<p>A Roth Individual Retirement Account (IRA) is a tax-advantaged retirement savings account that offers tax-free withdrawals in retirement provided you meet certain conditions. The Roth IRA is a popular retirement plan used to build a substantial corpus and enjoy tax benefits. Roth IRA contributions are made with after-tax dollars, meaning you pay taxes on money going into your Roth IRA. Your contributions and the subsequent earnings on those contributions grow tax-free in a Roth account. You can make a tax-free withdrawal once you have reached 59.5 years of age and your account has been open for at least five years. Both these conditions need to be met otherwise you may have to shell out a 10% penalty on the withdrawn amount. Moreover, you do not have to take Required Minimum Distributions (RMDs) on Roth IRA accounts.</p>
<p>Consider <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=are_roth_ira_distributions_taxable?pagetype=articles" target="_blank"><strong>consulting with a professional financial advisor</strong></a> who can help you understand Roth IRA tax liabilities and plan your contributions and withdrawals to derive the maximum Roth IRA tax benefits.</p>
<p>This article discusses Roth IRA distribution tax rules, the taxability of Roth IRA earnings, and how to avoid Roth IRA taxes and penalties.</p>
<h2>What are the rules concerning Roth IRA distributions?</h2>
<p>Generally, Roth IRA distributions are tax-free in retirement, however, you may be taxed in certain situations. It is advised that you understand the aforesaid situations to avoid incurring tax and penalties if you make unqualified withdrawals.</p>
<h3>IRS tax and penalty rules:</h3>
<h3>1. You may attract a 10% penalty if you make an early withdrawal before reaching 59.5 years of age</h3>
<p>If you make a withdrawal from a Roth IRA before reaching 59.5 years of age, you may incur a 10% early withdrawal penalty on the withdrawn amount, in addition to ordinary income taxes charged as per your applicable tax rates.</p>
<p>That said, there are certain exemptions where the Internal Revenue Service (IRS) does not levy a penalty, such as:</p>
<ul>
<li>If you make use of the Roth IRA funds to pay a medical insurance premium after a job loss.</li>
<li>If you have suffered a total and permanent disability.</li>
<li>If you use the money to cover qualified higher education expenses, such as tuition, fees, books, supplies, and more.</li>
<li>If the funds are used by qualified military reservists called to active duty.</li>
</ul>
<h3>2. You may incur a 6% excess contribution penalty if you contribute over the permissible annual contribution limit</h3>
<p>If you contribute to your Roth IRA beyond the applicable annual limit or make a contribution when you are not eligible, you may attract a 6% excess contribution penalty on the additional amount. Do note that the aforesaid 6% penalty will be charged every year till the time you remove any excess Roth IRA contributions from your Roth IRA account.</p>
<p>To ensure that you do not exceed the contribution limit, you must know your income eligibility limit and the annual contribution limit. Let us find out how this works:</p>
<p><strong>A. Income eligibility&nbsp;limits</strong></p>
<p>You are eligible to make a Roth IRA contribution if you earn income in one of the following ways:</p>
<ul>
<li>If you are gainfully employed and earn remuneration in the form of a salary, commission, bonus, tips, etc.</li>
<li>If you are a business owner or own a farm and earn business income.</li>
<li>If you earn untaxed combat pay, military differential pay, or taxed alimony.&nbsp; &nbsp;</li>
</ul>
<p>We have discussed different types of income that are eligible for making a contribution to a Roth IRA account. Now let us find out which kinds of income do not qualify for a Roth IRA contribution:</p>
<ul>
<li>Child support</li>
<li>Untaxed alimony</li>
<li>Social Security benefits</li>
<li>Unemployment benefits</li>
<li>Wages earned by penal institution inmates</li>
</ul>
<p><strong>B. Income limits</strong></p>
<p>Roth IRA income limits are determined on the basis of your Modified Adjusted Gross Income (MAGI). Here are the contribution limits based on your MAGI in 2024:</p>
<table border="1" width="100%">
<tbody>
<tr style="height: 35px;">
<td style="height: 35px; text-align: center;" width="344">
<p><strong>Tax filing status</strong></p>
</td>
<td style="height: 35px; text-align: center;" width="189">
<p><strong>MAGI&nbsp; </strong></p>
</td>
<td style="height: 35px; text-align: center;" width="266">
<p><strong>Contribution limit</strong></p>
</td>
</tr>
<tr style="height: 62px;">
<td style="height: 132px; text-align: center;" rowspan="3" width="344">
<p>Single, head of household, or married&nbsp;taxpayer filing separately and not living with their spouse at any time during the last year</p>
</td>
<td style="height: 62px; text-align: center;" width="189">
<p>Less than $146,000</p>
</td>
<td style="height: 62px; text-align: center;" width="266">
<p>$7,000&nbsp;or $8,000 if 50 or older</p>
</td>
</tr>
<tr style="height: 35px;">
<td style="height: 35px; text-align: center;" width="189">
<p>$146,000 to $161,000</p>
</td>
<td style="height: 35px; text-align: center;" width="266">
<p>Begin to phase out</p>
</td>
</tr>
<tr style="height: 35px;">
<td style="height: 35px; text-align: center;" width="189">
<p>$161,000&nbsp; or more</p>
</td>
<td style="height: 35px; text-align: center;" width="266">
<p>Ineligible for direct Roth IRA</p>
</td>
</tr>
<tr style="height: 49px;">
<td style="height: 119.775px; text-align: center;" rowspan="3" width="344">
<p>Married taxpayer filing separately and have lived with their spouse at some time during the last year</p>
</td>
<td style="height: 49px; text-align: center;" width="189">
<p>$240,000 or more</p>
</td>
<td style="height: 49px; text-align: center;" width="266">
<p>Ineligible for direct Roth IRA</p>
</td>
</tr>
<tr style="height: 35.775px;">
<td style="height: 35.775px; text-align: center;" width="189">
<p>Less than $10,000</p>
</td>
<td style="height: 35.775px; text-align: center;" width="266">
<p>Begin to phase out</p>
</td>
</tr>
<tr style="height: 35px;">
<td style="height: 35px; text-align: center;" width="189">
<p>$10,000 or more</p>
</td>
<td style="height: 35px; text-align: center;" width="266">
<p>Ineligible for direct Roth IRA</p>
</td>
</tr>
<tr style="height: 35px;">
<td style="height: 70px; text-align: center;" rowspan="2" width="344">
<p>Married taxpayer filing jointly and qualifying widow(er)&nbsp;</p>
</td>
<td style="height: 35px; text-align: center;" width="189">
<p>Less than $230,000</p>
</td>
<td style="height: 35px; text-align: center;" width="266">
<p>$7,000 ($8,000 if age 50 or older)</p>
</td>
</tr>
<tr style="height: 35px;">
<td style="height: 35px; text-align: center;" width="189">
<p>$230,000 to $240,000</p>
</td>
<td style="height: 35px; text-align: center;" width="266">
<p>Begin to phase out</p>
</td>
</tr>
</tbody>
</table>
<p>&nbsp;</p>
<p><strong>C.&nbsp;</strong><strong>Contribution limits</strong></p>
<table border="1" width="100%">
<tbody>
<tr>
<td style="text-align: center;" width="356">
<p><strong>Age</strong></p>
</td>
<td style="text-align: center;" width="169">
<p><strong>Contribution limit</strong></p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="356">
<p>Under 50 years</p>
</td>
<td style="text-align: center;" width="169">
<p>$7000</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="356">
<p>50 years or older</p>
</td>
<td style="text-align: center;" width="169">
<p>$8000</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="356">
<p>Catch-up contribution if you are 50 or older</p>
</td>
<td style="text-align: center;" width="169">
<p>$1000</p>
</td>
</tr>
</tbody>
</table>
<h2>&nbsp;</h2>
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<h2>Are your Roth IRA earnings taxable?</h2>
<p>Your Roth IRA earnings may be taxed based on your age and purpose for withdrawal.</p>
<h3>1. If you are 59 years old or younger, you can be taxed in the following ways:</h3>
<ol>
<ol style="list-style-type: lower-alpha;">
<li>If you make an early withdrawal, you will have to pay applicable taxes and a 10% penalty on the earnings.</li>
<li>If you held your Roth IRA account for less than five years prior to the distribution, you will have to pay applicable taxes and a 10% penalty on the withdrawn amount.</li>
</ol>
</ol>
<p><strong>Under what conditions you will not be taxed on your Roth IRA?</strong></p>
<ol>
<ol style="list-style-type: lower-alpha;">
<li>Your Roth IRA contributions are exempt and you will not pay taxes or a 10% penalty on them. However, your Roth IRA earnings will be taxed and imposed with a penalty.</li>
<li>If you are paying for a first-time home purchase, a withdrawal of up to $10,000 is exempt.</li>
<li>If you are using the money to pay for qualified education expenses, you will not pay tax on the same.</li>
<li>If you use the amount to pay for qualified expenses related to a birth or adoption, the withdrawal will be exempt from taxation.</li>
<li>If you have become disabled or died, your beneficiary will not have to pay tax on the distribution.</li>
<li>If you are using the money to pay for unreimbursed medical costs or health insurance during unemployment, your distribution will not incur tax.</li>
<li>If the distribution is made in equal periodic payments, it would be exempt from tax.</li>
</ol>
</ol>
<h3>2. If you are 59.5 years of age or older, you can be taxed in the following ways:</h3>
<p>You will have to pay applicable taxes and a 10% penalty on your Roth IRA earnings (and not your contributions) if you have not held the Roth IRA account for at least five years.</p>
<p><strong>Under what conditions you will not be taxed on your Roth IRA?</strong></p>
<ol>
<ol style="list-style-type: lower-alpha;">
<li>If you have held the Roth IRA account for at least five years, you will not be subject to taxes.</li>
<li>Any distributions made after reaching the age of 59.5 years will not be taxed. You can choose to withdraw and use the money at any time and for any purpose. You can also let your Roth IRA funds remain in the account for a lifetime if you should wish to. Since Roth IRAs are not subject to RMDs, you do not have to follow any further rules with respect to withdrawals at this stage.</li>
</ol>
</ol>
<h2>Important things you should know about&nbsp;Roth IRA taxes&nbsp;and penalties</h2>
<p>There are certain things you should be aware of when it comes to Roth IRA taxes and penalties:</p>
<ol>
<li>Your Roth IRA contributions are taxed in the years you contribute. If you were to lower your tax liabilities as you get closer to retirement, you may not be able to fully profit from Roth IRA tax benefits. If you foresee tax as a concern during this period, you may be better off going for a Traditional IRA.</li>
<li>You may be able to avoid paying a 6% penalty on excess contributions in two ways:
<ol style="list-style-type: lower-alpha;">
<li>Withdraw your excess contribution and income earned on it before the due date for your tax return.</li>
<li>Recharacterize your excess Roth IRA contributions into a Traditional IRA wherein, the excess amount will be transferred to a Traditional IRA.&nbsp;</li>
</ol>
</li>
</ol>
<p>Additionally, you have the option of adjusting the excess contributions to a future year. Do note that if you choose this option, you will have to pay the 6% penalty in the year the excess contribution was made.</p>
<h2>What can you do to avoid Roth IRA taxes and penalties?</h2>
<h3>1. Ensure you know the latest Roth IRA contribution limits</h3>
<p>The IRS revises its contribution limits every year due to several reasons, chief among them is inflation. Ensure you stay up to date with the latest limits to avoid taxes and penalties. For example, for 2022, the contribution limit was set at $6,000 for people below the age of 50 which was increased to $6500 in 2023. Take care to ensure you are contributing the correct amount to your Roth IRA account. Do check the IRS website or consult with a financial advisor for the same.</p>
<h3>2. Make use of online resources to find out how much you can contribute as per your MAGI</h3>
<p>As stated above, your Roth IRA contribution limit is determined by your MAGI. Suppose you have a high MAGI, it is likely that you may be ineligible to contribute to a Roth IRA. You can take the help of online resources to calculate your MAGI and find out how much you can contribute. Avoid contributing too much or too little as doing so may result in taxes and penalties.</p>
<h3>3. Ensure that you understand Roth IRA contribution and distribution rules for effective retirement planning</h3>
<p>To ensure you do not end up paying a penalty or undue taxes, take care to learn and understand the different rules concerning Roth IRA contributions and distributions. Roth contributions are made with after-tax dollars meaning income tax on such contributions has already been deducted. If you want to make a penalty-free withdrawal from your Roth IRA account, you must be 59.5 years of age and should have held the account for at least five years. Understanding these rules can help you plan your contributions and withdrawals effectively and live comfortably in retirement.</p>
<h3>4. Avoid making non-qualified withdrawals by carefully planning your Roth IRA distributions</h3>
<p>As explained above, you can ensure that your Roth IRA distributions are tax and penalty-free by meeting certain conditions. However, you may attract taxes and penalties if you take distributions before meeting some conditions and make an early withdrawal. In this situation, you can assess whether you qualify for a tax exemption by assessing your circumstances. If you are facing a financial emergency, you can consider liquidating other assets rather than withdrawing your retirement savings and jeopardizing your financial security in retirement.</p>
<h3>5. Consult with a financial advisor to plan your Roth IRA withdrawals and avoid taxes and penalties</h3>
<p>Reach out to a professional who can help you plan your contributions and withdrawals to avoid attracting taxes and penalties. A financial advisor can help you understand the rules and tax limitations of a Roth IRA and advise you on how to create a diversified investment portfolio. <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=are_roth_ira_distributions_taxable?pagetype=articles" target="_blank"><strong>Engaging a financial advisor</strong></a> can enable you to make informed decisions and avoid making costly errors that may result in losses.</p>
<h2>To conclude</h2>
<p>A Roth IRA is one of the more popular retirement plans that Americans use to save for retirement. It allows individuals to earn tax-free growth and make tax-free withdrawals in retirement. It is important to follow the rules and limitations to reduce your overall tax burden and avoid penalties. Ensure that you are aware of the latest contribution limits and rules related to contribution and distribution. Additionally, consult with a financial advisor who can help you plan ahead and guide you on how to effectively manage your account to save for retirement. Doing so will enable you to enjoy Roth IRA tax benefits and live your retirement years comfortably.</p>
<p>Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=are_roth_ira_distributions_taxable?pagetype=articles" target="_blank"><strong>free advisor match service</strong></a>&nbsp;to find a financial advisor who can help avoid taxes and penalties associated with Roth IRAs and plan your withdrawals in retirement. Simply answer a few questions about your financial needs, and our matching tool can connect you with 1 to 3 advisors who are best suited to help you.</p>

