Four Common Concerns About Roth IRAs
There is a list of objections commonly used against the use of a Roth. The following are answers to the most common tax concerns. Concern #1: Is it better to pay taxes now or later? Because there are many unknowns related to tax code and changes in individual earnings, there is only one good way to approach this question meaningfully. One must presume that tax brackets will not change, individual earnings do not change, and that only the tax-deductible equivalent is invested using the Roth. To illustrate, a $5,000 contribution made to a traditional IRA by an individual in the 15% tax bracket, would result in an out-of-pocket expense of about $4,250 once you take into consideration the tax deduction. As such, $4,250 would be the ‘tax-deductible equivalent’ for use in comparing to a Roth. Presuming both contributions earn 6% per year, but withdrawals are tax-free to the Roth holder and taxable to the Traditional IRA account holder, the result is that there is no tax advantage either way. One did not position themselves better from a tax perspective. (There are still other advantages to using this strategy, such as not having a required minimum distribution and the cross generational
Delay Social Security, Not Your Retirement
Most people think that they can’t retire until they take Social Security. So, when I advise them to delay their Social Security benefit until age 67 (and most often until age 70), all they hear me saying is, “YOU HAVE TO WORK LONGER!” Not True! The age when you take Social Security and the age at which you retire DO NOT have to coincide. Where my clients are concerned, they have saved substantial amounts of money in their 401(k)s, IRAs, trust accounts and the like. They can retire, delay their social security benefit, withdraw from their retirement savings and then simply draw less once they start taking Social Security. If they live past 80, they are likely better off. No two financial plans are the same. Have your CFP® professional run your Social Security analysis to see what’s best for you.
Finance Essentials: Personal Budget Basics
You cannot take control of your financial life if you don’t know two basic things: (1) how much money is coming in, and (2) how much money is going out. Most people operate in the dark as it relates to their finances. They often take the head-in-the-sand approach or the, cross-your-fingers and hope approach to their financial life. Yikes! Perhaps it will end up working out, but what a stressful way to handle your money. Just knowing where your money goes and how much you need to “keep the lights on” at home provides a tremendous sense of relief. It is integral to everything related to your financial life. So, building a cash flow projection should be at the foundation of your financial strategy. Rather than averaging expenses over a year, I advise that you project your annual income and expense by month. But don’t go over-board. It isn’t meaningful to create line items for coffee expenditures or even clothing for that matter. Rather, list all expenses that you need to keep your house running, food in the fridge and gas in the car. The rest is discretionary; it’s what you can spend on things like eating out, movies, clothes
How Finances Play a Role in Your Relationship
Relationships are typically divided into two financial roles: the active and the passive. To be more specific, the person who assumes the domestic financial lead by paying bills and making financial decisions and the person who takes a passive approach to the finances (“I don’t know” … “fine” … “you decide.”) Although this is typical, it is not optimal. In this traditional circumstance contentiousness can emerge between spouses as a result of misunderstandings and miscommunications about money. Ideally, partners should approach finances like all other areas in a healthy relationship, as a team: collaborating on goals and strategies while openly communicating about money. If they don’t however, the following are important points to consider about each role. The Financial Lead The role of the financial lead, for those who take this responsibility seriously, is not an easy one. You have the challenge of balancing the important financial responsibilities while simultaneously making your family happy. And for domestic tranquility’s sake, you can’t always say “no, we can’t afford it,” but occasionally you need to pull the reins on the household spending. We have met with many widows who were surprised to find that their spouses left them in a precarious monetary
Why You Should Consider a Roth at Any Age
It is typical for people to turn to “common wisdom” when looking for answers to major decisions about money. But this is a mistake because each financial situation is unique. You cannot maximize the success of a financial plan by simply following rules of thumb. One such rule I frequently hear, purports to simplify the usefulness of a Roth to: it only makes sense if you are young. Rules of thumb like this make Certified Financial Planner™ professionals like me cringe. Successfully navigating the complexities of our financial system depends on how well you know your players and how creative you can be in your strategy. When used properly, a Roth IRA, Roth 401(k) and Roth conversions can be the queen in your financial chess game, at any age. So, what makes the Roth so special? Tax-Free Growth While after-tax monies are used to fund Roth contributions, earnings grow tax-free. The longer the investment time horizon one has, the greater the potential for tax-free appreciation, which is why it is commonly considered a tool only for the young. Do not forget, however, that even a retiree may have a time horizon of thirty years or longer during which their money
Estate Plan vs. Beneficiary Statement
Misconception: “My designated beneficiaries on my IRAs and 401(k) are no longer relevant because I have had my estate planning done and I have a living trust.” Not so – don’t make this mistake. Bottom Line The beneficiary statement, whether it is for your 401(k), IRA, life insurance and so on is a will substitute. It matters not how your wills or trusts are written; the beneficiary statements dictate where those monies go. We recommend that you have your estate planning attorney periodically review these to make sure they are properly coordinated with your overall estate plan. Tell Me More This item deals with the transfer of asset at death. When a person passes away, each financial institution will look for an instruction about who should inherit the money. In many cases, a beneficiary is designated upon account establishment, such as in the case of a 401(k), IRAs, life insurance policies and so on. A beneficiary designation provides the necessary instruction to the institution for the distribution of the asset. But in cases where there is no beneficiary designation, such as an individual account or real estate, there is no instruction about to whom this money should go. As such,
