• The Top 5 Funding Reminders for Roth IRAs

    By: Denise Appleby, MJ, CISP, CRC, CRPS, CRSP, APA

    The rules of Roth IRAs create multiple tax-saving opportunities for Roth funding.

    Many consider Roth IRAs a gold standard for retirement savings because they provide a source of tax-free income during retirement. This tax-free benefit includes tax-deferred earnings, which are tax-free for those eligible for qualified distributions. Taxpayers who choose to fund Roth IRAs instead of traditional IRAs pay taxes upfront in exchange for this benefit. However, the promise of tax-free income is only one of the factors that must be considered, and taxpayers who choose Roth must also consider various strategies and operational requirements. The following reminders are a good start.

    1. After-tax 401(k) contributions: an opportunity for tax-free conversions

    Once a plan participant is eligible to make withdrawals from their 401(k) or other type of employer plan account (401(k)), eligible amounts may be rolled over to an IRA or another eligible retirement plan. For those who want to continue tax deferral until they are ready to take distributions, a traditional IRA is a common choice for rolling over assets from 401(k)s. However, if the 401(k) account includes after-tax amounts, that after-tax balance is an opportunity for a tax-free conversion.

    Unlike a conversion of pre-tax amounts, for which a suitability assessment is often recommended because it is taxable when converted, the conversion of an after-tax amount is tax-free. Therefore, no suitability assessment is needed. Further, any earnings on the after-tax amount would eventually become tax-free in a Roth IRA when you are eligible for a qualified distribution—a contrast with earnings that accrue in a traditional IRA, which would be taxable when distributed.

    Essential Tip: If you want to roll over their 401(k) account to an IRA, and that 401(k) includes an after-tax amount, instruct the plan administrator to split the distribution and send the after-tax amount to your Roth IRA. Doing so helps to ensure that the after-tax amount is not sent to your traditional IRA.

    2. Micro conversions for tax management

    Roth conversions are included in income, with any pre-tax amount being taxable for the year the conversion occurs. However, converting small amounts over time can mitigate the tax impact. For example, an individual who wants to convert $500,000 could make $50,000 yearly conversions over ten years instead of converting the entire $500,000 all at once. This strategy is commonly referred to as micro-conversions.

    This strategy can also be used to stay within a tax bracket in cases where a conversion could cause some of the individual’s income to be taxed at a higher tax bracket.

    Ideally, you would consult with your tax advisor to project the tax impact of the conversion and help them determine how much would be an ideal amount to convert each year.

    3. Tax withholding is not conversion

    If you want to have taxes withheld from the requested conversion amount, the withholding tax is not included in the conversion. As a result, the amount withheld for taxes will be subject to the (10% additional tax) 10% early distribution penalty unless an exception applies.

    Example 1: 45-year-old Sean’s Traditional Number 12345 had a balance of $100,000—all of which is pre-tax amounts. He instructed his IRA custodian to convert Traditional IRA Number 12345 to his Roth IRA Number 67890 and withhold 20% for federal taxes. Based on his instructions:

    • $20,000 was sent to the IRS for federal tax withholding.
    • $80,000 was deposited to Roth IRA #64890 as a Roth conversion.

    The result:

    • $100,000 is included in Sean’s income for the year.
    • $100,000 is taxable.
    • $80,000 is not subject to the 10% early distribution penalty.
    • $20,000 is subject to the 10% early distribution penalty because it is not part of the Roth conversion.

    If Sean had funds in a regular savings account (not a tax-deferred account), he could pay the income tax from that account instead of his traditional IRA.

    Consideration: An analysis should be done to determine if it makes good tax sense for Sean to perform a Roth conversion if it requires paying the income tax from his IRA.

    4. Roth conversion amounts must be rollover eligible

    A Roth IRA conversion is a two-part transaction:

    1. A distribution from the traditional IRA, and
    2. A rollover to the Roth IRA- which is treated as a conversion.

    Consequently, like a rollover, only eligible amounts can be included in the amount credited to the Roth IRA.

    An example of an amount that is not eligible to be rolled over is a required minimum distribution (RMD). If you are at least 73 this year, you must take RMDs due from your traditional IRA before any Roth conversion.

