IRA

  • Increased Retirement Account Contribution Limits for 2024

    The IRS announced new contribution limits to employer retirement accounts (401(k)s, 403(b)s, most 457(b) plans, and the Thrift Savings Plan) and individual retirement accounts (IRAs, Roth IRAs). Along with increased contribution limits, the income limits to be able to contribute to a Roth IRA and to deduct contributions to a traditional IRA are receiving a bump for 2024 as well.

    Key Points

    • 401(k)/403(b) employee contribution limits increased to $23,000 for 2024.
    • IRA and Roth IRA contribution limits also increased and are up to $7,000.
    • The income limit to be able to directly contribute to a Roth IRA ranges from $146k – $161k for single filers and  $230,000 – $240,000 for married filing jointly.
    • The total contribution limit for employer retirement accounts also grew to $69,000. This is the limit for all employee, employer, and after-tax contributions.

    2024 Employer Retirement Account Contribution Limits

    The employee contribution limit for employer retirement accounts, think 401(k)s, 403(b)s, the Thrift Savings Plan and most 457(b) plans is increasing to $23,000. A $500 bump from 2023. The total limit which includes employee and employer contributions rises to $69,000, a $3,000 boost from last year.

    The catch-up contributions available to employees who are 50 or older remains unchanged for the new year at $7,500.

    After-tax 401(k) Contribution Limits

    Once you hit the limit to what you can contribute as an employee, $23,000 for 2024, you may be able to save more in your 401(k) through after-tax contributions. That’s where the combined limit of $69,000 comes into play. If your 401(k) plan allows you can make additional after-tax contributions up to the $69,000 limit.

    Consider an example where your employer makes a flat $5,000 401(k) match and your 401(k) plan allows after-tax contributions. Once you’ve made your $23,000 contribution you can contribute an additional $41,000 of after-tax contributions.

    $23k employee contribution + $5k employer match + $41k after-tax contribution = $69k

    Your after-tax contributions will continue to grow tax-free and you will owe taxes on their withdrawal in retirement similar to traditional 401(k) contributions.

    After-tax 401(k) -> Mega Backdoor Roth

    An even better option if your 401(k) plan allows it is to do an immediate Roth conversion on your after-tax contributions. Since the contribution is made with after-tax dollars there will be no tax owed on the Roth conversion, and your converted funds will grow tax-free and can be withdrawn tax-free in retirement. You can learn more about the Mega Backdoor Roth at this link.

    2024 IRA (Individual Retirement Account) Contribution Limits

    The contribution limit on IRAs is getting a $500 increase for 2024 as well. Individuals can contribute up to $7,000 to Roth and Traditional IRAs, up from $6,500 last year. The 50 and over catch-up contribution will remain at $1,000.

    The income limits to contribute to a Roth IRA or to make a tax-deductible traditional IRA contribution are increasing as well. These limits can be a little confusing because the amount you can contribute or deduct decreases once you earn above a certain amount, and if you are married the limits also vary based on whether you or your spouse have access to an employer retirement plan like a 401(k).

    2024 Roth IRA Income Limits

    The income limits for a Roth IRA are relatively straightforward compared to the rules around the traditional IRA. For a Roth IRA in 2024 single taxpayers can make the full contribution if your income is $146,000 or less. Above $146k as you make more income the amount you can contribute is reduced until you make $161,000 at which point you can no longer directly contribute to a Roth IRA.

    Although, if your income is too high to contribute to a Roth IRA directly you can still make a backdoor Roth IRA contribution.

    The phaseout limits for married couples filing jointly contributing to a Roth IRA go from $230,000 to $240,000. Both of these limits increased $12,000 from last year, so more folks should be eligible to contribute to a Roth IRA directly in 2024.

    2024 Traditional IRA Income Limits

    Income limits to deduct contributions to a traditional IRA follow a similar pattern. There’s a range of income where your ability to deduct contributions is phased out and the actual limit depends on your tax filing status and on whether you or your spouse have access to a workplace retirement plan.

    If you are a single filer and you don’t have a workplace retirement plan, or if you are married filing jointly and neither you nor your spouse have a workplace retirement plan then there aren’t any income limits and your traditional IRA contribution will be deductible.

    Single filers with a workplace retirement plan have an income limit phaseout range from $77,000 to $87,000.

    For married filers where the spouse making the contribution has a workplace retirement plan the income limit phaseout range is $123,000 to $143,000.

    For married filers where the spouse making the contribution does not have a workplace retirement plan, but the other spouse does, the income limit phaseout range is $230,000 to $240,000.

    These limits are also increases from last year.

    Qualified Charitable Contributions

    Along with increases to retirement contributions, the amount that you can contribute from your retirement account to charity also increased. A QCD (Qualified Charitable Distribution) allows you to roll funds directly from your IRA to a qualified charity. QCDs satisfy RMD rules and you can exclude the amount donated from your taxable income. The QCD increases by $5,000 for 2024 up to $105,000.

    Should you make any changes based on these increases?

    If you’re maxxing your 401(k) contribution you’ll want to review your planned contributions for 2024. For IRAs and Roth IRAs, compare your expected income for 2024 to the new limits and adjust any automatic contributions you already have set up.

    If you are unsure where your income will fall or if you’ll have the cash to contribute to your Roth or traditional IRA you can always wait until you file your taxes the next year to make your contributions. So, you could make 2023 IRA contributions up to tax-day 2024.

