As we look back over the year, we gathered our top financial tips and advice for you and our clients in 2021. Review our list and click the links to read the full articles on the topics that interest you.
5 Tips for Tax-Efficient Retirement Withdrawals
Retirement is supposed to be a time of relaxation—a reward for the decades of work you performed. But life happens, and sometimes you may need to withdraw more money from your accounts than you had expected. Inefficient withdrawals can lead to you owing more money in taxes than you anticipated — money that is hard to offset when you are no longer working and earning an income. The following is a list of tips that will leave you better informed on how to make tax-efficient withdrawals in your retirement.
4 Tax-Efficient Withdrawal Tips:
- Tax Write-Offs
- Make Money from Your Hobbies
- Pay Attention to Your Long-Term Investments
- Tax-Loss Harvesting for Capital Losses
Most people are familiar with at least two types of IRAs (Individual Retirement Accounts), but not many know there are actually seven (7) types of IRA accounts. Choosing the best one for you is based on several factors such as your income, employment status, and what your current employer offers to name a few. A trusted financial planner or tax advisor can help guide you.
Essentially, an IRA is a tax-saving, money-growing account intended for use in retirement. There are many rules regarding contribution limits, when funds may be added and withdrawn, and how the funds are taxed. Let’s review the 7 types of IRAs that may benefit you and your financial situation.
7 Types of IRAs:
Which One is Best for You?
Every financial situation is different so let a CERTIFIED FINANCIAL PLANNER™ professional, or another financial advisor, help you decide the best options based on your tax bracket. The deadline to contribute funds to your IRA is midnight, usually on April 15, for the previous year. That date may change if the tax filing deadline date changes. Consult a qualified advisor to make your contributions count for the tax bracket you are currently in and the one you expect to be in when you retire.
Part of your overall financial planning may include things like college funds for children and retirement funds for your later years. Your financial advisor may have recommended IRAs (Individual Retirement Accounts) as one of your assets to grow funds for future use. As with all your assets, beneficiaries should be named for each one. There are several considerations when choosing your beneficiaries, particularly as it relates to the rules and tax liabilities when they inherit your IRA account(s).
There are two main IRA accounts for individuals – a traditional IRA and a Roth IRA. A traditional IRA offers a tax deduction on your income when contributions are made to the account, which can help offset your tax liabilities. Taxes are due when the money is withdrawn from the IRA later. If money is withdrawn before age 59½, the IRS (Internal Revenue Service) adds a 10% tax penalty on top of the owner’s income tax rate at the time the withdrawal or distribution is done.
Otherwise, traditional IRA owners must take a required minimum distribution (RMD) beginning at age 72 (or 70½ if you reach 70½ before January 1, 2020). All RMD withdrawals will be included in your taxable income. Be aware that IRA owners face a 50% penalty on the dollar amount of the RMD for that year if they fail to take the distribution.
A Roth IRA, on the other hand, offers tax-free withdrawals in retirement since the money is taxed at the time contributions are made into the account. There are no required distributions from a Roth IRA.
Inherited IRA Tax Considerations
Now that you understand the basic differences between a traditional and Roth IRA, it is time to consider the laws and tax implications as they relate to your beneficiaries. Typically, a spouse or children are designated as beneficiaries and there are different rules for each of them. These can be quite complicated and professional services should be used to ensure the money and accounts are handled properly.
If you are the named beneficiary of an individual retirement account (IRA), it is important to know it may not be considered a tax-free inheritance. Tax laws are subject to change, but the current tax laws (applicable to 2020 tax filings) state that while receiving the account inheritance is tax-free, the required minimum distributions from the account may be taxable.
What types of financial goals have you created for yourself and your family? Maybe you started with the basics –a monthly budget and a savings account. Later, you may have spoken to a financial advisor to tackle credit card debt, build your emergency fund, contribute to an IRA or your employer’s pension plan, and how to open college savings account for your children or grandchildren.
If you’re still in the early stages of reviewing your short and long-term financial goals, the idea of building generational wealth and estate planning may not have occurred to you just yet. We’d like to suggest the idea of teaching children and grandchildren how to create healthy habits with their money. This will teach them to make better choices now with their money – and later when they receive their inheritance from you – creating a cycle of multi-generational wealth for future generations.
At Heath Wealth Management, CFP® professional Elijah Heath and his team are committed to helping clients make smart choices with their money and investments. They take that responsibility one step further by showing clients and their children creative ways to save money.
