Latest news with #Roths
Yahoo
29-04-2025
- Business
- Yahoo
6 Cash Flow Mistakes Boomers Are Making With Retirement Savings
Retirement should be a time to enjoy financial security and not stress over cash flow. That said, some common money mistakes may be putting boomers at risk. Be Aware: Try This: Even those who have diligently saved for decades can run into trouble if they're not managing their withdrawals, spending habits or investment strategies wisely. From underestimating inflation to relying too heavily on Social Security, certain missteps can drain savings faster than expected. Here are some cash flow mistakes boomers are making with their retirement savings — and how to avoid them. A common mistake retirees make is not taking IRA withdrawals in low tax years, according to Matt Hylland, a financial planner at Arnold and Mote Wealth Management. 'If a majority of your savings is in a traditional IRA, your tax liability will likely increase as you age. This is because of RMDs (required minimum distributions) and the onset of other income, like Social Security.' While withdrawals from IRAs are taxed as income, retirees with no other sources of income can very likely take out withdrawals at very low tax rates, Hylland pointed out. 'For example, in 2025 a 65-year-old married couple with no other income could take out $130,000 from IRAs and still remain in the 12% federal tax bracket.' Waiting to withdraw from your IRA until you start claiming Social Security benefits can incur tens of thousands of dollars in additional tax liability each year, Hylland said. Read Next: Waiting until you reach retirement to start figuring out your tax strategy may put you in jeopardy, Hylland said. 'Many retirees have spent decades trying to defer taxes as long as they can with their 401(k)s. But once you enter retirement, your optimal strategy may very well be to prioritize IRA withdrawals, and purposely pay some taxes.' He said retirees often use cash savings, brokerage accounts or even Roths early in retirement to keep a very low tax bill. 'While that may save them some money in the short term, it can be very costly in the long term.' The reasons are that delaying RMDs can lead to higher taxes later by pushing retirees into a higher tax bracket. Additionally, if retirees keep their taxable income too low early in retirement, they could miss the chance to convert pretax retirement savings into a Roth IRA at a lower tax rate. Lastly, Social Security benefits become taxable if the total income exceeds certain thresholds. Another problem is when retirees act too conservatively and fail to consider the tremendous impact of inflation in the first five to seven years of their retirements, according to Myles McHale, an adjunct professor at Cannon Financial Institute. 'High inflation early in their retirement journey will force higher withdrawals from their retirement portfolio,' he said. Another mistake is thinking that if you didn't save enough for retirement, and now are at least 55 or older and staring at retirement directly in the face, that you don't have any options, McHale said. However, retirees in this position can still make headway by working longer, increasing their saving rate and delaying claiming Social Security benefits for as long as possible. McHale said many boomers don't realize that they could spend more years in retirement than they did working. 'Longevity will be the biggest factor impacting boomer retirees,' he said. He recommended they start working with advisors who can build holistic strategic plans, no matter what stage of retirement they're at, a process his institute refers to as 'aging with grace.' He explained that a plan of that kind can cover such important elements as: Applying financial wellness principles to develop comprehensive transition plans for aging. Identifying and addressing key risk factors, including diminished capacity, elder abuse and family dynamics. Demonstrating effective communication techniques for conducting difficult conversations with family members. Developing and implementing practical solutions for housing, transportation and safety needs. While it's all well and good to save money for retirement, it's even better in the long run to invest in income-generating assets that can provide a steady stream of income, according to Jared Hubbard, the fintech product manager at investing app Plynk. 'This may include dividend-paying stocks, money market funds or bonds. When in doubt, do your research,' he said. Financial education tools can help determine what may be the best level of risk for your financial plan and ensure your investments seek to align with your retirement goals. More From GOBankingRates 5 Luxury Cars That Will Have Massive Price Drops in Spring 2025 4 Things You Should Do if You Want To Retire Early 6 Popular SUVs That Aren't Worth the Cost -- and 6 Affordable Alternatives 10 Genius Things Warren Buffett Says To Do With Your Money This article originally appeared on 6 Cash Flow Mistakes Boomers Are Making With Retirement Savings Sign in to access your portfolio
Yahoo
26-04-2025
- Business
- Yahoo
Why your Roth 401(k) match from work doesn't go into a tax-free account yet
If you are all in on Roths, it might be a little vexing to you that your employer is not. More than 82% of large employers offer a Roth 401(k) option to employees, which means workers can pay tax now on their income and sock away their savings tax-free for the rest of their life. But only 0.1% of companies are buying into the new feature in the Secure 2.0 legislation that allows employers to put matching contributions into Roth accounts rather than traditional pretax 401(k) funds, according to a new report from Mercer. What a plunge in shipping traffic from China says about tariffs, stocks and the economy 'An argument ensued': My mother entrusted my inheritance to her second husband. It all went horribly wrong. S&P 500's rapid exit from correction territory hinged on Trump's walk-backs of tariffs and Fed fight 'She's kept him afloat': I'm 78 and leaving my daughter, 41, my life savings, but her partner is a mooch. How can I protect her? This strategist warned of a selloff in December. He's watching