We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for August 19, 2024
Radon and Murs discuss the essential rules and considerations surrounding your 401K as you approach and surpass the age of 50. Age 50 is a pivotal milestone when it comes to retirement planning, with key changes in contribution limits, withdrawal rules, and rollover options that can significantly impact your financial strategy. Understanding these rules can help you optimize your retirement savings and avoid costly mistakes.
Navigating the complex world of 401K plans as you get closer to retirement can feel daunting, especially as you approach age 50. This age marks the beginning of a new chapter in your retirement planning journey, one that comes with its own set of rules, opportunities, and potential pitfalls. But why does age 50 matter so much in the context of 401K rules?
Navigating the complex world of 401K plans as you get closer to retirement can feel daunting, especially as you approach age 50. This age marks the beginning of a new chapter in your retirement planning journey, one that comes with its own set of rules, opportunities, and potential pitfalls. But why does age 50 matter so much in the context of 401K rules?
In this blog, we’ll explore the key 401K rules that come into play once you reach age 50, including catch-up contributions, withdrawal options, rollover possibilities, and Roth IRA conversions. Whether you’re still actively working, considering early retirement, or simply want to ensure your retirement documents are in order, understanding these rules is crucial for maximizing your financial security. So, let’s dive into the specifics and see how turning 50 can actually work to your advantage in retirement planning.
The Power of Catch-Up Contributions at Age 50
One of the most significant changes when you turn 50 is your eligibility for catch-up contributions to your 401K. The IRS sets annual contribution limits for retirement accounts, but once you hit the big 5-0, you’re allowed to contribute extra funds beyond the standard limit. For 2024, the regular contribution limit is set at $22,500 per year. However, individuals aged 50 and above can make an additional catch-up contribution of $7,500, bringing the total allowable contribution to $30,000 annually.
This opportunity is particularly valuable for those who may have started saving for retirement later in life or who feel they are behind on their retirement goals. By taking full advantage of the catch-up contributions, you can significantly boost your retirement savings in the critical years leading up to retirement. Moreover, contributing more to your 401K not only enhances your investment potential but also reduces your taxable income, providing an immediate tax benefit.
Withdrawal Rules After Age 59½
Another important age to keep in mind in the 401k retirement discussion is 59½years old. This specific age is when you gain more flexibility in accessing your retirement funds without incurring penalties. Prior to age 59½, withdrawing money from your 401K would result in a 10% early withdrawal penalty on top of the regular income tax you’d owe on the distribution. However, once you reach 59½, you can start taking distributions without that additional penalty, which can be a game-changer if you’re considering retirement or need to access your funds for other reasons.
Many 401K plans also allow for in-service rollovers or in-service distributions after 59½, meaning you can transfer your 401K balance to an IRA while still working and contributing to your 401K. This can be beneficial if you’re looking for more investment options, want professional management of your funds, or simply prefer the flexibility that an IRA offers. Importantly, your 401K account remains open, allowing you to continue contributing and receiving any employer match.
The Age 55 Rule: Early Access to 401K Funds
What if you want to retire before 59½? The age 55 rule might be your solution. This rule allows individuals who leave their job after turning 55 to withdraw funds from their 401K without the 10% early withdrawal penalty, provided the funds remain in the 401K and are not rolled over to an IRA. Keep this rule in mind if you experience an unexpected job loss or if early retirement is part of your financial plan.
The age 55 rule is often an overlooked benefit of 401K plans. It’s designed to give you access to your retirement savings during a transitional period, whether due to retirement, layoffs, or other life changes. While you will still owe income taxes on any withdrawals, avoiding the 10% penalty can save you a significant amount of money. If early retirement is on your horizon, understanding and leveraging this rule is crucial for maintaining your financial stability.
Exploring Rollover Options: Traditional IRA or Roth IRA?