Uncover the tax rules for Roth IRA distributions. Explore the taxability of earnings and smart ways to sidestep taxes and penalties.

Are Roth IRA Distributions Taxable? | Rothira.org

Are Roth IRA Distributions Taxable?

<p>Saving for retirement is critical if you want to live comfortably in your retirement years. To be able to do so, you need to build a large retirement corpus that will ensure that your savings last you in your non-working years. As per a recent report, almost three-quarters of Americans believe that the United States is facing a retirement crisis. The numbers back up the claim. The savings benchmark increased considerably by as much as 10% to $1.04 million in 2021 for retirees looking to retire and live comfortably after retirement. The picture becomes grim when one finds out that more than one-fifth of Americans have only $5,000 as retirement savings, and 15% of Americans have not saved for retirement. Due to insufficient savings saved up for retirement, more than 55% of workers plan to work in retirement. Among these people, 14% of people may have no other option but to work due to not having enough money to support their essential everyday expenses during retirement.</p>
<p>It is important to work on creating a custom retirement plan for yourself that takes into account your unique financial needs and goals. The aim should be to accumulate enough savings so that you can live a comfortable life and pursue any interests that you may have such as travel, supporting your children or grandchildren&rsquo;s education costs, starting a business, and more. You should also be open to making adjustments to your retirement plan to be able to take advantage of any opportunities that may come your way. <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=10_ways_to_grow_your_retirement_savings?pagetype=articles" target="_blank"><strong>Consult with a professional financial advisor</strong></a> who can advise you on how you can boost your savings by using strategies such as cutting back on your spending, investing smartly, boosting your savings rate by maximizing contributions in tax-advantaged retirement vehicles, lowering your income tax, delaying Social Security benefits, and more. The advisor can also help you create a retirement plan to safeguard your financial future as per your risk appetite and future goals.</p>
<h2>Below are 10 ways you can grow your retirement savings:</h2>
<h3>1. Start saving for retirement at the earliest</h3>
<p>The sooner you begin saving for retirement, the more time your funds get to earn interest and grow. You can utilize the power of compounding to build a substantial retirement corpus. If you save and invest $10,000 today, this sum can grow and be worth up to $30,000 in ten years. You do not have to start saving big or invest a lump sum right at the beginning. Start small and gradually increase your savings rate. Set a savings target for yourself and try and stick to it. Do not think that you have missed the ship to start saving. As per a recent study, if you begin saving 15% of your annual salary from the time you turn 25, you would have sufficient funds to live an adequately-funded retired life. Let's say you start saving $6,000 each year and manage to save $30,000 in five years and invest this sum in a 401(k) or a similar tax-advantaged retirement savings account, your savings can grow anywhere between 5-8% each year. But if you start saving at 30 years of age, not only do you miss out on five years worth of interest and earnings on interest but you will also need to save at a higher rate to make up for the difference. Thus, it is in your best interest to start saving now and consistently meet your savings target. To ensure you meet your savings goal, you can also automate your savings.</p>
<h3>2. Eliminate any high-interest debt</h3>
<p>High-interest debt puts a lot of strain on your finances. The high-interest charges eat away at your savings leaving less money with you to save for retirement. Hence, you need to first pay off your high-interest debt. Doing so would allow you to save more and create a significant retirement fund. Take stock of your existing debt. Find out how much you owe in credit card debt, any small loans you may have taken out, mortgage payments, etc. Pay off the high-interest debt first to lower your interest outlay. Afterward, you can start work on paying off your low-interest debt. If you wish, you can take out a low-interest loan to consolidate your pending loans and gradually work on getting rid of your debt.</p>
<h3>3. Manage your expenses by creating a budget and sticking to it</h3>
<p>You can boost your retirement savings by reducing your expenses. Try and cut down on your discretionary expenses (such as eating out, going to the movies, online subscriptions, etc.) so that you can put more towards your savings. Create a budget to keep a tab on your discretionary and non-discretionary expenses. Track your spending and find out areas where you can cut down on your expenses and use that saved money to boost your savings. <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=10_ways_to_grow_your_retirement_savings?pagetype=articles" target="_blank"><strong>Seek guidance from a professional financial advisor</strong></a> who can advise you on creating a zero-based budget. In a zero-based budget, every dollar that you spend has a specific purpose. You could also follow the 50-20-30 rule of budgeting. Herein, you spend 50% of your income on your needs, 30% on your wants, and 20% on saving and investing. Having a budget helps you stick to the targets that you have set for yourself to be able to attain your long-term retirement savings goal.</p>
<h3>4. Design a retirement investment plan that can be adjusted per your life stage</h3>
<p>Reaching your savings target goal is merely the first step in securing your future retirement. You need an astute retirement investment plan that has been created, keeping your risk appetite and unique financial goals in mind to increase your money over time. Depending on your risk profile, you could invest in high-risk, high-rewarding securities like stocks, ETFs (Exchange-Traded Funds), commodities, currencies, real estate, and more. On the other hand, if you are conservative in investing, you could invest in low-risk securities like government and corporate bonds and other fixed-income securities. Take care to also modify your portfolio as you advance in age. As you near retirement, you may invest more in bonds and fixed-income securities to preserve your capital. However, if you are still further away from retirement, say ten years or more, you may consider investing more in equity and equity-linked securities. You should also aim to create a diversified portfolio having a mix of stocks, bonds, and other assets, irrespective of age. You can set the composition of equity and debt based on your risk appetite. However, take note not to completely ignore investing in shares (if you prefer investing in low-risk investments) or bonds (if you prefer high-risk investments). It is easier to weather market volatility when you have invested in a diversified portfolio.</p>
<h3>5. Max out your 401(k) contributions</h3>
<p>Several employers offer their employees the opportunity to invest in a 401(k) plan i.e. tax-advantaged retirement savings account where you can contribute pre-tax dollars<strong>&nbsp;</strong>to earn tax-free returns over time. The Internal Revenue Service (IRS) revises the contribution limits from time to time. For 2023, you can contribute up to $22,500 and an additional catch-up contribution of $7,500 if you are 50 years of age and up. You should aim to maximize your contribution limit for each year and make an effort to be up to date about any revisions that may take place. Usually, your employer may also match your 401(k) contributions. This holds as per a survey that reported that around half of the employers offer matching 401(k) contributions. This makes up for an average of 3% of your salary. You should aim to benefit from employer contributions as it is essentially &lsquo;free money&rsquo; for your retirement. The total employer and employee contributions can be $66,000 for employees under 50 years and $73,500 for employees above 50 years for 2023, as mandated by the IRS. There is also another option that you can go for. Check if your employer also offers a Roth 401(k) plan. With a Roth 401(k) plan, You can contribute after-tax dollars to earn tax-free returns and make tax-free withdrawals in retirement, provided you meet certain conditions. Assess what your tax bracket will be in the future and compare it with the present tax rate. If you think you will be placed in a lower tax bracket, you can invest in a traditional 401(k) in the present. However, if you believe you would be placed in a higher tax bracket in the future, you can choose a Roth 401(k) to receive tax-free withdrawals during retirement. Rest assured that you would retain control of your traditional or Roth 401(k), even if you have quit your job or started working for a different employer.</p>
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<h3>6. Invest in an IRA to boost your savings</h3>
<p>An IRA or Individual Retirement Account is a tax-advantaged retirement account like a 401(k) where you can contribute pre-tax dollars to receive tax-free earnings. You can also make tax-free withdrawals, subject to some conditions, such as withdrawal at or after reaching 59.5 years of age. To open an IRA, you can contact an IRA custodian such as banks, trust companies, brokerage firms, federally insured credit unions, etc. The custodian invests your funds across different instruments - bonds, stocks, mutual funds, and ETFs at your direction. If you do not wish to invest in a traditional IRA, you can access other IRA options such as Roth IRA, SEP (Simplified Employee Pension), and self-employed IRA. The most popular among these is the Roth IRA. With a Roth IRA plan, you can invest after-tax dollars to earn tax-free growth on your funds. You can also make tax-free withdrawals provided you have held your Roth IRA account for at least five years and you are 59.5 years of age or above when making a withdrawal. You can save up to $6,500 or make an additional catch-up contribution of $1,000, bringing your total to $7,500 if you are above 50 years of age. You cannot breach this limit, and it is a blanket ceiling for all IRAs that you may have invested in. Moreover, you can contribute to a Roth IRA from your earned income only. Earned income, herein, refers to any income sourced from salary, wage, earnings from the business, disability retirement benefits, commission, bonus, assignment work, etc. Do note that income from interest, rental income, Social Security benefits, dividends, unemployment benefits, child support, pension, and annuity money is ineligible and not deemed as earned income for contribution toward a Roth IRA.</p>
<h3>7. Invest in a Health Savings Account</h3>
<p>You can boost your savings for retirement by investing in a Health Saving Account (HSA). An HSA is a tax-advantaged savings account wherein you can make annual tax-deductible contributions<strong>&nbsp;</strong>to cover your future healthcare expenses. As per a recent report, a 65-year-old retired couple may need to shell out $300,000 (after taxes) to pay for their healthcare expenses during retirement in 2021. An HSA offers multiple benefits to its investors. You can save your money, grow your funds tax-free via market-linked investments, and can tax-free withdrawals (if you are going to use the funds to cover your medical expenses). An HSA may serve well as a separate fund that you can use to pay for future medical costs during your retirement years. This can help lower the burden on your retirement fund and may allow you to earmark more funds towards other pursuits such as travel, starting a business, etc. However, if you withdraw funds from your HSA for non-medical expenses, you will be penalized. The IRS has set the annual contribution limit for self-only HSA at $3,850 and for family coverage at $7,750 for 2023. Also, if you are 55 or above, you can make an additional catch-up contribution of $1,000, bringing your total to $4,850 in a self-only HSA plan and $8,750 for a family HSA plan.</p>
<h3>8. Make investments in alternative assets</h3>
<p>Alternative assets are a separate category of investments that do not fit the category of conventional assets, such as equity, debt, or cash. Some examples of alternate assets include art and antiques, derivatives contracts, private equity, currencies, hedge funds, commodities, real estate, and managed futures. These are high<strong>-</strong>risk assets that are complex and are not strictly regulated. Compared to low-risk investments, alternate assets can generate exponentially high returns. Investing some funds in alternate assets can help create a well-diversified portfolio. Additionally, investing in alternative assets such as gold, oil, and real estate can also serve as a hedge against inflation. With that said, do keep in mind that these assets are not highly liquid compared to conservative asset classes, such as bonds and stocks.</p>
<h3>9. Maximize your Social Security benefits by delaying your withdrawals</h3>
<p>Though you can withdraw your Social Security benefits as early as age 62, it is in your best interest if you delay taking them. Doing so would not only allow you to earn better returns but also increase your monthly check. You can consider delaying your Social Security benefits to the age of 70 because the increases stop after you reach this age. Taking Social Security benefits early reduces your monthly check by a small percentage each month before your full retirement age, whereas delaying it till 70 increases it by 8% yearly. You can also consider working during retirement to finance your monthly expenses and defer your Social Security payments until your full retirement age.</p>
<h3>10. Lower your taxability</h3>
<p>Taxes have the detrimental effect of reducing your disposable income and, consequently, your savings for retirement. Since taxes eat up a large part of your income, you should look to minimize your taxes by employing smart tax-saving strategies. You can reach out to a financial expert who can advise you on identifying tax-effective strategies for investment, saving, spending, and more that may be best suited for you. The advisor can also help you in several ways, such as how to maximize your contributions in tax-advantaged retirement accounts, create trusts, make charitable donations, effect tax-loss harvesting strategies, offer lifetime gifts, and deploy capital gain offsetting strategies. The professional financial advisor can also help create an infallible estate plan in case of an inheritance or a large estate to minimize your tax burden and lower your inheritance tax implications.</p>
<h2>To summarize</h2>
<p>Having ample retirement savings to live your retirement years comfortably is an ideal goal for most investors. However, some people enter the retirement phase unprepared. It can be tricky to figure out how to grow your retirement savings. However, if you wish to lay a strong financial foundation for your future and ensure your future financial stability, it is important to learn how to effectively use the tips discussed in this article to grow your retirement savings.</p>
<p>Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=10_ways_to_grow_your_retirement_savings?pagetype=articles" target="_blank"><strong>free advisor match service</strong></a>&nbsp;to get matched to an advisor&nbsp;who can help you effectively plan your retirement. Answer a few simple questions about yourself, and the match tool will help connect you to 1-3 vetted financial advisors suited to meet your financial requirements.</p>