these two signals to confirm if stocks have bottomed. That means that if you are among the 17% of workers who contribute to a workplace Roth 401(k), according to Vanguard, you will still collect a small pile of pretax funds in a separate account at your employer's retirement custodian. If you look at your account statement, you'll likely see these as different line items, or buckets, labeled something like 'employee Roth contributions' and 'employer matching' or 'Safe Harbor match,' depending on the financial institution. The money is still yours — it's just separated for recordkeeping purposes. Workers only need to keep track in order to do tax planning for retirement. Employers aren't ignoring all the new features allowed by Secure 2.0. Some 74% are clamoring to increase the involuntary cash-out amount for employees, according to Mercer, so they can get more low-balance retirement accounts off their systems. And 10% of companies want to make it easier for employees to take out money before age 59½ to cover the costs of terminal illnesses without penalty — but only 6% want to make that benefit available to victims of domestic violence and only 1.2% want to make penalty-free withdrawals available for general emergencies. Employer Roth 401(k) matching may be one of those ideas that is better in theory than in practice. 'There are a few complexities on the back end that have made it administratively difficult for providers to roll out. So for the most part, this is in the no-go area still,' said Jamie Hopkins, chief wealth officer at Bryn Mawr Trust. The problems stem mostly from the tax considerations of a Roth account, which is easier to manage from the employee side than the company side. To make a Roth 401(k) contribution, an employee simply pays the tax on their income in the current year, and then the money grows tax free while it's in the Roth account. On the company side, however, that match counts as an expense to the company and as income for the employee, and it involves a lot of coordination to get all of it properly accounted for. 'This is a very complex optional provision,' said Holly Verdeyen, defined-contribution leader at Mercer, a workplace-benefit consulting firm. 'It requires coordination between different vendors — the plan, their trustee, their payroll provider and plan recordkeepers.' Rich Schainker, director of retirement and investments at WTW, another workplace-benefit consultant, said that the potential tax implications for employees is another reason for the slow adoption. 'Employers may be cautious about introducing features that require significant changes to plan administration and employee education,' he said. 'Overall, while Roth features continue to gain traction, the specific adoption of Roth matching contributions remains limited as employers weigh the benefits against the administrative and educational efforts required.' Still another hurdle Schainker mentioned is that employers are tied up at the moment implementing other Secure 2.0 provisions, specifically those that require high-income older earners to put catch-up contributions into Roth accounts and those that allow new 'super' catch-up contributions for people between the ages of 60 and 63, who can put away a total of $11,250 in 2025 on top of the regular employee deferral limit of $23,500. There comes a time for many highly compensated people when they realize they've saved too much — at least in tax-deferred accounts. Socking away money for retirement in a 401(k) is a fantastic benefit, but once you hit 73, you have to start taking money out and paying tax on it. Those required minimum distributions stress out a lot of people, especially when their account balances reach $1 million and the amount they must take out each year tips them into a higher tax bracket or forces them to pay IRMAA surcharges on their Medicare premiums. This is why people start to scramble in their early 60s to do Roth conversions, paying the tax in chunks ahead of time and shifting that money into these tax-free-forever accounts. If you figure out this math early enough, you can start diverting your retirement savings into a Roth 401(k) directly. It's a smart move, especially if you're above the income limit to contribute to a non-workplace Roth IRA — which is $150,000 for a single person in 2025 — and you want to contribute more than the $7,000 allowed. If you're a very high earner and you want to sock away even more than you're allowed to as an employee, at many companies you can make after-tax 401(k) contributions and then immediately roll them over into a Roth 401(k) account, up to the total annual limit for retirement savings set by the IRS (which in 2025 is $70,000 for those under 50, and $77,500 with catch-ups). 'In-plan Roth conversions allow employees to convert their traditional 401(k) balances to Roth balances, providing the same tax advantages without the need for immediate implementation of new matching features,' Schainker said. But that's still all about your money and what you contribute. For the time being, it seems that company matching funds will stay in the tax-deferred universe, and employees will pay tax on those funds when they withdraw them in retirement. 'Likely, we will see more plans open this up next year,' predicted Hopkins. But given that there are still tax considerations to work out, 'without likely guidance this year from the government, it could hinder the adviser and plan sponsor support of adoption for a few years.' Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at . Please put 'Fix My Portfolio' in the subject line. You can also join the Retirement conversation in our . The buying opportunity of a lifetime is coming. But not before a 40% drop for the S&P 500, says this strategist. 10 'pure value' stocks favored by analysts to soar 20% to 96% over the next year I held power of attorney for my late brother. Can I withdraw money from his bank account to give to his favorite charity? 'I am suspicious': My father died, leaving me $250,000. My brother says it's all gone. What can I do? 'In their last days, our parents changed their will': They left me $250,000, but gave my sister $1 million. What should I do?
