Tag: retirement

7 Tips to Pay Yourself in Retirement

Post author By Gene Gard
Post date October 18, 2023

For most soon-to-be retirees, the idea of no longer receiving a paycheck and relying on savings and retirement income to make ends meet is scary. With proper planning and strategy, you can create your own retirement “paycheck” using various sources of retirement income. The following tips can help you get started.

1. Understand your current financial situation.

The first step in establishing a retirement paycheck is to gain a full understanding of your current financial situation, including your savings, investments, potential Social Security benefits, pension benefits, and any additional sources of income you expect to receive during retirement.

2. Estimate your monthly expenses.

Once you understand your current financial situation, the next step is to determine how much you’ll need to spend each month based on your desired retirement lifestyle. This will include your required monthly expenses like the cost of housing, healthcare, transportation, food, etc. Additionally, you’ll want to include discretionary spending (“the fun stuff”), such as travel, entertainment, and hobbies. You should also consider if there are any large purchases you hope to make in retirement, such as a second home, a boat, new cars, big trips, gifting to family members, etc.

3. Identify any potential income gaps.

Compare your expected retirement income sources to your estimated expenses. Do you have enough to pay for your desired lifestyle? If not, you’ll need to review your monthly spending expectations, focusing on the amount, timing, and/or frequency of your discretionary spending and big-ticket purchases. Alternatively, identify additional sources of retirement income (e.g. part-time work) to bridge the gap.

4. Implement a strategic withdrawal strategy.

A tax-efficient, strategic withdrawal strategy can provide a steady stream of monthly income and help ensure you don’t outlive your assets. If you have retirement accounts with different tax characteristics (taxable, tax-deferred, tax-exempt, etc.), you’ll likely have flexibility to minimize your tax obligations while optimizing your monthly income.

The benefit of following a disciplined withdrawal strategy is that you can monitor your ongoing expenditures, making changes as needed to ensure you don’t spend more than you can afford in any given year. This practice can help you maintain adequate assets to last a lifetime, regardless of market volatility.

5. Maintain an emergency fund.

Once you retire and say goodbye to your earned income stream, the first priority is to fund and maintain an emergency fund for unexpected expenses. This fund should be prioritized above all other savings and helps ensure you don’t need to dip into retirement savings or sell investments at inopportune times to pay for unforeseen expenses.

6. Plan for healthcare and long-term care expenses.

We can all count on healthcare expenses at some point in our lives. It’s imperative to have a plan to cover the possibility of increased healthcare needs in retirement. While there are many ways to account for these expenses, retirees should consider supplemental health insurance, use of tax advantaged health savings accounts (pre-retirement), and whether long-term care insurance is appropriate to help protect their retirement savings from unexpected medical expenses.

7. Incorporate Social Security planning.

It’s important to carefully consider the timing of your Social Security benefits in order to maximize the amount you’ll receive over your lifetime. Filing for benefits early means you’ll start receiving payments earlier but at a reduced monthly amount. On the other hand, delaying until age 70 to begin taking benefits means you’ll receive an increased monthly payment, growing at 8 percent per year following your full retirement age through age 70.

You and your wealth manager can determine a Social Security timing strategy that makes sense given your personal financial situation, benefit options, and retirement goals.

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 finances, retirement

News News Feature

How to Cover Retirement Living Expenses

Post author By Gene Gard
Post date October 4, 2023

Congratulations! After years of planning and saving, you’re finally nearing retirement! This stage in life comes with a mix of emotions, but with planning, you can turn your savings into a source of income to cover your living expenses. Here are four tips to help you plan for income in retirement.

1. Make a plan.

The first step is to have a comprehensive financial plan. A custom financial plan serves as a blueprint to inform your financial decision-making and ensure all aspects of your financial life are working together to achieve your goals.

A solid plan puts you in control of your financial future and provides you with the confidence of knowing you have a plan to generate retirement income.

2. Properly structure your portfolio.

One of the best ways to generate income in retirement is by striking a balance between short- and long-term investments.