    Reminder: If the funds are in an employer plan and you are still employed by the plan sponsor, you should check with the plan administrator to determine if you must take an RMD for the year.

    5. Let conversion amounts sit and stay for at least 5-years

    A Roth IRA conversion is not subject to the 10% early distribution penalty, regardless of the age at which it occurs. However, distribution from a Roth conversion amount is subject to the 10% early distribution penalty if it occurs before it has aged in the Roth IRA for at least five years.

    Example 2: Using the facts from Sean’s example above, assume that the conversion was done in 2024. If Sean withdraws any amount from that $80,000 conversion before January 1, 2029, it would be subject to the 10% early distribution penalty unless he qualifies for an exception.

    Reminder: The 10% early distribution penalty does not apply if you are at least age 59 ½ when the distribution is made or if the distribution qualifies for an exception to the penalty.

    Note: Under the ordering rules, any regular Roth IRA contribution or conversions done in previous years would be drawn before Sean’s 2024 Roth conversion.

    Disclaimer

    The tips provided in this article are generally operational in nature. The decision of which to choose—Roth IRAs vs. traditional—is more complex and requires a suitability analysis. However, using some of the strategies mentioned in this article can lessen any immediate tax effect. Except for the tax-free conversion of after-tax funds from a 401(k), the assistance of a tax professional should be engaged to help determine suitability.

    Original Post by Horsesmouth, LLC.: https://www.savvyira.com/article.aspx?a=99588

  • Your Financial Reset Checklist: Moves to Make as We Approach Mid-Year

    Strategic Adjustments for Enhanced Financial Health: A Mid-Year Review Guide

    As we approach the midpoint of the year, it’s an ideal time to review and potentially reset your financial strategies. This period allows you to assess your progress towards your annual goals, adjust your budgets, and fine-tune your investment strategies, too. Here’s a practical mid-year financial reset checklist to guide you through your mid-year financial review.

    1. Review Your Budget

    Start with a thorough review of your current budget:

    • Examine Spending Habits: Compare your planned expenses against actual spending. Look for areas where you’ve overspent and identify categories where you can cut back.
    • Adjust Budgets: Based on your spending review, make the necessary adjustments to your budgets for the rest of the year. Consider any changes in your income or expenses since the beginning of the year.

    2. Evaluate Your Emergency Fund

    An emergency fund is crucial for financial security, providing a buffer against unexpected expenses:

    • Assess Fund Adequacy: If you don’t have one already, work toward an emergency fund that covers at least three to six months of living expenses. If you aren’t near your goal yet, plan how you can bolster this fund in the second half of the year.
    • Replenish If Needed: If you’ve had to dip into your emergency fund, it’s alright! That’s why you have it. However, now you need to make a plan to replenish it. Prioritize this to avoid potential financial strain going forward.

    3. Reassess Your Financial Goals

    Mid-year is a perfect time to reassess and refine your financial goals:

    • Goal Progress: Evaluate how close you are to achieving the goals you set at the beginning of the year. This could be saving for a down payment, paying off debt, building a plan to pay for healthcare in retirement, or investing more of your retirement savings.
    • Adjust Goals as Necessary: Life circumstances change, and so may your financial goals. Adjust your strategies to better align with your current situation and future aspirations.

    If you neglected to set goals at the start of the year, it’s not too late! There is nothing magical about January 1, so get started setting your goals now with the S.M.A.R.T. goals framework.

    Related: New Year, New Goals: Planning Your Money Moves for 2024

    4. Check Credit Reports

    Regular checks on your credit report can help you catch and rectify any inaccuracies that might affect your financial health, not to mention helping you spot identity theft:

    • Request Credit Reports: You can obtain a free credit report from each of the three major credit bureaus once per year at AnnualCreditReport.com.
    • Review for Accuracy: Look for any discrepancies or fraudulent activities. Promptly report any errors to the credit bureau for correction.

    5. Review Insurance Coverages

    Insurance needs can evolve, so it’s important to periodically review your policies:

    • Assess Coverage Needs: Consider changes in your life that might affect your insurance needs, such as buying a new home, changing marital status, or adding a family member.
    • Shop for Better Rates: Compare your current policies with what’s available on the market to see if you can find better rates or more comprehensive coverage for the same price.