Four Common Concerns About Roth IRAs
There is a list of objections commonly used against the use of a Roth. The following are answers to the most common tax concerns. Concern #1: Is it better to pay taxes now or later? Because there are many unknowns related to tax code and changes in individual earnings, there is only one good way to approach this question meaningfully. One must presume that tax brackets will not change, individual earnings do not change, and that only the tax-deductible equivalent is invested using the Roth. To illustrate, a $5,000 contribution made to a traditional IRA by an individual in the 15% tax bracket, would result in an out-of-pocket expense of about $4,250 once you take into consideration the tax deduction. As such, $4,250 would be the ‘tax-deductible equivalent’ for use in comparing to a Roth. Presuming both contributions earn 6% per year, but withdrawals are tax-free to the Roth holder and taxable to the Traditional IRA account holder, the result is that there is no tax advantage either way. One did not position themselves better from a tax perspective. (There are still other advantages to using this strategy, such as not having a required minimum distribution and the cross generational
Delay Social Security, Not Your Retirement
Most people think that they can’t retire until they take Social Security. So, when I advise them to delay their Social Security benefit until age 67 (and most often until age 70), all they hear me saying is, “YOU HAVE TO WORK LONGER!” Not True! The age when you take Social Security and the age at which you retire DO NOT have to coincide. Where my clients are concerned, they have saved substantial amounts of money in their 401(k)s, IRAs, trust accounts and the like. They can retire, delay their social security benefit, withdraw from their retirement savings and then simply draw less once they start taking Social Security. If they live past 80, they are likely better off. No two financial plans are the same. Have your CFP® professional run your Social Security analysis to see what’s best for you.
Finance Essentials: Personal Budget Basics
You cannot take control of your financial life if you don’t know two basic things: (1) how much money is coming in, and (2) how much money is going out. Most people operate in the dark as it relates to their finances. They often take the head-in-the-sand approach or the, cross-your-fingers and hope approach to their financial life. Yikes! Perhaps it will end up working out, but what a stressful way to handle your money. Just knowing where your money goes and how much you need to “keep the lights on” at home provides a tremendous sense of relief. It is integral to everything related to your financial life. So, building a cash flow projection should be at the foundation of your financial strategy. Rather than averaging expenses over a year, I advise that you project your annual income and expense by month. But don’t go over-board. It isn’t meaningful to create line items for coffee expenditures or even clothing for that matter. Rather, list all expenses that you need to keep your house running, food in the fridge and gas in the car. The rest is discretionary; it’s what you can spend on things like eating out, movies, clothes
How Finances Play a Role in Your Relationship
Relationships are typically divided into two financial roles: the active and the passive. To be more specific, the person who assumes the domestic financial lead by paying bills and making financial decisions and the person who takes a passive approach to the finances (“I don’t know” … “fine” … “you decide.”) Although this is typical, it is not optimal. In this traditional circumstance contentiousness can emerge between spouses as a result of misunderstandings and miscommunications about money. Ideally, partners should approach finances like all other areas in a healthy relationship, as a team: collaborating on goals and strategies while openly communicating about money. If they don’t however, the following are important points to consider about each role. The Financial Lead The role of the financial lead, for those who take this responsibility seriously, is not an easy one. You have the challenge of balancing the important financial responsibilities while simultaneously making your family happy. And for domestic tranquility’s sake, you can’t always say “no, we can’t afford it,” but occasionally you need to pull the reins on the household spending. We have met with many widows who were surprised to find that their spouses left them in a precarious monetary
Why You Should Consider a Roth at Any Age
It is typical for people to turn to “common wisdom” when looking for answers to major decisions about money. But this is a mistake because each financial situation is unique. You cannot maximize the success of a financial plan by simply following rules of thumb. One such rule I frequently hear, purports to simplify the usefulness of a Roth to: it only makes sense if you are young. Rules of thumb like this make Certified Financial Planner™ professionals like me cringe. Successfully navigating the complexities of our financial system depends on how well you know your players and how creative you can be in your strategy. When used properly, a Roth IRA, Roth 401(k) and Roth conversions can be the queen in your financial chess game, at any age. So, what makes the Roth so special? Tax-Free Growth While after-tax monies are used to fund Roth contributions, earnings grow tax-free. The longer the investment time horizon one has, the greater the potential for tax-free appreciation, which is why it is commonly considered a tool only for the young. Do not forget, however, that even a retiree may have a time horizon of thirty years or longer during which their money
Estate Plan vs. Beneficiary Statement
Misconception: “My designated beneficiaries on my IRAs and 401(k) are no longer relevant because I have had my estate planning done and I have a living trust.” Not so – don’t make this mistake. Bottom Line The beneficiary statement, whether it is for your 401(k), IRA, life insurance and so on is a will substitute. It matters not how your wills or trusts are written; the beneficiary statements dictate where those monies go. We recommend that you have your estate planning attorney periodically review these to make sure they are properly coordinated with your overall estate plan. Tell Me More This item deals with the transfer of asset at death. When a person passes away, each financial institution will look for an instruction about who should inherit the money. In many cases, a beneficiary is designated upon account establishment, such as in the case of a 401(k), IRAs, life insurance policies and so on. A beneficiary designation provides the necessary instruction to the institution for the distribution of the asset. But in cases where there is no beneficiary designation, such as an individual account or real estate, there is no instruction about to whom this money should go. As such,
