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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.
Waking up early in the dark mornings of winter to exercise comes hard. Once your workout ends, though, you often begin the day with the payoff of a tremendous energy boost. Can the same process apply to your finances?
If you’re like most people, you exercise for many reasons but expect to benefit from your sweat equity in the future, not just in the current moment. We will all encounter health issues at some time and the medical world assures us that we’ll deal better with problems if we get – and stay – physically fit. Preparation matters.
So, what does exercise have in common with financial planning and investing? The answer: Very few individuals prepare to invest, except maybe when selecting from choices in a retirement plan.
Or not: One study shows that in 2020 – in the teeth of the COVID-pandemic and perhaps the most volatile market year since maybe 2008 – most 401(k) retirement plan participants made no changes to their contributions.
Getting back to the fitness analogy, exercise’s greatest benefits come from the stress we intentionally place on our muscles so that when a health problem arises, our bodies are in better condition to deal with the situation. Regarding investments, if you choose to go it alone, you need a methodical (and regularly visited) regimen for taking in and processing market data. You also need a strategy to accommodate unforeseen yet inevitable future events, such as market downturns.
Don’t let random financial news clips guide your decisions when determining how to act. For the record, you need not re-allocate asset classes or otherwise change your portfolio just because something in the market changed. Call your financial planner to discuss your concerns and get a better perspective.
You do need to be prepared to consider adjustments when the information dictates that conditions shifted, such as stocks increasing to a higher portion of your portfolio than you want.
We call this an investment policy statement or some prefer the term “investment playbook.” The playbook outlines your holdings and specifies how you intend to respond to change with a disciplined approach aimed at particular objectives – as opposed to the usually heated emotions most of us feel in a suddenly rough market.
How are your holdings doing against benchmarks such as the S&P 500 Index? At specifically what point will market shifts make you re-allocate percentages of stocks and bonds in your portfolio?
Your playbook also describes what you’re trying to achieve as an investor – pay for retirement or for college tuition, for example – and how you’ll react to market changes. You might plan to sell or buy only if the S&P 500 hits a certain number or invest in oil if the cost per barrel drops to a pre-set price. A well-designed playbook keeps you from panicky decisions or from freezing up during Wall Street roller coasters.
Your playbook needs to clearly document your investment information sources, the technology involved in your investing and why you bought a particular investment. Remember: Great stock or mutual fund opportunities may arise and shimmer, but if they don’t match your playbook, you pass.
At the gym, you can wander among the clanking weights or plan exactly how to invest your energy. You know which method works better. And you can enlist the help of an experienced trainer who knows more than you’ve learned and can take you to the next level.
Investing is no different.
Today, unlike previous generations, there is an extensive array of financial information that steadily flows from the news media and the Internet. Almost instantaneously, you can review your own finances, ascertain your progress, and make necessary adjustments. However, do all these signs of progress really make managing your finances any easier? The fact remains that regular reviews of your entire financial affairs will help put you on a long-term track for success.
Now that it’s a new year, why not add “regular financial reviews” to your existing list of New Year’s resolutions? Here’s a brief description of what a typical review might entail:
Does your income equal or exceed the amount you put into savings and expenses? If it exceeds, by how much? The amount in your income that exceeds what you saved or spent is called positive cash flow. If your expenses exceed your income, you have negative cash flow. If your cash flow is negative, it may be time to reorganize and minimize any unnecessary expenses in your budget.
For every financial goal you establish, you need to address the projected cost, the amount of time until your goal is to be realized (time horizon), and your funding method (a scheduled savings plan, liquidating assets, or taking a loan).
Plan your goals on three tiers. On the first tier, you have an emergency fund of at least three months’ of income. On the second tier, you may establish a savings plan for your children’s education or future expenses. Finally, on the third tier are more flexible goals such as: automobiles, home renovations, and vacations.
Are you going to have enough money when you retire? Pensions and Social Security may provide insufficient income to maintain your existing lifestyle during your retirement years. Consequently, project your future needs and plan a disciplined savings program for your retirement.
Many taxpayers reduce their taxes by taking advantage of tax deductions. While many people are familiar with deductions (e.g., mortgage interest, contributions to retirement plans, and donations to charities), there may also be other ways to reduce your income tax bite. For example, under appropriate circumstances, losses or expenses from previous years may be carried over to the next tax year. A qualified tax professional can help you implement a tax strategy that is consistent with your needs.
Suppose the inflation rate is currently 3%. In order to maintain your buying power—just to break even—you need a 3% annual wage increase. A decline in your buying power will certainly lower your standard of living and affect your lifestyle. In the end, you’ll have less money if inflation starts to beat you. So, as you can see, you need to put your money to work to beat inflation. A disciplined approach to saving can help you meet your long-term goals.
You are probably well aware that life sometimes throws us unexpected “curve balls”—that is, risks we haven’t foreseen. Suddenly and unexpectedly, your potential risk may become a financial loss (e.g., you become disabled without income or an untimely death causes financial hardship for your family). Disability income insurance and life insurance offer protection that can help cover potential liabilities and risks.
In today’s complex financial world, everyone needs help in making knowledgeable, objective decisions. A qualified financial professional can help ensure that your current financial affairs are consistent with your changing goals and objectives. These seven steps will help you focus on your entire financial picture. During subsequent reviews, you may need to make alterations due to changing goals and circumstances. However, if you faithfully keep track of your progress, you may be better able to afford your future lifestyle and finance your dreams.
For many people, the New Year is a time for personal reflection, a time to consider commitments and resolutions for the coming year.
This year, why not resolve to make your finances a priority? With proper planning and appropriate guidance, you can begin to build financial stability and prepare for the uncertainties of tomorrow. Consider the following steps:
Gather all your important financial documents – life insurance policies, homeowners insurance, wills, trusts, and other pertinent financial records – and organize them so you can access them quickly and easily.
Arrange a time to meet with your financial advisor to review or write your will and establish any necessary trusts. Prior to your meeting, discuss with your spouse or other loved ones how to handle property dispositions and guardian appointments.
Pay off high interest debt first, especially if the interest is not tax deductible. Do your best to avoid the minimum payment trap. By making only the minimum monthly payment, the interest that accumulates over time can make even “bargain” purchases costly in the long run.
Review your life insurance policies to ensure that your beneficiary designations are appropriate to your current situation and that all arrangements are up-to-date. Also, consider repaying any loans you may have against your insurance policies. This can help to reestablish an emergency fund for the future.
If your children plan to attend college next year and require financial aid, remember that financial aid forms are due early in the year. The earlier you apply, the better your chances may be for obtaining aid.
Begin to gather your tax information and arrange a time to meet with your accountant, if necessary. It is important to file your income taxes on time and to be aware of any tax changes that may affect your return.
Once you’ve met with your professional advisors, write down a few realistic goals that you think are achievable. Make the commitment now to plan your finances accordingly. This is your first step to building a solid financial future.
The New Year offers us a fresh beginning. This year, resolve to make your finances a priority. With proper planning and appropriate guidance from your financial advisor, you can begin to work toward financial independence and prepare for life’s uncertainties.