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Roth accounts are a popular as a way for people to save for retirement and potentially receive tax-free income in retirement. The idea behind a Roth account is simple: you make contributions with after-tax dollars, and then when you withdraw the money in retirement, it is tax-free. This is in contrast to traditional retirement accounts, such as a traditional IRA or 401(k), where you make contributions with pre-tax dollars and then pay taxes on withdrawals in retirement.
There are a number of factors to consider when deciding whether a Roth account is right for you. Firstly, it is important to understand the tax implications of a Roth account. With a Roth account, you make contributions with after-tax dollars, meaning that you do not receive an immediate tax deduction for your contributions like you would with a traditional retirement account. However, the money grows tax-free in the account, and when you withdraw the money in retirement, it is not taxed. This can be a significant advantage for people who expect to be in a higher tax bracket in retirement than they are currently.
Another factor to consider is the timeline for your retirement savings. With a Roth account, you are essentially paying taxes now in exchange for the promise of tax-free income in retirement. This is why it is often said that Roth accounts are best for younger people who have a long time horizon for their retirement savings.
The longer you have until retirement, the more time your money has to grow tax-free, potentially resulting in a larger tax-free payout in retirement.
It is also important to consider your current financial situation when deciding whether a Roth account is right for you. If you are currently in a high tax bracket, making contributions to a Roth account can help reduce your taxable income, potentially lowering your tax bill. However, if you are currently in a low tax bracket, making contributions to a Roth account may not have as significant of an impact on your tax bill.
Another benefit to consider is the flexibility of a Roth account. Unlike traditional retirement accounts, Roth accounts do not have required minimum distributions (RMDs), meaning that you are not required to start taking money out of the account at a certain age. This can be a significant advantage for people who want to have the flexibility to access their retirement savings as needed, without incurring taxes or penalties.
It is also important to consider the potential for future tax law changes when deciding whether a Roth account is right for you. While the tax-free nature of Roth accounts is currently a significant advantage, there is always the potential for future changes to tax laws that could affect the tax-free status of Roth accounts. While it is impossible to predict what future tax laws will be, it is important to be aware of the potential risks when making decisions about your retirement savings.
Finally, it is important to consider the impact of Roth contributions on your overall retirement savings strategy. For many people, a combination of traditional and Roth retirement accounts can be a good way to balance the tax implications of their retirement savings.
For example, you may choose to make contributions to a traditional retirement account in order to reduce your taxable income now, and then switch to making contributions to a Roth account later in life when you expect to be in a higher tax bracket.
There are a number of factors to consider when deciding whether a Roth account is right for you. While the tax-free nature of Roth accounts can be a significant advantage, it is important to carefully consider
By taking the time to consider these factors and working with a financial advisor, you can make informed decisions about your retirement savings and potentially reap the benefits of a Roth.
Each time you start a new job, your employer will give you a Form W-4 to complete that determines the amount of Federal income tax that is withheld from each paycheck. While many people prefer to have too much tax taken out so they can look forward to a refund in the spring, overpaying your taxes means you are allowing the IRS to hold onto your money.
Conversely, underpaying your taxes can result in a big tax bill in April, and possibly penalties from the IRS for underpayment. To avoid these problems, strive to match the amount withheld as closely as possible to your actual tax liability, adjusting your rates and allowances as your status changes.
Form W-4 asks you to specify whether you want your taxes withheld at the single or married rate, how many withholding allowances you wish to claim, and whether you want an additional amount withheld from each paycheck. Claiming more allowances lowers the amount of taxes withheld, while claiming fewer increases the amount taken at each pay period.
Using the worksheets that accompany Form W-4 or the withholding calculator on the IRS website can help you determine how many allowances you are entitled to claim.
If you have income from two jobs, the IRS recommends that you complete only one set of Form W-4 worksheets or online calculations, and that you then split your allowances between the Forms W-4 for each job. Alternatively, you can claim all your allowances with one employer and none with the other. However, you cannot claim the same allowances with more than one employer at the same time.
If you are married filing jointly and both you and your spouse are employed, calculate your withholding allowances using your combined family income, adjustments, deductions, exemptions, and credits – again, using just one set of worksheets or one set of calculations. While you and your spouse can divide your total allowances at your discretion, your family cannot claim an allowance twice.
If, however, you and your spouse expect to file separate returns, you should each calculate your allowances using separate worksheets based on your individual income, adjustments, and deductions.
When an event occurs in your life that affects your tax liability, adjust your Form W-4 to reflect the change. You can alter your withholding as frequently as you like by filling out a new form and submitting it to your employer.
Events that may require you to recalculate the withholding amount include getting married or divorced, having a baby, and buying a house. You may also consider adjusting your withholding if your spouse starts or stops working; if you or your spouse takes on a second job; or if you have new income from non-wage sources, such as an inheritance, unemployment compensation, retirement plan distributions, alimony, dividends, capital gains, interest, or gambling winnings.