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10 Strategies To Boost Your Retirement Savings | Rothira.org

10 Ways to Grow Your Retirement Savings

<p>Both 401(k)s and Roth IRAs are popular tax-advantaged retirement savings accounts. Retirees can opt for either of these accounts as both plans offer attractive tax benefits. In a 401(k), you contribute pre-tax dollars that help reduce your taxable income but your withdrawals will be taxed. In a Roth IRA, you make contributions with your after-tax income and can make tax-free withdrawals in retirement. Both 401(k)s and Roth IRAs offer unique tax benefits to their account holders making them both attractive options for investors.<br /> <br /> <strong>You can open both a Roth IRA and a 401(k) and benefit from both accounts at the same time. <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=can_you_open_both_401k_and_roth_ira_account?pagetype=articles" target="_blank">Reach out to a professional financial advisor</a></strong> who can help you understand the various tax benefits, taxability, and contribution limits of 401(k)s and Roth IRAs and guide you on the same.</p>
<p>In this article, we will talk about how you can hold both 401(k) and Roth IRA accounts and reap their benefits at the same time.</p>
<h2>What is a 401(k) retirement account?</h2>
<p>A 401(k) is a company-sponsored retirement plan wherein employees contribute a portion of their gross income to the account. The contribution is deducted directly from the employee&rsquo;s paycheck before income taxes have been taken out. Hence, your taxable income is reduced by the total amount of your contributions for the year. You do not have to pay any taxes on your contributions or earnings until you make a withdrawal, usually in retirement. Suppose you earn $65,000 annually and contribute $15,000 per annum to your 401(k) account, you will have to pay income tax on $50,000 and not $65,000. For 2023, the annual limit on employee contributions is $22,500/year. If you are 50 years of age or older, you can make an additional catch-up contribution of $7,500 to your 401(k) account, bringing your total 401(k) contribution to $30,000 per annum.</p>
<p>In a traditional 401(k) account, your employer can match your contributions either partly or fully. Most financial advisors advise that employees should contribute enough funds at a minimum to get the full employer match. This is a good way to boost your <a href="https://www.rothira.org/articles/11-tips-for-retirees-to-make-their-retirement-savings-last-longer" target="_blank">retirement savings</a>.</p>
<h2>What is a Roth IRA account?</h2>
<p>A Roth IRA (Individual Retirement Account) is a tax-advantaged account where you contribute after-tax dollars to earn tax-free growth and returns on your investments. The major tax benefit of a Roth IRA account is that you can make tax-free withdrawals provided you meet the following conditions:</p>
<ul>
<li>You must be 59.5 years of age or older</li>
<li>You must have held your Roth IRA account for at least five years</li>
</ul>
<p>For 2023, you can contribute a sum of $6,500. However, if you are 50 years of age or older, you can contribute an additional $1,000 to your Roth IRA account. This means that you can contribute a sum of $7,500 in the year. Having a Roth IRA account is beneficial if you expect to be in a higher tax bracket post-retirement.</p>
<p>Moreover, you can withdraw from your Roth account before turning 59.5. However, you need to remember that you can only draw the money contributed by you and not the earnings. If you withdraw your earnings, you may have to pay a 10% penalty on the same.</p>
<p>Additionally, you do not have to take out Required Minimum Distributions (RMDs) in a Roth IRA account, unlike a traditional 401(k). Further, you can pass on your Roth IRA account to your beneficiaries with them not having to pay any taxes on their inheritance. This is not true for 401(k) account holders. The beneficiaries must shell out taxes on any withdrawals made subject to the prevalent income tax slabs and rules.</p>
<h2>How can you open both 401(k) and Roth IRA accounts simultaneously?<strong><br /> </strong></h2>
<p>If you invest in both 401(k) and Roth IRA retirement plans, you can benefit from tax-deferred and tax-free growth at the same time. Doing so would also help maximize your savings rate and build a significant retirement corpus.</p>
<h3>Here&rsquo;s what you need to do:</h3>
<ul>
<li>First, open a 401(k) account through your employer. If your employer does not offer a 401(k) plan, you can still open one through an online broker. Next, you can open a Roth IRA account with a bank, brokerage company, other financial institutions, or an online broker.</li>
<li>Though you are allowed to run both kinds of retirement plans, you must keep an eye out on your income to ensure it does not cross the permissible limit for making Roth IRA contributions. For 2023, your Modified Adjusted Gross Income (MAGI) must be less than $153,000 to contribute to your Roth IRA (as a single taxpayer). If you are a married taxpayer filing taxes jointly, your MAGI must be less than $228,000 for the tax year 2023.</li>
</ul>
<h2>What are the benefits of having both 401(k) and Roth IRA accounts?</h2>
<p>Let us go through some of the pros of having both 401(k) and Roth IRA accounts:</p>
<h3>1. It lowers your taxability</h3>
<p>Since employees contribute pre-tax dollars to their 401(k) accounts, it reduces their taxable income. On the other hand, you pay taxes on the contributions made to a Roth IRA account, making your qualified withdrawals tax-free. Thus, you can <a href="https://www.rothira.org/articles/8-ways-you-can-lower-your-taxes-in-retirement" target="_blank">reduce overall taxability</a> by owning both these retirement accounts.</p>
<h3>2. It helps boost your retirement savings</h3>
<p>You can boost your retirement savings by maxing out your annual contribution limits along with making catch-up contributions if you are eligible for them. Doing so can help increase your retirement savings significantly and enable you to attain your financial goals sooner.</p>
<h3>3. It offers increased flexibility</h3>
<p>If you have invested in both 401(k) and Roth IRA plans, you can benefit from increased flexibility when saving for retirement. You do not have to pay taxes while saving for retirement in a 401(k), plus you also benefit from tax-free earnings. Additionally, it is relatively stress-free since contributions are automatically deducted from your paycheck. While you must start taking RMDs in a 401(k) at age 72, you are not required to do so in a Roth IRA. You can let your Roth IRA funds grow tax-free as long as you wish and use them to pay for any emergencies in retirement without attracting a penalty.</p>
<h3>4. Employer match benefits</h3>
<p>As stated above, if you invest enough funds in your 401(k) plan, your employer will match a certain percentage up to a specific limit. You can boost your savings rate considerably if you take advantage of the 401(k) employer match.</p>
<h2>To summarize</h2>
<p>If you choose to invest in both 401(k) and Roth IRA retirement accounts, you receive the tax breaks associated with an employer-sponsored retirement plan and an individual retirement account. Doing so will allow you to build a substantial retirement fund and live your golden years comfortably. Take care to stay on top of your contribution limits and when you have to start taking your RMDs and withdrawals to avoid incurring any penalties.&nbsp;</p>
<p>If you want to learn about the taxability, contribution limits, and benefits of having both 401(k) and Roth IRA retirement accounts, use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=can_you_open_both_401k_and_roth_ira_account?pagetype=articles" target="_blank"><strong>free advisor match service</strong></a>&nbsp;to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself, and the match tool will help connect you to vetted advisors that are best suited to match your financial needs.</p>

Learn how to effectively manage both a 401(k) and Roth IRA, unlocking the advantages of dual retirement accounts.

Can You Open Both A 401(k) And A Roth IRA Account? | Rothira.org

Can You Open Both a 401(k) and a Roth IRA Account?