As you approach retirement, you may begin to consider rolling over your 401K into an IRA. This process involves transferring your 401K funds into either a traditional IRA or a Roth IRA, depending on your financial goals and tax situation. Remember, if you’re over 59½, this rollover can be done without penalties, offering you the flexibility to choose the investment strategy that best suits your needs.
A traditional IRA rollover is often a straightforward option, allowing your money to continue growing tax-deferred. However, some individuals may opt for a Roth IRA conversion, which involves moving your funds from a pre-tax 401K or traditional IRA to a Roth IRA. The key difference is that with a Roth IRA, you pay taxes on the funds when you convert them, but all future growth and withdrawals are tax-free.
Roth conversions can be an attractive option, particularly if you anticipate being in a higher tax bracket in the future or if you want to create a tax-free income stream for retirement. However, it’s important to weigh the tax implications carefully and consult with a financial advisor to determine if a Roth conversion aligns with your long-term financial goals.
The Importance of Reviewing Beneficiary Designations
While turning 50 might prompt you to review your retirement savings strategy, it’s also an excellent time to revisit your beneficiary designations on your 401K and other retirement accounts. Beneficiary designations determine who will inherit your assets after you pass away, and ensuring these designations are up to date is crucial for your estate planning.
Life changes, such as marriage, divorce, or the birth of a child, may necessitate updates to your beneficiaries. Failing to update these designations can lead to unintended consequences, such as assets being distributed to an ex-spouse or other individuals no longer in your life. To avoid these pitfalls, make it a priority to review and update your beneficiary designations as you approach and enter retirement.
Documents for Retirement: Confirming Everything Is in Order
In addition to reviewing your beneficiary designations, turning 50 is an excellent time to ensure that all your documents for retirement are in order. This includes not only your 401K and IRA accounts but also other important documents such as wills, trusts, and powers of attorney. Confirming these documents are aligned with your goals and intentions is an essential piece to protecting your assets and ensuring your wishes are carried out.
Consider working with a financial advisor or estate planning attorney to review your retirement documents and make any necessary adjustments. This proactive approach will help you avoid potential complications and give you peace of mind as you transition into retirement.
Conclusion: Take the Next Step in Your Retirement Planning
Navigating the world of 401K rules after reaching age 50 may seem complex, but it also presents opportunities to optimize your retirement savings and strategy. Understanding concepts like catch-up contributions, withdrawal rules, rollover options, and Roth IRA conversions, impact how you plan your financial future.
If you want to understand all this a little better, we offer a complimentary phone call that you can schedule with us on our website. If we can’t answer all your questions in just 15 minutes, we’ll guide you to the next steps to find the answers you need.
Schedule your complimentary call with us and to learn more about 401K Rules After Age 50 and how it can impact retirement planning.
When was the last time you reviewed your annuity? If you’re like many annuity holders, it might have been a while. With interest rates at all-time highs and significant economic changes on the horizon, now is a crucial time to take a closer look at your annuity. In this blog, we delve into why reevaluating your annuity is essential and the key reasons it might be time for a change.
The Current Economic Landscape
Interest rates have experienced a dramatic increase recently, benefiting not just banks but also insurance companies and, by extension, your annuities. The economic environment is dynamic, and keeping your financial products up to date with these changes is crucial. Here’s why a review of your annuity is more important now than ever.
Interest Rate Changes
The primary reason to reevaluate your annuity is the significant shift in interest rates. Just a few years ago, interest rates were incredibly low which made any fixed-income investment, (including annuities) less attractive. Fast forward to today, and the Federal Reserve has implemented 11 interest rate hikes between 2022 and 2023. This increase has opened new opportunities for better returns on annuities.
If your annuity was purchased in a low-interest-rate environment, its growth potential might be limited compared to newer products available now. For example, an annuity purchased in 2017 when bank rates were near zero might not be performing optimally in today’s environment where banks offer around 4% interest.
Reevaluating your annuity could reveal opportunities to switch to a product that leverages current higher interest rates, potentially earning you significantly more in the long run. Even if there’s a surrender charge for early withdrawal, the long-term benefits might outweigh the costs.
