Tag: Finance

Locating Lost Assets

Post author By Gene Gard
Post date September 27, 2023

Don’t lose track of your assets. (Photo: Joshua Hoehne | Unsplash)

Losing track of retirement funds is a common and concerning trend that has worsened in recent years. According to a report from the firm Capitalize, as of May 2023, there were about 29.2 million forgotten 401k accounts in the United States that held approximately $1.65 trillion in assets. Due to recent increases in job switching, the number of forgotten 401ks has grown by more than 20 percent since May 2021.

Missing out on these retirement funds can put your retirement at risk, as you may end up losing significant assets. Fortunately, there are ways to locate and reclaim lost retirement accounts. The following tips can help.

1. Check with past employers.

If you’ve changed jobs throughout your career, it’s important to follow up with past employers to make sure you didn’t leave any money behind. Retirement plan administrators have several options for how to handle abandoned funds in an employer-sponsored account, based on the amount left in it.

$1,000 or less — The employer can issue a check and mail it to your last known address. If you’ve moved since leaving a job, you may need to request a new check.

Between $1,000 and $5,000 — Employers can move funds to an IRA without your consent. You’ll need to ask your past employer how to access the account.

More than $5,000 — There’s a good chance your funds are still in the employer’s plan. It may be wise to roll over the account balance to an IRA that you control.

2. Search unclaimed property databases.

Sometimes people lose track of their retirement savings when they move and forget to notify past employers of their new address. When an employer or financial institution is unable to reach an account-holder, it may turn over the account to the state’s unclaimed property office.

Fortunately, you can search for your name on the National Association of Unclaimed Property Administrators (NAUPA) website or your state-specific unclaimed property office to find any unclaimed retirement funds that may be waiting for you.

3. Check the Department of Labor (DOL) abandoned plan database.

If your past employer’s plan was terminated, the DOL’s Employee Benefits Security Administration consolidates information about unclaimed retirement benefits and makes it easy to track down missing funds.

4. Contact the Pension Benefit Guaranty Corporation (PBGC).

The PBGC can be a great resource if you lost track of a defined benefit pension plan at a previous employer. This organization is a government agency that insures the value of pension benefits and helps individuals locate lost pension plans. Visit pbgc.gov for more information.

5. Track down forgotten IRAs.

If you think you may have abandoned an IRA along the way, take inventory of past bank and investment account statements for any evidence of the account. You can also reach out directly to any financial institutions you’ve worked with in the past to inquire about any inactive or dormant IRAs associated with your name.

If you think you left behind retirement assets at some point, it may be worth the effort of tracking them down. Even if you haven’t contributed to the accounts in many years, the power of compounding has the potential to significantly grow your retirement assets over time.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

Tags Finance, lost assets

News News Feature

Required Minimum Distributions

Post author By Gene Gard
Post date September 20, 2023

Be aware of IRS rules. (Photo: Kelly Sikkema | Unsplash)

If you’re nearing or living in retirement, it’s likely you’re at least somewhat familiar with the rules surrounding required minimum distributions (RMDs). As a refresher, by April 1st following the year you reach age 73, you must start taking distributions from your tax-deferred retirement accounts, per IRS rules. Each year after that, you must continue taking RMDs or face severe penalties from the IRS.

Even if you’re already taking RMDs, you may not be familiar with all the rules surrounding them. Here, we highlight five lesser-known facts about RMDs.

RMD rules can differ for inherited IRAs.

If you inherit an IRA or another tax-deferred account from someone other than your spouse, you may be required to withdraw the full balance of the account within 10 years. This is a recent change from previous rules that allowed payments to be stretched out over the course of a beneficiary’s lifetime.

IRA RMDs can be aggregated.

If you own multiple traditional IRAs, you have the option to aggregate the RMD amount and take the total distribution from one or more accounts of your choice. This flexibility allows you to plan your withdrawal strategy in order to optimize your tax situation.

401ks and IRAs have slightly different RMD rules.