    Wrap Up

    While it doesn’t quite make up for the spike in inflation we’ve seen the past few years, it is nice to be able to stash away a few more dollars tax-free for retirement. Make sure to review your income and planned contributions for next year to take advantage of additional contribution limits especially if you’ve turned 50 and can start making catch-up contributions.

  • What is an Index Fund?

    Depending where you are on your financial journey the information in today’s post might seem obvious. But for every individual who knows the ins and outs of mutual funds and ETFs along with what the letters VTSAX stand for, there are just as many who are just getting started and are eager to learn. So, what is an index fund?

    Key Points

    • Mutual Funds and Exchange Traded Funds (ETFs) can be thought of as a basket that holds pieces of other assets like stocks, bonds, and even other mutual funds or ETFs.
    • Mutual Funds and ETFs make it much easier for investors to create a diversified portfolio.
    • The best stock pickers and mutual fund managers often fail to do better than the overall stock market, and that’s their job. If they can’t beat the market, why do so many individual investors think that they can?
    • Investing in Index Funds is a way of acknowledging that it’s extremely difficult to outperform the stock market and you are better off matching it’s performance instead.

    What Goes in Your 401k?

    When you got your first job with a 401k or 403b and made the choice to contribute a percentage of your paycheck you might have been confused when you next had to pick your investment allocation.

    We don’t do a great job with financial education in the U.S. so thinking you were done after choosing to put money in your 401k is understandable. But the 401k is the just the account that holds your investments. Contributing is great, but choosing what investments to hold in your 401k is extremely important.

    Nowadays some 401k/403b plans will auto invest individuals into a target date retirement fund, which is great. But what if this doesn’t apply to you? What types of investments should you hold in your 401k/403b or your IRA, Roth IRA or 457b for that matter? The answer to that varies based on your age and goals, but it should generally be a mix of stock and bond index funds. So what exactly are index funds?

    An index fund is simply a type of mutual fund or Exchange Traded Fund (ETF) that tracks the movement of a particular index. In plain English that means it’s like a stock whose price goes up and down the same as the index it follows. Most index funds follow a specific stock or bond index.

    So, if an index is just a basket of companies what makes an index fund so special and why should you choose to invest in them versus other funds, or individual stocks and bonds?

    The Stock Market Generally Trends Up

    Investing in stocks is one of the best ways to earn the higher returns needed for your portfolio to grow and provide for your future goals, such as retirement. Keeping your money in cash, which is attractive right now in October 2023 with savings accounts offering interest of 4% or more often fails to beat out inflation over the long haul.

    Money invested in bonds will grow slowly, generally in the range of 3% – 5%. While the returns on the US stock market have generally been around 8% annually, depending on the date range you look at.

    So, if we believe that the value of the stock market will continue to increase and investing in stocks is the best way to grow our wealth to prepare for the future, why are index funds the best way to do that? Shouldn’t we just find the next Amazon or Google and buy their stock instead?

    Picking the Hot Stock

    The problem with finding the next hot stock is finding the next hot stock. There are many very smart people who spend a ton of time and money trying to find the next Apple or guess when the next recession will hit.

    You’ve likely heard of famous investors like Warren Buffett. That’s because it is incredible hard to pick successful stocks, or “beat the market” year in and year out. The people that can do this are justifiable famous.

    If you have the skill to pick the best performing stocks and only buy those, that is definitely the way to go. The problem is that the vast majority of us are just as likely to pick the next pets.com as we are to find the next Amazon.

    The Benefits of Diversification

    If we acknowledge that we it’s hard to pick winners in the stock market what are our options? The solution is to purchase a variety of different stocks. Some stocks will do well and grow in value, and others will do poorly. By diversifying among a large number of stocks we decrease the chance that we’ll go bust and lose our entire investment. We choose to own the entire market, rather than trying to beat it.

    With a diversified portfolio we settle for the opportunity for decent return, rather than risk an all or nothing bet on one single stock.

    That’s where mutual funds and ETFs come in. These are single securities that act like a basket holding a slice of many different stocks. Instant diversification!

    How About Paying Someone to Pick the Best Stocks?

    Since there are smart people out there who know how to beat the market why don’t we pay them to pick the best stocks and beat the market for us? It turns out you can try to do this by buying “active” funds.

    Active funds are mutual funds or ETFs made up of stocks or bonds that the fund manager chooses because they think they will do well and outperform the market. The problem is that just as with picking a quality individual stock, it is very hard to pick a quality active fund.

    Maybe an active fund will outperform its benchmark for one year, but it’s very difficult for it to do better year after year. The S&P Dow Jones Indices releases their SPIVA® (S&P Indices Versus Active) reports each year. During the first half of 2023 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500. If you look over a three-year period 79.8% underperformed.

    It is just as hard for someone to select which active funds will outperform in a certain year as it is to select which stocks will do the same. So, if we can’t really pick which of the active funds will do well, why do we choose index funds instead? Reason 1: an index fund won’t outperform the market but it shouldn’t underperform either. Reason 2: index funds cost much less than active funds.

    Index Funds are Cheaper Too

    We’ve learned that the majority of active funds don’t do any better than their index, so they must cost less than an index fund that “just” tracks the index right? Nope!

    The average expense ratio for an active equity fund in 2018 was 0.76% and the average for an index equity fund was 0.20%.

    That 0.56% difference in fees between an index fund and active fund may not seem like a lot. After all, 0.56% of a $10,000 is only $56 but it adds up over time. For a $500,000 portfolio growing at 6% per year, paying an extra 0.56% in fees would cost you $421,938 over a period of 30 years. That’s quite an impact!

