have they had on how IRAs work?

The biggest change concerns how a beneficiary can access an IRA after they’ve inherited it. Previously, a stretch IRA allowed non-spouse beneficiaries unlimited time to withdraw funds from their inheritance. Now, the money must be out of the IRA within 10 years after the date of death, so beneficiaries can no longer access them over their lifetime.

Say, for example, you want to leave $40,000 to your grandchild, who is 30 years old. The Secure Act now means they must withdraw all of the assets within 10 years, either as a lump sum or as annual distribution payments. If they don’t, they’ll have to pay tax all at once, which could significantly reduce their inheritance pot.

Thankfully, the introduction of the Secure Act isn’t all bad news for those with an IRA. There are two other rule changes which many will see as a benefit:

  • The age at which you must withdraw required minimum distributions (RMDs) from your IRA has risen from 70 to 72. This means you’ll have two more years to pay into your retirement account before you need to start drawing money from it.
  • The Secure Act has removed the upper age limit of paying into an IRA. Now, so long as you’re still earning income, you can continue paying into your retirement account indefinitely.

What to consider when withdrawing from an IRA inheritance fund

Now that beneficiaries have just 10 years to withdraw assets from an IRA, they must think about how and when to access their inheritance. Remember, a beneficiary can withdraw funds either as a lump sum or as regular distributions, affecting how much they pay in tax.

If a beneficiary is 60-65 and within 10 years of retirement, it could be worth waiting until they retire before withdrawing money from the IRA. That’s because retirement means a smaller income, so they’ll be in a lower tax bracket and pay less tax on the total inheritance amount.

For younger beneficiaries, withdrawing from an IRA over the 10-year period may be more advantageous – especially if they expect their income to increase as they get older.

Through these examples, you can see why it’s important for beneficiaries to think about the best time to withdraw funds from an IRA. We’d always recommend discussing these options with your beneficiaries so that they can make the most of their inheritance after you’ve gone.

How to manage your inheritance now that the stretch IRA is gone

Now that the stretch IRA is a thing of the past, what other options can help you make the most of your inheritance?

With advanced IRA planning, you can make sure your beneficiaries don’t face a heavy tax burden on their inheritance. There are a few different options that provide good alternatives to the stretch IRA, including Roth conversions and life insurance.

Roth conversions

A Roth conversion is the process of switching your pre-tax IRA assets into tax-free ‘Roth’ assets. This means that you pay the tax on your beneficiary’s inheritance so that all the money they receive is tax-free.

The beauty of Roth assets is that, while the 10-year Secure Act rule still applies, there’s no tax to worry about for both lump sum and annual withdrawals. What’s more, as Roth assets earn interest, it’s well worth letting the inheritance grow over the 10-year period.

A Roth conversion does mean you’ll have to settle the tax bill yourself, passing this benefit to your beneficiary. If that’s important to you, it could be a great option.

Life insurance

The second option we’d recommend as an alternative to the stretch IRA is life insurance. Although slightly more complicated than a Roth conversion, taking out life insurance guarantees tax-free inheritance for your beneficiaries after you’ve gone.

A key thing to note about the life insurance option is that you have to go through underwriting, meaning you first have to qualify. Some people may be concerned that their age will bar them from taking out life insurance, but you may be surprised at the rates and options available.

Life insurance is a great way to ensure your non-spousal beneficiaries can enjoy their inheritance without worrying about tax. What’s more, there’s no 10-year rule on when an inheritor has to withdraw the funds from a life insurance plan, making it a beneficial long-term inheritance option.

So, if you have money set aside as inheritance, life insurance could be the best way to guarantee a tax-free benefit for your loved ones.

Do you need help with your inheritance planning?

We understand that planning your inheritance can be complicated, especially given the recent rule changes introduced by the Secure Act. So, if you need help understanding the different options available, our experts can provide impartial advice on the best way to pass your retirement assets on to your loved ones.

Whatever you’re planning for your inheritance and however big the sum you’ve set aside for your beneficiaries, we can help make the process simpler to manage. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.

What Are Annuities and How Do They Work?

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When it comes to your retirement plan, you may have dismissed fixed annuities as overly complicated. But with major benefits to be had, we think investing in an annuity is a conversation worth having.

In this post, we’re taking an in-depth look at fixed annuities, including what they are, how they work, and the different options available. We’ll also walk you through an example, so you can see how this type of annuity could benefit your retirement fund.