Unlike IRAs, the IRS doesn’t permit the aggregation of employer-sponsored plan RMDs. That means if you have multiple employer-sponsored retirement plans, such as 401ks and 403bs, you must take an RMD from each account based on the same life expectancy factor that applies to IRA distributions.

Another important difference between IRAs and 401ks is that if you’re still working at age 73 (and don’t own more than 5 percent of the company), you can choose to delay taking your first 401k RMD until the year in which you stop working. However, you must begin taking IRA distributions at age 73 whether or not you’re still working.

The tax withholding on RMDs is optional.

IRA providers typically withhold 10 percent of RMD distributions as a payment to the IRS. However, this payment is completely optional. If you prefer to have less or more than 10 percent withheld, simply notify your IRA provider. Your wealth manager may recommend modifying your withholding amount if it makes sense to do so based on your personal financial situation.

Regardless of the amount withheld at the time of your RMD, you’ll still be responsible for paying taxes on your distribution at your ordinary income tax rate.

The penalty for missing an RMD can be waived.

Most people know that if you fail to withdraw the required RMD amount, you’ll be assessed a 25 percent penalty on any amount you didn’t withdraw. However, did you know that penalty can be lowered or waived in certain situations?

If you take the necessary RMD by the end of the year following the year in which it was due, the penalty drops to 10 percent. The penalty may be waived completely if you’re able to establish that the missed distribution was due to reasonable error and that you’re taking steps to remedy the shortfall. In order to qualify for a waiver, you must file IRS Form 5329 and attach a letter of explanation.

Tags Finance, required minimum distributions, retirement

News News Feature

Five Ways to Overcome Roth Contribution Limits

Post author By Gene Gard
Post date September 13, 2023

Roth IRAs can be a powerful tool to accumulate post-tax retirement savings, achieve tax-deferred investment growth, and receive tax-exempt withdrawals in retirement. However, contribution limits can make it difficult to maximize savings and access a tax-exempt source of retirement income.

In 2023, individuals can contribute up to $6,500 per year to a Roth IRA ($7,500 for those age 50 and older). The maximum contribution is reduced for individuals whose modified adjusted gross income (MAGI) is more than $138,000 ($218,000 married filing jointly), and no Roth IRA contributions are allowed for individuals with a MAGI of $153,000 or more ($228,000 married filing jointly).

Similarly, Roth contributions to an employer-sponsored retirement plan are limited to $22,500 in 2023, with an additional $7,500 permitted as a catch-up contribution for those age 50 and older.

If you find your options restricted by Roth contribution limits, there are still several strategies that can help you optimize your retirement savings.

1. Consider a backdoor Roth IRA.

If your income exceeds the limit for direct Roth IRA contributions, a “backdoor” Roth IRA strategy can be an effective option. This involves establishing a traditional IRA alongside your Roth IRA. You can make the same $6,500 ($7,500 for those age 50 and older) contribution to your traditional IRA on an after-tax basis. This means you don’t take a tax deduction in the current year for contributing to the IRA account. You then convert the funds from the traditional IRA to the Roth IRA.

Because there are no income limits for traditional IRA contributions on an after-tax basis, this allows high-income earners to contribute to a Roth IRA. Because the traditional IRA contributions were made with after-tax funds, this strategy is allowed by the IRS.

2. Consider a “mega” backdoor Roth.

This strategy takes the backdoor Roth IRA to a new level, allowing individuals whose income exceeds IRS limits to supercharge their after-tax retirement savings. The strategy involves two steps:

Make after-tax contributions to your employer-sponsored retirement plan, such as a 401k. And complete an in-plan conversion of the after-tax assets to a Roth IRA or Roth 401k.

In 2023, the IRS allows individuals to contribute up to $43,500 in after-tax assets to an employer-sponsored retirement account, assuming you’re not eligible for an employer matching contribution (if you receive an employer match, you’ll need to deduct any employer contributions from $43,500 to determine your maximum contribution amount). You can then convert those assets directly into a Roth IRA or 401k to help optimize your after-tax retirement savings.