    The Best, Most Cost-Effective Option

    All of these reasons: diversification, lower fees, the difficulty of picking winners are why index funds are the right choice for most investors. These benefits have led to a rise in popularity of index funds. Where before you could only find funds that tracked the largest stock markets, today you can find an index fund for almost anything.

    Wrap Up

    Index funds are the best investment options for most investors for their workplace retirement accounts, IRAs and Roth IRAs, and taxable brokerage accounts.  They provide a low cost way to track the stock market and diversify your portfolio versus trying to pick individual stocks or active mutual funds that you think will beat the market.

  • Supercharge Your Retirement Savings With The Mega Backdoor Roth

    Saving for retirement is a critical aspect of financial planning. While traditional retirement accounts like 401(k)s, 403(b)s and IRAs offer valuable tax advantages, they come with contribution limits that may not be sufficient for physicians with substantial incomes.

    This is where the “mega backdoor Roth contribution” comes to the rescue. In this post, we’ll explore how physicians, including self-employed and locum tenens doctors, can harness this strategy to supercharge their retirement savings.

    Key Points

    • With an attending physician salary, you can fill up your tax-advantaged retirement buckets pretty quickly. This can leave you searching for other types of accounts and investments to continue saving for your retirement needs.
    • The Mega Backdoor Roth can help you contribute up to an additional $43,500 to Roth retirement accounts. Since these are Roth funds they grow tax-free and withdrawals are also tax-free.
    • The Mega Backdoor Roth is also a great option for self-employed physicians, such as practice owners or locums physicians, to save more for retirement.

    What is a Mega Backdoor Roth?

    Most physicians have heard of the backdoor Roth IRA before, but what is the Mega Backdoor Roth? With the regular backdoor Roth strategy, you make after-tax contributions to your traditional IRA and then execute a Roth conversion to convert those funds to a Roth IRA.

    With this strategy you are limited to the annual IRA contribution limit, which is $6,500 for 2023. The mega backdoor Roth allows you to execute essentially the same strategy using your 401k in place of your IRA. Since 401(k)s have much higher contribution limits and no income limits this allows you to supercharge your retirement savings.

    How the Mega Backdoor Roth Works

    1. Max Out Your Pre-Tax 401(k) Contributions: Start by contributing the maximum allowed amount to your traditional 401(k). In 2023, the annual limit for employee contributions is $22,500, with an additional $7,500 catch-up contribution for those aged 50 and older.
    2. After-Tax 401(k) Contributions: Some 401(k) plans permit after-tax contributions beyond the pre-tax limit. This provision is required for the mega backdoor Roth to work, so check with your employer to make sure your 401k allows after-tax contributions.

    In 2023, the overall contribution limit for all contributions (including employee and employer contributions) is $66,000 or 100% of your income, whichever is less. This means you can potentially contribute a significant amount of money on an after-tax basis.

    For an example, if you contribute the maximum of $22,500 to your 401k and your employer contributes a flat match of $5,000 you could make additional after-tax contributions of $38,500.

    $22,500 employee contribution + $5,000 employer match contribution + $38,500 after-tax contribution = $66,000 contribution limit

    1. In-Plan Roth Conversion: Once you’ve made your after-tax contributions, your plan may allow you to convert these funds to a Roth 401(k) within the same plan. Since these were after-tax contributions there is no tax associated with the Roth conversion. This is the critical step that turns your after-tax contributions into tax-free Roth assets.

    Some plans may not allow in-plan Roth conversions and may instead allow in-service withdrawals. In this case you would roll your after-tax contributions into a Roth IRA outside of your retirement plan.

    In the case where your 401k allows you to make after-tax contributions but does not allow in-plan conversions or in-service withdrawals you should still consider making after-tax contributions. Even though it is not as advantageous as a plan that allows in-plan Roth conversions.

    When you retire or leave your employer you can roll your after-tax 401k into an IRA at that time. Your after-tax contributions will roll into a Roth IRA, but any growth will be treated as pre-tax dollars and rolled into a traditional IRA.

    Example: You contributed $20,000 to your after-tax 401k which grew to $25,000. You decided to leave your employer and do a rollover of your 401k into an IRA. Your $20,000 of contributions would roll into a Roth IRA. The $5,000 of gains would roll into a traditional IRA.

    Benefits of a Mega Backdoor Roth Contribution

    1. Tax-Free Growth: One of the primary benefits of the mega backdoor Roth is that once your contributions are converted to Roth, they grow tax-free. This can be especially advantageous for high-income individuals who anticipate being in a higher tax bracket in retirement.
    2. No Income Limits: Unlike traditional Roth IRA contributions, there are no income limits for the mega backdoor Roth strategy, making it accessible to high-earning physicians.
    3. Higher Contribution Limits: Compared to the regular backdoor Roth you can contribute over 6 times as much to your after-tax 401k, helping to supercharge your retirement savings.
    4. Estate Planning: Roth IRAs can offer excellent estate planning benefits, as they can be passed on to heirs tax-free.

    Utilizing the Mega Backdoor Roth for Practice Owners, Self-Employed, and Locum Physicians

    Being a self-employed physician can be an outstanding career choice for many doctors, but can have the unfortunate downside of losing access to employer retirement plans such as 401(k)/403(b)/457(b) plans.

    Self-employed physicians, whether they are practice owners, 1099 emergency docs or locum tenens physicians, have a unique opportunity to implement the mega backdoor Roth strategy using a Solo 401(k). Here’s how:

    1. Open a Solo 401(k): Self-employed individuals can set up a solo 401(k), also known as an individual 401(k) or one-participant 401(k). This plan allows for both employer and employee contributions, crucially including after-tax contributions.