<p>Many changes will likely occur from when you first open your retirement account to when you retire. You may grow in your profession, switch jobs or move careers, with your income increasing along the way. As time passes, your priorities will also likely change with changes in your situation. You may get married, have children, or get divorced, which may necessitate altering your goals. Moreover, you may have to modify your retirement plan due to a change in your plan administrator, your company being acquired by another firm, the availability of different investment options in different jobs, and more.</p>
<p>It is important to ensure you save enough for retirement to spend your golden years comfortably without worrying about money. This may become challenging if you have to manage any 401(k) plan changes. Consider <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=what_to_do_if_your_401k_plans_change?pagetype=articles" target="_blank"><strong>consulting with a professional financial advisor</strong></a>&nbsp;who can help you understand and navigate any changes in your 401(k) plan to ensure you have enough saved to last the remaining years of your life.</p>
<p>This article discusses what happens if any changes occur in your retirement plan and how you can continue maximizing your rewards despite these changes.</p>
<h2>What is a 401(k) plan?</h2>
<p>A 401(k) is a company-sponsored retirement account that offers certain tax advantages, such as tax-deferred growth, a host of investment options, employer match, and more. An employer offers this retirement plan to their employee. There are primarily two kinds of 401(k)s - traditional and Roth. In a traditional 401(k), employees contribute from their pre-tax income, reducing their taxable income but must pay tax on any withdrawals made in retirement. On the other hand, in a <a href="https://www.rothira.org/articles/what-is-a-roth-401k" target="_blank">Roth 401(k)</a>, contributions are made from after-tax income. However, you can make tax-free withdrawals in retirement.</p>
<h2>What are some of the reasons your 401(k) plans may change?</h2>
<h3>1. A job switch</h3>
<p>As per a recent report, an Average American can switch jobs 12 times throughout their career and tend to stay with the same employer for an average of 4.1 years. In addition, at any given time, 65%&nbsp;of people may be actively searching for a new job. Changing jobs has several advantages, such as higher salaries, more opportunities to learn and grow in their career, better positions, etc. There are also certain drawbacks, especially if you have a 401(k) retirement plan.</p>
<p>As stated above, your employer offers you a 401(k) plan. So, if you change your job, your employer will no longer offer you a 401(k), and if you were getting the employer match, it would stop. Moreover, you would be unable to contribute to your 401(k) plan. That said, you can still continue saving through your 401(k) by:</p>
<p><strong>a. Rolling over your old 401(k) to a new 401(k): </strong>When changing your job, you can continue saving by rolling over your old 401(k) to a new 401(k). You can do a direct 401(k) rollover once a year, which will help eliminate any potential taxes and penalties associated with early withdrawals. Once you have transferred your money to your new 401(k) account, you can choose investments offered by your new employer and invest your money accordingly.</p>
<p><strong>b. Withdrawing your money from your 401(k) account: </strong>If you choose to take out your money and transfer it into your new account, you need to keep certain things in mind:</p>
<ul>
<li>Deposit the transferred funds into the new account within a period of 60 days of withdrawal. If you fail to do so, the Internal Revenue Service (IRS) will treat the withdrawal as an early withdrawal (if you did it before reaching 59.5 years of age). You must pay a 10% penalty plus any income tax due on the withdrawn amount. In this scenario, your old employer would keep 20% of your money to prepay the tax due on your 401(k) savings.</li>
<li>Suppose you have an ongoing loan through your 401(k), you must repay the loan when switching your job. If you fail to do so, the loan will be considered an early withdrawal, and you will have to pay taxes and a penalty on the same.</li>
</ul>
<h3>2. Business mergers and acquisitions</h3>
<p>Not every company offers the same employee retirement plans. So, if your company undergoes a business merger, your new employer may offer a new 401(k). <br /> <br /> <strong>This can happen in three ways:</strong></p>
<p>a. Your old 401(k) may be merged with your new 401(k) offered by your new employer. If this occurs, the new plan&rsquo;s rules, employer matching, investment options, etc., will apply to your 401(k). In addition, you may be locked out of your plan until all the formalities for the merger are completed.</p>
<p>b. Your old 401(k) plan may continue without any changes, and you continue to invest as before. The new employer may or may not offer a new 401(k), and it would be up to you to decide if you wish to switch to a new plan or continue investing in your old one.</p>
<p>c. You can also go for a full dissolution of your 401(k) plan. In this situation, you would not be able to further invest in your current plan, and the previously invested capital can be withdrawn after you reach 59.5 years of age. You may also be asked to switch to an Individual Retirement Account (IRA) as you cannot contribute to your old 401(k) account.</p>
<h3>3. Changes made to your 401(k) account by your company</h3>
<p>The employer can make changes to your 401(k) plan occasionally. Usually, this change pertains to changing the plan administrators. In this case, the employee is informed of the change within a period of 210 days of the end of the year. You will receive a document - Summary of Material Modifications (SMM) containing detailed information about the changes made to your plan. <br /> <br /> <strong>Pay attention to the following:</strong></p>
<p>a. Check whether your account balance is the same or not. Compare the last statement from the old administrator and the first statement from the new administrator. Contact your company&rsquo;s human resources or payments department if you find any discrepancies.</p>
<p>b. Check the names of the beneficiaries of your 401(k) plan. In the event of your demise, your 401(k) money will be given to the beneficiary of your 401(k) plan rather than the nominee mentioned in your will. Hence, ensure that everything is up to date and as per your wishes, especially after changes have been made to the plan&rsquo;s administrator. Contact your company&rsquo;s HR department if you encounter any irregularities or misinformation.&nbsp;</p>
<p>c. Check your 401(k) plan&rsquo;s asset allocation, as the new plan&rsquo;s administrator may change the asset allocation during the transition period. Look at your investments to check for any changes to your asset allocation, and keep an eye on your contribution rate as well.</p>
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<h2>Can you change your 401(k) retirement plan?</h2>
<p>You can change your retirement plan if you leave or switch your job. <br /> <br /> <strong>However, here are a few things to keep in mind:</strong></p>
<h3>a. Review the available investment options</h3>
<p>Every retirement plan offers different investment options that you can choose from based on your needs and goals. Ensure that you look at your options carefully before making a transfer. Choose a retirement plan that offers different investment options, such as stocks, bonds, mutual funds, target-date funds, real estate investment trusts (REITs), exchange-traded funds (ETFs), etc. It is considered advantageous to have a wide <a href="https://www.rothira.org/articles/6-investments-to-consider-for-retirement" target="_blank">range of investment options</a> to choose from.</p>
<h3>b. Review the associated charges and fees of the new 401(k) plan</h3>
<p>There are several costs associated with 401(k)s, such as administration, transaction, and maintenance fees. These costs can vary for different companies. Ensure your new plan has a more competitive fee structure than your previous one. If your plan has higher costs, it may not be beneficial for you in the long run. This is critical when rolling over your old 401(k) to a new 401(k) and 401(k) to IRA rollovers.</p>
<h3>c. Check if your new employer offers an employer match</h3>
<p>Try and negotiate an employer match when switching your job. Remember that not all companies offer an employer match, but most firms may offer one to attract and retain good employees. It is easier to negotiate a match if you are in a senior position in a company however, you should still try and get a match irrespective of your age or experience level.&nbsp;</p>
<h3>d. Stay up to date about the contribution limits</h3>
<p>The IRS revises the contribution limits each year. For 2023, you can contribute $22,500 in a 401(k) annually and an additional catch-up contribution of $7,500 if you are above 50. On the other hand, you can contribute $6,500 to an IRA or $7,500 if you're 50 or older. If you switch to an IRA from a 401(k), you will lose the employer matching contributions. Moreover, your total accumulated capital will be much lesser in an IRA since the investment options, more or less, remain the same.</p>
<h3>e. Consider what will happen to your employee stock</h3>
<p>Many companies offer their stock to employees as a part of the bonus, at the time of joining the company, or promotion through the 401(k) account. If you continue working with the same company, you may continue to receive tax breaks on the same. However, if you switch your plan administrator or roll over your old 401(k) account to a new one, you may lose the above-mentioned tax breaks and pay tax liabilities on your company stock.</p>
<h3>f. Be aware of the vesting period</h3>
<p>Employers may impose a vesting period if they offer a 401(k) match. The vesting period helps encourage employees to stick around for a longer duration of time. Employees can lose a portion or the entirety of their employer match if they switch from their 401(k) to another retirement account. However, this can be avoided if the employee is fully vested. That said, the vesting period differs from company to company.&nbsp;</p>
<h2>401(k) plan changes you should be aware of</h2>
<p>There are certain 401(k) plan changes you should remember at the time of switching jobs. These are:</p>
<p>a. Suppose you have less than $5,000 in your 401(k) account and decide to join a new company. In this instance, your previous employer can transfer your money to an IRA chosen by the company.</p>
<p>b. If your 401(k) account balance is less than $1,000, your employer can simply write you a check for the same amount, which you would have to deposit into a new 401(k) or an IRA within a period of 60 days from the date the check was issued. If the transfer is not made within the stipulated period of time, it will result in a 10% penalty and additional income tax as per your total annual income if you are less than 59.5 years of age.</p>
<h2>To summarize</h2>
<p>You may not have control over 401(k) plan changes. However, you can take certain steps to ensure you stay on track to achieve your goals, such as staying up to date with the laws and provisions of 401(k) plans. Doing so can help you avoid any potential penalties or taxes. Diversify your investments and not rely on a single retirement account for all your needs. Spread your savings across different instruments to reduce overall risk and maximize potential returns. If you have doubts or need help keeping up with 401(k) plan changes, consider hiring a professional financial advisor to help you manage your finances and secure your future.</p>
<p>Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=what_to_do_if_your_401k_plans_change?pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to get matched with 1-3 financial advisors based on your financial requirements. Simply answer a few straightforward questions about your financial needs, and our matching tool will connect you with advisors who are most suitable for meeting your financial goals.</p>

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What To Do When Your 401(k) Plans Change | Rothira.org