If you’re working with a financial planner and still wonder if you’ve done everything you could be doing, ask yourself if your financial plan includes multi-generational wealth options. What does that mean and how can you create and manage multi-generational wealth for your family?
How much money do you need to save in order to retire? It’s a common question, especially as people are nearing that time and start to wonder if there’s an actual number they need to know to be comfortable.
Elijah Heath, a CERTIFIED FINANCIAL PLANNER™ professional at Heath Wealth Management, has created two quick ways to answer this question. Why? Because he learned early in his career that people would stop him and regularly ask him about their retirement plans. He says, “I would tell them my team and I help all our clients answer the two questions that keep them up at night: 1) Am I going to make it on what I have saved for retirement? And 2) Do I have any blind spots?”
The First Step – Define Your Retirement
Before you can determine how much money you will need to retire, you first need to define what you want your retirement to look like. Start with ideas and goals you want for your retirement years. You can always change your plans later but thinking about what you want to do in retirement will help your financial planner look at your current financial situation and review where you want to be financially when you retire.
In Part 1, we looked at first defining what retirement means to you and how it should look. We covered some key factors to consider when planning for your retirement. And finally, we offered two quick math options to estimate how much money you need to save, and how much that will provide annually.
What Happens If You Run Out of Money In Retirement?
In our discussion in Part 1 about using a .035 withdrawal rate on a retirement savings balance of $500,000, we determined that would allow you to withdraw $17,500/year to live on. If you planned ahead with your financial planner to combine this amount with other income such as a pension and Social Security, then factored in things like having your home paid off and no other major expenses, this might be comfortable for you.
We also shared advice to work with your financial planner to watch for “blind spots”. These are potential problem areas you may not have considered in your basic retirement planning. If you find yourself in a situation where some of these unplanned circumstances have occurred, or you’re spending more money than you planned, you won’t be financially prepared to handle the new expenses easily.
As a result, maybe you decide to increase your withdrawal rate from the recommended .035 (3.5%) to .10 (10%). In the example of a $500,000 retirement savings that would give you $50,000 a year to enjoy a nicer lifestyle or cover unexpected expenses that require more money. But at a 10% withdrawal rate, your original $500,000 savings would run out much faster than you planned. After being retired for several years, do you want to be looking for work again at age 75? There won’t be many companies interested in hiring 75-year-olds, except maybe as door greeters or fast-food workers.
What Are Your Options?
First, find a way to reduce spending. Set up a budget to see where money is being spent. Do a 30-day challenge and write down every penny you spend for that time, no matter how small it is. Once you’ve reduced your spending you can look at other options, such as selling your house then add those proceeds to your savings.
Could you move in with your adult children to save money? Another option is to find a part-time job to generate some income. Be creative. Sometimes a hobby can become a part-time job, whether you’re selling something you create or teaching others to do it.
Mistakes People Make with Their Financial Estate Planning
Here is a sobering statement: “90% – 95% of the estates that go through my office do not go the way they’re planned.”
CERTIFIED FINANCIAL PLANNER™ professional, Elijah Heath, of Heath Wealth Management has spent years assisting clients in carefully making their financial plans for retirement and beyond, including naming and planning for their beneficiaries and heirs. He shares this advice as a cautionary tale based on years of experience.
In his estimation, all the situations that did not go as planned were avoidable. Many of his clients and their family members had perfectly good intentions originally that either changed suddenly, or over time, after the death of the original account holder. Some situations began to go wrong as soon as his clients’ health declined. Why? Because even the best-laid plans can be disregarded, particularly after the client has passed away.
When making financial and estate plans, your heirs are chosen and assets are carefully divided while you are able to make those decisions. Usually, spouses and children are named beneficiaries. But the situation becomes much more complicated when there has been a blending of families with stepparents and stepchildren. Typically, each spouse in a subsequent marriage designates assets to both biological children and stepchildren, but after their death, the surviving spouse can choose to remove stepchildren, leaving them with no assets from their deceased biological parent’s estate.
Planning your financial estate affairs provides peace of mind for your retirement years and for your family after your death. It also allows you to save for your children’s and grandchildren’s education, if desired, and to invest wisely so you achieve maximum gains with minimum tax liability.
To manage all these tasks properly, it often takes a team of qualified advisors to assist you. A CERTIFIED FINANCIAL PLANNER™ professional can work with your certified public accountant (CPA) for tax purposes, and an estate planning attorney can ensure your assets go to the people you intend to receive them. Together, this team can help you avoid expensive and devasting mistakes that could cost you and your loved one’s money.