Inflation Rates
Higher inflation rates impact everything from food costs to the purchasing power of your retirement income. If your annuity includes a lifetime income rider, now is the time to assess whether it will meet your future income needs, given the current economic climate.
Inflation can erode the real value of your fixed income. By evaluating your annuity, you might discover that switching to a newer product with better terms could substantially increase your guaranteed income, helping you keep pace with inflation. We’ve seen cases where clients were able to boost their guaranteed lifetime income by 20% just by moving to a new annuity with better terms.
Unnecessary Riders
Riders can add valuable features to your annuity, such as guaranteed lifetime withdrawal benefits. However, they often come with additional costs. Over time, your financial situation might change, making some of these riders unnecessary.
For instance, if you’ve significantly increased your savings or received an inheritance, you might no longer need a guaranteed lifetime income rider. Removing unnecessary riders can reduce your costs and potentially increase your annuity’s growth potential.
Consider whether the features you initially paid for are still relevant. If not, eliminating them can streamline your annuity and enhance its efficiency.
Life Event Changes
Major life events, such as changes in marital status, employment, or health, can significantly impact your financial needs. These changes might mean that the annuity you purchased years ago no longer aligns with your current situation.
For example, a change in health might alter your retirement income needs, or a shift in employment status could affect your overall financial strategy. Reevaluating your annuity considering these life changes ensures it remains a suitable part of your financial plan.
Understanding Surrender Charges and Bonuses
One common concern when considering an annuity change is surrender charges. These are fees for withdrawing from an annuity before a specified period. While surrender charges can be significant, it’s essential to consider the overall financial picture.
Insurance companies often offer bonuses to entice you to move your annuity to them. These bonuses can offset surrender charges, making the switch more financially feasible. For instance, if your current annuity is worth $100,000 but has an 8% surrender charge, you might hesitate to move it. However, if the new annuity offers a 10% bonus, your new balance could be $101,200, more than covering the surrender charge.
It’s crucial to work with a financial advisor to crunch the numbers and determine whether moving your annuity is beneficial. The goal is to ensure that any move makes sense financially and aligns with your long-term goals.
The Importance of a Personalized Review
Everyone’s financial situation is unique, and there’s no one-size-fits-all answer when it comes to annuities. That’s why it’s essential to conduct a personalized review with a financial professional who understands your specific needs and goals.
A thorough review should include:
An assessment of your current annuity’s performance.
An analysis of how changes in interest rates and inflation affect your annuity.
An evaluation of the relevance and cost of any riders.
Consideration of any recent life events that might impact your financial strategy.
Take Action Today
If you haven’t reviewed your annuity recently, now is the time to act. With interest rates and inflation impacting your financial landscape, ensuring your annuity aligns with your current and future needs is crucial.
A personalized review can provide valuable insights and uncover opportunities to optimize your annuity. Whether it’s switching to a product with better terms, eliminating unnecessary riders, or adjusting for life changes, taking action today can set you up for a more secure financial future.
If you would like to have a conversation about your annuity situation, or you just have a question about annuities, we’d love to hear from you! Schedule your complimentary call with us to get started.
By incorporating these strategies and regularly reevaluating your annuity, you can ensure that it continues to serve your financial needs effectively. Don’t let your annuity become outdated – take control of your financial future today.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for October 30, 2023
Roth IRA – 5-Year Rule – Your Retirement – Part 2 with Denise Appleby
Denise Appleby explains the nuances around two separate Roth IRA 5-year rules and what you need to take distributions from a Roth IRA if you’re aged 59 and a half or below. Listen in to learn the importance of starting your Roth IRA 5-year clock earlier and protecting your records to avoid paying taxes you don’t owe.
Roth IRA – 5-Year Rule – Part 2 with Denise Appleby
In our last podcast (read the blog here), we dove right into one of the most common questions our clients and listeners have: Roth IRAs and the 5-year rule. Well, we decided that we need to cover this topic even more in-depth and brought Denise Appleby on the show to clear up any confusion that you may have.