Annuities – a quick refresher

In part one of our ‘Annuities – Why Ever Use Them’ series we covered the basic what, why, and how of annuities. If you missed it, here’s a quick refresher:

  • An annuity provides income in retirement, either as a stable income stream or as a place to earn interest on your money
  • People take out annuities for one of two major reasons: income planning in retirement and as a safe place to store money
  • There are two major types of annuities: immediate and deferred
  • An immediate annuity is when you give a lump sum to an insurance company, which then distributes it back to you through income-for-life payments
  • A deferred annuity is a place to invest and store money for your retirement. You can earn interest on the money you’ve invested before withdrawing it as a lump sum or setting up an income stream
  • There are two major types of deferred annuities: fixed and variable

We always recommend the fixed-rate option, so that’s what we’ll focus on in this post.

If you’d like more information on the basics of how annuities work, be sure to watch part 1 or listen to our podcast episode.

What are the main types of deferred fixed annuities?

If you’re looking for somewhere to store your savings and make money, a deferred fixed annuity could be a good option. This is when you give a lump sum to an insurance company to earn interest on your retirement fund.

There are a couple of benefits to fixed annuities which make them more attractive than immediate annuities. Firstly, the money you give to the insurance company isn’t locked away, so you can access your savings for big purchases, like vacations or home improvements.

Secondly, you’ll earn interest on your investment, giving your retirement pot a significant boost without fear of losing your principal investment.

The amount of interest you earn will depend on the fixed annuity you invest in, with the two main types being declared rate and fixed index. Let’s take a closer look at how these annuities work and what they offer.

Declared rate annuities

A declared rate annuity provides a fixed rate of return over a set period. Think of them like a certificate of deposit (CD), wherein you consistently earn interest in a safe, stable way.

Declared rate annuities are a popular option for those who want to boost their retirement pot with a reliable source of interest. At the end of the plan, you can withdraw your money and walk away or set up an income stream for your retirement years.

Of course, the downside to declared rate annuities is that the amount of interest is fixed, so you’ll never make more than the declared amount. While this does mean reliable earnings, it takes away the opportunity to make money when the markets are up, so you’ll miss out on a potentially higher rate.

Fixed index annuities

Fixed index annuities bridge the gap between fixed-rate and variable annuities, allowing you to benefit from market upswings without fear of losing your principal investment. With this type of annuity, the interest you earn is based on an index, be it the SMP500 or the NASDAQ.

Having your retirement assets linked to the stock market might sound alarming, but the beauty of this type of annuity is that your investment is guaranteed. That means you can take advantage of higher interest rates when the market climbs, without fear of losing money should it fall.

The drawback to fixed index annuities is that when the market is negative, you could make little to no interest over a 12-month period. However, if this is a risk you’re willing to take, the interest you earn when the index goes up will more than likely outstrip that of a declared rate plan.

How is interest credited on a fixed index annuity?

So, how does the interest you earn through an index make its way to your retirement fund? To answer that, we’ll set out a basic example of a fixed index annuity, so you can get an idea of the numbers and timeframe.

Let’s say you invested $100,000 in a fixed index annuity on January 1, 2020. Over the next 12 months, you’ll earn interest based on how the index performs.

On January 1, 2021, the annual reset occurs, and you’ll receive your first statement. This tells you how much interest you’ve earned from the index as a percentage sum.

So, if you made 5% interest, your investment would now be worth $105,000. This is the amount that you start the new earning period with, and it’s guaranteed money that you can’t lose, even if the market declines.

Say, for example, the index performed poorly for the next 12 months; you wouldn’t make any money, but you wouldn’t lose any either. That’s why fixed index annuities can be a powerful way to boost your retirement fund and guarantee a good rate of return over the earnings period.

We understand that the annuities world can be complicated. That’s why we plan to continue this series, walking you through the ins and outs of the different options available.

Remember, if you need any advice or expertise in setting up an annuity for your retirement, our financial specialists are here to help. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.

Roth Conversion – When and How to Plan

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If you have a traditional IRA, you may be considering a Roth conversion. There are many reasons why a Roth might suit your money better than a traditional IRA, however, knowing the differences between the two and the long-term results of moving your money can help you decide which IRA to choose.

Roth IRAs and conversions are a popular topic for those approaching retirement, so in this post, we explain why a Roth IRA might be beneficial to you, when to do a Roth conversion, and what’s involved in the process. 

The differences between a Roth IRA and a traditional IRA

An IRA, or Individual Retirement Account, allows you to save for your retirement through tax-free growth or on a tax-deferred basis. There are several different types of IRA, but the two most common we see compared are Roth and traditional accounts.

