retirement accounts

07Mar

Wanna Be Tax-Free in Retirement?

BlogMarch 7, 2023

As you approach retirement, it’s important to consider tax-efficient strategies that can help you make the most of your retirement savings. By minimizing the amount of taxes you pay, you can stretch your retirement income further and make your savings last longer. Below are some tax-advantaged and tax-free retirement accounts you can utilize.

Roth IRAs

Roth IRAs are a popular retirement savings vehicle that can offer significant tax benefits. Contributions to a Roth IRA are made with after-tax dollars, which means that you won’t receive a tax deduction for your contributions. However, once you reach retirement age, you can withdraw your savings tax-free. This can be a valuable tax-free source of income in retirement.

Health Savings Accounts (HSAs)

HSAs are tax-advantaged accounts that are designed to help you save for healthcare expenses. Contributions to an HSA are made with pre-tax dollars, which can help reduce your taxable income. Additionally, withdrawals from an HSA are tax-free if they are used to pay for qualified medical expenses. This can be a valuable tax-free source of income in retirement.

Municipal Bonds

Municipal bonds are issued by state and local governments and are typically exempt from federal taxes. If you purchase a municipal bond issued by a state in which you reside, the interest on that bond is also exempt from state and local taxes. This can be a valuable tax-free source of income in retirement.

Life Insurance

Certain types of life insurance policies can offer tax-free benefits in retirement. For example, a permanent life insurance policy can provide tax-free withdrawals of the policy’s cash value. Additionally, a death benefit paid to your beneficiaries is typically tax-free.

Real Estate

Investing in real estate can be a tax-efficient strategy for retirement planning. Rental income from investment properties is typically taxable, but there are ways to offset that income. For example, you can deduct expenses such as property taxes, mortgage interest, and repairs. Additionally, if you hold the property for more than a year, any capital gains from the sale of the property will be taxed at a lower rate.

21Feb

Benefits of a Mega Backdoor Roth

BlogFebruary 21, 2023

One strategy for retirement planning that has gained popularity in recent years is the Mega Backdoor Roth. This is a savings strategy that allows high-income earners to contribute large amounts of after-tax dollars to their retirement accounts.

What is a Mega Backdoor Roth?

A Mega Backdoor Roth is a savings strategy that allows high-income earners to contribute additional after-tax dollars to their 401(k) plan, beyond the traditional contribution limits. This is done by using the non-discrimination testing exception, which allows employees to contribute up to the IRS annual limit ($19,500 in 2022) to their 401(k), and then contribute additional after-tax dollars up to a plan-specific limit. These after-tax dollars can then be rolled over into a Roth IRA, where they can grow tax-free.

Benefits of a Mega Backdoor Roth

Tax-Free Growth

The primary benefit of a Mega Backdoor Roth is the tax-free growth of contributions. Once after-tax dollars are rolled over into a Roth IRA, they can grow tax-free, meaning that retirees can withdraw the money without paying taxes on the contributions or earnings. This can be a significant advantage for high-income earners who are in higher tax brackets.

More Savings

The Mega Backdoor Roth allows high-income earners to save more money for retirement. By contributing after-tax dollars to a 401(k) plan and then rolling them over into a Roth IRA, individuals can save more than they would be able to with traditional contribution limits. This can be particularly beneficial for individuals who are behind on their retirement savings.

No Required Minimum Distributions

Another benefit of a Mega Backdoor Roth is that there are no required minimum distributions (RMDs). Traditional IRAs and 401(k) plans require individuals to begin taking distributions at age 72, which can result in higher taxes and potentially push retirees into higher tax brackets. With a Roth IRA, there are no RMDs, allowing retirees to let their money grow tax-free for as long as they choose.

Estate Planning

A Mega Backdoor Roth can also be a useful tool for estate planning. By contributing after-tax dollars to a Roth IRA, individuals can leave a tax-free inheritance to their beneficiaries. This can be particularly beneficial for high-net-worth individuals who are concerned about estate taxes.