What To Do If Your 401(k) Plans Change

<p>Most financial advisors recommend starting to save for retirement at an early age, as the longer investment horizon makes it easier to save and invest for retirement. For example, suppose you began your retirement planning at 25, and aim to retire at the age of 65. This gives you a solid 40 years to save and invest for your retirement years. <br /> <br /> While planning for your retirement, it is also important to account for several factors such as inflation and healthcare expenses, and how they might impact your retirement savings in the long run. This can help you estimate how much money you wish to save per month for retirement. If you&rsquo;re unsure of how to determine this amount, you may also consider <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=how_to_assess_your_monthly_savings_target_for_retirement?pagetype=articles" target="_blank"><strong>engaging in the services of a professional financial advisor</strong></a> who can help you determine what your ideal savings target should be based on your monthly income and expenses.</p>
<p>In this article, we will discuss different rules and tips that can help you estimate a suitable monthly retirement savings target for your specific financial needs.</p>
<h2>Here are two rules that can help you calculate how much you should be looking to save for retirement per month:</h2>
<h3>1. The 15% rule</h3>
<p>The 15% rule states that you should save at least 15% of your annual income every year. Both your pre-tax income and your contributions to your employer-sponsored retirement account are included in this. In a 401(k) plan, employers have the option of matching their employees&rsquo; contributions and contributing to their retirement accounts. If you invest in a 401(k) and your employer matches your contribution, you can factor both these contributions at the time of calculating your savings for the year. Do note that the 15% rule can only be applied if you started retirement planning in your mid-20s and plan to retire when you turn 67.</p>
<p>As per some studies, most retirees need at least 75% to 80% of their pre-retirement income after they retire to maintain the same standard of living as when they had a steady source of income. This is dependent on a number of factors such as the age at which you retire and you start saving, your annual income, etc. Let us assume that you earn a high income and continue to take big strides forward professionally. This would allow you to reach the 75% mark sooner compared to folks earning less than you.</p>
<p>You must also take care to cultivate and add additional streams of income in retirement apart from your savings and investments from retirement accounts. Do not forget your Social Security benefits and make sure you add them to your retirement savings. Additionally, inflation can play spoilsport if you are not careful. The 15% rule considers that your savings rate is tied to your income. If your income does not increase or you lose a steady source of livelihood, you would not be able to counter inflation and may need to save more aggressively to make up for the difference.</p>
<h3>2. The $1000 rule</h3>
<p>The $1000 rule was created by Wes Moss who is a registered Certified Financial Planner (CFP). Under this rule, for every $1000 you need in retirement, you must save a sum of $240,000. How does this work? To be able to withdraw $1000 each month in retirement, you need to plan on a 5% withdrawal rate from your investments. Let us do some quick math:</p>
<p>5% of $240,000 = $12,000 which in turn must be divided by the number of months in a year = $1000.<br /> <br /> Note that the $1000 rule might not be helpful for retirees whose retirement may last beyond 20 years. Suppose you call it a day at 65 but live on to 90 years of age, there is a good chance that you may run out of funds for the later years of your life. Additionally, this rule does not factor in inflation. You may deem $1000 a month sufficient to live in the present but that may not be the case twenty or thirty years from now. The value and purchasing power of the dollar will most likely decrease in the future and you may find it difficult to meet your expenses in retirement.</p>
<h2>What can you do to increase your savings for retirement?</h2>
<p>You need to build a substantial retirement corpus based on factors such as your income, age, retirement age, life expectancy, financial liabilities, responsibilities, etc., to ensure you do not run out of money during the later years of your retirement. No matter which rule you follow to save for retirement, you must try to save at least 75% to 80% of your pre-retirement income before you decide to retire. Doing so will allow you to not only counter inflation but also any unexpected emergencies. This can be especially helpful in cases of health emergencies, as healthcare costs can account for a significant chunk of your expenses during your golden years of life. <br /> <br /> To ensure you have sufficient savings for retirement, consider following the tips listed below:</p>
<h3>1. Make use of online tools such as a retirement calculator</h3>
<p>A <a href="https://www.rothira.org/match_advisors/search_by_zip?kwd=how_to_assess_your_monthly_savings_target_for_retirement&amp;pagetype=articles" target="_blank"><strong>retirement calculator</strong></a> can help you find out the exact amount of money you need to save to have a comfortable retirement based on your age, income, retirement age, debt, etc. Not only does this tool help you create a foolproof plan but it also measures inflation as per the past trends and offers you a precise estimate of how much to save per month for retirement. Using this tool can help simplify things and give you confidence in the choices you make.</p>
<h3>2. Establish suitable financial goals and targets</h3>
<p>Breaking down your major goals such as retirement planning into smaller, achievable targets can help you attain said goals. Set your targets per age and try to achieve them by the said age. Suppose you wish to buy a home by the time you turn 40. To achieve this goal as per your desired timeline, you need to consider different factors such as market movements, fluctuating stock prices or interest rates, rate of inflation, recession, etc., and accordingly, modify your plan and savings strategy. Doing so would ensure that you save regularly and remain on track to achieve your goals. Consider the following calculation based on your age:</p>
<ul>
<li>Try and save the equivalent of your present annual salary till you reach 30 years of age.</li>
<li>Try and save the equivalent of 2x your present annual salary till you reach 40 years of age.</li>
<li>Try and save the equivalent of 3x your present annual salary till you reach 50 years of age.</li>
<li>Try and save the equivalent of 6x your present annual salary till you reach 60 years of age.</li>
<li>Try and save the equivalent of 8x your present annual salary till you reach 67 years of age.</li>
</ul>
<h3>3. Diversify your investments instead of solely focusing on a 401(k)</h3>
<p>A 401(k) is a credible and incredibly popular retirement savings plan but you cannot build your entire retirement planning strategy on it. Firstly, even though a 401(k) account is an employer-sponsored plan, not every company offers this retirement account. As long as you stay in a job that offers this account, you can accumulate and build your savings. However, if you switch jobs and your new company does not offer a 401(k), you would stand to lose out on savings. The Internal Revenue Service (IRS) has capped the annual contribution limit to a 401(k) at $22,500 for 2023. However, if you are 50 years of age or older, you can make an additional catch-up contribution of $7,500.</p>
<p>Secondly, if you start a business and quit your 9 to 5 job, you cannot rely on a 401(k). You need to be flexible and look to invest in other options like stocks, bonds, mutual funds, ETFs, or an Individual Retirement Account (IRA). You can set up an IRA yourself and open it via a bank, a broker, or a trade union. For 2023, you can contribute up to $6,500 annually in an IRA and an additional $1,000 if you are 50 and above. This brings your total contribution to $7,500. Even though the contribution limit for an IRA is much lower compared to a 401(k), it is still a great way to boost your retirement savings.</p>
<p>You can also invest in different instruments depending on your goals. Say, for example, you can invest in a Health Savings Account (HSA) to save for medical expenses, a 529 plan for your child&rsquo;s college tuition, or build an emergency fund to take care of any emergencies that you may encounter in the future.</p>
<h3>4. Reach out to a professional financial advisor</h3>
<p><a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=how_to_assess_your_monthly_savings_target_for_retirement?pagetype=articles" target="_blank"><strong>You can consult with a financial advisor</strong></a> on how much money you should ideally save each month for retirement. An advisor having the right credentials, certifications, and professional experience can help design a customized financial plan for you based on your individual needs, goals, and risk appetite. Additionally, he can assist you in several different ways such as managing your debt, creating a budget, tax management, creating an estate plan, retirement planning, and more. You also have to consider that each individual has a unique financial situation and one cannot apply generalized rules such as the 15% or the $1000 rule to every person. Further, an advisor can help mitigate the effects of tax, inflation, debt, and more when creating a personalized financial plan for you.</p>
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<h3>5. Begin saving from a young age</h3>
<p>It is advised that one should ideally start saving early, preferably in their 20s so that you can take advantage of a long investment horizon. The full retirement age in the United States is 67 years. Suppose you start saving from the age of 25 and retire at 67, you would have a total of 42 years to build a retirement nest egg for yourself. If you save and invest regularly, you have ample time to earn long-term investment returns and weather out any short-term market fluctuations. But if you begin saving in your 30s or 40s, not only do you have considerably less time at your disposal but you also build up a lot of pressure on yourself to cover the shortfall. Hence, professionals advise saving for retirement as soon as you begin your professional journey. As the last few years have shown us, you never know when an unexpected event such as a recession, pandemic, or health emergency may occur so you need to prepare for contingencies. Thus, it is important to begin saving as early as possible.</p>
<h2>To conclude</h2>
<p>There is no right answer to how much money one should save for retirement each month. However, it is advised to take professional, personalized advice from a financial advisor&nbsp;who can offer you clarity on how much to save per month for retirement and what strategies you can use to boost your savings rate.&nbsp;Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=how_to_assess_your_monthly_savings_target_for_retirement?pagetype=articles" target="_blank"><strong>free advisor match service</strong></a>&nbsp;to&nbsp;connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Learn how to estimate your monthly retirement savings target by following helpful tips and guidelines for your financial security.

How To Assess Your Monthly Savings Target For Retirement | Rothira.org

How To Assess Your Monthly Savings Target for Retirement

<p>An IRA (Individual Retirement Account) is a tax-advantaged retirement savings account that allows you to save and invest to meet your retirement needs. It is one of the more popular retirement accounts in the United States. With a Roth IRA, you can invest in a number of financial products such as stocks, mutual funds, bonds, exchange-traded funds (ETFs), and more. An IRA can be opened with several different financial institutions such as a bank, a life insurance firm, a mutual fund house, a credit union, and even a broker.</p>
<p>A Roth IRA is a retirement account wherein you contribute after-tax dollars and your contributions and earnings on those contributions grow on a tax-deferred basis. The primary benefit of investing in a Roth IRA account is that you can make tax-free withdrawals in retirement provided you meet certain conditions set by the Internal Revenue Service (IRS). A Roth IRA can be a valuable part of your retirement planning; however, to derive the maximum benefit out of it you must know its rules and understand the different ways that can help you maximize your returns. To make tax-free withdrawals in retirement, you must be 59.5 years of age and have held your Roth IRA account for a minimum of five years. Moreover, the IRS revises the Roth IRA contribution limits every year or so, so ensure you keep an eye out for that. To learn more about Roth IRA withdrawal rules, contribution limits, and eligibility criteria for contribution to the account, <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=how_to_maximize_your_returns_investing_in_roth_ira?pagetype=articles" target="_blank"><strong>consult with a professional financial advisor</strong></a> who can advise you on the same.</p>
<h3><br /> The IRS has set the following limits for contributing to a Roth IRA in 2023:</h3>
<p>&nbsp;</p>
<table border="1" width="796" cellpadding="3">
<tbody>
<tr>
<td style="text-align: center;" width="70">
<p><strong>&nbsp;</strong></p>
</td>
<td style="text-align: center;" width="275">
<p><strong>Filing status</strong></p>
</td>
<td style="text-align: center;" width="233">
<p><strong>Modified Adjusted Gross Income&nbsp;(MAGI)</strong></p>
</td>
<td style="text-align: center;" width="219">
<p><strong>Maximum annual contribution</strong></p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="70">
<p>1</p>
</td>
<td style="text-align: center;" width="275">
<p>Single, head of household or married taxpayers filing separately</p>
</td>
<td style="text-align: center;" width="233">
<p>Less than $138,000</p>
</td>
<td style="text-align: center;" width="219">
<p>$6,500 or $7,500 if 50 or older</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="70">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="275">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="233">
<p>$138,000 up to $153,000</p>
</td>
<td style="text-align: center;" width="219">
<p>Contribution is reduced</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="70">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="275">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="233">
<p>$153,000 or more</p>
</td>
<td style="text-align: center;" width="219">
<p>No contribution allowed</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="70">
<p>2</p>
</td>
<td style="text-align: center;" width="275">
<p>Married taxpayers filing jointly or qualifying widow(er)</p>
</td>
<td style="text-align: center;" width="233">
<p>Less than $218,000</p>
</td>
<td style="text-align: center;" width="219">
<p>$6,500 or $7,500 if 50 or older</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="70">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="275">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="233">
<p>$218,000 up to $228,000</p>
</td>
<td style="text-align: center;" width="219">
<p>Contribution is reduced</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="70">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="275">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="233">
<p>$228,000 or more</p>
</td>
<td style="text-align: center;" width="219">
<p>No contribution allowed</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="70">
<p>3</p>
</td>
<td style="text-align: center;" width="275">
<p>Married taxpayers filing separately</p>
</td>
<td style="text-align: center;" width="233">
<p>Less than $10,000</p>
</td>
<td style="text-align: center;" width="219">
<p>Contribution is reduced</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="70">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="275">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="233">
<p>$10,000 or more</p>
</td>
<td style="text-align: center;" width="219">
<p>No contribution allowed</p>
</td>
</tr>
</tbody>
</table>
<p>&nbsp;</p>
<h3>The contribution limits for a Roth IRA&nbsp;as of 2023 are:</h3>
<ul>
<li>You can contribute up to $6,500 per annum if you are less than 50 years of age.</li>
<li>You can contribute up to $7,500 per annum including an additional catch-up contribution of $1,000 if you are 50 years of age or above.</li>
</ul>
<p>&nbsp;</p>
<h2>7 strategies to make the most of your Roth IRA account:</h2>
<h3>1. Max out your Roth IRA contributions</h3>
<p>$6,500 a year may seem like a small amount, however, if you maximize your Roth contributions, you can not only reach your goals but also save a substantial sum of money for your golden years. Suppose you contribute $6,500 every year for a period of ten years, you can save a sum of $65,000, which after adding the return on your investment coupled with the power of compounding, will help double your account&rsquo;s value. Staying focused and disciplined will help ensure steady and assured savings for your retirement. If you invest a sum of $6,500 a year for 30 years, you can have $195,000 worth of investments at the end. This sum would increase each year with the help of compound interest ensuring you have a stable and financially secure retirement. Take care to contribute the maximum amount you can. If you cannot contribute the full sum, try to contribute 50% of it. Then, slowly and gradually increase the amount to 75% or 80%, and finally try to invest 100% of the contribution limit.</p>
<h3>2. Choose the right investments for your Roth IRA account</h3>
<p>You can choose from various investment options such as stocks, bonds, mutual funds, ETFs, certificates of deposits (CDs), and even cryptocurrency. Your investment returns are largely dependent on the investment options picked by you making it critical to exercise caution at the time. Do your due diligence and look at the past returns of all the options. Take care to compare the returns and growth potential of the investments along with their costs before finally selecting one for your investment portfolio. In addition, you also need to ascertain your risk tolerance at the time of choosing an investment. For example, if you have a high-risk tolerance, you can focus on investing the better part of your funds in stocks. However, if you are risk-averse, you can add some bonds and debt mutual funds to your portfolio to balance out the risk. Doing so will help you disperse the risk and create a well-diversified portfolio.</p>
<p>Further, do not invest in the same asset classes in your Roth IRA account as you have invested elsewhere. For example, if you own stocks of &lsquo;Company A&rsquo; outside your IRA, you can choose to invest in other sectors and companies for your Roth IRA. Doing so will not only help diversify your portfolio but also boost its potential to earn more money. Building a well-diversified portfolio would allow you to <a href="https://www.rothira.org/articles/what-roth-ira-strategies-can-you-use-to-become-a-millionaire" target="_blank">create more wealth</a>, reduce risk, and place you in a better position to exploit different market opportunities.</p>
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<h3>3. Select the right custodian for your Roth IRA account</h3>
<p>You can open your Roth IRA account in several places such as a bank, life insurance company, a mutual fund house, a credit union, or a broker. Do assess your risk appetite, investment budget, and preferences before choosing your custodian. For example, if you select a credit union or life insurance company, you can invest in low-risk investments like CDs, bonds, money market accounts, etc. These investments are ideal for investors nearing retirement and offer low-risk returns. Moreover, if you have recently converted your traditional IRA to a Roth IRA and are going to retire in the near future. On the other hand, if you are years away from retirement, you would be better off picking a mutual fund house or a broker. These custodians can offer investments such as equity that may be more ideal for investors having a long-term investment horizon. Though these investments are deemed high-risk in nature, they can help you reach your long-term financial goals such as retirement as the scope for growth is considerably higher compared to debt instruments like bonds. If you wish to use your Roth IRA funds to pay higher education expenses of your child or grandchild, a Roth IRA would prove to be an ideal investment vehicle for the same.</p>
<h3>4. Ensure you comply with the Roth IRA rules</h3>
<p>To make the most of your Roth IRA benefits, you must comply with the rules mandated by the IRS. The primary benefit of a Roth IRA account is the ability to make tax-free withdrawals in retirement. To do so, you must be 59.5 years of age. If you fail to comply, you would have to pay a 10% penalty on any withdrawals made by you. Moreover, you need to abide by the <a href="https://www.rothira.org/articles/what-is-the-roth-ira-5-year-rule" target="_blank">five-year rule</a> too. As per this rule, you cannot make withdrawals for a period of at least five years after opening your account. This rule is applicable on Roth conversions as well. For example, if you have held a traditional IRA for 15 years, and then converted it to a Roth IRA, you have to wait for five years from the conversion date before you can make a withdrawal. If you adhere to the rules, you can ensure none of your savings are lost to tax or penalties. That said, there are certain exceptions to the penalty rules. These are:</p>
<ul>
<li>Buying a home for the first time</li>
<li>Paying college tuition of your children</li>
<li>At the time of the birth or adoption of a child</li>
</ul>
<p>&nbsp;</p>
<h2>To summarize</h2>
<p>There are many benefits of adding a Roth IRA account to your investment portfolio such as the ability to make tax-free withdrawals during retirement, not having to take out required minimum distributions (RMDs) at the age of 73, or pass on your Roth IRA account to your beneficiaries. However, to make the most of its benefits, you must follow its rules, keep track of the contribution limits, and be aware of withdrawal limitations.</p>
<p>To fully maximize the potential of your Roth IRA, it is important select the right investment options and if needed, reach out to a professional financial advisor&nbsp;who can advise you on the same. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=how_to_maximize_your_returns_investing_in_roth_ira?pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to&nbsp;connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool can help connect you with 1-3 advisors that match your financial needs.</p>

