Tag: Roth IRA

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A Wealthier Retirement

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If you’re part of Generation X, you’ve not yet reached retirement age. However, you are likely in, or quickly approaching, your peak earning years. Now is the time to get serious about planning for retirement. Whether you’ve been stashing money away for the last 20 years or are just now beginning to save, the following tips can help you plan today for a wealthier retirement down the road. 

1. Lower your taxes.

If you’re one of those people who only thinks about taxes as you approach the annual tax filing deadline, it’s time to make some changes. Proactive tax planning can have a big impact on your retirement savings. When done correctly and consistently, tax planning has the potential to save you a significant amount each year, which is money that can be used to help you fund a wealthier retirement. You’ll want to consider strategies such as tax loss harvesting, contributing to a health savings account, education planning for children, charitable giving, asset location, and timing of business income and deductions.

2. Shore up your retirement savings.

One of the biggest threats to many Gen Xers’ retirement security is “leaky” retirement planning. Just because your employer-sponsored retirement plan permits loans and withdrawals doesn’t mean it’s wise to take them. By taking money out of your retirement savings, even temporarily, you miss out on the benefit of compounding interest on that amount. Plus, early withdrawals are subject to taxes and penalties, which is money you’ll never get back. 

The best strategy is to invest regularly into your employer-sponsored retirement plan at a level that maximizes your employer match while being sustainable over time. Save enough in an emergency account to cover three to six months of living expenses so that you don’t have to tap into your retirement savings in an unexpected situation. 

3. Don’t miss out on growth opportunities.

While it’s wise to gradually shift to more conservative investment options as you near retirement, becoming too conservative may result in missed growth opportunities. Be sure to allocate a healthy portion of your portfolio to growth investments in order to continue enhancing the savings that will one day fund your retirement. Your wealth manager can help you determine an allocation that is in line with your risk tolerance, retirement goals, and time horizon while also meeting your income, protection, and growth objectives.

4. Eliminate debt. 

Perhaps the best way to increase your retirement savings potential is by paying off outstanding debt and saving that would-be monthly debt payment toward retirement. Once your debt is paid off, you may be able to free up enough funds to establish a passive form of income, such as an investment property or high-dividend investment that provides recurrent income to help support you in retirement. 

5. Optimize your employer benefits.

Not only are employer-sponsored retirement plans a great way to save for retirement, they also provide an added benefit of lowering your taxable income when you contribute on a pre-tax basis. At a minimum, be sure to contribute enough to your 401(k) or 403(b) to qualify for your employer’s full matching contribution. Beyond that, if you’re on the younger end of Generation X, consider contributing at least 10 percent to your retirement. If you’re on the older end of the generation, it might make sense to max out your savings by contributing 20 percent or more (up to the annual contribution limit). 

6. Don’t forget about IRAs. 

While employer-sponsored plans are a simple and effective way to save for retirement, it’s wise to diversify your savings by also contributing to IRAs. If you contribute pre-tax dollars to your 401(k), it might make sense to establish a Roth IRA, which will help diversify the tax status of your retirement income. 

Gene Gard, CFA, CFP, CFT-I, is a Private Wealth Manager and Partner 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.

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How to Start Investing in 2025

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A new year brings new goals and a fresh start. If your resolutions include investing for the future, congratulations! You’re taking the first step toward building wealth and achieving financial independence. Here are six tips to help you begin in 2025. 

1. Start simple. 

One of the easiest ways to start investing is through a retirement plan. If you have access to a workplace plan, such as a 401(k) or 403(b), make sure you’re contributing enough to take full advantage of any company matching contributions. If you don’t have access to a workplace plan, consider opening a traditional or Roth IRA. 

Once you have an account in place, commit to making regular contributions. Automatic payroll deferrals are a great way to effortlessly build an account balance. Each year, have a goal of increasing your contributions by 1 percent to 2 percent. Even a small increase can have a big impact on your retirement savings over time, and you’re unlikely to even notice the impact on your take-home pay. 

2. Find a fiduciary advisor. 

A great way to start investing is by working with a qualified fiduciary advisor to establish an investment strategy that makes sense for you, given your current financial situation and goals for the future. Fiduciary advisors are held to fiduciary duty standards, which means they’re legally obligated to act in clients’ best interests at all times. 

In contrast, some advisors are incentivized by investment managers and/or insurance companies to sell clients certain products that may or may not be in the client’s best interest. This practice can lead to high fees and the long-term erosion of your assets. 

Look for an advisor who provides 100 percent of their services as a fiduciary advisor; offers low-cost, tax-efficient strategies; and uses an approach based on rational, science-driven, academic research. There’s a lot of misleading financial data out there. Your advisor should have the knowledge, background, and experience to get to the facts and develop well-researched solutions to the challenges you face. 

3. Establish clear investing goals. 

Everyone has different goals for the future, so there is no one-size-fits-all strategy. A great way to begin your investing journey is by establishing an overall financial plan. A solid financial plan can serve as a blueprint to guide all aspects of your financial life and can help ensure your investment decisions make sense, given your overall financial situation. 

Consider working with an advisory team with experience navigating a range of financial challenges, including debt management, insurance planning, retirement planning, budgeting, estate planning, tax planning, and preparation, etc. 

4. Diversify. 

Regardless of where you are in your investing journey, it’s important to maintain a diversified portfolio. Investing in different types of assets can help spread out your risk because 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 your risk of being too heavily invested in the worst performing part of the market. 

5. Don’t neglect your emergency savings.

While investing in a diversified mix of stocks and bonds is a great way to build your wealth over time, it’s also important to have access to a liquid emergency fund to help cover unexpected expenses. Consider saving three to six months of living expenses in a short-term account separate from your invested assets. 

6. Protect your nest egg. 

As you build your investment portfolio, be sure to implement a variety of risk-management strategies. These include things like life insurance, umbrella liability insurance, long-term-care insurance, disability/income replacement insurance, and more. Work with your wealth manager to determine which strategies make sense for your particular situation. 

Gene Gard, CFA, CFP, CFT-I, is a Private Wealth Manager and Partner 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.

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Gifting a Roth IRA?

Photo: Micheile Henderson | Unsplash

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.

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Five Ways to Overcome Roth Contribution Limits

Photo: Alexander Grey | Unsplash

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.

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.

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Facts and Feelings: Roth vs. Traditional IRAs

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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.

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.

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Five Reasons to Consider Giving the Gift of a Roth IRA

Photo: Andrea Piacquadio | Pexels

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.