In our last podcast (read the blog here), we dove right into one of the most common questions our clients and listeners have: Roth IRAs and the 5-year rule. Well, we decided that we need to cover this topic even more in-depth and brought Denise Appleby on the show to clear up any confusion that you may have.
Denise is an expert in all things IRAs and an excellent consultant for these types of questions.
What are the 5-Year Rules?
Denise was quick to point out that it’s not the 5-year rule but the 5-year rules. Two main rules are in place and the challenge is determining which rule applies to you.
First 5-Year Rule
This rule is used to determine if a Roth IRA distribution is qualified. This rule starts January 1 on the first year that you fund your Roth IRA, and it never starts over.
For example:
2010, you contribute to a Roth IRA
2023, you start a new Roth IRA because you cleared out the original
When did the 5-year period start? January 1, 2010.
Second 5-Year Rule
The second 5-year rule only pertains to you if you’re not eligible for a qualified distribution. Under this rule, we’re looking at Roth conversions and their distributions. If you withdraw the money that you put in within the first 5 years, you’re subject to a 10% distribution penalty.
However, the rule is very complex because it starts over with each conversion.
For example:
In 2020, you perform a Roth conversion
You take a distribution in 2023
The distribution would come from the 2020 conversion first before any conversion you do at a later date, if that applies.
This rule can be very hard to wrap your head around without an example.
Whose Responsibility Is It to Track Distributions and the 5-Year Rule?
Each conversion you make has a 5-year rule attached to it. Unfortunately, it’s your responsibility to track these conversions and how long ago they were made. For example, let’s assume that you convert $10,000 over the next 5 years.
The IRA custodian will not track these conversions. The IRS says that if a distribution is made and the IRA custodian doesn’t know the following, the custodian will report it as a non-qualified distribution without an exception:
If the person is eligible for an exception, or
If the person is eligible for a qualified distribution
It’s your burden to provide your tax preparer with the documentation necessary to show that the distributions are penalty-free. You can do this by keeping documents handy, such as your Form 5498.
You must protect yourself by keepingclear documentation of conversions.If you don’t keep proper records, you’ll pay penalties because there’s no proof that the distributions are non-qualified.
As you can see, there are a few nuances around the 5-year rule that can be complex and a bit tricky. Part of the reason why we’re diving deep into this rule for retirement planning is that you can leverage conversions now for tax planning purposes.
We know that unless there are significant legislative changes made before 2026, tax rates are going to go up.
Converting traditional IRAs to Roth accounts now may be beneficial for you and allow your money to grow tax-free. Most of our clients are doing conversions for future potential use way down the road or they’re doing it for their legacy. In these cases, the 5-year rule won’t matter to them.
With this in mind, let’s consider the following example:
Example 1: 60 Year Old with a Roth Balance of $100,000 that is Well Past the 5-Year Rule
If this person did a conversion last year of $100,000, do they have to wait five years to take distributions on this conversion? No. Because they are over the age 59 and a half, the second 5-year rule does not apply, and they can take a distribution without additional tax or penalty.
Anyone over age 59 and a half doesn’t need to track anything aside from having had a Roth account open for at least 5 years. You’re in a very nice place to be at age 60.
Because of this, we recommend that you establish a Roth account, even with a small contribution, as soon as possible. Why? Your five-year period starts ticking down the moment that the account opens. You could potentially not contribute to the account for years, but that five-year period will be ticking down, allowing you the freedom to do conversions in the future and still take distributions from the account without penalties.
Example 2: 50 Year Old, No Roth Account and Has Opportunity to Do a Roth Conversion
Imagine that this individual begins converting their accounts and assumes that they’ll wait until they’re at least 59 and a half to begin distributions. Life happens, and suddenly, the person does need to take money out of the account before then.