    6. Optimize Your Investments

    Market conditions change, and so should your investment strategies:

    • Portfolio Review: Assess the performance of your investments and consider rebalancing if your asset allocation has drifted from your target, which happens to many investors over time.
    • Tax-Saving Strategies: Consider tax implications of any buy or sell actions in your portfolio and explore opportunities like tax-loss harvesting to offset gains.

    7. Plan for Tax Liabilities

    You may be breathing a sigh of relief with tax season behind you, but working all year round to understand your potential tax liabilities can help you manage your finances more effectively:

    • Estimate Taxes: Use your current earnings and expenses to estimate your tax liability for the year.
    • Adjust Withholdings: If you anticipate a major tax bill or a significant refund, adjust your tax withholdings accordingly to better manage your cash flow.

    8. Reflect on Your Financial Well-Being

    This step is a subjective addition to your mid-year financial reset checklist because financial well-being means different things to different people. So, decide what it means to you and take a moment to reflect on how you’re feeling about your finances:

    • Financial Stress Test: Consider how you would handle a financial emergency. Do you feel confident about your financial situation?
    • Educational Opportunities: Look for ways to improve your financial literacy. Engaging with financial news, books, or seminars can provide valuable insights and enhance your financial decision-making skills.

    Concluding Thoughts on Using a Mid-Year Financial Review Checklist

    A mid-year financial review checklist is a practical tool that can help you take proactive steps to stay on track with your financial objectives. This checklist serves as a guide to help you assess various aspects of your finances, from budgeting and savings to investments and taxes. By taking the time to review and adjust your financial plan now, you can improve your financial health and approach the rest of the year with a solid strategy in place.

    Illuminated Advisors is the original creator of the content shared herein. I have been granted a license in perpetuity to publish this article on my website’s blog and share its contents on social media platforms. I have no right to distribute the articles, or any other content provided to me, or my Firm, by Illuminated Advisors in a printed or otherwise non-digital format. I am not permitted to use the content provided to me or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.

  • National Retirement Planning Week

    Three Questions to Help You Clarify Your Lifestyle Goals

    There’s No Better Time Than Right Now to Strengthen Your Financial Future

    National Retirement Planning Week, observed from April 13-17, serves as a timely reminder of the importance of thoughtful retirement planning. This week emphasizes the need to reflect on our retirement goals and the steps necessary to achieve them. In light of National Retirement Planning Week, let’s explore three critical questions designed to help you clarify your lifestyle goals for retirement. By pondering these questions, you can gain insights into your desires and priorities, helping you navigate the path toward a fulfilling retirement.

    1. What Does Your Ideal Retirement Look Like?

    The first step in honoring National Retirement Planning Week is to envision your ideal retirement. This vision goes beyond financial figures; it’s about picturing the day-to-day life you wish to lead. Do you see yourself traveling the world, spending more time with family, or perhaps pursuing hobbies you’ve always been passionate about? Or maybe your dream retirement involves volunteering and giving back to the community.

    Envisioning your ideal retirement requires a deep dive into your personal aspirations and values. It’s about understanding what truly matters to you and how you want to spend your time. Reflecting on these preferences during National Retirement Planning Week can help you set more targeted goals and create a roadmap to achieve them.

    2. Where Do You Want to Live in Retirement?

    The second question to consider during National Retirement Planning Week focuses on your preferred retirement location. Your choice of residence in retirement can significantly impact your lifestyle, finances, and overall well-being. Some may dream of retiring to a beachfront property, while others might prefer the comfort of their current community or the adventure of living abroad.

    Consider factors such as the cost of living, proximity to loved ones, climate, and access to healthcare and recreational activities. Thinking about where you want to live can help you align your savings and investment strategies with the costs associated with your desired location.

    Related Article: Bridging the Retirement Gap with FIAs

    3. What Kind of Lifestyle Do You Wish to Maintain?

    The third question encourages you to reflect on the lifestyle you wish to maintain during retirement. This inquiry is crucial as it directly influences your financial planning. Understanding the lifestyle that you aspire to can help you estimate the funds needed to support your retirement dreams. Whether it’s a simple, modest lifestyle or one filled with luxury and adventure, being honest about your expectations is key.