Yahoo
05-04-2025
- Business
- Yahoo
Crafting the perfect retirement portfolio: A financial advisor's dilemma
Roths, HSAs, 401(k)s and more — when it comes to retirement planning, working Americans have no shortage of tax-advantaged accounts in which they can tuck away money for the later years of their lives. But with only so much money to go around, the question is: Where should advisors tell savers to put their money? It's a relatively simple question, but not without its conflicts. Financial advisors tend to agree on fundamental priorities for clients — establishing an emergency fund and contributing to get an employer match on a 401(k) — but it's not long before even experts reach a point of disagreement. In retirement planning, one of the biggest decisions an investor has to make is whether to pay income taxes on contributions now or pay taxes on withdrawals later. In practical terms, that means choosing between Roth accounts or traditional 401(k)s and IRAs. Roth accounts, which allow investments to grow tax-free, have surged in popularity over recent years. READ MORE: The 10 best- and worst-performing passive ETFs of the past 3 years From 2016 to 2022, the percentage of households with positive balances in Roth IRAs has increased significantly, according to an analysis of the Federal Reserve's Survey of Consumer Finances done by the Center for Retirement Research at Boston College. That's especially true for younger investors. In 2016, just 6.6% of households age 20 to 29 had a Roth IRA. By 2022, that figure jumped to 19.2%, according to the Center for Retirement Research. Advisors say that Roth accounts, whether a 401(k) or IRA, are ideal for younger, lower-income workers. But the factors that may make Roths appealing aren't always easy to nail down. "Deciding on whether to choose traditional or Roth options becomes difficult, requiring guesses as to what future tax rates, account values and retirement income needs may look like," said C Garrett Moore, founder of Moore Financial Management in Bradenton, Florida. Traditional 401(k)s and IRAs could be a better option for older workers who find themselves in a higher tax bracket, advisors say. Still, making that determination isn't just about an investor's current circumstances. As Moore said, it also involves comparing your current tax rate to what you imagine your future tax rate could be. That future figure is partially influenced by how much money you expect to withdraw in retirement, but it also includes broader assumptions about future tax policy. Choosing between traditional and Roth accounts may be the first step, but it's certainly not the last. For savers who decide to go the Roth route, there's still debate about which is better: IRAs or 401(k)s. READ MORE: A job-hopping slowdown could be a boon for retirement savings Roth 401(k)s offer a couple of distinct benefits over their IRA counterparts: namely, higher contribution limits ($23,500 vs. $7,000 in 2025) and the lack of an income cap. But most advisors say Roth IRAs are still the way to go for workers who have access to them." With Roth IRAs specifically, you can pull out your contributions at any time, penalty and tax free," said Filip Telibasa, owner of Benzina Wealth in Sarasota, Florida. "This is not true for 401(k) plans, even if they are Roth. After the IRA is full, we can rotate back to the 401(k) to max it out if there are funds left over." More liquid contributions aren't the only way that IRAs offer greater flexibility than 401(k)s. IRAs "typically offer many more investment options and the account is not run by your employer so you aren't subject to any changes they might make to their plan," said Leah Copertino, founder of Go Fish Finance in Louisville, Colorado. Advisors also point out that IRAs generally have lower fees than employer-sponsored 401(k)s. That said, for individuals making $150,000 or more, Roth IRAs are not an option due to strict income limits, making 401(k)s a saving grace for tax-averse high earners. The small but mighty health savings account (HSA) is often overlooked when it comes to retirement planning, advisors say. Thanks to its triple-tax-advantaged structure, the HSA is one of the most powerful retirement accounts available to workers, but advisors say the unique account isn't for everyone. READ MORE: Don't wait for rollovers — ask to manage client 401(k)s now For one, gaining access to an HSA requires that a worker sign up for a high-deductible health plan. Workers with more medical needs may not be good candidates for this approach, but those with relatively low medical costs can benefit from signing up for a high-deductible plan and contributing to an HSA, advisors say. "The HSA is never taxed (federally; some states do apply taxes to HSAs), allowing you to contribute tax-free, grow your money tax-free, and withdraw your money tax-free. It's truly a unicorn account," Copertino wrote in an email. "The watch-out here is that in order to get this triple tax advantage, you'll want to pay out of pocket for your current health care costs, so make sure this is reflected in your annual budget. This will allow you to invest in your HSA account for the long term and unlock that tax-free growth." Going the HSA path could incur more out-of-pocket expenses in the short term, but advisors say it's hard to beat the long-term tax advantages. "It really should be about building a retirement strategy that lowers your lifetime tax bill," said Ben Loughery, founder of Lock Wealth Management in Atlanta, "not just this year's tax bill."