    * You will want to make sure your solo 401(k) plan allows for both after-tax contributions and in-plan Roth conversions to maximize the benefits of the mega backdoor Roth. *

    1. Maximize Contributions: As both the employer and employee, you can contribute up to the annual limits mentioned earlier, including after-tax contributions.
    2. In-Plan Roth Conversion: Execute your in-plan Roth conversions to maximize the benefits of your after-tax contributions.

    Wrap Up

    The mega backdoor Roth contribution is a powerful tool for physicians looking to supercharge their retirement savings and enjoy tax-free growth on their investments. For self-employed physicians, such as practice owners, emergency doctors, and locum tenens physicians, the solo 401(k) offers an excellent platform to implement this strategy.

    It’s essential to consult with a financial advisor and/or tax professional to ensure that the mega backdoor Roth contribution aligns with your financial goals and retirement plan. By taking advantage of this strategy, you can supercharge your retirement savings and secure a more comfortable financial future.

  • September Financial Resolutions

    As summer fades into the distance, September brings with it a sense of renewal and rejuvenation. For many, it’s a time to refocus on their goals, much like the beginning of the year in January. With the start of school families get back into routines which helps people get organized and set goals.

    While you may have set resolutions in January, the start of the year is a tough time to follow through on them because of post-holiday exhaustion, and the temptation make a big change all at once. September represents a clean slate and offers a unique opportunity to revisit and reevaluate your financial progress.

    Here are seven things you can do this September to give your finances a mid-year boost and set yourself up for success through the rest of the year.

    1. Review Your Financial Goals:

    Begin by revisiting the financial goals you set at the beginning of the year. Take a close look at your short-term and long-term objectives. Are they still relevant? Have your circumstances changed? Use this time to adjust and fine-tune your goals to align better with your current situation and aspirations.

    2. Assess Your Budget:

    A budget is your financial roadmap, and September is an ideal time to check if you’re staying on course. Review your income, expenses, and savings contributions. Are you overspending in certain areas? Are there areas where you can cut back? Make necessary adjustments to ensure you’re saving enough to meet your goals.

    3. Emergency Fund Check:

    One of the cornerstones of financial security is having an emergency fund. September is a great time to assess the state of your emergency fund. Aim to have at least three to six months’ worth of living expenses saved. If your fund falls short, prioritize saving to reach this critical milestone.

    Almost as important as having the right amount saved is the account you are saving in. If your emergency fund is in your checking account consider moving it to a high-yield savings account. Most big bank checking and savings accounts pay very little interest (close to zero percent). Today’s rates on HYSAs are close to 5% and you can transfer your emergency fund with just a few clicks.

    4. Investment Portfolio Review and Rebalance:

    Take a close look at your investment portfolio. How have your investments performed so far this year? Are they in line with your risk tolerance and long-term objectives? Index funds that track the overall stock market and bond market are the best long-term investments for most investors. Are your investments doing what they’re supposed to?

    Rebalance your portfolio if necessary to ensure it remains diversified and aligned with your financial goals. Rebalancing usually means selling some of your investments that have done well and buying more of those that have not. It’s best to rebalance on a set schedule. Choose to rebalance once per quarter, or once per year and set a reminder to stick to it.  

    5. Review Your Retirement Account Contributions:

    If you’re not maxing out your contributions to retirement accounts like a 401k or an IRA, September is a good time to increase your contributions. The maximum you can contribute to your 401k/403b for 2023 is $22,500, or $30,000 if you’re 50 or older. The max for your traditional or Roth IRA is $6,500, or $7,500 if you’re 50 or older.

    Increasing your contribution by just 1% each year can really add up. If you’ve received a bonus or a pay raise during the year and your paycheck has increased consider making an even bigger contribution.

    Along with your retirement accounts don’t forget about your HSA. These can also be used as stealth retirement accounts, and maxing out the contributions is a great idea. The contribution limits for HSAs in 2023 are $3,850 for singles and $7,750 for families.

    6. Backdoor Roth IRA Contribution

    If you make too much to contribute to a Roth IRA, consider making a backdoor Roth IRA contribution. The income phaseout for Roth contributions starts at $138k for single filers and $218k for MFJ. Most bonuses and raises are paid by September, so at this point you should have a good sense of your income for the year.

    Unlike the direct contribution to your Roth IRA, you only have until December 31st to make a backdoor Roth IRA contribution. Direct contributions to traditional or Roth IRAs are allowed all the way up to tax-day the next year.

    7. Tax Planning:

    It’s never too early to start thinking about taxes, and there are many decisions you can make in September to put yourself in a more favorable position.

    Now is a good time to review your federal income tax withholding. Withhold too little and you could have a hefty tax bill due next year as well as possible fines for underpayment. Withhold too much and you’re essentially providing Uncle Sam with an interest free loan. Don’t worry, it’s easy to adjust your withholding by filing a new W4 form with your HR department.

    Consider making additional 529 plan contributions. In most states contributions to a 529 plan have to be done before year end, while some states allow you to contribute until tax-day the next year. Many 529 plans offer state tax deductions and the investments grow tax-free.

    If your income for the year has been less than normal, perhaps due to switching jobs or taking time off consider making a Roth IRA conversion. Converting funds from a traditional IRA to a Roth IRA means paying taxes on the conversion now, but prevents you having to pay taxes on withdrawals later. A year with a lower income and lower tax rate is a good opportunity not to be wasted.

