Retirement Savings – Retirement Risk Advisors

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.

28Jun

After Taxes Now, Tax-Free Later: Roth 401(k)

BlogJune 28, 2022

Tax-advantaged has quite the ring to it, doesn’t it? Unlike the tax-advantages a traditional 401(k) offers—funded with pretax wages—a Roth 401(k) is funded with after tax wages. Income tax has already been paid so when it comes to withdrawing in retirement, your money is withdrawn tax-free.

What exactly is a Roth 401(k)? Created in 2006, Roth 401(k)s are employer-sponsored retirement savings accounts that use after-tax money.

How They Work

While employer-sponsored, enrollment and participation in Roth 401(k)s is entirely voluntary. Payroll deducts the special funds after taxes have been taken out each paycheck. Some employers may offer matches for Roth 401(k)s.

In comparison, a traditional 401(k) and a Roth 401(k) have different tax-advantages. A traditional 401(k) reduces an employee’s gross annual income, providing a tax break now. However, regular income taxes will be due upon withdrawal during retirement. A Roth 401(k) requires income tax be paid but reduces an individual’s annual net income. But after the money is placed into the Roth account, no further taxes are owed when taken during retirement—this includes profits earned.

Much like the traditional 401(k), a Roth 4010(k) is subject to contribution limits and is based off the investor’s age per guidelines of the IRS. For 2022, an individual may contribute up to $20,5000. Those over 50 are permitted a catch-up contribution of $6500. Another perk Roth 401(k)s offer is no income limit.

Withdrawal Special Considerations

Certain criteria must be met for withdrawals to be tax-free.

The Roth 401(k) must be at least 5 years old.
Withdrawals must occur when the account holder is at least 59 ½. If before, account holder must has passed or experiencing qualifying disability.

Roth 401(k)s do require required minimum distributions. Once you are 72 the first RMD from your Roth 401(k) must be taken by the first April after you turn 72. If you are still working for the company who sponsors the retirement account, you may hold off taking a distribution.

Advantages and Disadvantages Summary

Pros:

Helps those who may be in a higher tax bracket during retirement (which is commonly seen)
Distributions are tax-free.
Earnings grow tax-free.

Cons:

Uses after-tax dollars, meaning during working years you are out that money
Contributions do not limit taxable income

Roth 401(k)s and Market Volatility

Sadly, you can lose money since a 401(k) is an investment into the market. However, most employers offer low-risk options like government bonds. You are always welcome to work with the plan sponsor and stir up your investment yield and risk.

07May

Quick Check: How Ready for Retirement are You?

Podcast BlogMay 7, 2022

Retirement readiness is not an overnight success story. It is not a simple formula either. It takes dedication, hard work, and good strategies. Why? Because it is simply not just retirement savings. Below is a quick check to assess your readiness for your golden years whether you are 5-10 or even a year away from retirement!

Financial Wellbeing

As the biggest stressor of retirement, financial wellbeing is budgeting, savings, income streams, and planning. Here are some categories to review for your retirement planning

Housing, including utilities and maintenance
Healthcare costs (covered later)
Daily living: food, transportation
Entertainment and travel

Having an idea of where you stand now will help determine how much you should have for retirement assets.

Emergency Fund

Planning for the unexpected helps immensely when it comes to retirement readiness. When there is financial uncertainty, the emergency fund is the perfect security blanket. Advised to be kept separate from normal savings, the emergency fund should have roughly 3-6 months of living costs.

Debt Elimination

The less debt you need to pay in retirement, the better off you will be. Retires are often relying on fixed income streams, so beginning a repayment strategy now while you are still working would be ideal. If you can, paying down debts with higher interest rates would save a lot of money for you down the road.

Retirement Needs
As a CPA, knowing what you need and how you want to life your retirement helps set realistic goals and plans. This should include where you want to reside, what age you plan to retire, and even length of retirement. With longevity increasing by the day, it is estimated that retirement will last between 20-40 years for many. While evaluating your needs, this is a great time to also compose a timeline for when certain benefits/income streams begin.

Healthcare & Insurance

Health insurance is a major factor for retirement, and unfortunately will be the biggest expense you will face in retirement. Not including long-term care, a newly retired couple will need a minimum of $300,000 for medical expenses alone. This number is predicted to increase yearly, too. Moreover, should you have a long-term care event, without coverage, you are looking at approximately another $140,000 annually.

Now part of health care costs is insurance. Medicare only covers so much, and that depends on the plans you go with. Other than Part A each Part or supplemental plan has a premium. You may need prescription drug coverage, which is where Part D of Medicare may help. Consider a supplemental plan under Part C. Do further research into what a private health insurance company may offer so you know what options you have and are able to get the best price for what you need. Long-term care insurance is another premium monthly, but it would help a lot should you need it. There are some options where you may add a rider to a life insurance policy to help cover the costs long-term care would entail.

18Feb

A Retirement Strategy Offering Both Savings and Income

Podcast BlogFebruary 18, 2022

In economic uncertainty, finding answers that provide both savings and an income during retirement becomes challenging. While you try to recover from a downturn, so are companies. And history speaks for itself: employee retirement programs are usually the first cut. This was seen after the Great Recession when corporations across the U.S. reduced and eliminated 401(k) matches. More recently, with the Covid-19 crisis, some companies have begun reducing retirement programs and other employee benefits to aid in recovering from the crisis.

Since retirement is up to the employee, you want something that will withstand the market fluctuations, lower risk, and provide a promised regular income: annuities. As an insurance product, annuities are either done with a single, lump sum payment or recurring premiums that will grow and provide retirement savings and income stream.

Overview of Annuity Types

Variable annuities often yield higher returns because they are directly tied to the consumer’s investment choices. However, they can be decrease in value when the market experiences a downturn. No guarantee is offered with interest or principal protection with these annuities.

Fixed annuities accrue interest off a fixed interest rate set at the beginning of the contract. These are written in stone for a set number of years, meaning they cannot decrease in value for that time. Thus, these annuities offer some protection guarantee, have low yields, and offer low risk.

Fixed indexed annuities are a middle ground of the other two annuities. Based on the performance of a specific index, they provide guaranteed principal protection. Risk is medium with this annuity and has a capped yield that becomes part of the annuity income stream.

Ways Annuities Lower Risk in Retirement

Lifetime income – After accumulation, income payments can be received as either a lump sum, an installment payment for a set number of years, or lifetime payments depending on the rider. This may come with a fee, but some riders have no fee associated.

Tax-deferred – As long as funds remain in the annuity, your savings will remain protected from the yearly taxation on interest. As a chance to earn interest on interest, principal, and on taxes deferred, you get ahead on retirement assets that is not typically available with other retirement accounts.

Principal protection – Protecting your hard-earned money will help reduce retirement risks you will face. With fixed and fixed indexed annuities, your principal investment is protected with the chance to grow and become a stable income stream for retirement.

Growth – Annuities offer a flexibility for growth that may be capped or have a participation rate. These are linked specifically to market indexes. A variable annuity has the potential for a high growth rate, but fixed or fixed indexed annuities allow for participation but less risk.

For more information on how annuities can reduce and eliminate risk in your retirement, please listen to The Retirement Risk Show episode, “The Crossroads of Longevity and Volatility: How Annuities Help.”