3. Establish a spousal Roth IRA.

If you’re married and your spouse doesn’t make earned income, you may want to consider opening a spousal Roth IRA. This strategy allows you to contribute to a Roth on behalf of your spouse, essentially doubling your combined savings potential. Be sure you meet the income requirements and adhere to contribution limits for both your account and your spouse’s.

4. Take advantage of your Roth 401k.

While not a direct solution for overcoming Roth IRA contribution limits, contributing to a Roth 401k can be a viable alternative for high-income earners to accumulate after-tax retirement savings. Unlike a Roth IRA, Roth 401ks don’t impose income limitations. If your employer offers a Roth 401k option, it may make sense to max out your contributions to take advantage of tax-deferred growth and tax-exempt withdrawals in retirement.

5. Fund a Roth IRA for your child with unused 529 plan assets.

The Secure Act 2.0, passed in 2022, included a provision allowing unused 529 plan dollars to be converted to Roth IRAs for a beneficiary without incurring any taxes. The 529 account must have been open for 15 years, and the lifetime amount that can be converted from the plan to a beneficiary’s Roth IRA is $35,000. The amount converted per year is subject to the same eligibility rules as making outright Roth contributions.

It’s important to note these strategies present various financial complexities that, if not properly planned for, can lead to additional tax liabilities. Be sure to work with a qualified wealth advisor to execute them and protect your retirement savings.

Tags Finance, investment, retirement, Roth IRA

News News Feature

Seven Tips for Earlier Retirement

Post author By Gene Gard
Post date September 6, 2023

Preparing for retirement takes deliberate, consistent planning and attention to detail. One important detail is timing, or the age at which you plan to retire. Having an anticipated retirement date allows you to align your savings and investing goals with the year you’ll need to begin withdrawing money. However, many workers discover they must retire earlier than expected. In fact, according to a retirement confidence survey from the Employee Benefit Research Institute, the median American’s retirement age is 62 years old, while workers’ median expected retirement age is 65.

Whether you’re forced to retire early due to health concerns, a job loss, caregiving responsibilities, or just the desire to leave the workforce, leaving your career sooner than expected can significantly impact your retirement plan. Below are seven tips to help you navigate an early retirement.

1. Understand your financial situation.

The first step in retiring earlier than expected is to check in on your financial situation. Evaluate your current savings, investments, and assets. Assess your monthly expenses and budget to gain a clear understanding of your current financial obligations. Determine how much you can reasonably spend each month while still preserving your retirement savings. Your wealth manager can help you assess and understand your current financial situation and any potential challenges you should be aware of.

2. Set clear retirement goals.

The next step is to define your retirement goals. What do you hope your retirement will look like? How will you spend your time? Whom do you wish to support? What will bring you fulfillment? Having a clear vision of your desired retirement lifestyle can help guide your decision-making process and allow you to prioritize your spending. Return to these goals often as you navigate the various aspects of your finances.

3. Develop a savings strategy.

Because you’re retiring early, your savings will need to stretch over a longer period of time. If you’re still in the workforce, maximize your savings potential by cutting unnecessary expenses and increasing your contributions to your employer-sponsored retirement account. Depending on your modified adjusted gross income for the year, you may also consider contributing to IRAs or Roth IRAs. Make a goal to save as aggressively as possible during your final years in the workforce. Your wealth manager can help you identify the best account vehicles for your additional savings.

4. Plan for healthcare expenses.

Healthcare costs are often one of the biggest expenses faced by retirees. If you need to retire earlier than expected, it’s important to have a plan in place for paying for healthcare. Explore your options for health insurance coverage, including COBRA, Affordable Care Act (ACA) plans, or private insurance.

5. Evaluate alternative income sources.

Retiring early doesn’t necessarily mean you need to give up all sources of income. Explore opportunities to generate income in retirement, such as freelancing, consulting, part-time work, or starting a side business. Also consider more passive income sources, such as investing in real estate, if the circumstances are right.