Discover the secrets to maximizing your returns through strategic Roth IRA investments. Get expert advice on withdrawal rules, contribution limits, and eligibility criteria.

Maximize Returns: Mastering Roth IRA Investing For Higher Profits | Rothira.org

How to Maximize Your Returns Investing in a Roth IRA

<p>Most financial experts advise starting to save for retirement from a young age. However, if you were unable to do so, it is never too late for you to begin saving. That said, you will have to make up for the lost time and save at an increased rate to build a substantial retirement nest egg. You can do so by creating a budget (and sticking to it), cutting your expenses, increasing your sources of income in retirement, etc. It is advised that you <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=7_ways_to_financially_prepare_for_retirement?pagetype=articles" target="_blank"><strong>consult with a professional financial advisor</strong></a> who can guide you on how to build your savings and financially secure your retirement.</p>
<p>This article discusses the different ways you can prepare your finances to live comfortably in retirement.</p>
<h2>What steps you can take to financially prepare for retirement?</h2>
<h3>1. Increase your sources of income in retirement</h3>
<p>Some of the common sources of retirement income include Social Security benefits, 401ks, pension plans, individual retirement accounts (IRAs), and more. You should aim to maximize your contributions to retirement accounts to accumulate a bigger corpus. In addition, you can save taxes and make tax-free withdrawals in retirement subject to certain conditions. Moreover, you should know how pension plans work and their benefits. Inquire what happens to your pension benefits when switching jobs to ensure you do not miss out on any of the benefits. As per a study, you can replace up to 40% of your pre-retirement income with the help of Social Security benefits on average. Thus, getting a handle on your benefits can help you better manage your finances and <a href="https://www.rothira.org/articles/8-tips-to-help-make-your-retirement-plan-successful" target="_blank">plan for retirement</a>.</p>
<h3>2. Figure out how much you need to save for retirement and create a budget for your monthly expenses</h3>
<p>Before you retire, you need to make a list of all significant expenses that you may incur in retirement. Create a budget, keep a tab on your expenses, and find out where you can cut down your costs. You can start by canceling online subscriptions, reducing the number of times you eat out, travel, etc. Don&rsquo;t forget to take into account your non-discretionary expenses like rent, gas, utilities, groceries, etc. Social Security and pension can offer a steady income source post-retirement and replace a chunk of your regular paycheck. You can also adopt the 4% rule in retirement wherein as per the rule, you only withdraw 4% of your retirement savings the first year and adjust the withdrawals in the subsequent years for inflation. For example, if a retiree needs $40,000 per year to meet their expenses, they must have at least $1,000,000 in their retirement account when they retire. You can also boost your income by working part-time till the time you can start taking out your Social Security benefits. Doing so can help meet any shortfalls in your expenses without you having to overdraw from your retirement savings.</p>
<h3>3. Find out your risk tolerance and readjust it if necessary</h3>
<p>As you near retirement, assess if your portfolio is overexposed to market risk. Consult a professional who can help reduce your risk exposure and protect your retirement savings. This is important because as you grow older, you may not have enough time nor the risk tolerance to recoup losses caused by market ups and downs.</p>
<p>Aim for portfolio diversification that can help protect your investment income. If your portfolio is already diversified, you can invest in other investments such as real estate and gold to boost your returns. Gold especially can be an effective hedge against inflation, devaluation of the currency, and any political upheavals. Take care not to over-invest in precious metals. As per experts, gold investments should not comprise more than 5-10% of your portfolio.<br /> <br /> <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=7_ways_to_financially_prepare_for_retirement?pagetype=articles" target="_blank"><strong>Reach out to a professional financial advisor</strong></a> who can help lower your risks as you approach retirement and protect your retirement savings. The advisor can also help diversify your portfolio, pick the best investments, and advise what percentage of each investment should comprise your portfolio based on your financial needs and goals.</p>
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<h3>4. Assess how much you need to spend on healthcare</h3>
<p>As you grow older, there is an increased chance that you may develop health issues. This would likely result in you having to spend significantly more on healthcare. To offset the cost, you can open a Health Savings Account (HSA). An HSA is a tax-advantaged account that offers you multiple benefits - you can make tax-free distributions from your HSA (provided the proceeds are used for qualified health expenses), tax-free earnings, and tax-deductible contributions. For 2023, the total contribution limit for an individual is capped at $3,850 and $7,750 for a family. This limit is applicable to contributions made by both the employer and the employee. Also, folks aged 55 and up can make an additional catch-up contribution of $1,000.</p>
<h3>5. Make sure that you are adequately insured</h3>
<p>Due to the rising cost of healthcare, it is imperative that you buy the right insurance to secure your retirement. Insurance can help cover any expenses you may incur due to an accident or illness. Take care to carefully assess your policy, insured sum, and premiums payments at the time of buying insurance. Doing so would help ensure that your needs are adequately covered and you are neither under nor over-insured. Analyze and compare different policies from different providers and choose the one that best fits your needs and budget.</p>
<h3>6. Clear any debt before you retire</h3>
<p>&nbsp;It is critical that you clear your debt before you retire as it can pose a serious risk to your financial well-being if you are still paying off your debt after retirement. Consult with a financial advisor who can help come up with a plan to clear your high-interest debt such as mortgages, credit card debt, etc., either by reducing or restructuring your debt. Doing so would allow you to live your retirement years stress-free without having to worry about debt.</p>
<h3>7. Consult with a professional financial advisor</h3>
<p>Coming up with an effective plan for retirement is not an easy task, especially if you are new to the world of financial planning. Seeking counsel from a professional would not only help ensure your money is managed effectively but may also help avoid making expensive mistakes. The advisor can assess your <a href="https://www.rothira.org/articles/seven-ways-to-maximize-your-tax-free-retirement-income" target="_blank">retirement income goals</a> and the steps you need to take to attain those goals. In addition, the advisor can help save taxes, cut down expenses, boost returns, identify different income sources in retirement, and manage your assets and risk to secure your financial future.</p>
<h2>To summarize</h2>
<p>There is no shortcut to saving for retirement. If you wish to have a comfortable retirement, it is essential to have a customized plan that can help you attain your retirement goals. There are certain steps you can take to make the process smoother, such as saving for retirement from a young age, creating a budget and sticking to it, curbing your expenses, investing in the right investments, and eliminating debt before you hang up your boots for good. You can also consult with an advisor who can help manage your finances and create a foolproof plan based on your risk tolerance and future goals.</p>
<p>Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=7_ways_to_financially_prepare_for_retirement?pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to match with vetted financial advisors who can guide you effectively on how to build a substantial retirement corpus and secure your golden years. Answer a few questions about yourself and get matched with 1-3 financial advisors that can help you with your unique financial needs and goals.</p>

Learn 7 effective tips to secure your retirement financially. Prepare your finances to live a comfortable and stress-free life in your retirement years.