    Consider your current lifestyle and which aspects you want to carry into retirement. Also, think about potential changes or additions you’d like to make. During National Retirement Planning Week, take the time to detail the aspects of your desired lifestyle, including hobbies, travel plans, and daily activities. This clarity can guide your financial decisions and help ensure your retirement planning is aligned with your lifestyle goals.

    Get Motivated During National Retirement Planning Week

    National Retirement Planning Week is an opportune time to engage in deep reflection about your future. By asking yourself these three questions, you can gain a clearer understanding of your retirement aspirations and the steps needed to achieve them. Remember, retirement planning is not solely about accumulating wealth; it’s about creating a future that aligns with your personal vision of happiness and fulfillment.

    As National Retirement Planning Week encourages us to think about the future, it’s important to approach retirement planning as an ongoing process. Regularly revisiting your goals, adjusting your plans as necessary, and staying informed about financial strategies can help you navigate the path to a rewarding retirement. While the journey may require patience and discipline, the reward of achieving your desired retirement lifestyle is immeasurable.

    In observance of National Retirement Planning Week, consider setting aside time to ponder these questions seriously. Reflect on your aspirations, discuss your goals with loved ones or a financial advisor, and take proactive steps towards making your retirement dreams a reality. Remember, it’s never too early or too late to start planning for retirement, and National Retirement Planning Week is the perfect time to begin.

    Illuminated Advisors is the original creator of the content shared herein. I have been granted a license in perpetuity to publish this article on my website’s blog and share its contents on social media platforms. I have no right to distribute the articles, or any other content provided to me, or my Firm, by Illuminated Advisors in a printed or otherwise non-digital format. I am not permitted to use the content provided to me or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.

  • Maximizing Charitable Giving: Strategies for Making an Impact

    Tips to Help You Practice Meaningful and Strategic Philanthropy

    Many people find that being philanthropic with their money brings them joy. After all, being charitable can be a meaningful experience and is a way to put your core values into practice. Recent data confirms this, as the 2023 Giving USA Foundation report has shown that 64% of Americans donated to charity in the previous year. If being philanthropic fits with your personal and financial values, here are six strategies to help you maximize your charitable giving impact.

    Charitable Giving Impact Tip #1: Identify the Causes You Care About

    With finite resources, it’s important to be intentional about where to donate your money. Making a list of non-profit organizations that you have given to in the past, and perhaps adding some new organizations whose work you care about, is a good start. Looking over your list, consider what your current priorities in life are, and choose those that are in alignment with your values. This exercise can help you to ensure that your charitable dollars are supporting not just the causes that are appealing to you for help, but the causes that are currently important to you.

    Charitable Giving Impact Tip #2: Consider Streamlining Your Giving

    Speaking of those charitable appeals, it’s likely that you receive a multitude of donation requests from worthy nonprofits throughout the year. However, philanthropy isn’t like investing, where diversification is a recommended strategy. To maximize the impact of your philanthropy, you may consider streamlining your donations to charities that are akin and most closely align with your core values. For example, if animal welfare is important to you, you may want to focus your giving on shelters or animal and wildlife protection organizations. In this way, your giving achieves a greater impact across the spectrum of the cause you care most about.

    New Year, New Goals: Planning Your Money Moves for 2024

    Charitable Giving Impact Tip #3: Involve Your Family

    Philanthropy is about more than money. It can also involve sharing your values with future generations and teaching them about meaningful ways that they can make a difference in the lives of others. Gathering your family together to actively participate in charitable giving decisions can also create a new shared tradition. While together, you’re helping to instill the spirit of giving, while offering each family member the opportunity to share with everyone the causes that are most important to them. There are a variety of ways to maximize your family’s charitable giving, including pooling money together toward a selected cause, establishing a fund that allows family members to choose how to direct their donations, or annually rotating the selection of charitable causes. When you instill the habit of giving, you are also building a values-based tradition that will positively impact both your family members and the lives of others.