6. Adjust your retirement lifestyle.

Retiring earlier than expected may require you to make some adjustments to your lifestyle and spending habits. Carefully review your expenses to identify areas where you can cut back without compromising your mental and physical well-being. Consider downsizing your home or reducing your travel and entertainment expenses.

Before making any major changes, revisit your retirement priorities (see #2 above) to ensure your decisions align with your goals. By making conscious choices, you may be able to better stretch your savings without significantly impacting your long-term goals.

7. Continuously monitor and adjust accordingly.

Once you retire, it’s important to remain financially vigilant. Regularly review your overall financial situation, including your investments, budget, and progress toward your goals. Make adjustments as necessary based on market conditions and your ever-evolving financial life. Stay informed and engaged with your finances to help ensure your continued financial security.

Tags Finance, Memphis, retirement

News News Feature

Five Common Investing Mistakes

Post author By Gene Gard
Post date August 23, 2023

Avoid these five common mistakes. (Photo: Kier in Sight Archives | Unsplash)

Investing is one of the best ways to build your wealth and help achieve your long-term financial goals. However, several common and expensive missteps have the potential to derail your investment progress. Recognizing the following mistakes and taking proactive steps to avoid them will likely improve your investment outcomes and, ultimately, give you a better chance of achieving your long-term financial goals.

1. Chasing the trends

A common mistake many investors make is choosing investments based on short-term market forecasts and chasing current trends without first researching and doing their due diligence. Without a full understanding of each investment in your portfolio and its risk and return characteristics, underlying holdings, costs, etc., how can you know your investments align with your objectives?

It’s critical to educate yourself on various investments’ risk characteristics, return potential, underlying holdings, tax treatment, asset class characteristics, expenses, and more. Your wealth manager is a great source for insight into how specific investments may impact your overall portfolio and financial goals.

2. Failing to properly diversify

Regardless of where you live, it’s always wise to maintain a diversified investment portfolio. Investing in different types of asset classes will spread out your risk. When one sector or investment type is performing poorly, another investment type that’s performing better can help smooth out overall portfolio volatility. While diversification won’t prevent losses, it can reduce the risk of being too heavily invested in the worst performing part of the market.

To achieve adequate diversification, consider combining stocks with bonds, large company stocks with small company stocks, U.S. stocks with international stocks, and investments from different sectors, such as technology, financial, energy, real estate, healthcare, etc. It’s also important to be aware of the underlying holdings in your investment funds to ensure you’re not overly weighted in a certain area.

3. Trying to time the market

Knowing that the market is unpredictable, time in the market is more important than trying to time the market by buying low and selling high. This strategy can backfire on even the most seasoned investors. Attempting to predict short-term market movements is risky and can lead to missed opportunities or significant losses.

Instead of timing the market, smart investing involves patience and a long-term investment approach that aligns with your goals and time horizon. Invest regularly and consistently, take advantage of dollar-cost averaging, and maintain a diversified portfolio. Over time, this strategy will help smooth out some market volatility.

4. Not rebalancing

It’s important to regularly review and rebalance your investment portfolio to help ensure it remains aligned with your objectives. Failing to rebalance on a regular basis can result in certain investment types or sectors becoming overweighted. Over time, this can cause your portfolio to drift away from your target risk profile.

By regularly rebalancing to your asset allocation, you can lock in gains from top-performing sectors and ensure your portfolio remains in line with your investment objectives and risk tolerance.

5. Neglecting the power of compounding

Compounding is a powerful force that can significantly increase your investment returns over time. The earlier you begin saving and investing, the more compounding interest works to your advantage. Focus on re-investing your dividends and maintain a long-term approach to your investment portfolio to maximize your compounding potential.

Tags Finance, investing, investing mistakes

News News Feature

Six Tips to Help Preserve and Grow the Value of Your Investments

Post author By Gene Gard
Post date August 9, 2023

Counteract the effects of inflation. (Photo: Nataliya Vaitkevich | Pexels)

Inflation has been in the news a lot lately. The high inflation rates of the last couple years have significantly eroded Americans’ purchasing power on a variety of goods and services. While inflation puts a strain on short-term spending and saving, it can be especially detrimental to long-term investment accounts if not properly planned for. Fortunately, a well-built investment portfolio can help counteract the effects of inflation. The following tips can help preserve and grow the value of your investments in the face of inflation.