Common Financial Estate Plan Mistakes
It can be tempting to put off making estate decisions or to try to handle certain tasks yourself to avoid paying a professional. While it is certainly possible to manage some of them on your own, all too often mistakes are made without realizing it. In our blog, “Mistakes in Estate Planning”, CFP® professional Elijah Heath at Heath Wealth Management details actual stories of clients whose final wishes were not carried out as they wanted, despite making certain plans.
Examples of common mistakes include:
- Financial procrastination
- Outdated wills and forms
- Updating your beneficiaries
- Failure to fund a trust
- Making children joint owners of your assets
- Inadequate financial planning
- Triggering estate tax through life insurance
In a world of turbulent marketplaces and increasing costs on desirable items such as homes and higher education, it can be challenging to set aside money for not just your future—but also for the future of your family.
Setting aside money to pass on to your children may be one of many financial goals you and your financial planner discuss. Obviously, establishing who inherits your assets is very important and a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional can assist with this goal. The list of your beneficiaries often includes a surviving spouse, children and stepchildren, and possibly grandchildren.
One idea to consider is that your children may be adults in their 60s entering their own retirement years when you pass away. They are not likely going to be buying their first homes, getting married, or heading to college — times when a financial inheritance could assist with those expensive life events. Instead, it would be your grandchildren who could be facing these costly expenditures for the first time.
Widows And Widowers – What To Do in The First Year
There are approximately 15 million widows and widowers in the United States, most of them over age 65. According to Census Bureau data, a little over three million of them are under age 65, which can present different options and challenges. All of them faced the challenges of financial upheaval when their spouse passed away, although a larger percentage of women will face greater financial difficulties than men.
Did you know that household income generally decreases about 40% when one spouse dies due to changes in Social Security benefits, a spouse’s retirement income, and earnings? That’s a sobering statistic because living expenses remain at 80-85% of what they were when the spouse was alive.
For some widows and widowers, this means the road to poverty begins after their spouse dies with women being impacted in greater numbers than men. Statistics show that about half of widows in the US over the age of 65 live on less than $22,000 a year.
If you would like additional information on SSA survivor benefits, you can contact the Social Security Administration or visit their website at www.ssa.gov.
For Widows, Living Longer Means Planning Ahead Financially
Women tend to live about three years longer on average than men. Since women are typically younger than their husbands, it also means they will spend more years living as a widow, approximately 15+ years. One study showed that widowers tend to remarry at a higher rate than widows, lending to the overall statistics of widows facing greater financial difficulties in their later years.
This means couples should begin saving early for their retirement years with this possibility as one consideration. Preparing for the financial future of your spouse and family now with trusted advisors is an essential task.
Ideally, couples and families should plan years, if not decades, before the idea of becoming a widow or widower seems likely. Having detailed discussions and plans with a trusted advisor in place before a spouse passes on will make the transition and financial decisions easier to manage.
The Importance of Tax-Efficient Investing
When it comes to your investments, it is important to pay close attention and work with your financial planner and tax advisor before making changes, such as selling or taking a withdrawal. If not, you could trigger unintended tax consequences.
For example, let’s say that you want to take money from your retirement account, or you received a nice sum of money from an inheritance, and now intend to use that money on a big purchase. What are the tax consequences of using that money on a big purchase? If the standard deduction for taxes is withheld, there is a chance that the amount will not be enough once the withdrawal amount is added to your annual income. How will you cover that tax liability if you spent all the money on a large purchase (minus the taxes), and you owe much more in taxes than expected?
When you work with a CERTIFIED FINANCIAL PLANNER™ professional, you will receive *fiduciary advice to protect you, and your investments and help reduce unintended tax consequences so there are no unpleasant surprises at tax time.
Minimize Your Taxes
The money you keep after paying taxes is the money you use to pay your expenses and enjoy life, so it is important to maximize your post-tax income. And while you cannot control trends in the market, or what the government will do on future tax laws, you can place yourself in a better financial position by working with a trusted financial planner who can guide you through careful, tax-efficient investing.
We’re Here To Help You
Elijah Heath, a CERTIFIED FINANCIAL PLANNER™ professional, is a *fiduciary with an ethical obligation to provide information, products, and services in your best interest, not what earns him the best fee or commission. Heath Wealth Management wants to be your advisor for life so you, your children, and grandchildren all benefit from the relationship.
Call us to learn more, ask questions about your specific circumstances, and determine if we are the right fit for you. Our phone number is 813-556-7171. We can also be reached by email at Elijah.Heath@LPL.com.
*Fiduciary services are with advisory relationships only.