Changing your withholding is particularly important if an event occurs that lowers the number of allowances you are entitled to claim, or if your income rises dramatically. In addition to the situations mentioned above, there are a number of other, less obvious events that could lead to a decrease in the number of allowances claimed.
For example, if you have been claiming an allowance for a dependent who is a qualifying relative or child, but you no longer expect to provide more than half of the dependent’s support for the year, resubmit your W-4. Similarly, if you have been claiming allowances for your anticipated deductions, but you now find they will be lower than originally expected, a change in your withholding may be necessary.
Even if you do not realize until later in the year that you have been underpaying your taxes and may be liable for interest and penalties, it is not too late to adjust your W-4. Simply calculate the additional amount you expect to owe, and use the form to instruct your employer to withhold the extra amount over the remainder of your paychecks for the year. To correct any future discrepancies, file a new Form W-4 in January that accurately reflects your changed tax situation.
In addition, consider adjusting your withholding if you have received a large refund and anticipate no changes in your tax liability for the coming year. Rather than overpaying the IRS over the course of the year, deposit the money in an interest-earning account, use the additional income to pay off credit card debt, or increase your retirement plan contributions.
For more information on withholding and to review your individual circumstances, consult your financial professional.
As you know, tax laws change often. Therefore, lowering your tax bill involves careful planning. In fact, there’s hardly an aspect of your financial situation—savings, education, real estate, investments, retirement funding, and estate planning—that isn’t influenced by changing tax law. In recent years, historic tax reform has provided significant savings for individuals, families, and investors. However, many of these opportunities are temporary.
This information has been developed to help you make the most of current, temporary tax breaks and help you minimize your tax liabilities and maximize your potential savings.
Tax planning is especially important if your circumstances have changed. As you begin preparing your taxes, think about the life changes you have experienced in the past tax year.
As you can see, life changes are relevant to planning your tax strategies.
Waiting until just before April 15 to start thinking about your taxes may prove to be a costly mistake. Like your financial strategy, your tax strategy operates in two time frames—now and later.
“Now” covers the 12 months of the current tax year. The specifics of your income and the deductions available to you will certainly change from year to year according to your changing circumstances, and you may be able to save money now by making small changes.
“Later” covers long-range tax strategies that benefit your future, such as maximizing the tax-deferred savings offered by a qualified retirement plan like a 401(k). Either way, timing is critical, and your planning can make a significant difference.
By coordinating your tax strategies with your life changes and financial strategies, you may accomplish a variety of goals, such as buying a home, funding a child’s education, and funding your retirement.
It’s easy to lose or misplace money. But unlike finding $20 in an old jacket, what if a bank or investment account containing thousands goes untouched for years because you forgot about it or never told anyone it existed?
For various financial accounts, holdings, investments, loans, tax returns, and other arrangements, you need to gather account information and relevant contacts. If you’re wondering why it’s worth taking the time to get all this info in one place, just think of the people you love. By organizing your financial and legal documents, if something happens to you your family can more easily:
First, you need to determine all the types of accounts you have. Here’s a comprehensive list to get you started:
After you’ve identified all the accounts you have, here’s the information you need to gather for each. Tip: The details for each account or asset may vary, so just pointing a person you trust in the right direction -- like giving them the name of your financial advisor -- will be super helpful.
Name of Financial Institution:
Type of Credit Card: Visa | MasterCard | American Express | Discover | Diner’s Club | JCB | Store/Gas Card | Other
How do you prepare your taxes? (You could answer this question out loud but that won't really do anything. Except maybe scare the cat. So keep track of it.)
If you use a Financial Planner/Accountant: Share the name and contact info of this professional.
If you do your own taxes using Software or an Online Service: What software/service do you use? How do you login to this account?
No Matter What: Tell someone you trust where you keep your past tax returns! If something happens to you, these are an ideal financial blueprint for people in your life to understand your estate.
Keeping important documents (deed to your house, insurance policies) and valuable items (heirlooms, jewelry) extra safe is smart. Not giving someone access in case something happens to you can turn into a long detour through the courts. This is especially troubling if you kept your Will or other important documents your family might need in a safe deposit box. Solution: Check with the bank where you’re renting a box and name a designee or whatever they might refer to this person as.
Now, onto the details to share:
Don’t let any loans your family and loved ones are unaware of sneak up on them. Keep track of the following info and once the loan is paid off feel free to mark it “PAID” and celebrate.
Type of Loan: Line of Credit | Personal Loan | Student Loan | Other
Make sure all of the stuff listed above is neatly organized, updated, and shared with a trusted family member or close friend. Your financial advisor can offer experienced assistance as well. Having this information organized and available helps with those unexpected interruptions in life and is well worth the effort you put in today.