Retirement Financial Planning: 7 Ways To Prepare Wisely | Rothira.org

7 Ways to Financially Prepare for Retirement

<p>A Roth IRA is a tax-advantaged individual retirement savings plan wherein you can contribute after-tax dollars to save for retirement. The primary benefit of this account is that your money grows tax-free and can be withdrawn tax-free after fulfillment of certain conditions. If you wish to build a substantial retirement corpus and achieve millionaire status, you may consider taking advantage of this retirement account invest your money in a Roth IRA for the long-term. <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=what_roth_ira_strategies_can_you_use_to_become_millionaire?pagetype=articles" target="_blank"><strong>Reach out to a professional financial advisor</strong></a> who can guide you on maximizing your savings using a Roth IRA account.&nbsp; <br /><br />Read below to learn how you may use different Roth IRA strategies to substantially grow your retirement funds.</p>
<h2>How to make the most of your Roth IRA account</h2>
<p>There are several investment options available to you that you can invest in a Roth IRA. This includes:</p>
<ul>
<li>Stocks</li>
<li>Exchange-traded funds (ETFs)</li>
<li>Mutual funds</li>
<li>Money market funds</li>
<li>Bonds</li>
<li>Certificates of Deposits (CDs)</li>
<li>Cryptocurrency</li>
</ul>
<p>The Internal Revenue Service (IRS) stipulates the contribution limits for a Roth IRA, which are revised occasionally. For 2023, you can contribute $6500 to your Roth IRA account. However, if you are 50 years of age or above, you can make an additional catch-up contribution of $1000, bringing your total to $7500 for the year. Try and maximize your contributions for the year. Doing so would allow you to harness the power of compounding and give a significant boost to your retirement fund.</p>
<h2>6 Roth IRA strategies can you employ to grow your finances</h2>
<p>Everyone wants to save a substantial sum of money to live comfortably in retirement. And saving a million dollars would go a long way toward making that dream a reality. Let us discuss some strategies that can help you to become a millionaire, while maximizing the use of your Roth IRA account.</p>
<h3>1. Start investing in your Roth IRA from a young age</h3>
<p>If you start saving from a young age, say in your mid-20s, you would be looking at a 40-yr window before you reach your full retirement age. By starting early, you not only harness the power of compounding but also enable your money to grow at a faster rate. You can also consult with an advisor who can advise you on which investments to pick in a Roth IRA. Given ample time and with careful planning and execution, you could grow a significant corpus for your retirement.</p>
<h3>2. Maximize the power of compounding</h3>
<p>When saving for retirement, you need to consider the impact of the power of compounding on building wealth and your savings in the long term. Let us consider an example to understand this effect better. Suppose you start investing money in a Roth IRA when you turn 25. You make a contribution of $6500 (as per the Roth IRA 2023 contribution limit) each year until you turn 70 years of age. Say, you earn an average return of 7% annually, meaning by the time you turn 70, you would have saved $1.86 million in your Roth IRA. That said, it is not given that your investment will grow at 7% each year. However, if they were to grow at only half the return i.e. 3.5 to 4% per year, you would still save a sum of $$389,937. This may not be true if you start saving for retirement at a later stage in your life, say at 35 years of age. To do so, you will need to save at a significantly higher rate to reach the same level of wealth. Hence, it is better to start saving and <a href="https://www.rothira.org/articles/why-it-is-advised-to-start-planning-for-retirement-early" target="_blank">investing your money from an early age</a> to make the most of the power of compounding.</p>
<h3>3. Avoid making early withdrawals</h3>
<p>&nbsp;To maximize your Roth IRA account, you should refrain from making early withdrawals and allow your money to grow over time to take advantage of the power of compounding. However, if you need to withdraw in case of a financial crisis or a medical emergency, ensure that you do not attract any penalties or taxes on the withdrawn amount. Ensure that you are 59.5 years of age or older and have held your Roth IRA account for at least five years before you withdraw money. Doing so will allow you to make tax and penalty-free withdrawals. You could also spread out your withdrawals over several years to avoid entering a higher tax bracket. You also have the option of borrowing money from your Roth IRA without having to pay taxes or a penalty provided you deposit the money back in less than 60 days. That said, ensure you understand the rules with respect to making a withdrawal vis-a-vis your taxability.</p>
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<h3>4. Maximize your contributions to boost your Roth IRA savings</h3>
<p>You must invest more money in your account to derive the maximum benefit from your Roth IRA investment. As per studies, an individual should invest nearly 15% of their annual income in their <a href="https://www.rothira.org/articles/retirement-planning-checklist-10-years-from-retirement" target="_blank">retirement plan</a> but that is not the case. On average, an individual invests only 3% of their annual income which is not enough to build a million-dollar retirement corpus for themselves. Apart from maximizing your contributions, you must ensure you invest them in the right investment instruments that will allow you to boost your retirement savings. Choose your investments based on your risk appetite, future goals, and needs. There are a number of options that you can select from such as stocks, bonds, mutual funds, money market funds, CDs, ETFs, and more. Make sure that you invest in a mix of different asset classes that will allow you to not only minimize your risk but also generate higher returns. Do keep in mind to start early and pick your investments wisely.</p>
<h3>5. Take Roth IRA fees into account while budgeting your finances</h3>
<p>To run and maintain your Roth IRA account, you must shell out a certain fee. In addition, you may incur a transaction fee on the sale or purchase of investments. This fee varies based on the asset, broker, and financial entity that brokers the transaction. It is vital to consider this fees while calculating your investment amount.</p>
<h3>6. Take advantage of a Spousal Roth IRA</h3>
<p>If you are married, you can boost your contributions by investing in a spousal Roth IRA. If only one of the spouses earns, he/she can contribute on behalf of their spouse no matter if they earn little or no income. Contributions to a spousal Roth IRA are subject to the same rules and limits as a regular Roth IRA. That said, there are certain rules you must adhere to be eligible to make a spousal Roth IRA contribution. These are:</p>
<ul>
<li>You must be married and file a tax return jointly.</li>
<li>You can only make contributions from earned income i.e. any income received from a job or self-employment such as salary, commission, bonuses, wages, and tips.</li>
<li>Your total contribution cannot exceed the taxable compensation filed by you on your joint tax return.</li>
</ul>
<h2>To conclude</h2>
<p>If fully utilised, your Roth IRA could contribute to your goals of becoming a millionaire. Take advantage of its tax benefits, maximize your contributions, do not make early or unplanned withdrawals, and make use of the power of compounding. It is also vital to be disciplined and ensure that you invest in different asset classes and sectors to minimize your risk. A Roth IRA can be a great tool to attain your financial goals, provided you are willing to commit to a long-term investing strategy by being patient and financially disciplined.</p>
<p>Reach out to a professional financial advisor who can assist you with suitable Roth IRA strategies to grow your finances so you can live comfortably in retirement. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=what_roth_ira_strategies_can_you_use_to_become_millionaire?pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself, and the match tool will find advisors that match your financial needs.</p>

Unleash the potential of your Roth IRA with proven strategies for becoming a millionaire. Maximize your retirement funds and create lasting wealth for the future

Roth IRA Millionaire Strategies: A Roadmap To Wealth | Rothira.org

What Roth IRA Strategies Can You Use to Become a Millionaire?

<p>Retirement planning is a critical component of securing your financial future. It is important to build a significant retirement corpus for yourself that will last you your retirement years. There is no right time to begin planning for retirement, however, the earlier you start, the more likelihood of you attaining your retirement goals. Retirement goals include creating and identifying additional sources of income, creating a budget, growing your savings, and managing your assets and risk.</p>
<p>To make informed decisions, it's important to understand the different types of retirement plans available. By learning about the features, benefits, and considerations of each plan, you can better navigate the world of retirement planning and choose the option that suits your long-term goals. Additionally, <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=4_kinds_of_retirement_plans_to_know&amp;pagetype=articles" target="_blank"><strong>it is advisable to consult a financial advisor</strong></a> who can provide personalized guidance and help you gain a deeper understanding of these retirement plans.</p>
<p>This article explores four common retirement plans that everyone should know about.</p>
<h3>4 Kinds of Retirement Plans You Need to Know</h3>
<h3>1. 401(k)</h3>
<p>A 401k is an employer-sponsored, tax-advantaged retirement plan that a company may offer its employees. Contributions to a 401k are made directly from the employee&rsquo;s salary. The company can also match the employee&rsquo;s contribution up to a certain limit. This is basically free money. The Internal Revenue Service (IRS) sets the contribution limits and may change every year. For 2023, the contribution limits for a 401k are as follows:</p>
<ul>
<li>Investors can contribute up to a maximum of $22,500 per year. However, if you are 50 or older, you can make an additional catch-up contribution of $7,500 annually.</li>
<li>The employee and the employer can make a maximum combined contribution of $66,000 ($73,500 with catch-up).</li>
</ul>
<p><strong>There are primarily two kinds of 401ks. These are:</strong></p>
<p><strong>1. Traditional 401k</strong></p>
<p>In a traditional 401k, you contribute pre-tax dollars which means your withdrawals will be taxed in retirement as per the tax bracket you fall into for the year you make withdrawals. Moreover, since you owe tax on your withdrawals, the IRS mandates that you must take out Required Mandatory Distributions (RMDs) from the age of 72, failing which you will be charged a penalty.</p>
<p><strong>2. Roth 401k</strong></p>
<p>&nbsp;In a Roth 401k, you make contributions from your after-tax dollars, meaning you can make tax-free withdrawals in retirement. Since you pay tax upfront when making a contribution, you are exempt from the same in retirement. Additionally, you do not have to make any mandatory withdrawals in retirement, unlike a traditional 401k. However, in order to make a tax and penalty-free withdrawal, you must be 59.5 years of age at the time of your first distribution and must have held your account for at least five years.</p>
<h3>2. Individual Retirement Account (IRA)</h3>
<p>An IRA is a tax-advantaged retirement savings account that can be opened by a bank, a mutual fund house, a broker, an investment company, or an online brokerage firm. You have a wide range of investment options available to choose from such as stocks, bonds, exchange-traded funds (ETFs), and mutual funds. There are several kinds of IRAs where the taxes on each type of account is handled differently. These are:</p>
<p><strong>a. Traditional IRA</strong>: In a traditional IRA, you can make tax-deductible contributions to earn tax-deferred growth and earnings. For 2023, you can make a contribution of $6,500 along with an additional catch-up contribution of $1,000, if you are 50 or up. Do note that if you make an early withdrawal from your traditional IRA account i.e. before reaching 59.5 years of age, a 10% penalty will be levied on the withdrawal. Also, similar to a 401k, you must take out RMDs after you turn 72.</p>
<p><strong>b. Roth IRA</strong>: Though contributions to a Roth IRA are not tax-deductible (contributions are made from after-tax dollars), you can make tax-free withdrawals in retirement provided you are 59.5 years of age and have held your Roth account for at least a period of five years. The contribution limits are the same as a traditional IRA. Compared to a traditional IRA, you can access a broader range of investment options like money market funds, equities, ETFs, mutual funds, bonds, certificates of deposit (CDs), and more.</p>
<p><strong>c. Spousal IRA</strong>: A spousal IRA is a regular IRA with the critical difference being that working spouses can make a contribution to a traditional or Roth IRA on behalf of their non-working spouses. Specially designed for married couples, a spousal IRA acts as a way to save money for retirement if one spouse is presently not working. This can be a great source of boosting retirement income for married couples.</p>
<p><strong>d. SEP-IRA</strong>: Also known as a Simplified Employee Pension (SEP), a SEP-IRA can be set up by self-employed workers like independent contractors, freelancers, as well as small-business owners. For 2023, you can contribute up to 25% of your total compensation or $66,000, whichever is less.</p>
<p><strong>e. SIMPLE IRA</strong>: SIMPLE or Savings Incentive Match Plan for Employees IRA is designed for small businesses having 100 or fewer employees. It is primarily used by small businesses and self-employed individuals. SIMPLE IRA follows the same withdrawal rules as a traditional IRA. For 2023, employees can contribute a maximum of $15,500 with an additional catch-up contribution of $3,500 if they are 50 and up.</p>
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<h3>3. Thrift savings plan (TSP)</h3>
<p>A TSP is a kind of retirement investment plan designed for federal employees and uniformed services personnel. It is similar to a 401k and offers the same benefits to government employees that are available to private sector employees. For 2023, you can make an annual contribution of $22,500 and an additional catch-up contribution of $7,500 if you are 50 and up. <br /><br /><strong>The major features of a TSP are:</strong></p>
<ul>
<li>It offers automatic payroll transfers which means your contributions are directly deducted from your paycheck.</li>
<li>It allows matching contributions wherein the agency will match your contributions thereby boosting your savings.</li>
<li>It provides a Roth version of TSP wherein you can contribute after-tax dollars to make tax-free withdrawals in retirement.</li>
<li>It allows the transfer of a 401(k) and IRA to a TSP and vice versa when employees switch their jobs.</li>
</ul>
<h3>4. Cash-balance pension plan</h3>
<p>A cash balance pension plan refers to a defined-benefit pension plan wherein the employer credits the employee&rsquo;s account with a set percentage of their yearly compensation as well as any interest charges that may have accumulated over the year. The main benefit of this plan is that contribution limits increase with age. For example, individuals aged 60 and above can save more than $300,000 per annum.</p>
<h2>To conclude</h2>
<p>Based on your employment, risk tolerance, and financial needs, you may invest in a number of retirement plans as per your choice. While some retirement accounts such as a 401k are offered by employers, others like IRAs can be opened by individuals themselves. Though each retirement account may have different benefits and drawbacks, all of these plans do help you accumulate significant savings for retirement. Due to rising inflation and the shrinking value of Social Security benefits, it is vital that you begin planning for retirement as early as possible.</p>
<p>You may also consult with a professional financial advisor who will be able to explain the various retirement plans, their benefits, taxability, contribution limits, etc., and guide you effectively in building a substantial retirement corpus. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=4_kinds_of_retirement_plans_to_know&amp;pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Wondering which retirement plan is right for you? Don't miss our guide to the four most important types of retirement plans, including 401(k)s, IRAs, and more.

