High income? You may still be unprepared for retirement.

Even if you are nearing retirement and have a large 401(k) or IRA balance, you may not have as much money as you think. Lots of people don’t realize that they owe taxes on their accumulations. You have benefited throughout your investing years by not having to pay taxes on contributions into traditional 401(k) plans and IRA accounts and on the investment returns on those contributions. Deferring taxes for decades has real value. We usually come out ahead, even after we pay taxes on the withdrawals. And higher income people benefit the most. The problem is that higher income investors tend not to take taxes into account when assessing how well prepared they are for retirement. For some, the tax bill will be quite high, as shown in the table below. The group under consideration is working households ages 55-64 with assets in a 401(k) plan in 2016 — the most recent year for the Federal Reserve’s Survey of Consumer Finances. The income levels that define the deciles in the first column are for all working households. The second column reports the median combined 401(k) and IRA balances for those households in each decile that have a 401(k). The third

July 29, 2019 No Comments

Setting up a Child IRA

It’s normal for parents to worry about their kids. Although young children’s retirement isn’t an immediate concern, smart parents can help their kids get a head start on saving for retirement by setting up a Child IRA. Here’s why it’s a good idea. There’s no lower age limit when it comes to starting an IRA. A Child IRA is a custodial IRA that can be funded with pre- or post-tax money; it functions the same as a regular IRA except that there is a custodian overseeing the account. A Child IRA can yield unbelievable results. If you contribute roughly $3 a day to a Child IRA from the moment a baby is born, that’s about $20 a week, $80 a month or $1,000 a year. If you do that every year until the child reaches the age of 19 and then stop contributing, assuming an 8% return per year, the child will have more than $2 million at the age of 70. Is there a catch? Well, yes. While nothing prohibits a child from establishing a Child IRA, a child needs a paycheck to offset an IRA contribution. IRA rules say that to contribute to an Individual Retirement Account—at any age—you

June 28, 2019 No Comments

How safe are your retirement savings in a bankruptcy?

How safe are your retirement savings in a bankruptcy? Are they at risk if you roll over a 401(k) to an IRA? In most cases, your 401(k) funds qualify for creditor protection under a federal law known as ERISA. ERISA contains a special clause that basically blocks your 401(k) money from the reach of most creditors. Typically, the only people who can get a piece of your 401(k) money while it’s inside of its protective “ERISA shell” are the IRS and an ex-spouse as part of a divorce proceeding. Other than that, your 401(k) creditor protection is basically airtight. So, does the protection in your 401(k) follow along in bankruptcy? And what happens if you move those ERISA-protected 401(k) funds to an IRA? Although bankruptcy laws are generally determined by each individual state, a 2005 federal law provides your retirement account with strong bankruptcy protection, no matter what state you live in. Under that law, plan funds, including 401(k) funds, are given an unlimited exemption in bankruptcy proceedings. That means you can have any amount of money in your 401(k), and all of it could be protected in a bankruptcy proceeding. If you roll that money over to your IRA,

November 2, 2018 No Comments

IRA do’s and don’ts for 2019

The end of the year will be here before you know it. Consider making the following IRA tips into New Year’s resolutions and start 2019 on the right foot. NOTE: If you’re interested in starting a traditional 401(k), profit-sharing, or pension plan for year 2018, Azzad’s deadline is December 1). Check IRA and employer plan beneficiary forms. If you got married or had a birth, adoption, or death in the family in 2018, your retirement plan beneficiary forms may need to be updated. Take the new year as a reminder to look at the beneficiaries on your plans and make sure they’re the ones you intend. Don’t forget contingent beneficiaries. Although they’re often overlooked, contingent beneficiaries are critical. They generally inherit the retirement plan if the primary beneficiary passes away before the retirement account owner. You should always have both a primary and contingent beneficiary named on your retirement accounts. Review 2018 distribution reporting. Most IRS reporting will be done in January 2019 for 2018. Check all Forms 1099-R for accuracy. Mistakes are not uncommon. There still may be time to correct these forms if the mistakes are caught early enough. Make sure you receive your notification about RMDs for the upcoming year. If you’re 70½ or

November 2, 2018 No Comments

Whether you’re Muslim or not, annuities are a bad idea

We talk with a lot of people who come to us seeking advice about using annuities. We get why annuities can be attractive: they’re usually presented as being low-risk, reliable sources of retirement income. In the not-too-distant past, people had pensions through their employers — monthly income they knew they could count on when they no longer earned a paycheck. As pensions become less common, annuities have become a popular way to replace that income stream. But for most people, they’re a terrible idea. First, let’s look at how annuities work: When someone buys an annuity, a vendor (typically a large insurance company) contracts to pay the purchaser a stream of cash payments for the remainder of their life, usually beginning at retirement. The annuity may be level, may increase at a fixed rate, or may be linked to an inflation index. All of these options are, of course, reflected in the annuity’s initial pricing. Some financial advisors push hard for their clients to purchase annuities. One reason for this may be that annuities pay notoriously high commissions to the advisor who sells them. Even if they tell you they don’t charge a fee for an annuity, they are most