    Wrap Up

    September is indeed a month of fresh beginnings, and it’s a perfect time to revisit your financial resolutions, assess your progress, and make necessary adjustments. By taking these proactive steps, you can set yourself up for financial success in the months and years ahead. Remember that financial planning is an ongoing process, and staying proactive will help you achieve your goals and build a secure financial future.

  • A late Christmas gift from Uncle Sam! Higher IRA and 401k contribution limits for 2019

    With all of the hubbub around the holiday season you probably missed a nice gift you received from Uncle Sam. And, like the forgetful uncle that he is, he forgot to give it to you until January, but as they say, it’s the thought that counts.

    So, what present am I talking about? Why, the $500 increase in IRA and 401k contribution limits of course!

    Contribution Limits for 2019

    For 2019 the maximum you can contribute to an IRA has increased to $6,000, up from $5,500 last year ($7,000 for individuals 50 or older). And for a 401k the maximum employer contribution increased to $19,000 up from $18,500 (this also applies to 403b, most 457 plans and the governments Thrift Savings Plan). Individuals 50 or older contributing to these plans (401k, 403b, 457, TSP) can still contribute an additional $6,000.

    What also increased were the income limits for the phaseout of when you can and can’t contribute to IRAs and Roths. You can find the full rundown of the changes on the IRS’s website here: IRA increases contribution limits for 2019.

    But don’t forget about 2018

    You also still have the option to contribute to your IRA or Roth for 2018. You can contribute right up to April 15. So, if you haven’t yet contributed this year you still have time to sock away up to $5,500 ($6,500 if your 50 or older) into your IRA and count it against 2018’s taxes.

    If your income is above the Roth contribution limits, you are unfortunately too late to enact a backdoor Roth contribution for 2018 since you had to complete those by Dec 31 2018. Maybe a financial planner could have helped make sure your financial tasks were completed on time wink, wink?

    What is the impact of that extra $500?

    You may yawn and think, “big whoop, an extra $500, what will that get me?” Well I’m glad you asked. Even though it might not seem like much, given it’s only an extra $41.67 a month. Depending on your investing time frame that $500 could add up to a serious bump in your portfolio over time.

    If We assume 7% growth within a tax advantaged account, after 10 years you would have an additional $6973. After 20 years it would be $20,624 and after 30 that would grow to $47,479. All from contributing just an extra $500 a year.

    Upping your contribution

    Now is the perfect time to increase your contribution for 2019 or make one for 2018. If you’re a W-2 employee you should receive your copy in the mail any day now.  By comparing your earned income in box 1 of your W-2 to the income limits at the link mentioned above you can figure out if you qualify to contribute to an IRA, Roth, or both. And if you plan to earn the same amount for 2019 this will help you decide where to contribute for the coming year as well.

    Another decision to make is when to make your 2019 contributions: in one $6,000 chunk or by dollar cost averaging with an automatic monthly contribution.

    The upside with automatic monthly investments is that you don’t have the worry about contributing $6,000 in one chunk then watching the market drop the next day. The downside is if the market decides to move steadily upward throughout the year, the impact of your monthly contribution is reduced each month.

    Historically the stock market finishes the year higher than where it started about ¾ of the time. Given this info you are likely better off making the lump sum contribution at the start of the year. But if it helps you to sleep at night by making the monthly contributions then go that route. We humans tend to feel the pain of loss much more acutely than the joy from a gain.If you are in Boise or beyond and would like to talk with a fee-only advisor about your IRA or 401k funding questions, or anything other questions you might have, give us a call. We are happy to help.

  • MILLENNIALS HAVE HOW MUCH IN THEIR 401(K)?!

    A recent article in Investor’s Business Daily got a lot of attention online. The subject of the article was how much the average 401(k) balance has increased over the past 10 years split out by generations. Millennials had an average balance of $137k in 2019 up from $10,500 in 2009. While Boomers had an average of $366k up from $98k 10 years ago.

    It seemed that most people responding to the article on social media had a similar reaction along the lines of, “that’s crazy, there’s no way that’s true”. And turns out they were mostly right. The data was taken from a fidelity survey of their 401k plan participants, but what wasn’t stated in the article was that these numbers only considered those individuals that had their same 401k account open for the past 10 years. Once you hear this detail the numbers start to make a bit more sense.

    The majority of millennials are still in the early stage of their careers which is typically a time where people take the opportunity to jump around between jobs, companies, and different places to live and see what fits them best. This is especially true for this generation as we have pushed marriage and home buying later either because of preferences, opportunities or both. It makes sense that those that have had a stable job with the same 401k for the past 10 years would have a much higher balance than the overall average. It’s probably a pretty limited set of the millennial cohort included in this data set, but I think there are a few points we can take away from this info, even if the article seems to have been constructed in a way to get people worked up and share it purely from a “would you look at this *#$&?!” angle.

    Just stick with it

    The accounts included in this group have been open for at least 10 years, which illustrates the amazing effect you can have by continuing to do the little things right month after month and compound them over time. Continuing to contribute to your 401k plan, paycheck after paycheck, is a great first step towards building up your retirement savings. Especially given the benefits that a 401k typically provides vs an IRA: employer matching, higher contribution limits, additional after-tax contributions if available.  

    It can be tempting when moving from one job to another to cash out your 401k rather than roll it over into a new 401k or IRA. There are a few times where cashing it out makes sense from a financial planning perspective, such as in the case of extreme hardships, but it’s typically a much better option to roll it into another plan and continue making your contributions and grow your funds for the future.