    Charitable Giving Impact Tip #4: Research the Charities Carefully

    Take the time to determine the best charities that will accomplish your family’s charitable goals. Knowing the mission of each organization is the best place to start. Be sure the mission and values of your chosen nonprofits align with your giving intentions. Also ensure that the finances and management of the organization are sound. Look into what percentage of charitable donations directly support the cause or programs, as opposed to administration and overhead. There are reputable tools to help you gain this knowledge such as Charity Navigator, GuideStar, Charity Watch, and Charities Review Council.

    Charitable Giving Impact Tip #5: Maximize Your Gift

    Having determined where you want to focus your philanthropy, there are some steps you can take to maximize your giving:

    • Give directly to avoid the middleman. Some nonprofits utilize the services of professional fundraisers, paying them anywhere from 40 to 80 percent of the proceeds received. Often these solicitations are via phone, so avoid this and give directly to the charitable organization.
    • Avoid using credit cards. Nonprofits usually have to pay a credit card fee of 3 to 5 percent, which reduces the amount of your donation and thus the level of your charitable giving impact.
    • Look into employer matching gift programs. Many employers offer the opportunity to match your gift, thus increasing your charitable contribution and your impact.
    • Gifting appreciated assets that you have held for more than one year as a direct gift can provide you with tax benefits while helping the charity of your choice. You may also consider establishing a donor-advised fund (DAF) which can also provide you with tax savings.

    Note: A donor-advised fund (DAF) is a charitable investment account that you establish at a public charitable foundation for the sole purpose of supporting nonprofit organizations that you care about. They provide a flexible way to donate with either cash or securities, and they can provide many tax advantages. A DAF can prove to be a strategically beneficial tool to consider in your philanthropic efforts, though it won’t be right for every family.

    Charitable Giving Impact Tip #6: Giving Beyond Money

    Donating money isn’t the only way to practice philanthropy. Time and talent can be just as valuable to a charitable organization, and many organizations need the skills of volunteers. Whether you’re giving at the financial level that you would like to or not, volunteering can help you feel more connected to the causes you care about.

    Concluding Thoughts on Maximizing Your Charitable Gifting Impact

    Practicing philanthropy through the giving of your time, talent, or money to make an impact on the charities and causes you care about can be very meaningful for both you and the organizations of your choice. Often, it doesn’t take a lot to make a difference. Be comfortable with the level of your giving and consider some of the strategies offered here to maximize your impact and instill the value of philanthropy in your family, as well.

    Illuminated Advisors is the original creator of the content shared herein. I have been granted a license in perpetuity to publish this article on my website’s blog and share its contents on social media platforms. I have no right to distribute the articles, or any other content provided to me, or my Firm, by Illuminated Advisors in a printed or otherwise non-digital format. I am not permitted to use the content provided to me or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.

  • The Excise Tax Waiver Has Expired for 10-Year IRA Beneficiaries with Annual RMDs

    By: Denise Appleby, MJ, CISP, CRC, CRPS, CRSP, APA

    Beneficiaries subject to SECURE Act’s 10-year rule and required to take annual RMDs were granted an automatic waiver of the excise tax that would otherwise apply if they failed to take required minimum distributions (RMDs). These automatic waivers applied to 2021, 2022, and 2023. But, failing further extension by the IRS, these beneficiaries must take RMDs for 2024 to avoid the 25% excise tax.

    Who qualified for this automatic excise tax waiver?

    This automatic waiver applies only to beneficiaries who meet the following two requirements:

    1. They are subject to the 10-year rule, under which their inherited IRA must be fully distributed no later than the 10th year after they inherited the IRA. And
    2. They are required to take annual RMDs.

    These beneficiaries are:

    A. Any designated beneficiary who inherited a traditional, SEP, or SIMPLE IRA, where the IRA owner died on or after their required beginning date (RBD).

    • The RBD is the date an account owner must take their first RMD.
    • Roth IRAs are not included because Roth IRA owners do not have RMDs.

    Example 1

    50-year-old Tom inherited his 75-year-old father’s traditional IRA in 2020. Tom is more than ten years younger than his father, not disabled or chronically ill, and, therefore, not an eligible designated beneficiary. Since Tom is a plain designated beneficiary, he is subject to the 10-year rule and, therefore, must ensure that the inherited IRA is fully distributed by the end of 2030. In addition, because Tom’s father died after his RBD, Tom must take annual RMDs over his life expectancy beginning in 2021.