1. Diversify your investments.

One of the most effective ways to position your portfolio to weather inflation is by investing in a diversified mix of asset types, such as stocks, bonds, real estate, and commodities. Different asset classes tend to perform differently during various stages of the market cycle. By maintaining a diversified portfolio, you reduce the risk of all your investments being impacted in the same manner at the same time.

2. Incorporate stocks.

Historically, equity returns have outperformed inflation over the long term. Investing in a diversified mix of large- and small-cap stocks, both domestic and international, can help provide you with the long-term growth potential you need to offset rising inflation and protect your portfolio’s purchasing power. By owning stocks, you own the companies raising the prices causing inflation.

3. Consider inflation-protected securities.

Consider incorporating an allocation to inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS). TIPS are government bonds that change value based on the Consumer Price Index (CPI) that can provide a hedge against inflation. They offer fixed-interest payments that can help your investment keep pace with rising prices.

4. Include an allocation to real assets.

Tangible assets, such as real estate and commodities, have historically helped hedge portfolios against inflation. Real estate investments have the potential to appreciate in value and generate rental income, which can rise with inflation rates. Commodities tend to retain value during inflationary periods.

5. Rebalance regularly.

When planning for inflation, it’s important to regularly rebalance your investment portfolio. Rebalancing is the process of selling off outperforming assets in order to invest in lower-performing assets. While this practice may seem counterintuitive, it helps prevent your allocation from drifting too far from your target investment ranges. Adding to a lower-performing asset can be difficult, but it’s important to remember the reasons it’s in the portfolio in the first place. This practice helps offset inflation because it prevents one asset type from dominating your portfolio and throwing off your risk exposure.

6. Review your portfolio.

Periods of high inflation often coincide with challenging market conditions. Economic factors are constantly changing and evolving, so it’s important to regularly review your investment portfolio. This practice will ensure your portfolio continues to align with your goals and remains positioned to weather the prevailing economic landscape.

Tags Finance, inflation, investments, Memphis, money money money, stocks

News News Feature

Facts and Feelings: Roth vs. Traditional IRAs

Post author By Gene Gard
Post date July 19, 2023

The choice between a Roth and a traditional retirement account is one of the most common dilemmas in financial planning. As you probably know, both types of accounts grow tax-deferred. The difference is that contributions to traditional IRAs or 401(k)s may reduce your income tax due today. For Roth accounts there’s no upfront tax benefit, but then withdrawals in retirement are generally tax-exempt.

The typical “correct” answer is that the decision between a traditional and a Roth IRA comes down to the relationship between your tax rate now and your tax rate in retirement. This seems counterintuitive, as it feels like paying taxes on the large eventual balance you’ll have in your retirement account would be much worse than paying a little bit of tax now on today’s smaller contributions. The math does work, however, because the assumption is that you’ll have less to invest in your Roth because you have to pay taxes before you can invest.

Here’s a hypothetical example: Imagine a world where everyone pays a flat 20 percent income tax rate, now and forever, and your investments today will exactly double between now and retirement.

If you have $5,000 of income today that you want to invest in a traditional IRA, you’ll invest all $5,000 today, and it will double. If you pull that money out at retirement, you’ll start with $10,000, but after 20 percent in taxes you’ll end up with a net of $8,000 available to you.

If you have $5,000 of income today that you want to invest in a Roth account, you’ll get no tax benefit today. That means you only have $4,000 to start with after paying the 20 percent tax this year. If you withdraw these funds upon retirement, your money will have doubled and you’ll have $8,000 tax-exempt, which is exactly the same outcome as the traditional IRA example above.

You can see that if you think your tax bracket will end up higher in retirement, you’d lean toward a Roth. If you’re expecting a lower tax rate in retirement, you’d likely prefer a traditional contribution.