If they haven’t had the Roth IRA for 5 years and aren’t eligible for a distribution, then we need to look next at the ordering rules.
What are Ordering Rules?
Ordering rules pertain to your Roth IRA and distributions. Your distribution is taken from your account in the following levels:
Regular Roth IRA contributions or money rolled over from Roth 401(k), 403(b), 457(b). These contributions come out first and are always tax- and penalty-free.
Conversions from traditional SEPs and SIMPLEs and rollovers from the pre-tax side of 401(k) plans. Unless you qualify for an exception, these distributions will have a 10% penalty because of your age and not meeting the 5-year rule. What are the exceptions? If you converted the account at least 5 years prior, you could take distributions without penalty.
Earnings, which are taxable and subject to the 10% penalty.
If you must take distributions early, you want to avoid taking money from levels 2 and 3. Level 2 money still has the 10% penalty unless you fall under very specific circumstances, and level 3 money is both taxable and comes with a penalty.
Example 3: 50 Year Old with Plans to Convert $10,000 Each Year Until 60, Never Had a Roth Before
Over the 10 years, the person has $100,000 in conversions in the account. The account has been open for five years, so one rule is checked off. The person is also 60, so they can start taking qualified distributions if they wish. Any distribution going forward is both tax-free and penalty-free. They can tap into growth without penalty as well.
Legislatively, everything is always up in the air. Ages can change for these rules. A few years ago, the government did try to make changes to some Roth provisions, but they haven’t tried to do so recently.
Denise does not believe that Roth accounts are going anywhere any time soon because the IRS wants to be paid upfront. The IRS always wants to be paid as soon as possible, so it’s not likely that Roth accounts will be a major legislative target at this time.
Of course, things can change and new rules can be added, but we’ll keep you up to date on these occurrences.
Does a Roth 401(k) Start the 5-Year Clock?
No. A Roth 401(k) does not start the Roth IRA clock. The time that you’ve had the 401(k) open doesn’t apply to your IRA, which is very unfortunate.
What Should People Think About When It Comes to the 5-Year Rule?
Final points from Denise:
Having and contributing to Roth 401(k) is not the same as opening and contributing to a Roth IRA.
If a spouse beneficiary inherits a Roth IRA and the spouse treats it as their own, the 5-year period is considered to have begun at the earlier of the two spouse’s first Roth IRA contributions. However, if the funds are transferred to a beneficiary IRA, the accounts inherit the decedent’s period. Do you have documentation on these accounts?
Beneficiary IRA accounts allow for $10,000 to be used for a first-time home purchase without penalties.
Clearly, there is quite a lot to think about with Roth IRAs, conversions and the 5-year rule. Having an expert like Denise at your side is extremely beneficial when working on these accounts.
If you have any questions, you can schedule a free 15 minute call with us and we’ll be more than happy to have a conversation with you. We can even consult Denise on any complex questions.
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for April 17, 2023
This Week’s Podcast -Retirement Withdrawal Strategy
Learn how to determine your spending during retirement and which accounts the money will come from. You will also learn the importance of being flexible to make changes to your strategy as things and priorities shift over time.
If you’re like most people, you’ve worked a lot, put money into retirement and relied on your paycheck to pay the bills. A lot of time goes into retirement planning, and then there’s this cosmic shift where you’ll find yourself spending your retirement money.
You have all of these accounts that have grown as you tried to secure your retirement, and you may be wondering: Which accounts do I take money from?
If you’re like most people, you’ve worked a lot, put money into retirement and relied on your paycheck to pay the bills. A lot of time goes into retirement planning, and then there’s this cosmic shift where you’ll find yourself spending your retirement money.
You have all of these accounts that have grown as you tried to secure your retirement, and you may be wondering: Which accounts do I take money from?