We typically recommend maintaining three to five years of living expenses in a short-term, semi-liquid investment account. A mix of bond funds typically works well, as it provides capital for opportunistic rebalancing as well as a monthly income. Having a short-term allocation to bonds can prevent you from being forced to sell out to equities at a loss when markets are low.

It’s also important to continue growing your assets throughout retirement in order to help offset inflation and ensure you have enough income to last. We often recommend investing any assets not necessary to fund short-term needs in a diversified portfolio that focuses on growth and inflation protection. While this portfolio should be in line with your overall risk tolerance and investment objectives, it can be invested in riskier assets than your short-term account. Throughout retirement, you can identify opportune times to transfer assets from your long-term savings to your short-term savings in a tax-efficient manner.

3. Implement a tax-efficient withdrawal strategy.

Ideally, you’ve been saving in multiple accounts with different tax treatments, such as traditional IRAs, Roth IRAs, 401ks, and taxable accounts. If so, you may have an opportunity to maximize your retirement income by strategically withdrawing from different accounts in different circumstances. We call this tax diversification.

• Taxable (non-retirement) accounts: These accounts offer the benefits of tax-loss harvesting and have fewer restrictions on contribution amounts as well as fewer distribution penalties.

• Tax-deferred retirement accounts, such as pre-tax IRAs and 401ks: Withdrawals from these accounts trigger ordinary income taxes, as they’ve enjoyed tax-deferred growth.

• Tax-exempt accounts, such as Roth IRAs: These accounts allow tax-exempt investments to grow for as long as possible, and qualified withdrawals are tax-free.

There are two main withdrawal strategies to consider based on your specific goals, tax situation, and income needs.

• Traditional approach: You would withdraw from one account at a time. Typically, the order of withdrawals is from taxable accounts first, followed by tax-deferred accounts, and, finally, tax-exempt accounts. This allows the tax-advantaged accounts to continue growing tax-deferred and tax-free for a longer time. However, it may result in uneven taxable income.

• Proportional approach: This strategy establishes a target percentage that will be withdrawn from each account each year. The amount is typically based on the proportion of retirement savings in each account type. This can help ensure a more stable tax bill and can also help you save on taxes over the course.

The benefit of following a disciplined approach is that you won’t be tempted to spend more than you can afford. This can help you maintain adequate assets to last a lifetime, regardless of market volatility. An advisor can assist you with creating a distribution strategy aligned with your financial needs and tax bracket, whether through a traditional or proportional approach or some combination of the two.

4. Regularly revisit and readjust.

Given the potential longevity of retirement, periodic reviews of your financial plan and income strategy are essential. You don’t have to do it alone — a qualified wealth manager can help you understand how regulatory and market changes may impact you, and adapt your plan as needed to align with your evolving goals.

Tags Finance, retirement, retirement plan, retirement savings

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

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

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

How Location Can Impact Your Retirement Goals

Post author By Gene Gard
Post date May 3, 2023

When planning for retirement, people often focus on how much money they need to save, when they’ll retire, and how to spend their free time. An often-overlooked retirement planning consideration is where to retire — and the decision can have a significant impact on your finances.

Here are some factors to consider when deciding where to retire:

• Income tax implications — Let’s go ahead and start with the elephant in the room. Sadly, even after you finish working, you’ll still owe taxes. Taxes can have a significant impact on your retirement, and different states have different tax rates for retirement income. Some states have more favorable tax policies than others, which can allow retirees to keep more of their retirement income. In addition, some states don’t tax Social Security benefits or other types of retirement income, which can help you further maximize your retirement savings.

• Retirement income
Social Security benefits — While most states don’t tax Social Security benefits, there are a few states that impose some form of taxes on them. Regardless of where in the U.S. you live, up to 85 percent of your Social Security income may be subject to federal income tax.
Retirement plan distributions — Many people hold most of their retirement savings in tax-deferred accounts, such as IRAs and 401(k)s. While these vehicles provide a great way to save in a tax-deferred manner, retirement distributions from these types of accounts are subject to ordinary income tax at the federal level. However, some states don’t tax retirement plan distributions, which can help you maximize your funds available for retirement.