The math above is accurate, but for most people that’s not how it works. Very few people think in terms of allocating a certain amount of income to investment and netting out the taxes as necessary (as shown above). A more common plan would be to simply pick a dollar amount, then choose between a traditional IRA or a Roth. All else equal, putting $5,000 (or any fixed amount) in a Roth is likely going to result in more money for you in retirement than putting the same amount into a traditional IRA. That’s because these two hypothetical accounts funded identically will end up with the exact same balance at retirement, but tax would be due on the traditional IRA (while the Roth money would be available to you tax-exempt).

If you made a traditional contribution with the $5,000, you wouldn’t be thinking that you should invest the extra tax savings from funding your traditional IRA — you’d probably splurge on something with your slightly larger tax return next year. If you funded the Roth with $5,000, you’d likely eat out a little less over the year (or otherwise tighten your belt) to make up the difference (probably without noticing), functionally giving up a little consumption today to avoid taxes in the future.

Ultimately, the decision to fund a Roth is a little bit like a choice to prepay taxes. A Roth might be the “wrong” choice if you end up with very low taxable income in retirement, but on the other hand, I don’t know anyone who has ever had big tax problems in retirement from overfunding their Roth! A Roth might not be the optimal financial choice, but, depending on your situation, there can be intangibles (such as peace of mind) that can eclipse the hard numbers on paper.

You and your advisor are fortunate to have taxable, traditional and Roth options available. Together you can combine the facts with your personality to make the decision that allows you to feel confident — and stay invested — on the path toward a secure financial future.

Tags Finance, IRA, money money money, retirement, retirement savings, Roth IRA

News News Feature

Financial Planning as an Experience Service

Post author By Gene Gard
Post date July 12, 2023

In economics, goods and services can be divided into three different categories based on how they can be evaluated: search goods, experience goods, and credence goods.

Search goods have qualities you know before purchasing. For example, any brand of basic iodized table salt at the grocery store is likely to be similar with no surprises.

Experience goods can be judged only after purchase. You might love a particular restaurant, but until you order today’s special (and taste it!), you won’t know for sure if you’re going to like it.

Credence goods are goods you aren’t able to assess even after experiencing or consuming them. A good example of this is vitamin supplements — you have to trust your daily multivitamin brand will contain what it’s supposed to because you can’t easily verify it.

Financial services include aspects of all three concepts, but, ultimately, advisors largely provide a credence experience. This is true of most service professions, like your doctor, lawyer, accountant, or auto mechanic. You wouldn’t likely hire these experts if you were a world-class expert in each of these fields, so it’s difficult for you to assess the quality of services provided (especially when uncertainty is involved).

If you get audited by the IRS, are you unlucky or did your accountant push boundaries that got you flagged? If you lose a lawsuit, was your lawyer ineffective or was your case unwinnable? For services like these, you’ll probably never truly know the answer — you simply have to do your due diligence and make the best decision you can without knowing how things will turn out in the end.

If you work with a financial planner, here are three tips that might move you from wondering if you’re on the right track (the credence zone) to feeling confident and reassured (the experience zone).

• Understand what you’re going to receive. If your advisor suggests they can consistently beat the market by a large margin, you’re both likely to be in for disappointment. Ironically, the desire to achieve market-beating investment performance year after year is one of the worst reasons to hire a financial professional. In my opinion, the best financial advisors focus on all the things you can control, like tax planning, estate planning, asset location, tax-loss harvesting, and making sure your spending and saving is on track for your future. Prudent, consistent participation in markets without drastic allocation swings or frequent moves to cash is enough to put most investors far ahead of the pack.

• Differentiate the signal from the noise. A 99 percent successful medical procedure performed on a million patients will produce around 10,000 disappointed people who wonder if they were unlucky or suffered some sort of malpractice. In the same way, signing up with a new financial advisor in 2001, 2008, or February 2020 would likely have been disappointing in the short term, but the right advisor would have helped you weather the storm and make the right choices in the inevitable, incredible recoveries that followed.

