Retirement Planning Archives

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 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.

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.

How Much Retirement Savings Is Enough? Why Couples May Disagree

As couples combine their finances and think about their financial future, its common for the conversation to be uncomfortable or tricky. While one individual in the relationship might think about money one way, the other party could think about it completely different. Just know, it’s normal and okay to have different background and approaches to money, but that communication is key in coming to a solid compromise and understanding.

The first step is communication. When discussing your finances, it’s important to communicate and feel open about discussing an often uncomfortable topic such as money.

The Wall Street Journal highlighted an issue that can get overlooked in retirement planning: the financial burdens that women, in particular, face late in life.

A survey last year by the National Council on Aging and Ipsos, a polling and data firm, found that fully half (51%) of women age 60 and older are worried about outliving their savings. In the same survey, almost six in 10 women (59%) said they are worried about losing their independence.

According to the survey, women, of course, typically live longer than men—about five years, on average—and are more likely to live their final years alone. In 2019, almost half (44%) of women age 75 and older in the U.S. lived alone, according to the Administration on Aging.

As you can see from the survey data reference above, both men and women often have different expectations on how much money they need for their future, which is normal. Again, make sure to communicate and research with your partner to insure both individuals are comfortable with their finances and savings. Of course, a good financial adviser also can make a difference. But the most important step is to talk about retirement and how your finances might play out before you get there. If you have any questions, or want to discuss retirement with us, please schedule a complimentary 30-minute consultation.

IRS Finalizes ABLE Account Regulations: Here’s What to Know

The IRS recently published final regulations for Achieving a Better Life Experience, or ABLE, accounts for disabled Americans. ABLE accounts aim to help people with disabilities and their families save and pay for disability-related expenses. Even though the contributions aren’t deductible, distributions such as earnings are tax-free to the designated beneficiary if they’re used to pay for qualified disability expenses. These expenses can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services, along with other disability-related expenses.

The regulations come in response to and finalize two previously issued proposed regulations from the IRS. The first proposed regulation was published in 2015 after enactment of the ABLE Act under the Obama administration. The second proposed regulation was published in 2019 in response to the Tax Cuts and Jobs Act, which made some major changes to ABLE.

Eligible individuals can now put more money into their ABLE account and roll money from their qualified tuition programs (529 plans) into their ABLE accounts. In addition, some contributions made to ABLE accounts by low- and moderate-income workers can now qualify for the Saver’s Credit.

The new regulations also offer guidance on the gift and generation-skipping transfer tax consequences of contributions to an ABLE account, as well as on the federal income, gift, and estate tax consequences of distributions from, and changes in the designated beneficiary of, an ABLE account.

In addition, before Jan. 1, 2026, funds can be rolled over from a designated beneficiary’s section 529 plan to an ABLE account for the same beneficiary or a family member. The regulations provide that rollovers from 529 plans, along with any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) can’t exceed the annual ABLE contribution limit.

Lastly, the final regulations offer guidance on the record-keeping and reporting requirements of a qualified ABLE program. A qualified ABLE program must maintain records that enable the program to account to the Secretary with respect to all contributions, distributions, returns of excess contributions or additional accounts, income earned, and account balances for any designated beneficiary’s ABLE account. In addition, a qualified ABLE program must report to the Secretary the establishment of each ABLE account, including the name, address, and TIN of the designated beneficiary, information regarding the disability certification or other basis for eligibility of the designated beneficiary, and other relevant information regarding each account.

For more information about ABLE accounts or if you have any questions regarding these regulatory changes, please contact us at info@shermanwealth.com or check out our other relevant blogs.

What to Do If You Don’t Have a 401(k)

Piggybank on wooden table with stacks of coins beside it. A hand putting a coin into the piggy bank.

As the coronavirus sweeps the world and people take a step back to look at their financial picture, they are realizing that they do not have a company 401(K).

Even though some of these people work at a company where they offer a 401(k), they may not be eligible due to not meeting criteria, such as length of employment, or they are not a full-time employee.

So, as people are stressing more about the importance of having a hefty savings account, it’s a great time to discuss options for individuals who are not eligible for their company 401(k) or do not have one through their workplace. Below we will share several options for people in this situation according to an article by MorningStar.

1) Invest in an IRA.

A good first step for someone without a 401(k) is setting up an IRA. An IRA is a great other step to save for retirement and seek tax benefits. You are eligible to contribute $6,000 a year to your IRA.

2) Look Into Self-employment accounts are an option.

For self-employed individuals, there are several options to consider. Some of them are similar to 401(k)s but are just set up a bit differently. Speak with a financial professional to see what options you can set up for yourself.

3) Consider an HSA

If you have a high-deductible health care plan you can consider setting up an HSA in order to save some of those dollars and grow your money tax deferred.

4) Open a Taxable brokerage account.

While its always nice to grow your money tax deferred, investing in a regular taxable account is always a great option. You can speak with a tax professional to see how to do so in a tax efficient manner.

5) Be part of the solution.

Lastly, if you work for a small employer without a 401(k), maybe ask them to see if it’s something they are interested in starting. Never hurts to ask!

As always, if you have any questions about your current 401(k) or need help investing money in order to supplement a lack of one, please reach out to us and we would be happy to discuss your future financial goals.

Top 5 Pieces of Financial Advice

As we are all adjusting to the new norm that the coronavirus pandemic has created in our world, we are also learning pieces of advice that we could share from this experience. When going through an economic crisis, it’s important to keep some tips at top-of-mind to help you navigate the bumpy waters. In a CNBC Select Article, we found 5 great pieces of financial advice that we want to share with you to put in your financial repertoire.

First and foremost, try not to accumulate credit card debt. Racking up credit card debt can have very negative long term consequences, so it’s important that you pay the full balance on time. When you do not pay the full balance on time, your card will quickly accumulate interest, which often can get so high that it’s hard to pay off.

According to recent Federal Reserve data released in September, the average interest rate for all credit card accounts is 14.87%. Among accounts assessed interest, or accounts with outstanding finance charges, the average interest rate rises to 16.88%. But for consumers with credit scores below 670, interest rates can near 30%, CNBC Select reports.

Next, make sure you don’t buy things you can’t afford. Although this one seems obvious, it’s much more common than you think. Avoid overspending and spending on things you can live without. Start putting that extra money into savings accounts where you can be accruing interest and earning money.

Third, invest the year’s expenses or anything saved after you have the year’s expenses saved? Before the pandemic, many people were saying how you should have several months of rent and expenses in a savings account for a rainy day, but as we have seen the economic hardships the coronavirus has inflicted upon our society, we are suggesting to save about a year’s worth of expenses before investing it elsewhere.

Fourth, start to think like a savvy businessman or woman. Learn to negotiate. Especially in the world we are living in today, make sure you are constantly looking for deals and inquiring about credit card versus cash options. Oftentimes, places will charge you less if you pay in cash. So, before swiping that card, make sure you think about all your options.

Lastly, buy in bulk. With Amazon becoming increasingly popular and making it possible to get what you need in a matter of hours, take advantage of deals and places you can buy in bulk. If you can save a few dollars here and there, take advantage of it. It’s important to be a smart shopper, especially when buying something pricey, such as groceries for a large family.

By implementing some of these basic money management tips into your daily routine, you will find yourself becoming a more savvy shopper and saving more money. It is especially important during an economic recession to take these concepts into consideration and make the most of your finances. If you have any questions on other ways you can maximize your financial portfolio and find places in your budget where you can save money, please reach out to us at info@shermanwealth.com or visit our site at www.shermanwealth.com. Check out our other blog posts for more financial advice and tips!