Yahoo
03-04-2025
- Business
- Yahoo
Do we really want Roth 401(k) and Roth IRAs to be more generous than traditional retirement plans?
Something snuck by me: The Secure 2.0 Act eliminated required minimum distributions for Roth 401(k) accounts. At first glance, that change seems relatively harmless. After all, the account holders paid taxes up front, so why force them to withdraw their money? What that rationale ignores is that the assets in the Roth continue to generate tax-free returns, even after the account holder reaches 73 — the age when required minimum distributions, or RMDs, kick in for traditional plans. That ability to continue to save tax-free makes Roth accounts considerably more valuable. 'I cannot afford to lose more': Will Trump's 'liberation day' tariffs hurt my retirement? 'I'm not trying to be overly doomsdayish': My grandmother is in her 70s and has $400K in stocks. Should she sell? I invested $100,000 in the S&P 500 in February and lost $10,000. How long will it take to recover? It's Trump's 'liberation day.' Where investors are hiding as tariff fears spark stock-market selloff. Here are 4 charts investors should keep an eye on as Trump's 'liberation day' tariffs arrive A quick refresher on the so-called equivalence between traditional and Roth plans may be a good way to clarify what has happened. Under a traditional 401(k) plan, the government does not tax the original contribution nor the returns on those contributions until the funds are withdrawn from the plan. In contrast, initial contributions to Roths are not tax deductible, but interest earnings accrue tax-free and no tax is paid when the money is withdrawn. Although the traditional and Roth plans may sound quite different, the conventional argument is that they offer virtually identical tax benefits. Unfortunately, the easiest way to demonstrate this point is with equations. Assume that t is the individual's marginal tax rate and r is the annual return on the assets in the plan. If an individual contributes $1,000 to a traditional plan, then after n years, the balance would have grown to $1,000 (1+r). When the individual withdraws the accumulated funds, both the original contribution and the accumulated earnings are taxable. Thus, the after-tax value in retirement is (1-t) $1,000 (1+r). Now consider a Roth. The individual pays tax on the original contribution, so he puts (1-t) $1000 into the account. After n years, these after-tax proceeds would have grown to (1+r)(1-t) $1,000. Since the proceeds are not subject to any further tax, the after-tax amounts under the Roth and traditional plans are identical: Note that a key assumption in this exercise is that n — the number of years of accumulation — is the same in both cases. That used to be true. In both cases, RMDs limited tax-free accruals. Now 'n' is no longer the same for traditional and Roth 401(k)s. Owners of traditional plans have to start taking their money out at 73; owners of Roths never have to take their money out. (Postdeath minimum distribution rules still apply.) One argument for changing the RMD rules appears to have been to make the treatment of Roth 401(k)s consistent with the treatment of Roth IRAs, which have never been subject to RMDs. Consistency is a good goal. Congress simply flipped the wrong way. Flipping the wrong way costs the government money. Right now, even though 82% of employers offer a Roth 401(k) option, only 17% of participants take up the offer (see Figure 1). As more workers recognize the advantages of no RMD, that percentage will increase. As a result, the tax expenditure for retirement plans — a wasteful expenditure under any regime — will increase. If Congress is looking for money, introducing RMDs for Roth IRAs and restoring RMDs for Roth 401(k)s would not only make the tax benefits fairer but also raise revenues. That has to be a good thing. 'I'm considering marriage in my mid-60s': Am I responsible for my spouse's medical debt? 'She has been telling him lies': My sister convinced my father to sign everything over to her. What can I do? 'I'm stuck': I'm a single mom with a 6-year-old child. What can I do to earn money fast? 'My daughter harasses me and wants to know where I go': She's after my money. How do I protect myself? These 2 ETF strategies can lower your risk during this period of stock-market uncertainty Sign in to access your portfolio
