tax-free – Retirement Risk Advisors

457 retirement plans when and what, the affect on your retirement

09May

When Would A 457 Account Affect Your Retirement?

BlogMay 9, 2023

If you’re a government employee, you may have access to a 457-retirement account. A 457 plan is a type of tax-advantaged retirement account that is available to employees of state and local governments, as well as certain non-profit organizations.

Let’s take a closer look.

What is a 457-retirement account?

A 457 plan is like a 401(k) or 403(b) plan, but it is designed specifically for government and non-profit employees. Like a 401(k), a 457 plan allows you to make pre-tax contributions, which can help lower your taxable income. The money you contribute to the plan grows tax-free until you withdraw it in retirement. Additionally, like a 401(k), some employers offer a matching contribution, which can help boost your savings.

One key advantage of a 457 plan is that it allows you to contribute more to your retirement savings than a 401(k) or 403(b). In 2023, the maximum amount you can contribute to a 457 plan is $22,500. However, if you are 50 or will be 50 by end of the year, you can contribute a catch-up of an additional $7500.

Another advantage of a 457 plan is that you may be able to withdraw money penalty-free before you reach age 59 and a half. This is known as the “substantially equal periodic payments” provision, and it allows you to receive a stream of payments over your lifetime, based on your life expectancy.

What are the differences between a 457 and a 401(k) or 403(b)?

While a 457 plan shares many similarities with a 401(k) or 403(b), there are a few key differences. For example, a 457 plan does not have an early withdrawal penalty if you leave your job before age 59 and a half. Additionally, you can contribute the maximum amount to both a 401(k) or 403(b) and a 457 plan in the same year, which can help boost your savings.

However, one key disadvantage of a 457 plan is that it may not be as well-known or widely available as a 401(k) or 403(b). Additionally, some 457 plans may have higher fees or less investment options than other retirement plans.

Is a 457-retirement account right for you?

If you are a government or non-profit employee and have access to a 457 plan, it may be a good option for your retirement savings. However, like any retirement plan, it’s important to carefully consider the fees, investment options, and contribution limits before deciding to contribute.

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.

20Jun

Retirement Savings: Consider a Roth IRA

BlogJune 20, 2022

A Roth individual retirement account is a brilliant way to save for retirement. Much like a traditional IRA, a Roth IRA allows you to invest and for it to grow tax-free. One great advantage this type of account has is that it also lets you take tax-free withdrawals of your contributions at any age. Your earnings may have the same benefit under certain circumstances. For your earning to be withdrawn tax-free you must be:

59 ½ years old
Disabled
Using the funds as first-time

Naturally, like any tax-advantaged retirement account, the IRS has stipulations and rules that cover contribution limits, income limits, and withdrawals.

Roth IRA Eligibility

The first requirement for contributing to a Roth IRA is having earned income. This could be from the income earned from working for someone else (commissions, tips, bonuses count). Secondly, this earned income could be from a self-operated business or other means of earned income such as tax alimony or even combat pay.

Earned income that does not count:

Rental properties
Nontaxable alimony
Child support
SS benefits
Unemployment benefits

On a plus side, there is no age limit for making Roth IRA contributions. From a teen working a summer job to someone even in their 80s can contribute. Note: someone under 18 would need to set up a custodial account.

If you are contributing towards another qualified retirement plan you are still eligible to contribute towards a Roth IRA. So, if you earn money and meet the limitations, you can contribute towards your own Roth IRA and your employer-sponsored 401(k) plan.

14Feb

HSA: A 401(k) for Healthcare Costs

BlogFebruary 14, 2022

Not your typical retirement account, a Health Savings Account allows you to set money aside to pay for qualifying medical expenses. Being able to contribute now will make retirement easier later. Good news: Contributions are tax-deductible AND never expire!

Here’s why you should consider an HSA.

A tax break today and save for your tomorrow.

Contributions to HSAs reduce yearly taxable income similarly to 401(k)s. In 2022, families can contribute $7300 into an HSA while individuals can contribute up to $3650. Those 55+ can contribute an extra $1000 to these.

However, to have a Health Savings Account you need to have a qualifying high-deductible health plan. Typically, this is $1400 for individuals or $2800 for families. Please note these vary by marketplace.

Even with the contribution limits a fraction of what 401(k) limits are, you are saving money today that will help aid in medical costs in your retirement. The saying does go, “slow and steady wins the race,” right?

Three cheers for tax-free withdrawals!

You read that right. You can withdraw tax-free for your medical expenses at any age. However, if you are planning to save this for your retirement, pulling from your HSA should be avoided.

Now, you may also use your HSA for nonmedical withdrawals, but you will have to pay income taxes and a penalty tax should you do so before age 65. The taxes are higher than if you pulled from your 401(k) early. Luckily, once you are 65, HSAs are tax-free medical withdrawals and mimic 401(k)s.

Zero required minimum distributions

Unlike 401(k)s and other retirement accounts like Roths, HSAs do not have RMDs. Without having to worry about this, you can leave your funds in the HSA for as long as you would like!

Want an HSA?

HSAs make great additions to retirement plans, and you can open one with banks or brokers. Once opened, the freedom an HSA offers is yours!

07Jan

How to Face Your Retirement Risks: Think in Buckets

Podcast BlogJanuary 7, 2022

Since the old paradigm of retirement will do more harm than good in this current world, tackling the Top Ten Risks can be tricky.

Why won’t the old paradigm work? The first reason is folks nowadays live into their 80s when decades back that was not as common. Because retirement age back in the late 20^th century was 55, many retirees waited until years past their retirement age to fully leave the workforce. Another major contributor to retirement plans back then were pensions. Social Security (SS) was on the table then, too. Folks could easily retire and enjoy their golden years off their employment pension and SS. Now, a lot of retirement is unfortunately up to the employees.

Beyond understanding SS and Medicare, balancing your assets over taxable, tax-deferred, and tax-free accounts is key to the success of your risk-free retirement. This is known as the Three Bucket System.

First and foremost, the taxable bucket is designed for emergency funds. Having 6 months of your living expenses in this bucket permits less risk. You are protected in case of emergency, and you are not exposing your savings to extra taxation.

The second bucket is tax-deferred and is a bucket folks overfill. While this bucket varies individually, there are some ‘rules’ to be mindful of. Your required minimum distributions (RMDs) should be low enough to not create provisional income (too much would cause your SS to be taxed). Secondly, you do not want them to exceed your standard deduction.

Filling the other two buckets means you can successfully begin filling the third bucket up: tax-free. The sooner you do this, the better off your risk-free retirement will do. Things that can be done for this bucket are Roth conversions or buying a life insurance retirement plan.

**We strongly encourage you to listen to our podcast Retirement Risk Show episode “Break Down the Top 10 Risks Facing Your Retirement” for a deeper dive into the information provided in this blog. For even more on the 10 Risks Top Ten Risks and strategies to reduce them during retirement, register for our webinar “Getting Safely Through Retirement.”