Retirement Planning Archives

What’s The Secure Act 2.0?

On Tuesday March 29th, The House Of Representatives passed the Secure Act 2.0, a bill that is aimed to improve the retirement savings system for U.S workers. The legislation will now head to senate for its decision.

According to the House Ways and Means Committee Chairman Richard Neal, D-Mass., “H.R. 2954 will help all Americans successfully save for a secure retirement by expanding coverage and increasing retirement savings, simplifying the current retirement system, and protecting Americans and their retirement accounts,” he ahead of the Tuesday vote. “Too many workers reach retirement age without having the savings they need.”

According to a Wall Street Journal article, the bill proposes that “legislation would gradually increase the age at which savers must start taking withdrawals from 401(k)-type accounts and traditional individual retirement accounts to 73 next year, rising to 74 in 2030 and 75 in 2033.” As of right now, people who have a retirement savings account must start withdrawals at age 72, so this will help those who wish to grow their money longer or may not need it quite yet.

In addition to the increased age to take RMDs, the new bill will allow older workers to make larger contributions to their 401(k)s. According to WSJ, “people 50 and older can contribute an extra $6,500 a year to 401(k)-style retirement accounts, for a total of $27,000. The legislation would raise that to $10,000 a year starting in 2024 for people ages 62, 63 and 64. The bill would require catch-up contributions to be made after taxes. Under the legislation, starting in 2024, the extra $1,000 people 50 and older can contribute annually to an IRA would rise to account for inflation.” Again, this added benefit is a huge opportunity for individuals who maybe missed out on the early years of retirement savings.

This bill and the ultimate Senate decision could be huge for individuals, especially older ones, who want to boost and make the most out of their retirement savings by allowing them to maximize them in their later years. We will continue to follow updates from Senate on the progression and eventual implementation of this bill. If you have any questions for us, email us at info@shermanwealth.com.

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Last Call To Fund Your Traditional & Roth IRA For 2021

Spring has arrived which means it’s time to get out your spring cleaning checklist. That doesn’t just mean yard work and old clothes, but your finances too! A great place to start is to fund your Traditional and Roth IRA accounts for 2021. The deadline for these contributions is April 18, so make sure to act fast if you plan to fund these accounts. Below you will find further details from the IRS website on this deadline.

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“The Internal Revenue Service reminds taxpayers they may be able to claim a deduction on their 2021 tax return for contributions to their Individual Retirement Arrangement (IRA) made through April 18, 2022.

An IRA is a personal savings plan that lets employees and the self-employed set money aside for retirement and can have tax advantages. Contributions for 2021 can be made to a traditional or Roth IRA until the filing due date, April 18, but must be designated for 2021 to the financial institution.

Generally, eligible taxpayers can contribute up to $6,000 to an IRA for 2021. For those 50 years of age or older at the end of 2021, the limit is increased to $7,000. Qualified contributions to one or more traditional IRAs may be deductible up to the contribution limit or 100% of the taxpayer’s compensation, whichever is less. There is no longer a maximum age for making IRA contributions.

Those who make contributions to certain employer retirement plans, such as a 401k or 403(b), an IRA, or an Achieving a Better Life Experience (ABLE) account, may be able to claim the Saver’s Credit. Also known as the Retirement Savings Contributions Credit, the amount of the credit is generally based on the amount of contributions, the adjusted gross income and the taxpayer’s filing status. The lower the taxpayer’s income (or joint income, if applicable), the higher the amount of the tax credit. Dependents and full-time students are not eligible for the credit. For more information on annual contributions to an ABLE account, see Publication 907, Tax Highlights for Persons With Disabilities. PDF

While contributions to a Roth IRA are not tax deductible, qualified distributions are tax-free. Roth IRA contributions may be limited based on filing status and income. Contributions can also be made to a traditional and/or Roth IRA even if participating in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA-based plan).

Taxpayers can find answers to questions, forms and instructions and easy-to-use tools at IRS.gov. This news release is part of a series called the Tax Time Guide, a resource to help taxpayers file an accurate tax return. Additional help is available in Publication 17, Your Federal Income Tax (For Individuals)”

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For further information about the April 18 contribution deadline, check out the IRS website here. As mentioned prior, spring time is here which constitutes a great time to get your finances in order and make a financial plan. Whether that begins with getting those 2021 contributions in or not, let us know if you have any questions as we are happy to help. Email info@shermanwealth.com or schedule a complimentary intro call here.

Should You Contribute To a Pre-Tax or Roth 401(K)?