    The benefits of having a 401k 

    If your employer didn’t offer a 401k and you only had access to investing within an IRA (with contribution limits below $7k/year for the past decade) you would be hard pressed to grow your account in the same way without maxing out your IRA contribution every year over the past 10. However, with a 401k you could contribute up to $16,500 yourself and $49k total between you and your employer in 2009, and those numbers increased over the decade to $19,000 and $56k respectively. It’s obvious with a 401k that you could contribute much more, especially as your income grows, than with only an IRA, not to mention the benefits of receiving employer match contributions.

    If you don’t have access to a 401k consider asking your employer to offer one. Many small businesses do not offer a 401k because of concerns about cost and matching contributions, but in recent years 401k plan administration costs for small businesses have decreased and companies do not need to offer a full or even any match if they don’t want to. 401k plans have been shown to be great for retention of employees and I’m sure the individuals in the fidelity study are glad that they had the opportunity to invest in theirs over the past decade.

    What else can you do

    So, what can you do if you don’t have a 401k and it doesn’t look like you will get access to one anytime soon?

    • If you are a 1099 employee consider setting up a SEP-IRA. With a SEP you can contribute up to 25% of your earnings or $57k, whichever is lower, for 2020. This can be a way to goose your contribution above the traditional IRA limit of $6k. If you are not a 1099 employee but are considering it make sure to consult with a tax professional whether or not it makes sense to switch from a W-2 to self-employed because there are additional tax consequences to consider.
    • If you can, contribute to an HSA. Stack that on top of your IRA adds an additional $3,550 ($7,100 if you are married) that you can contribute to tax advantaged accounts. HSAs are also one of my favorite stealth retirement accounts because they are triple tax efficient if used correctly. You can contribute tax-free, the funds grow tax-free inside the account, and the funds can be withdrawn tax-free if used for qualifying medical expenses.

    So, there are steps you can take if your 401k or other retirement savings accounts aren’t at the level of those in the article, or otherwise where you’d like them to be. And if you’d like someone to help you put together a plan to boost your 401k or IRA contributions consider reaching out to a fee-only financial planner today.

  • IS THE HSA THE BEST RETIREMENT ACCOUNT?

    As we head into the last quarter of the year, many of us are coming up on the time to re-enroll in our employer benefit programs. This leads nicely into a discussion of one of the best retirement accounts available. A secret retirement account, that wasn’t designed as for retirement savings in the first place. The Health Savings Account.

    Where did the HSA come from?

    The Health Savings Account (HSA) was created in 2003 as a way to help those with high deductible health insurance plans save for future healthcare costs. These plans were created for people that didn’t expect to need as much health insurance throughout the year. The health insurance company offers a less expensive plan, but the catch, is there is a higher deductible if you do get sick and need to get healthcare. The HSA is an account for someone with this type of plan to save money to use for future healthcare expenses in a tax-advantaged account.

    Retirement accounts are designed to save you on taxes, but you do have to pay them at some point. With a traditional IRA or 401(k) you get to contribute pre-tax dollars, but the withdrawals are taxed as ordinary income in retirement. With a Roth IRA or 401(k) the reverse is true, you pay taxes now and can withdraw the funds tax-free in retirement. So why is the HSA one of the best retirement accounts available?

    The beauty of the HSA is that you get to deposit pre-tax dollars into your account and as long as you have qualifying medical expenses, you can withdraw your money tax-free. This is the only account where you can both contribute and withdraw tax-free. 

    HSA basics

    • 2018 Individual Contribution limit: $3,450
    • 2018 Family Contribution limit: $6,900
    • Contributions are made with pre-tax money, and can be made by you and your employer.
    • Contribution limits apply to the money contributed by you and your employer.
    • You can open an HSA if you have a high deductible plan at any time in the year.
    • If you switch to a high deductible plan during the year, you get a prorated contribution limit. So, if you’re single and switched to a high deductible plan in September, and have it through the end of the year, your contribution limit would be $1,150 (4/12 x $3,450).
    • Money can be withdrawn tax free when used for qualifying medical expenses.
    • After the age of 59 ½ money can be withdrawn for any purpose and is taxed at ordinary income tax rates; essentially the HSA can function the same as a traditional IRA.

    How to use an HSA as a retirement account

    If the HSA was created for healthcare expenses how do you use it as a retirement account? The key lies in a little bit of planning ahead. With an HSA you are allowed to withdraw money from the account to pay for qualifying healthcare expenses. You can withdraw the money any time after the expense occurs and you don’t have to withdraw it in the same calendar year or within a period of time after the expense occurs.

    You can allow the money in your HSA to grow by paying for healthcare expenses with after-tax dollars today, and reimbursing yourself from the HSA in the future.

    By paying out of pocket, you allow your HSA contributions to continue to grow tax-free until you withdraw them. That could be another 30-40 years of tax free growth! 

    Example

    Let’s say I have a high deductible health plan for my family. That means I can contribute $6,900 into an HSA for the year. I estimate that my healthcare expenses that aren’t covered by insurance are around $500 per year. I can pay those costs with after-tax dollars and keep that $500 in my HSA to keep growing tax free. I just have to keep track of my healthcare expense receipts to withdraw the money at a later date.

    If you happen to lead an exceptionally healthy life and don’t need to spend much on medical expenses, your HSA turns into a quasi-IRA after you turn 59 ½. You can withdraw your money tax-free for healthcare expenses as before, or you can withdraw it and pay income tax as you would with a traditional IRA. 