• Be all in. In my experience, the most satisfied clients of financial advisors are those who are open to new ideas and eager to help their advisor optimize all aspects of their financial lives. Some people feel they aren’t getting value from service providers unless they’re constantly critical and indignant, but a myopic focus on minutiae and minor deviations in short-term investment returns will shift important focus from larger opportunities. Time is not unlimited, and every moment spent agonizing over insignificant details is a moment that could be spent on something more constructive.

Like any service profession, the quality of financial advice is hard to assess — even after experiencing it. Along with the tips above, I believe the most satisfied clients are process-oriented rather than outcome-oriented. If you have a solid financial plan and investment process with an attentive and adaptable advisor, you should be able to withstand a downturn in the markets, unexpected expenses, or even temporary unemployment. Working with your financial advisor to make the best possible choices now, regardless of future unknowns, will help you shift your relationship from the credence zone to the experience zone.

Tags credence goods, experience goods, Finance, search goods

News News Feature

Five Reasons to Consider Giving the Gift of a Roth IRA

Post author By Gene Gard
Post date June 28, 2023

When it comes to giving thoughtful gifts, financial security may not be the first thing on your mind. However, giving a Roth IRA can be a meaningful way to start your loved ones on a path toward financial security.

A Roth IRA is a type of individual retirement account that offers tax-exempt growth and tax-exempt withdrawals in retirement, which make it a powerful tool for building long-term wealth. Contributions to Roth IRAs are made with after-tax dollars, and qualified withdrawals of assets are tax-exempt and don’t increase your taxable income. In contrast to traditional IRAs, they aren’t subject to required minimum distributions (RMDs) during the owner’s lifetime, which means assets in the account can continue growing tax-exempt throughout the account holder’s life.

There are several benefits to giving a Roth IRA.

1. Tax-Exempt Growth

One of the primary benefits of Roth IRAs is that they allow contributions to grow on a tax-exempt basis. This means any earnings, such as interest, dividends, and capital gains, aren’t subject to federal income taxes while held within the account. Over time, this can add up to significant savings, especially for younger investors who are able to let their assets grow over many years before withdrawing them in retirement.

2. Retirement Savings

Establishing a Roth IRA for a loved one can be a great way to help them save for retirement. Many young people struggle to find extra money to set aside for retirement planning. Funding a Roth IRA can help remove some of that financial burden and allow your family member to focus on other financial priorities, such as saving for a home, paying down student loan debt, starting a business, etc.

3. Financial Literacy

Giving a Roth IRA can be a great opportunity to educate loved ones on multiple financial topics, such as saving early and often, the power of compound interest, the basics of investing, and the importance of planning for retirement. With a Roth IRA, not only are you helping your loved ones financially, you’re also teaching important financial strategies.

4. Estate Planning

Not only are Roth IRAs not subject to RMDs during the account holder’s lifetime but they can also be passed on to heirs tax-free following the account holder’s death. Roth IRAs are a tax-efficient way to transfer wealth to future generations because they allow heirs to receive assets without having to pay income taxes on the distributions (unless the Roth IRA is less than 5 years old).

In addition, Roth IRAs don’t count toward the taxable estate of the account holder, which means they can help reduce the size of an estate for tax purposes. By giving a Roth IRA as part of an estate planning strategy, the account holder has the potential to reduce their heirs’ estate tax liability, which helps preserve more assets for future generations.

5. Compound Interest

By giving a Roth IRA to a younger family member, you offer the opportunity to take advantage of compounding interest over the individual’s lifetime. The impact of this cannot be overstated.

Suppose you contribute $1,000 to a Roth IRA on behalf of your granddaughter every year, beginning at age 20. By the time she reaches 40, you would have invested $20,000 on her behalf ($1,000 x 20 years). Assuming an average annual return of 10 percent, the investment would be worth $63,773.40 after 20 years.

On the other hand, if your granddaughter began contributing $2,000 per year to a Roth IRA from age 30 to 40 ($20,000 total), her investment would only be worth $36,934.83 after 10 years (again assuming an annual average return of 10 percent) because she has less time to take advantage of the power of compounding.