We often get many questions around this time of year regarding the key differences between a Roth and Pre-Tax (Traditional) 401(k). This is such a great question and an important concept to understand so you can fully maximize your financial and retirement goals. And, there is no better time than the beginning of the year to review your retirement portfolio. So, let’s get started.

The main difference between the traditional and Roth 401(k) is that with the pre-tax option, you pay the tax on your contributions and the earnings when you withdraw them at retirement at that current tax bracket, whereas with the Roth, you pay the tax on your contributions upfront, but the earnings can be withdrawn tax free. Roth options are becoming more and more common in company 401(k) plans, so don’t be shocked if you see the option during open enrollment season. What’s really great about this option is that the Roth 401(k) has no income limits unlike the Roth IRA, so if your employer offers it, you are good to contribute. As found in a CNBC article and depicted in the chart below, “roughly 86% of 401(k) plans offered a Roth account in 2020, up from 75% in 2019, according to the Plan Sponsor Council of America.”

As this option is becoming more popular and if your employer’s 401(k) includes a Roth option, how do you decide between the two? Typically when deciding between whether to contribute to a Roth and Pre-tax 401(k), you will compare your current tax bracket with what you think it will be in retirement, which will depend on your taxable income and tax rates in retirement. So, if you plan on making more money in retirement or think you will fall in a higher tax bracket than you are currently in now, you should highly consider contributing to a Roth to take advantage of that often sizable tax break. However, if the opposite is true, and your tax bracket will likely be lower in retirement, consider contributing to a traditional 401(k). Keep in mind that if you are unsure or are interested in both, you can contribute to both the Roth and the Pre-Tax.

Considering Roth options when deciding on your 401(k) and IRA contributions can often be confusing or stressful, yet very important. However, for those wanting to contribute to an Roth, but don’t have the option within their 401(k)s, keep in mind that Roth IRA’s have income limits which can limit your eligibility when you are past a certain income level. Check out this article from the IRS to see if your income qualifies you to contribute to a Roth IRA. For a mathematical breakdown and example between the two, check out our other blog we wrote a few months back. To discuss which route makes the most sense for your retirement savings, send us an email at info@shermanwealth.com or schedule a complimentary 30-minute consultation here. Also, make sure you check with your CPA or tax professional when making this decision to ensure you are fully protected.

Are You HSA Eligible? If So, Check This Out

Are You HSA eligible? If so, here’s how to take advantage of it during this time of year. As open enrollment is underway, you might have some questions about what benefits you are eligible for, and what those benefits truly mean. Retirement savings and medical coverage are typically a large part of your workplace benefits, which is why it’s so important to take advantage of what’s available to you, such as an HSA.

So, what are HSA’s? An HSA is a tax-advantaged health savings account that allows you to save money to use to pay medical and health care expenses. If you get your insurance coverage through high-deductible health plans, you can qualify for an HSA. Your contributions within the account will grow on a tax-free basis, and any untouched dollars can be rolled over year to year. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs.

For 2022, employees and employers can contribute a total of up to $3,650 for individual coverage and up to $7,300 for family coverage. Be sure to contribute by the end-of-the-year December 31st deadline, so that you can make the most of your yearly contribution. Keep in mind that HSAs are just one of the many benefits that you can take advantage of. Check out our open-enrollment blog to see what else you may be eligible for! For other end of the year tips, check out our financial checklist blog here. If you have any questions about funding your various accounts, email us at info@shermanwealth.com or schedule a complimentary 30-minute consultation here.

Retirement planning

Retirement Inflation-Adjustments for 2022

Happy November everyone! New retirement inflation-adjustments for 2022 have been released, and we want to provide you with a quick breakdown. Business owners and employees, this one applies to you, so don’t miss it.

See Below For Retirement Inflation-Adjustments for 2022

IRA/Roth IRA contribution: $6,000 (no change)
401k/403(b)/457 deferral: $20,500 ($1,000 increase)
401k/403b/457 catch-up: $6,500 (no change)
SEP IRA/PSP: $61,000 ($3,000 increase)
SIMPLE deferral: $14,000 ($500 increase)
SIMPLE catch-up: $3,000 (no change)
Also boosted for 2022: The income ranges for determining eligibility to make deductible contributions to traditional IRAs, Roth IRAs.
IRS also issued technical guidance regarding all of the cost of living adjustments

If you have any questions on how these adjustments apply to your financial situation, email us at info@shermanwealth.com.