Overall, a Mega Backdoor Roth can be a powerful tool for high-income earners to save more money for retirement and take advantage of tax-free growth. However, it’s important to note that this strategy is not suitable for everyone. Individuals should consult with a financial advisor to determine if a Mega Backdoor Roth is the right strategy for their retirement plan. With careful planning and the right strategy, retirees can maximize their savings and prepare for a comfortable retirement.

12Dec

Retirement Plan Contribution Limits Are Increasing Come 2023

BlogDecember 12, 2022

2023 is upon us and an important factor to tax-advantaged accounts and plans is the contribution limits the IRS sets. This year the contribution limits were increased more than they have been in the past due to historically high inflation and cost-of-living. Here is a general overview for 2023:

401(k) Plans

In 2023, for 401(k) plans the contribution limit has been increased to $22,500. This contribution limit applies to most 457 plans and 403(b)s.

For those over 50, the catch up contribution limit is increasing to $7500. So those over 50 in 2023 can contribute up to $30,000.

Defined Contribution Plans and SEPs

For these plans, the contribution limit is increasing by $5000 from 2022’s limit: $66,000.

SIMPLE Plans

Increasing just over a $1000, these plans can contribute $15,500. The catch-up for those over 50 has been increased to $3500.

IRAs

While the over 50 catch-up limit is not being changed for IRAs, the annual contribution limit is being raised to $6500.

14Sep

What Exactly is a LIRP?

BlogSeptember 14, 2022

Much like a game of chess, retirement planning is about strategy. Back in the 1970s the traditional route was relying on Social Security and having a pension. Today retirement is entirely on the individual to fund—and Social Security only should be about 40% of what you need. And among the various products out there, a life insurance retirement plan (LIRP) can help supplement your income during retirement.

So, what exactly is a LIRP?

A life insurance retirement plan is a permanent life insurance policy that uses its cash value to fund retirement. While mimicking tax benefits of Roth IRAs, any life insurance that is permanent with cash value (i.e. whole life insurance) can be used. However, term life insurance cannot be used as a life insurance retirement plan since it does not have a cash value.

How is the cash value used?

Based on your individual policy, a set percentage of the life insurance policy’s premium payment is put into a tax-deferred savings like an investment account. This becomes known as the cash value of the policy. Over time, the cash value account grows.

Once the account has accumulated a certain amount or has grown long enough, you can access the money by either withdrawing or taking out a loan against it. This money can then be used to provide tax-free income during retirement.

How can you use your LIRP in retirement?

LIRPs are great for supplementing your existing retirement funds. Assuming you max out contributions to traditional retirement accounts, you can put the extra funds into your cash value, creating additional growth. Furthermore, in case of a stock market downturn, having the cash value to pull from is great.

To build your cash value fund pay more than your required premium. Some policyholders chose to overfund their cash value account. Any extra amount paid goes directly into your cash value account and grows tax deferred. However, this strategy only works if you do not make withdrawals before age 59 ½. A cash value policy, if overfunded, can exceed the annual premium limit set by the IRS. Should this happen, it may convert to a modified endowment contract (MEC)—meaning your policy is subject to additional taxes and penalties.

The cash value of your policy can be supplemental income. The beauty of a cash value policy is your capability to withdraw from it. In additional to your traditional retirement accounts and Social Security, your LIRP can be used as supplemental income. This allows for increased retirement spending, should you wish such as a small road trip or to offset if the market has a downturn.

Your policy can be used for long-term care. With a long-term care rider, you may have the option to use the cash value portion of your LIRP to have long-term care covered should you need it. The rider provides coverage from the cash value account if you need to pay for a nursing home, assisted living, or even medical expenses associated with long-term care as you age. A LIRP might not be for everyone, but it could supplement your retirement income, help cover medical expenses, or help take care of a long-term care e