    While the excise tax applies to an RMD that is not taken for a year, it is automatically waived for Tom for 2021, 2022, and 2023.

    B. A successor beneficiary, where the primary beneficiary was taking life expectancy distributions.

    This provision applies to traditional, SEP, SIMPLE, and Roth IRAs.

    Example 2

    75-year-old Sally inherited a traditional IRA from her 77-year-old sister Carla in 2020. Sally is an eligible designated beneficiary because she is ‘not more than ten years younger’ than Carla.

    Sally must take annual distributions over her life expectancy, beginning in 2021. The 10-year rule does not apply to Sally because she is an eligible designated beneficiary.

    The automatic waiver does not apply to Sally because she is not subject to the 10-year rule.

    Sally died in 2022, and her IRA was inherited by her son, Tim.

    Tim, the successor beneficiary of Carla’s IRA, must continue taking distributions over Sally’s life expectancy beginning in 2023. Tim must also ensure that the IRA is fully distributed no later than 2032, which is the 10th year after Sally’s death.

    While the excise tax applies to an RMD that is not taken for a year, it is automatically waived for 2023 for Tim.

    While other beneficiaries could qualify for waivers under other circumstances, these are the only two types that qualify for the automatic waiver discussed in this article.

    Are ‘catch-up RMDs’ required?

    A catch-up distribution is optional for those qualifying beneficiaries who did not take their RMDs for any or all three years (2021, 2022, and 2023). However, they must still meet the 10-year deadline. For instance, in the case of Tom in Example 1, he must still ensure that his inherited IRA is fully distributed by the end of 2030 despite the waiver of the excise tax.

    No special tax forms or tax reporting required

    Generally, IRS Form 5329 must be filed for an RMD not taken by the deadline, and any excise tax included as ‘additional taxes’ on the individual’s tax return. But an exception applies where there is an automatic waiver. Resultantly, beneficiaries who qualified for the automatic waiver discussed herein need not file IRS Form 5329 for any RMDs not taken for those years.

    Should these beneficiaries wait and see for 2024?

    One of the common questions about this automatic waiver is whether it will be extended for 2024. There is yet to be an indication from the IRS that it will. There is still time for those who prefer to wait, as the deadline for taking the 2024 RMDs is December 31, 2024.

    The IRS’s first notification of the excise tax waiver was published in July of 2022, explaining the excise tax was waived for 2021 and 2022.

    The second notice, extending the waiver to 2023, was issued in July 2023. It would be reasonable to assume that any notification of an extension of the waiver could be issued later in the year.

    To take or not to take a 2024 RMD

    Beneficiaries should consider the impact of not taking RMDs for 2024, even if the excise tax is waived. Not taking an RMD for 2024 means bunching up the distributions over a period that is one year shorter, causing larger RMD amounts for the remainder of the ten years. However, a waiver might be a welcome solution for a beneficiary who needs to shift the income from 2024 to a later year for tax and other financial planning reasons.

    The consequences of missing the 2024 deadline

    Failing any further extension of the automatic waiver provision, a beneficiary who misses the deadline for taking their 2024 RMD will owe the IRS an excise tax of 25%. This excise tax is reduced to 10% if the shortfall is corrected in a timely manner.

    If a taxpayer misses the RMD deadline due to reasonable error, their tax preparer may request a waiver of the excise tax when filing IRS Form 5329.

    Reminder: RMD rules, including the ones discussed in this article, also apply to employer plans. However, plan administrators administer RMDs. Employees and beneficiaries with assets under employer plans should contact the plan administrator for assistance with their RMDs.

    Copyright ©2024 Horsesmouth, LLC. All Rights Reserved. Horsesmouth, LLC is not affiliated with Lane Hipple Wealth Management Group or any of its affiliates. Information contained above is accurate as of 2/2/24. It is subject to legislative changes and is not intended to be legal or tax advice. Consult qualified tax advisors regarding specific circumstances. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness are not guaranteed, and all warranties expressed or implied are hereby excluded. Seek legal, tax, and investment advice from qualified professionals.