The steps below can help you create a retirement withdrawal strategy that works well for you:
5-step Retirement Withdrawal Strategy
1. Determine Your Retirement Needs
We work and save for so long that when retirement comes, most of us don’t know our needs. You’ve built up a nest egg, and now it’s time to understand your needs:
Essential income: What do you need to stay relatively happy? You’re not having all of the fun yet, but you need to pay your mortgage, eat and enjoy life a little bit, such as going out to dinner. Calculate this expense, which may be $3,000 to $4,000 or less and maybe even more, depending on your lifestyle.
Wants in retirement: Do you want to travel, play golf, or spoil your grandkids? What will make retirement fun for you? It’s important to come up with your own bucket list and then put a dollar figure on each item.
Social Security is unlikely to cover all of your needs, and this is where the coming steps will help you create a withdrawal strategy.
2. Understand the Different Types of Retirement Accounts
Many people know a lot about their 401(k) accounts because they’ve paid into them for so long. Their employers may have contributed to these accounts, and it is where many people have the bulk of their wealth.
However, you may be involved with:
Traditional or Roth IRA
Traditional or Roth 401(k)
If you have a traditional IRA or 401(k), there is a rule that you have to take what is known as a required minimum distribution. Currently, at age 72, you need to begin taking withdrawals from these accounts every year. This age is set to increase to over the years, but right now, it’s 72.
We have a few clients who didn’t realize that they needed to take this distribution and don’t need the money. However, since these accounts are traditional, you’ll need to take your withdrawals and pay taxes on this money, creating a lot of interesting scenarios.
For example, you may have to deal with:
Health benefit changes that are based on income
Paying into a higher tax bracket because your income is now higher
Roth accounts do not require you to take a required minimum distribution. In many cases, we’ll discuss doing things early, such as in your 50s and early 60s, when you still have time to convert the traditional account earlier to avoid potential drawbacks in the future.
Everyone with a traditional or Roth IRA must sit down and figure out the rules of each account type that they have.
3. Figure Out Your Priorities
Year by year, your retirement withdrawal strategy can change. Nothing is set in stone, but we find a yearly strategy provides our clients peace of mind. With that said, you do need to determine your priorities.
For example, you may want to prioritize:
Roth conversions to get into a tax-free scenario
Tax strategies to lower future taxes
Roth conversions will trigger taxes and can impact you in the future.
We have one client who is trying to leverage a very low tax year, live on cash in the bank and do a Roth conversion. He plans to live on the cash he has saved so that the Roth conversion can happen at a rate of just 12%.
Since he is converting into a Roth account, he benefits from:
Allowing the money in the account to grow
Not having to take withdrawals
He is making it a priority to get his money into accounts that can grow tax-free and not have to worry about future withdrawals.
Another priority that we have seen in recent years is staying under IRMAA. IRMAA is a Medicare surcharge, and if you go over a certain threshold, you’ll need to pay higher premiums as a result.
If you never want to go above the IRMAA threshold, this can be a priority and achieved by creating the right withdrawal strategy.
4. Manage Investment Risk
Investment risks can be complicated, but we like to keep it simple with a three-bucket strategy. The strategy includes:
Cash in the bank that you can use as emergency money any time you need it.
Investment bucket, which is the money that you want to grow. Some risk is involved here.
Income or safety bucket. Let’s assume that we have an income or safety bucket, this will cover your expenses and allow your investment bucket to rise and fall without worrying about market downturns.
You can read more about our retirement bucket strategy here.
5. Be Willing the Adjust
The final step in a retirement withdrawal strategy is that you should be able to adjust the strategy at any time. Unfortunately, there is no one-size-fits-all approach or rule of thumb to follow with your withdrawal strategy.
Retirement-focused financial plans are “living and breathing.”
We want to have the ability and flexibility to adjust your plan when it benefits you the most or when priorities change. For our clients, we recommend going through their plans at least once a year.
A quick review helps you understand if you have everything to cover your life for 30+ years in retirement. If you get caught in autopilot, you may miss important changes that need to occur.
If you prioritize your withdrawal strategy, you’ll find that it’s a lot less complex than it is if you scramble to create a strategy too late.