• Pension income — Some states differentiate between public and private pensions and may tax only public pensions. Other states tax both, while some states tax neither. Again, the amount of state tax you pay on this retirement income source can have a big impact on your lifestyle.

• Estate taxes — In 2023, the federal government allows individuals to pass on up to $12,920,000 without any federal estate tax ($25,840,000 for married couples filing jointly). However, depending on where you live, you may need to pay state estate taxes. It’s important to understand the estate tax requirements of your current state as you’re planning your legacy, especially since some states’ estate tax limits may be lower than you would expect.

• Capital gains — Long-term capital gains are taxed by the federal government at more favorable rates than ordinary income. However, this is often not the case for states that charge state income tax. Many states don’t differentiate between earned income and capital gains, which means depending on the state in which you live, you may have significant tax liabilities on investment income.

• Cost of living — Cost of living can differ widely between various cities and states, making it essential to choose a retirement location you can afford. Some cities have a much lower cost of living than others, which allows you to do more with your retirement savings. By choosing a location with a lower cost of living, you may be able to afford a larger home, travel more often, or pursue hobbies and interests that may be out of reach if you were paying more for daily living expenses.

• Healthcare costs — When choosing where to retire, it’s important to find a location that offers access to high-quality healthcare facilities. Having convenient access to healthcare can help keep your costs down.

• Housing costs — Housing costs can vary widely between different cities and states, which is why it’s important to choose a retirement location that aligns with your housing budget. It’s also important to consider what property taxes you’ll be responsible for paying, as these too can vary widely.

While we’re not advocating for a mass migration to a retiree-friendly state such as Florida, it’s important to understand how where you live can impact your retirement finances. This knowledge allows you to choose a location that fits within your retirement budget and allows you to live the lifestyle you want.

Gene Gard, CFA, CFP, CFT-I, is a Wealth Manager with Creative Planning, formerly Telarray. 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, retirement

News News Feature

Retirement Changes in SECURE 2.0

Post author By Gene Gard
Post date January 25, 2023

In late 2022, a bill called SECURE 2.0 was signed into law. There’s nothing revolutionary in the law; it’s more of a kitchen sink of various adjustments and tweaks to retirement plan and IRA rules. There are dozens of parts to the law, but some changes are important and relevant for typical investors and we’ll highlight some meaningful ones here.

Delayed Age for Required Minimum Distributions (RMDs): SECURE 2.0 increases the required minimum distribution age to 73 starting on January 1, 2023, and increases the age further to 75 starting on January 1, 2033. This is meaningful because it allows the option to defer taxes to later in life.

No More RMDs for Roth 401(k)s: Previously, all 401(k) plans required RMDs (including Roth). This change is a fix to an oversight — typically Roth accounts don’t have RMDs.

Leniency for RMD Mistakes: RMD mistakes are extremely costly, and now only slightly less so. This law reduces the penalty for a missed RMD from 50 percent to 25 percent. If a mistake is corrected quickly and proactively, then the penalty might be only 10 percent.

529 to Roth IRA Transfer: Effective in 2024, if you have an unused balance in a 529 plan, you can transfer those funds to your child’s Roth IRA tax-free. The most you can transfer is $35,000 over a lifetime. These transfers reduce the amount of your child’s regular contributions, and they must be eligible to make contributions to a Roth IRA (i.e. have earned income, etc.). The 529 plan must have been maintained for at least 15 years, and the funds eligible for transfer must have been in the 529 plan for five-plus years.

New Future Limit for Qualified Charitable Distributions (QCDs): For years, the maximum annual QCD amount was limited to $100,000. Beginning in 2024, the limit will be linked to inflation.