September 6, 2018 No Comments

Naming someone other than your spouse as the beneficiary for your IRA

Naming a beneficiary for your traditional IRA or employer-sponsored retirement plan may be one of the most important financial decisions you ever make. The beneficiary (or beneficiaries) you name will receive the funds remaining in your IRA or plan after you die, so consider your loved ones’ future needs. However, choosing the right beneficiary is often more complicated than that. If you’re married, your first thought may be to name your spouse as the primary beneficiary of your IRA or plan. Naming a spouse is very common and can make sense for several reasons. But whether you’re married or not, naming someone other than a spouse as your retirement account beneficiary may sometimes be a better choice. Children, grandchildren, other relatives, and close friends are popular beneficiary choices for IRA owners and plan participants. You should consider your options and seek professional advice to make the right choice. Advantages of naming a child, grandchild, or other individual When you take a distribution from your traditional IRA or retirement plan, you generally have to pay federal (and probably state) income tax on all or a portion of it. For federal income tax, distributions are taxed at a certain rate according

July 7, 2018 No Comments

Three strategies to reduce your RMDs

Nothing lasts forever, not even the tax deferral on your IRA. When you turn 70½, the government will require that you withdraw money from your IRA; those withdrawals are known as required minimum distributions, or RMDs. But what if you don’t need the money? What if you want to avoid a tax hit? Here are three strategies to help reduce your RMDs. Be charitable. If you’re 70½ and planning on giving money to charity anyway, consider making a qualified charitable distribution (QCD) from your IRA. You can transfer up to $100,000 annually from your IRA to a charity free to tax. The QCD will satisfy your RMD without increasing your taxable income. Be careful though — make sure your QCD is done properly. Go Roth. If reducing RMDs is a top concern for you, you may want to consider converting some or all of your IRA into a Roth. This is because you aren’t required to take RMDs from your Roth IRA during your lifetime. While you will pay taxes on your conversion, you can exchange the one-time tax hit for a lifetime of never having to worry about RMDs and their tax consequences. Note: your beneficiaries will need to

September 7, 2017 No Comments

The cost of not tracking your IRA contributions

Do you know how much you’re allowed to contribute to your IRA each year? Are you periodically tracking your deposits? Contributing more than the permitted amount can result in costly penalties. Fortunately, there are ways to fix it. How can it happen? Let’s look at a hypothetical example. In 2016, Ahmad, age 51, set up monthly automatic bank deposits to his traditional IRA that totaled $8,500. However, the IRA contribution limit for 2016 is $5,500, with a catch-up contribution for individuals over 50 of $1,000, for a total of $6,500. Although we believe automatic deposits are the best way to invest for your goals, it’s also an easy way to unintentionally contribute too much to your IRA. You may also end up with an excess contribution if you contribute to a Roth IRA and later discover that your modified adjusted gross income (MAGI) was above the Roth IRA income limit. And because you’re not allowed to deposit money into a traditional IRA for the year you turn 70½ or later, forgetting to turn off automatic deposits or continuing to contribute past that age will also count as excess contributions. Roth IRAs have no age limits for contributions. What can you

April 3, 2017 No Comments

New rules affect retirement savings advice

On April 6, 2016, the Department of Labor (DOL) issued new “conflict of interest” rules regarding financial advice as it relates to retirement plans and IRAs. The new DOL rules generally hold financial professionals to a fiduciary standard if they receive compensation for providing investment advice to retirement plan participants or IRA owners, which means they must act impartially and in their clients’ best interests. Here are answers to some basic questions about the new rules. What is a “fiduciary” and why does it matter? “Fiduciary” is a term for an individual who has a legal or ethical duty to act for another’s benefit. When a financial professional provides investment advice or recommendations to an IRA owner or an employer-sponsored retirement plan participant, and in doing so receives compensation, the new rules generally hold the financial professional to a fiduciary standard. In other words, the financial professional must put the client’s best interest ahead of his or her own. To that end, the rules are designed to eliminate potential conflicts of interest. One example is a situation in which a financial professional would get paid more for one investment product than another, creating a possible conflict when he or she

April 27, 2016 6 Comments

10 frequently asked questions about IRAs

1- When is my IRA contribution due? Your traditional and Roth IRA contribution must be made no later than April 18. If you make your contributions in year 2016, make sure your financial institution reports the deposit for year 2015. Your SEP IRA contribution for year 2015 isn’t due until you file your tax return (that could be as late as October 15 if you file an extension). 2- How much can I contribute to an IRA? The IRS may annually adjust contribution maximums. 3- How do I report my Roth IRA contributions? Roth IRA contributions are not tax reportable nor are they deductible from your income. Your financial institution will report the contribution to the IRS on form 5498 in late May. However, you must report a Roth IRA conversion on your 1040 form (using information provided to you on the 1099-R form). Keep in mind, you’ll owe taxes on the taxable part of the Roth IRA conversion in the year you make the conversion. 4- How do I report my deductible traditional IRA contribution? You report your deductible IRA contribution on your personal tax return 1040. 5- Why does my tax professional insist my traditional IRA contribution was

February 2, 2016 No Comments