    Your HSA always belongs to you, not your employer. Even if you decide to switch away from a high deductible plan, you can still use your HSA for medical expenses and the money you contributed can continue to grow.

    Don’t forget!

    There are a few things to keep in mind when researching your HSA. More employers are starting to contribute to employee HSA’s so take that into consideration when deciding whether and how much to contribute. Most HSA’s require you have a certain balance in the account before you can allocate funds to investments. The amount varies, but is typically around $1,000.  Some HSA providers don’t offer the option of investing in low-cost index or mutual funds, so do your research on the available investments before opening an account. The fees vary between HSA’s and some employers will cover the cost. If you leave an employer or they decide to switch to a new HSA provider be sure to check on the fees, it may make sense to open an account with another provider.

    What do you think? Is the HSA is the best retirement account available?

  • THE ROTH VS TRADITIONAL IRA

    A comment that I often hear when talking to friends and family is, “I know I need to do it, but I’m just not sure where to start saving for retirement”. I think the reason that this is such a common refrain is due to the number of options and choices available. Having more options is usually better, but after a certain point it becomes too much. It’s much easier to choose between a vanilla or chocolate cone from your local soft serve, than it is to select from the 40 different flavors at the trendy new ice cream shop downtown. Will you have the pistachio & honey, the coffee chocolate chunk, or one of the other 38 flavors available?

    Mmmmm, They all look great, how do you choose?!

    So today I want to explain why I think the traditional IRA should be most folk’s first choice for a retirement account, but that you really can’t go too wrong by picking either of your tax advantaged account options. As always, everyone’s situation is different and it can be immensely helpful to talk to a professional before making any investment decisions.

    There are two main retirement accounts that area available to everyone who earns an income, the IRA and Roth IRA, but before I dive into this I want to offer one caveat (I know, I know, I haven’t even started and I’m already making an exception). If your employer has a 401(k) plan and offers any match at all, even if it’s only 1%, then contribute at least as much into your 401k to get the full employer match before doing anything else. It’s hard to beat free money, but the stats say that about 20% of folks out there don’t take advantage of it.

    The IRA (and Roth) in a nutshell

    First, a short primer on the IRA. The IRA (Individual Retirement Account) is a type of savings account that offers you a few tax advantages as long as you leave the money in the account to withdraw after you turn 59 ½. In both a Roth and traditional IRA your money grows tax free. This means you do not have to pay any taxes on dividends, interest, or capital gains while your money remains in the account. For a traditional IRA you can deduct your yearly contributions from your income, lowering your taxable income for that year. Later in retirement when you withdraw from your IRA you will pay income taxes on what you withdraw. For the Roth IRA the reverse is true. Your contributions are included in your income and taxed before going into your account, so when you withdraw your money in retirement it is not taxed again. There are limits on the income you can make and still contribute to a Roth or claim the deduction for a traditional IRA. For the purposes of this post I don’t want to get too bogged down into those numbers, but you can find them all here at the IRS website.

    I think this is the point in the decision-making process where most people throw up their hands and give up. Not only are you anxious about making the right financial decision in the first place, but we’ve also brought taxes into the discussion. Yay taxes!

    But if you can stay with me for just a bit longer I will explain why this choice is not as complicated as it seems. When you do the math to compare the Roth and traditional IRA, the only thing that makes any difference are your income tax rates when you make your contributions and later in retirement when you make your withdrawals. And if they happen to be the same, then it doesn’t matter which type of account you choose! Most individuals can expect to earn more as they advance in their career, and they can also make an educated guess about their income needs in retirement. So you might think that your tax rate will be higher later on in your career, but maybe lower when you retire. The problem lies in trying to figure out what the tax rates will be on your income on those future dates.

    The prevailing wisdom for the last few years has been that federal income taxes will have to go up in the future to pay for increasing entitlement spending, so it makes sense to plan on a higher income tax rate in the future. But we just had the biggest change to the tax code in over 30 years and taxes on corporations and business went down a lot, and for individuals they mostly remained the same or down slightly, with small changes mostly depending where your income falls in the newly created tax brackets.

    The Real Benefit of a Roth or Traditional IRA

    The biggest benefit is choosing a tax-advantaged account, making steady contributions, and letting it grow. By saving and investing in a tax-advantaged account like an IRA you can expect to gain an extra 0.7% – 2.7% vs investing in a standard brokerage account. For someone contributing the maximum of $5,500 per year, the additional gain adds up to an additional $58k or even $277k after 30 years. That’s a huge benefit that you lose out on if you decide to give up on using these accounts because the choices seem too complicated.

    I’ll take the light blue bar, please and thank you.

    I was inspired to write this post after reading this great post on Alpha Architect which is where the 0.7% – 2.7% number comes from. In the post they go deeper into the details and crunching the numbers on the different tax benefits of investing in tax advantaged accounts like IRAs and 401(k) plans. Consider my post a primer and if you want to get more into the details and learn more, please head over to their site and give it a read.

    “So, this is great, you’re saying all I need to do is flip a coin and pick one of the two to get my extra returns? All right sign me up.” Great! I’m glad that I’ve been able to get you excited about IRAs. But before you pick one, there’s one more thing I want you to consider before making your choice: Entrepreneurship and Income. 

    Careers and the changing nature of work

    Careers have changed and evolved over time. While many of our parents or grandparents may have worked at one job their entire careers, most of us in the workforce today can reasonably expect to switch jobs multiple times in our career. And many people these days have a side business or “side hustle” that they work at for additional income. Some of these opportunities can grow to the point of becoming a full-time gig and replacing your main job.