Mandatory 401(k) Enrollment: Requires new 401(k) and 403(b) plans started after 2024 to automatically enroll participants in the plan with at least 3 percent but not more than 10 percent contribution, with automatic increases of 1 percent until contributions reach 10 percent but not more than 15 percent of income.

New Catch-Up Contribution: Increases the catch-up contribution to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62, and 63. The increased amounts are indexed for inflation after 2025. New limits are effective for taxable years beginning in 2025.

Matching Student Loan Payments: Allows employees to receive matching contributions by reason of repaying their student loans rather than contributing to retirement plans. This is effective for contributions made for plan years beginning after December 31, 2023.

Retirement Savings Lost and Found: Creates a national online searchable lost-and-found database for retirement plans at the Department of Labor (DOL), allowing participants to search for the contact information of their plan administrator. Directs the creation of the database no later than two years after the date of enactment of SECURE 2.0.

Catch-Up Contributions Must Be Roth: The cost of SECURE 2.0 will be offset by requiring that catch-up contributions be designated as Roth contributions. This provision will apply to eligible participants whose wages for the preceding calendar year exceed $145,000 and is effective for taxable years beginning after December 31, 2023.

SECURE 2.0 was broadly bipartisan and is largely main-street investor friendly, which is refreshing news coming from Washington. It’s definitely worth you or your advisor thinking through how these changes might help you. Retirement always creeps up more quickly than new retirees ever imagined possible, and every little bit helps on the path to your secure financial future.

Gene Gard, CFA, CFP, CFT-I, is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Tags Finance, Memphis, retirement, SECURE 2.0

News News Feature

Social Security: Choosing When to Claim

Post author By Gene Gard
Post date October 5, 2022

Social Security decisions matter. (Photo: YouVersion | Unsplash)

One of the most difficult decisions around retirement is when you choose to take your Social Security benefits. Deciding when to claim Social Security can make a difference in your monthly bottom line early in retirement and also influence your opportunity for a secure financial future later in life. Here are a few things to consider.

Before You Retire

Your monthly Social Security Benefit amount is calculated based on the number of years you have worked and the taxes you have paid into the Social Security Benefits program. Social Security counts the years you have paid taxes as “credits” for years that you have worked. For example, if you were born in 1929 or afterward, you must have 40 credits to receive Social Security benefits when you retire. This is equal to about 10 years of work.

Your benefit amount is also calculated by the number of credits you have earned during your working years. Fortunately, the Social Security Administration has made verifying your expected benefits easier by setting up an online account. It is worth double-checking your earnings to catch errors and factor in your expected benefits as you strategize for retirement.

What Age Should You Claim?

Several ages should be considered when deciding when to claim Social Security.

• Early Retirement Age: The earliest age you can claim Social Security benefits is 62. However, if you claim Social Security early, you will be penalized for not waiting until the full retirement age via reduced benefits.

• Full Retirement Age: This is the age when you are eligible to receive the full amount of your Social Security benefits. The full retirement age is calculated based on the year you were born. For example, for those born between 1943 and 1954, the full retirement age was 66. If you were born between 1955 and 1960 or beyond, the full retirement age rises to 67.

• Delayed Retirement Age: You can also delay the claim of your retirement benefits until age 70. If you wait until then, you will continue accruing opportunity for higher monthly income when you do retire. However, potential benefits stop increasing at age 70, so there is likely not any good reason to delay the claim of benefits past age 70.

Deciding when to claim Social Security benefits is important as you approach your retirement age. Cases can be made for taking Social Security early, late, or any time in between, but without looking at your comprehensive financial picture it’s hard to use any particular rule of thumb. The interplay between Social Security, Medicare, and other retirement decisions can have a major impact on your financial future, and sometimes you can’t easily undo decisions if you make the wrong choice!

There is a lot of information available online about Social Security, but of course we believe it’s wise to engage an advisor with experience and tools to help you make the right decision for you — and more importantly, be confident in that decision.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Tags Finance, retirement, savings, Social Security