If you have a traditional IRA, you typically receive an immediate tax benefit after you’ve contributed. You put your money in pre-tax, and it will grow tax-deferred. This means that when you begin withdrawing money from the IRA, it’s treated as income and is taxable.

If you have a Roth IRA, you don’t get any immediate tax benefits after contributing. You put your money in after-tax, however, it grows tax-free within the Roth account and remains tax-free after you withdraw it.

So, if you’re looking at making substantial or long-term contributions to an IRA, a Roth account could be a better option for you. This way, you’ll pay less tax in the long run, as you won’t have to pay any tax on your savings growth.

But if you’d prefer immediate tax benefits, then a traditional IRA could be the better choice. So which IRA is best for you depends on whether you’d like your tax benefits now or in the future.

How RMDs affect traditional IRAs 

One thing to bear in mind with traditional IRAs is that you have to take an RMD (required minimum distribution) from the age of 72 and every year after.

This is the deal you make with traditional IRAs. While you receive immediate tax benefits when you make contributions, RMDs are the government’s way of ensuring that they still receive tax revenue. RMDs are not optional, and you have to take them every year even if you don’t need the money.

RMDs are also taxed at future tax rates. If you believe that tax rates will be lower in the future, then a traditional IRA may make more sense for you. However, if you think that they will be higher, you might want to consider a Roth IRA.

A Roth IRA has no RMDs. You can withdraw as much or as little as you like, and you won’t be taxed on any withdrawals. 

Why contribution limitations can lead to conversions

There are contribution limits to both Roth and traditional IRAs, but for Roth IRAs there are also income limitations. If you earn too much, then you cannot make a direct contribution to your Roth IRA.

This is where a Roth conversion can help.

A Roth conversion is where you transfer money from your traditional IRA into your Roth IRA. One important thing to remember when you do this is that you have to pay tax on that asset. As the money will have gone into your traditional IRA pre-tax, you must pay tax on it before you can put it into your Roth IRA.

Once your money is in the Roth account, it can continue to grow tax-free for however long it’s in there. There are no requirements for when you should start taking money out or how much you should take out annually.

If you are taking RMDs from your traditional IRA, it’s important to know that you cannot convert them into a Roth account. The only way to move your RMDs into a Roth account is to combine it with an additional amount first. For example, if your RMD is $15,000 and you want to move this into your Roth account, you’ll have to take out more from your traditional IRA, say an extra $15,000, and move both amounts into the Roth account.

You can contribute to your IRA account when you file your taxes. For most people this is usually around April. But conversions must be done by the end of the year. The deadline for Roth conversions is December 31st.

Why should you do a Roth conversion

Roth conversions make a lot of financial sense when you’re temporarily in a low tax bracket or receiving very little taxable income. If you’re in a situation where you’re expecting your tax bracket to rise or your taxable income to increase, then it’s best to do a Roth conversion as soon as possible.

Converting at a time when you pay less tax has the best long-term benefits for your money as it will continue to grow tax-free and you’ll never have to pay tax on it again. This is the number one reason that many people do a Roth conversion.

The second reason is that you want to avoid RMDs. If you’re planning long term, then you could aim to convert all of your money from your traditional IRA before you turn 72. This way you won’t have to take RMDs and pay tax on them. Even if it’s not possible to convert all of your money before then, by moving some money into a Roth account, your RMDs could decrease and you’ll pay less tax overall.

The step-by-step process of a Roth conversion

If you’re thinking about doing a Roth conversion, the first step is to speak to a financial advisor. We can help you look at the whole picture and gauge whether it makes sense for your money.

We take a look at your current tax bracket, what future tax brackets we can expect, and if it’s the best year to make this type of conversion. We also involve CPAs who can help us decide how much to convert and navigate tax brackets.

Speaking to a financial advisor will also help you determine what your goals are for your money. We’ll help you understand why a Roth conversion may or may not help you reach those goals, and then once you’re happy, the process is as simple as moving money from one account to another.

So, if you’re considering a Roth conversion or have any questions about IRAs and what they can do for you, then reach out to us. You can book a complimentary 15-minute call with a member of our team to discuss which avenue is right for you. Book your call today to get started!

What Are Annuities and Should You Consider One?

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Should annuities be part of your retirement plan? Some would say no, but once you know what they are and how they work, they could be a good option for you.

In this post, we’ll show you what annuities are and the different types available, before looking at ways to make them work for you.

What is an annuity?