What to Know About 2021 RMDs

After being waived for 2020, Required Minimum Distributions (RMDs), which are amounts you must take each year from most retirement accounts once you reach a certain age, are happening again in 2021. Make sure you don’t overlook taking these distributions from your retirement account.

Last year, the RMD age changed to 72 from 70½ and new IRS life expectancy tables are to go into effect next year. Anyone born July 1, 1949, or after can wait until 72 to take their required distributions.

In a recent CNBC article, they stated “The amount you must withdraw each year is generally determined by dividing the balance of each qualifying account by a “life expectancy factor” as defined by the IRS. And, if you already were taking RMDs before 2020 (you had already reached age 70½), you would simply resume those distributions this year, using the current life expectancy tables, your age and your account balance at the end of 2020.”

Also included in the RMD data is that if you turned 70½ in the first half of 2019 and planned to take advantage of the April 1, 2020, deadline for taking out the RMD — and did not do it — it must be taken by December 31. That being said, if you turn 72 this year, you have until April 1st 2022 to take your 2021 RMD.

“There are also withdrawal rules to take into account. For inherited IRAs, 401(k) plans or other qualified retirement accounts, the balance must be entirely withdrawn within 10 years if the owner died after 2019, unless the beneficiary is the spouse or other qualifying individual. The 2019 Secure Act eliminated the ability of many beneficiaries to stretch out distributions across their own lifetime if the original account owner died on Jan. 1, 2020, or later,” according to an article by CNBC.

The specifics of RMDs can seem complicated, so if you have any questions about whether or not you are eligible or other concerns relating to your required retirement withdrawals, send us an email at info@shermanwealth.com and we are happy to further explain it for you.

Here Are The Differences Between A Roth and Traditional 401(K)

Have you been hearing more about Roth 401(k)’s lately. There are more and more options in company 401(k)’s recently, including the Roth option, whereas before many companies only provided traditional 401(k) options. More employers are now offering this option to their employees so check out the rest of the blog and then see if it’s a valuable option for you.

So, you may be asking yourself, what is a Roth 401(k)? A Roth 401(k) is an employer-sponsored retirement savings account that can be funded with after-tax dollars up to its contribution limit. For people who think they may be in a higher tax bracket down the line, this might be the better option for you. On the other hand, in a traditional 401(k) plan, you contribute pre-tax money, which will be taken out based on your future tax-bracket in the future.

Now that you know what a Roth 401(k) is, you may be wondering, do I qualify for one? As long as your employer offers the Roth options, you are eligible for it if you are also eligible for your company’s traditional 401(K).

Let’s take a look at this example:

Your yearly base salary, gross income is $50,000. If you choose to contribute 10% ($5,000) to a traditional 401(k), your taxable income becomes $45,000 for the tax year. You took that 10% and deferred paying taxes on it. That $5,000 now grows tax-deferred inside of your traditional 401(k). When you withdraw the money from your traditional 401(k) at retirement, your total will be taxed then with regards to your tax bracket.

Within a Roth 401(k), you are paying your income taxes as you should, and then the funds head into your Roth account. So with that same $50,000 salary, if you choose to contribute 10% to your Roth 401(k), you will pay income taxes on your full $50,000. After income taxes are taken out, your funds for the year ($5000) goes towards your Roth 401(k). When you withdraw the money from your Roth 401(k), you can take both the contributions and earnings out tax-free since you had previously paid them.

For both Roth and Traditional 401(k)s, the contribution limits are the same, at 19,500. You can defer $19,500 out of your paycheck into a traditional 401(k). In contrast, you also can contribute $19,500 to your Roth 401(k). Additionally, you are also allowed to contribute to both a Roth and Traditional 401(K), as long as you stay within the contribution limits.

Considering Roth options when deciding on your 401(k) and IRA contributions is a very important step. If you want your money to grow tax deferred, you should highly consider opening a Roth account. Continue following along to see if there are any tax changes in the near future, and make sure you consult a tax professional to see what options make the most sense for you. If you have any questions about your personal situation or want to know how to get started, email us at info@shermanwealth.com or schedule a 30-minute consultation here.

The Benefits of Saving Early For Retirement

Combining asset allocation and early regular savings today helps to prevent playing the catch up game tomorrow. Contact Sherman Wealth Management for an investment strategy that, with periodic review, will potentially maximize your savings in the long-run with respect to your individual tolerance for risk. We can show you the benefit of saving early for retirement.