Contributing to Roth IRAs should not exceed the amount actually earned in a year by the account owner — or the maximum contribution limit, if the owner earns more than that amount.

The gift of a Roth IRA to young family members has the potential to significantly improve their long-term financial outlook and be a cornerstone of their nest egg now and in the future. Roth IRAs can truly be the gift that keeps on giving.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

Tags Finance, Memphis, retirement, Roth IRA

News News Feature

Five Financial Tips for Young Adults

Post author By Gene Gard
Post date June 14, 2023

It can be difficult to know how to start building a solid financial future. With all the responsibilities of early adulthood you may be tempted to put financial planning on the back burner. However, the sooner you start planning, the better off you’ll be in the long run. The following tips can help you get started.

1. Create a budget.

Identify how much money you spend each month and compare that to your monthly income, considering two types of expenses: fixed and discretionary.

Fixed expenses are those you pay each month, including rent/mortgage, minimum credit card payments, car payments, insurance, utility bills, and cell phone.

Discretionary expenses are costs you choose to take on that may not be essential, including eating out, movie and concert tickets, streaming TV subscriptions, gifts, and vacations.

Once you’ve added up your fixed and discretionary expenses, compare the total to the income you bring in. If you’re spending less than you earn, congratulations! You’re one step closer to a stronger financial foundation. If you find you’re spending more than you’re earning, you may need to trim some discretionary expenses to bring you back to level footing.

Look at the discretionary expenses. Where can you lower your spending? Maybe you can cut back from eating out four times per week to one or two times per week. Perhaps you don’t need all your streaming services. Or maybe you choose to take your next vacation closer to home rather than paying for a plane ticket.

The key is to establish a budget that allows you to pay your fixed expenses and discretionary expenses while living within your means and taking care of obligations.

2. Pay off debt.

Regardless of the type of debt (student loan, credit card, auto loan, etc.), the sooner you pay it off, the sooner you’ll achieve financial security. While there are times when it’s necessary to take on debt, there are other times where outstanding debts can spiral out of control. Two effective strategies for paying off debt include:

• The snowball method — This involves paying off your smallest debt balance as quickly as possible, then moving on to the next-smallest debt. This approach can help you gain a sense of accomplishment as you knock out one loan after another.

• The avalanche method — You begin paying on the loan with the highest interest rate first. Once that is paid off, you move to the loan with the next-highest interest rate. This allows you to pick up speed because each payment saves you more money than the one before.

3. Build an emergency fund.

An emergency savings account can enable you to keep up on your necessary expenses, pay down debt, and continue your lifestyle for a period of time. A rule of thumb is to have three to six months’ worth of living expenses saved. An emergency fund can protect you from taking on additional debts to meet your needs

4. Save for retirement.

The sooner you start saving, the better your chances of achieving or maintaining the lifestyle you want. The easiest way to start is by contributing to your employer-sponsored retirement plan at a rate that maximizes your employer matching contributions while still being sustainable.

Don’t have access to an employer-sponsored plan? Consider an individual retirement account (IRA). There are two main types of IRAs: traditional and Roth.

• Traditional IRA — Contributions are made on a pre-tax basis, which reduces your taxable income in the year you contribute. Money invested in a traditional IRA is free to grow tax-deferred until retirement. Distributions are taxed as ordinary income and may be subject to a 10 percent early withdrawal penalty if taken before reaching age 59½.

• Roth IRA — Contributions are made with after-tax funds, providing no tax benefits during the year in which you contribute. Contributions can be withdrawn after five years with no taxes or penalties (earnings are subject to tax and a potential 10 percent penalty if withdrawn before you reach age 59½).

5. Avoid lifestyle inflation.

As your income increases over time, it may be tempting to increase your spending. This tendency is sometimes referred to as “lifestyle creep,” and if not managed, it can get in the way of your financial goals. When your income increases, consider increasing your savings first.

Tags budget, debt, emergency fund, Finance, financial goals, lifestyle creep, retirement savings