    For those individuals that have lower income in some years because they are working to get their business off the ground, or gaps in employment moving between jobs, the traditional IRA has one clear advantage: convertibility. You can convert the money in your traditional IRA to a Roth IRA and pay the income taxes in that year. If you have a transition year, moving jobs or starting a business, where you are making much less than you normally do you can take advantage of that opportunity and convert some of your IRA contributions to a Roth IRA and pay the lower income tax rate on that conversion. At that point it will continue to grow tax free in your Roth IRA account, and as your income rises back to normal levels you can go back to making contributions to your traditional IRA account.

    Pay taxes now or later, just not in between the two

    To sum up, consider the traditional IRA as your first choice because of its convertibility during periods of low income. Nobody can tell you for sure what tax rates will be in the future, so don’t stress too much about the difference between the traditional or Roth IRA. The big thing is to take advantage of the opportunity to invest in one of the tax-advantaged accounts available to you because the main benefits for all of them is the tax deferred growth while your money is in the account. And please, please, don’t be part of the 20% that skips out on your 401(k) match.I hope you enjoyed this post and that it helps reduce the intimidation that comes along with researching and making these big financial decisions. If you have questions or you would like some help planning for your retirement or other financial goals, you can learn more by visiting http://www.steadyclimbfp.com or sending me an email at chris@steadyclimbfp.com.

  • 9 SMART USES FOR YOUR TAX REFUND

    If you have a refund check coming your way, consider using it to bolster your personal balance sheet. The average refund is usually around $3,000, and most people receive the money within three weeks of filing their returns (I filed our taxes a few days before the April 17 deadline and received ours in a little over a week, woo!).

    So, chances are you have a nice chunk of change in your bank account right now, do you know what you want to do with it? If you don’t have a plan in place, you might end up making a few flashy purchases, spend a bit more money than usual for a few weeks, then regret not putting it towards something more meaningful once that surplus is gone. Here are nine good things you could do with the money.

    If your refund was substantial, consider giving yourself an immediate raise by adjusting your tax withholding to increase your take-home pay. You’ll see more dollars show up in your paycheck and lessen the amount of that interest free loan you give to Uncle Sam.

    PAY OFF CREDIT-CARD DEBT

    Using your refund to pay off a balance with an 18% interest rate is like earning an 18% return on your investments. I’ll take that all day, every day.

    REBUILD YOUR EMERGENCY FUND

    It’s a good idea to keep three to six months’ worth of expenses in an emergency fund, so you don’t end up in debt or have to raid your retirement funds if you have unexpected expenses. If you’ve had to tap the fund over the past few years, you can use your refund to help build the account back up. Keep the money easily accessible in a savings account or money-market account that earns some interest.

    BOOST RETIREMENT SAVINGS

    You can contribute up to $5,500 to a Roth IRA for 2018 (or $6,500 if 50 or older) — and withdraw the money tax-free in retirement. You can contribute the full $5,500 as long as your income falls below $118,000 if you’re single, and $186,000 if married filing a joint tax return. You can make a partial contribution if you earn less than $133,000 if single or $196,000 if married filing jointly. If you work and your spouse does not, you can also contribute to a Roth IRA in his or her name if your joint income is within those limits. Even if you earn too much for a Roth, you can contribute to a nondeductible traditional IRA, then convert it to a Roth.

    BUILD YOUR COLLEGE SAVINGS

    It’s always hard to juggle saving for college and retirement. Here’s an opportunity to use your extra money to contribute to a 529 account. You’ll be able to use the money tax-free for college bills, and you could get a state income-tax deduction for your contribution.

    HELP YOUR KID SAVE

    You can use the extra money to contribute to a Roth IRA for your child. Your kid is eligible as long as he or she has earned income — from mowing yards or babysitting, for example. Your child can contribute up to $5,500 or the amount of his or her earned income for the year, whichever is lower, and you can give him the cash to do it.

    MAKE HOME IMPROVEMENTS

    Your refund won’t be enough to redo your kitchen or bathroom, but it can pay for some smaller home improvements. Use the extra cash to add a backsplash, paint a room or cabinets, replace your bathroom sink, swap out your faucets, organize a closet, install a programmable thermostat or spruce up your yard.

    SAVE FOR SOMETHING SPECIAL

    Set aside some money for vacation rather than using your credit card and paying interest long after you have returned. Or you can use some of your refund to start saving for holiday gift-giving or help with other short-term goals, such as for a down payment on a new car.

    MAKE AN EXTRA PAYMENT TOWARDS YOUR HOME LOAN

    If you are on track with your other savings and investing goals for the year, consider making an extra payment towards your mortgage principal. Making an additional principal payment on your mortgage earns you an instant return the same way paying off your credit card balance does. Your personal balance sheet consists of all your assets and liabilities, it’s important to grow your assets (investments) for use in retirement, but don’t neglect the other side of the ledger either.

    GIVE TO CHARITY

    If you have your financial bases covered, consider using your refund to make a charitable contribution to help others in need. You’ll feel good — and you’ll be rewarded for your good deed when you file your tax return next year (charitable contributions are deductible if you itemize).

    You also can use your refund to help accumulate enough money to open up a donor-advised fund. Most funds require a minimum of $5,000 to $10,000. You can claim a tax deduction in the year you make a contribution to the fund, but you have an almost unlimited amount of time to decide which charities to support.