Trying to time the market can prove detrimental for optimizing your portfolio’s growth. Sherman Wealth Management’s skills will help guide you through volatility. An individually tailored portfolio will try to deliver comfort in downturns, and help you maximize potential benefit from the market’s gains. Contact Sherman Wealth Management now so your portfolio doesn’t miss any more opportunities to maximize potential returns.

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Americans Were Given the Coronavirus Option to Raid Their 401(k). Most Didn’t.

Despite the financial toll of the coronavirus pandemic, few American households have raided their 401(k) retirement accounts to make ends meet. Faced with the prospect of surging unemployment and a declining economy, Congress in March passed a law that temporarily allows Americans to use their retirement money today. However, unlike expectations, so far, there hasn’t been a rush of funds out of accounts.

Research reported by the Wall Street Journal revealed that of those eligible to take money out of their accounts, many did not proceed to pull funds from their 401(k)s for various reasons. The withdrawal rates were much lower than anticipated back in April which raises an interesting topic regarding the state of the market over the last few months.

Given the wild ride we’ve had the last 6 months with the coronavirus pandemic, the election, and now positive vaccine news, the markets have seen a great deal of volatility. It’s been interesting to see how these events have either helped or hurt people as they’ve been trying to gauge the market and in turn buy or sell off parts of their portfolio. While the coronavirus began to surge as the election played out, many may have panicked and sold off a great deal of their stocks even though after-the-fact stocks are the highest they’ve been following a presidential election in many years.

Although this new law passed by Congress has allowed for the potential to pull funds from 401(k)’s, it’s been interesting to see the result and the fact that many have refrained, which could mean that some have had sufficient emergency funds to help them navigate these bumpy waters. It’s important to note that building an emergency fund is very crucial and comes in handy during unprecedented times. As explained above, it’s also incredibly difficult to measure the projection of the markets, which is why it’s important to stay calm and see your investments through the long term. If you have any questions regarding your 401(k) or other concerns about your finances, please reach out to us at info@shermanwealth.com or schedule a free 30-minute consultation here.

Why Now May Be a Good Time to Consider a Roth IRA Conversion

The coronavirus pandemic and the upcoming election has created a great deal of uncertainty for investors. Income tax, furloughs, and job loss are lingering over the heads of many. As people are navigating these unprecedented times, they are becoming more and more unsure about where to and how much to invest. But it’s important to keep in mind that regardless of uncertainty in the market, it’s always a good time to invest for your future.

The recent stock market meltdown may have dented Americans’ retirement savings, but there’s a silver lining: The downturn made one common retirement strategy less costly for investors.

The strategy, known as a Roth IRA conversion, involves changing a traditional, pre-tax retirement account — such as a 401(k) plan or a qualified individual retirement account — to an after-tax Roth fund. This strategy has some unique benefits when compared with its traditional cousin.

To do the conversion, savers would opt to pay income tax now, while markets are down and tax rates are lower under the Tax Cuts and Jobs Act. Investors who own traditional accounts defer income tax on their savings until withdrawing the money in retirement. Roth savers pay tax up front and don’t pay later. Having at least some Roth funds is beneficial for a few reasons, according to financial advisors. Retirees don’t have to take mandatory withdrawals from Roth accounts, unlike traditional IRA investors, who have to beginning at age 72. Taking Roth distributions could also decrease Social Security taxes and Medicare premiums, which are pegged to one’s taxable income.

In addition, there’s the benefit of tax diversification. Like the concept of investment diversification, tax diversification is important because it reduces the risk associated with unknown future tax rates, advisors said. Data suggest investors aren’t greatly diversifying their retirement accounts from a tax standpoint.

Traditional IRAs held around $7.5 trillion at the end of 2018 — almost 10 times as much as Roth accounts, which had $800 billion, according to the Investment Company Institute. Ultimately, investors should peg a conversion primarily to tax rates — if savers believe their tax rate is lower now than it will be in retirement, a conversion makes sense because it will cost less in the long run, according to tax experts. And, contrary to popular opinion, one’s tax rate doesn’t always fall in retirement, they said.

Tax rates are currently low by historical standards and are likely to increase (rather than fall further) in the future, experts said, given the eventual need to raise federal revenue to reduce the U.S. budget deficit, which is larger as a share of its economy than most other developed countries.

If you are considering a Roth IRA Conversion, please consult with your financial advisor and your EA/CPA or tax preparer to ensure that this decision is the best for your financial situation. If you would like to discuss the potential of a Roth Conversion, please reach out to us and schedule a free 30-minute consultation.