An annuity is a retirement product that offers a steady income stream in retirement. They’re designed to provide a source of income for the rest of your life and are typically set up so that you can’t outlive the payments.

You can contribute to an annuity alongside other retirement contributions, like a pension, IRA, or 401k. Think of them like a certificate of deposit (CD) or a bond, whereby you invest a lump sum with the understanding that you’ll be remunerated at a later date.

How do annuities work?

Annuities are a long-term contract between yourself and an insurance company, which guarantees income-for-life payments when you retire. It’s when you give a lump sum of money to an insurance company, which converts it to an income stream that you can’t outlive – providing a lifetime of income.

Here’s how they work:

  1. You pay a lump sum to an insurance company – let’s say $100,000 as an example.
  2. You choose the type of annuity plan you want – there are two major types available, immediate and deferred. Keep reading for more information on the pros and cons of these different options.
  3. You start receiving income-for-life payments – this is either when you reach retirement age or at a time agreed with the insurance company.

Annuities can be complicated and are often misunderstood. But so long as you remember the basics of how they work, they can be a valuable addition to your retirement plan.

Why should you consider an annuity?

There are three key reasons why people look at annuities as part of their retirement plan.

The first concerns guaranteed income. Annuities offer the peace of mind that you’ll receive a reliable income when you retire, and these are payments that will continue for the rest of your life.

The second reason to look at annuities is that they’re considered a safe and profitable place to keep your money. If you choose a deferred annuity plan with a fixed interest rate, you’ll receive a guaranteed rate of return – helping to top up your savings for when you retire.

Lastly, annuities often bring a death benefit, meaning guaranteed money for your loved ones when you’ve gone. Though not one of the main reasons to invest in an annuity, it is a benefit that you may appreciate when thinking about your inheritance.

The pros and cons of different types of annuities

If you decide an annuity is right for you, the next question is: which type should you go for? As we touched on earlier, there are two main types of annuities to choose from, immediate and deferred. Let’s take a look at how they work and the pros and cons they offer.

Immediate annuity

An immediate annuity is a retirement product that you can access within 12 months of investing. It’s when you give a lump sum to an insurance company, which then distributes it back to you based on a defined schedule or over your lifetime.

The main benefit of taking out an immediate annuity plan is the guaranteed income it provides. It means you don’t have to worry about budgeting your savings, instead you’ll receive regular payments that you can live on through retirement.

One of the downsides of immediate annuities is that they aren’t flexible. As soon as you make a lump-sum payment to an insurance company, you can no longer access it. This could mean you find it difficult to make large, one-off purchases in retirement, especially if you don’t have other assets to rely on.

Deferred annuity

A deferred annuity isn’t as straightforward. Often compared to a CD or a bond, this type of annuity is a long-term investment where you can store money until you retire.

To further complicate things, there two types of deferred annuities, fixed-rate and variable. A fixed-rate annuity guarantees a reliable rate of return on your investment, while a variable annuity means your investment is subject to the highs and lows of the financial market – meaning you could lose money.

In most circumstances, we’d always advise a fixed-rate plan when considering a deferred annuity. It’s much safer if you’re relying on that money for later life. You’ll also get the benefit of added interest without the worry that you could lose money.

It’s worth noting that with a deferred annuity, you can withdraw money up until the point that you start receiving regular payments. Say, for example, you want the payment plan to begin when you’re 75. You could pay into a fixed-rate annuity before you retire, while still having access to your investment up until the regular payment schedule begins.

How to plan for an annuity as part of your retirement

Arranging an annuity for your retirement might sound complicated, but it doesn’t have to be. Provided you know what your assets are and how much money you’ll need in retirement, an annuity can be a feasible part of your retirement plan.

Whether you opt for an immediate or a deferred annuity, you’ll need a lump sum to give to the insurance company. This money usually comes from income sources like savings, pensions, social security, or the equity released when selling your property.

When deciding how much to invest in an annuity, be realistic about what you’ll need in regular income when you retire. Think about essential costs – to cover things like food, bills, and accommodation – as well as disposable income that will give you the freedom you deserve in retirement.

Financially planning for an annuity can feel overwhelming, but help is available. Our experts will consider your income and show you the options available, creating a customized retirement plan that meets your requirements and goals for retirement.

We hope we’ve cleared up some of the misconceptions you may have had about annuities. If you need help setting up an annuity for your retirement, don’t hesitate to get in touch. Book a complimentary 15-minute call with a member of our team to discuss your retirement goals today.