Retirement Planning 101: A Guide To The 4 Types Of Retirement Plans | Rothira.org

4 Kinds of Retirement Plans

<p>Retirement planning involves establishing your retirement income goals and figuring out how you are going to attain those goals. You need to identify different types of income sources, make up a list of expenses, implement a savings plan, and manage assets and risk. To save for retirement, most individuals consider investing in popular investment vehicles such as 401ks and individual retirement accounts (IRAs). These instruments allow investors to grow their money and have certain tax advantages that help build significant retirement corpus over time.&nbsp;</p>
<p>However, at times, when facing a financial crisis, you may consider making a withdrawal from your retirement account to meet your expenses. This may be ill-advised. If you make an early withdrawal from an IRA, you may incur a penalty. Doing so may also negatively impact your potential earnings in the future. <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=what_are_the_early_withdrawal_penalties_for_traditional_and_roth_ira_retirement_plans&amp;pagetype=articles" target="_blank"><strong>Reach out to a professional financial advisor</strong></a> who can advise you on the implications of making an early withdrawal from your IRA account and how to avoid them.</p>
<p>This article discusses the penalties charged when making an early withdrawal from both traditional and Roth IRAs and how you can avoid them.</p>
<h2>Traditional IRAs</h2>
<h3>What is the penalty for making an early withdrawal from a traditional IRA?</h3>
<p>Making an early withdrawal from a traditional IRA is subject to a 10% penalty. The Internal Revenue Service (IRS) levies the penalty which may be in addition to income taxes as well. You can calculate the penalty amount on the withdrawal by multiplying the taxable distribution amount by 10%. For example, if you withdrew $5,000 from your account, you would need to pay a $500 tax penalty which will be treated as your additional income.<br /><br />Since you make contributions to a traditional IRA from your pre-tax income, the contribution amount is subtracted from your taxable income for the year. This means that you receive an up-front tax break but will have to shell out ensuing taxes on your withdrawals in retirement. Thus, effectively your entire traditional IRA balance is subject to tax. Hence, if you make an early withdrawal before reaching 59.5 years of age, the 10% tax penalty will be applicable to the full amount of the withdrawal.</p>
<h3>Are there any exceptions to an early withdrawal penalty from a traditional IRA?</h3>
<p>There are certain cases wherein you can make a withdrawal before turning 59.5 and the ensuing penalty for the same may be waived off.</p>
<p>The exceptions are as follows:</p>
<ol>
<li>If you have to pay medical insurance premiums and have been laid off.</li>
<li>If you have become permanently disabled.</li>
<li>If your distributions are lower than the qualified higher education expenses.</li>
<li>If you are buying a home for the first time.</li>
<li>If there are any medical expenses that have not been reimbursed and exceed 7.5% of your annual gross income (AGI).</li>
<li>If you are having a baby or adopting one.</li>
<li>If the beneficiary makes a withdrawal after the IRA owner&rsquo;s death.</li>
<li>An IRS levy.</li>
</ol>
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<h2>Roth IRAs</h2>
<h3>What is the penalty for making an early withdrawal from a Roth IRA?</h3>
<p>In a Roth IRA, you make a contribution from your after-tax dollars which means that you have already paid tax on your contributions for the year when you make them. Thus, <a href="https://www.rothira.org/articles/a-detailed-guide-to-roth-ira-withdrawals" target="_blank">Roth IRA withdrawals</a> are not subject to income tax, otherwise, it would result in double taxation.</p>
<p>Suppose you withdraw a sum equal to the amount you contributed to your Roth account. Herein, the withdrawal will not be deemed as taxable income, no matter what your age. Moreover, the said amount will not be subject to penalty. On the other hand, if you withdraw a sum greater than the amount contributed by you i.e. your earnings, that amount will most likely be considered as taxable income. Further, this amount may attract the 10% early distribution penalty and would be treated as income.</p>
<p>Do note that if you make a contribution and distribute it during the same tax year along with the accrued earnings, the said amount will not incur a penalty. That said, you will need to declare the earnings as investment income.</p>
<h3>Are there any exceptions to an early withdrawal penalty from a Roth IRA?</h3>
<p>In a Roth IRA qualified distributions are tax and penalty-free. For a distribution to be considered as qualfied, the account owner must have held the account for at least 5 years and satisfies the following conditions:</p>
<ol>
<li>The Roth IRA account owner must be at least 59.5 years of age or above.</li>
<li>The Roth IRA account owner is disabled at the time of distribution.</li>
<li>The beneficiary of Roth IRA account receives the funds after the owner&rsquo;s demise.</li>
<li>The Roth IRA account owner uses the funds to buy, build or rebuild a home for the first time.</li>
</ol>
<p>Any withdrawals that do not meet the above-mentioned criteria will attract taxes and a 10% penalty. That said, the taxes and penalties will be applicable to the earnings only and not the contributed sum.</p>
<p>Moreover, you can avoid the early withdrawal penalty on Roth IRA earnings in the following cases:</p>
<ol>
<li>For paying qualified higher education expenses such as tuition, fees, supplies, and books.</li>
<li>If you are a qualified reservist i.e. an inactive member of the military reserve; you can make an early withdrawal when called to duty.</li>
<li>For paying medical insurance premiums if you have lost your job</li>
<li>For paying unreimbursed medical expenses exceeding 10% of your AGI</li>
<li>If you pay substantially equal distributions in succession</li>
</ol>
<h2>To summarize</h2>
<p>The decision to make a withdrawal from your IRA should be taken after careful consideration irrespective of the tax and penalties. If you make a wrong call, you may be putting any future potential growth and earnings at risk. Make sure you have assessed all possible alternatives and taken care to minimize any potential taxes and penalties before choosing to withdraw from your IRA.</p>
<p>It is advised that you consult with your financial advisor before withdrawing any funds from your retirement account. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=what_are_the_early_withdrawal_penalties_for_traditional_and_roth_ira_retirement_plans&amp;pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.<br /><br /></p>

Are you considering an early withdrawal from your IRA? Learn about the potential penalties and explore strategies to minimize them in this informative post.

Early Withdrawal Penalties: A Guide To Traditional And Roth IRA Retirement Plans | Rothira.org

What are the Early Withdrawal Penalties for Traditional and Roth IRA Retirement Plans? 

<p>Most financial experts advise starting to save for retirement from a young age. Since the average retirement age in the U.S. is 63, you have considerable time to understand your future needs and accumulate enough savings if you start saving in your 20s. However, you should take care not to fall into the trap of delaying saving for retirement. Retirement planning is a long process wherein you have to consider several factors such as inflation, changing financial needs, taxes, etc., that may pose a challenge to your future financial security. Thus, it is important to start retirement planning early and ensure you have enough saved for a comfortable retirement.</p>
<p>If you are in your 20s right now, the future may seem like a distant dream making it difficult to think of your future financial situation. It is quite likely that you may be juggling a student loan, a low-paying job, or even job and food insecurity at this stage of your life. You may struggle to get a high-paying job right out of college. Not to mention you would need to take care of your non-discretionary expenses such as rent, electricity, groceries, and more. Saving for retirement may be the furthest thing from your mind at this point in your life. That said, you cannot ignore the opportunity of starting saving early for your golden years. It is advised you <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=why_it_is_advised_to_start_planning_for_retirement_early&amp;pagetype=articles" target="_blank"><strong>consult with a professional financial advisor</strong></a> who can help you set up a budget, manage your finances, and choose investments to start saving for retirement.</p>
<p>This article discusses the reasons why you should start saving for retirement early and when you should start planning for retirement.</p>
<h2>6 reasons you should start saving for retirement early in life</h2>
<h3>1. You can harness the power of compounding</h3>
<p>Suppose you begin saving in your 20s to retire in your 60s, you would have around 40 years to build a substantial retirement fund. But if you begin at 35 and plan to retire at 65, you would lose out on an entire decade&rsquo;s worth of savings. You may think this as insignificant but the difference in your final earnings can be considerable. Try and use the power of compounding by reinvesting your profits in the market to earn higher returns. By investing your money from a young age, you can stay invested for a longer term allowing you to earn more money in the end.</p>
<h3>2. Maxing out your retirement contributions from a younger age helps build a larger corpus</h3>
<p>You can also begin contributing to your retirement plan from a young age giving your money more time to generate returns for you. Most employers offer a 401k retirement plan that you can use to build a substantial retirement corpus. The major benefit of contributing to a 401k retirement account is the employer match. Here the employer may match every dollar you put in your account either wholly or partially up to a certain limit. In essence, this is free money you receive in addition to your salary and other perks at work. For 2023, you can contribute a sum of $22,500 per year and an additional $7,500 as a catch-up contribution if you are over 50. That said, the general limit on the total employer and employee contributions for 2023 as per the Internal Revenue Service (IRS) stipulations is $66,000 ($73,500 including catch-up contribution). Due to the high value of the sum involved, it is strongly recommended that you max out your 401k contributions even if you have prior financial liabilities.&nbsp;&nbsp;</p>
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<h3>3. Having fewer responsibilities when you are younger can help you save more</h3>
<p>When you start working at a younger age, you have limited needs and fewer financial liabilities. In your 20s, you may not need a bigger apartment and can save on rent. You can also save money on groceries, fuel, insurance premiums, education expenses, etc., and invest it for your future needs. However, as you grow older, you would probably get married and later on have kids. You have to take care of their needs which means that you will have a lesser amount to put toward your retirement.<br /><br />That said, you should make the most of your youth and enjoy it to the maximum but refrain from spending all your money. Spend on travel, eating out, clothes, etc., every once in a while but try and cut out any frivolous expenses as well. For example, you can cancel some of the OTT subscriptions you do not need, travel by public transport instead of cabs, start eating more at home, and more. Avoid falling into the trap of peer pressure. Understand that you do not have to deprive yourself of little things that give you happiness or live frugally and save all your money for the future. Focus on making small changes that do not affect your quality of life such as making a budget and sticking to it, not spending above your means, saving more, and adopting better financial habits, etc.</p>
<h3>4. You can take advantage of having a higher risk tolerance when you are younger</h3>
<p>&nbsp;Investments carry varying degrees of risk ranging from high-risk investments that offer higher returns to low-risk options that deliver relatively lower returns. You can choose your investments based on your risk tolerance and financial goals. Moreover, your risk tolerance is at its highest when you are young. Your risk appetite gradually decreases as you age which is why it is advised that you begin <a href="https://www.rothira.org/articles/retirement-planning-checklist-10-years-from-retirement" target="_blank">retirement planning</a> at a young age when you may be more inclined to invest your money in high-risk, high-return investments. Doing so would help you earn a substantial amount of money at a younger age. On the flip side, if you start saving for retirement at an older age, you may be unable to take as much risk which may affect your ability to earn higher returns. This may result in you ending with a smaller retirement fund than you had hoped for.</p>
<h3>5. You have access to more time and money to balance various financial goals</h3>
<p>&nbsp;If you begin planning for retirement at an earlier age, you would have saved more money and can be further ahead in attaining your financial goals. Suppose you start putting away money toward retirement in your 20s, by the time you reach your 30s you would have in all likelihood saved up a substantial amount of money, gotten married, and had kids. Since you have already got a headstart, you would be able to devote more time and effort toward tackling the pressing issues ahead of you without being unduly stressed out. Moreover, you would be able to plan for multiple financial goals and concentrate on meeting your future targets. However, if you start saving for retirement at a later stage in life when you are already married with kids or planning to have kids, you are more likely to become stressed. You would have to juggle several expenses such as your child&rsquo;s education costs, food, clothing, healthcare, and more. Moreover, you may be looking to buy a home and may have to add a mortgage to your list of expenses. It would be fair to say that you may commit mistakes in trying to meet your needs and may even become a victim of financial fraud that promises high returns in a short period. Try and stay clear of such schemes that prey on vulnerable investors.</p>
<h3>6. You can work harder in the present to reap rewards later on in life</h3>
<p>You can enjoy a stress-free life in retirement if you put in the long, hard yards in the initial years of your career. If you start retirement planning early, you can take advantage of the power of compounding where even small contributions can add up to a lot. Set up a budget with a target to save at least 20% to 30% of your monthly salary for your <a href="https://www.rothira.org/articles/11-tips-for-retirees-to-make-their-retirement-savings-last-longer" target="_blank">retirement savings</a>. Ensure that you set a percentage target rather than a lump sum amount. Doing so would help increase your savings since when you advance in your career and your income goes up, your savings rate would go up as well. Not only will this help build financial discipline but also help ensure that you remain consistent in the long run. <br /><br />But suppose you wait till your 40s to start saving for retirement. Not only will you have to save at a much higher rate but may also have to change your lifestyle abruptly to meet your savings targets. Making changes to your lifestyle at a later stage in life to live frugally can be tricky, to say the least. Further, you have less room for errors as you inch closer to retirement. You have to exercise restraint and be diligent with your investments. If you are unable to save enough money for retirement, you may need to either postpone it or take up a part-time job to meet your living expenses. This can be a source of stress for you and may even lead to health issues in the future.</p>
<h2>Is there an ideal time to start planning for retirement?</h2>
<p>Though there is no ideal time to start planning for retirement, it is advised that you begin saving for retirement from a young age. There are quite a few advantages that you can benefit from if you go down this path. Apart from being in a more relaxed frame of mind, you can plan out your expenses so that you don&rsquo;t have to tackle big purchases at the same time such as buying a car, house, etc., and have enough funds if an emergency arises. Thus, try to start saving for your golden years from the time you start earning.</p>
<h2>4 things to keep in mind while you start planning for your retirement</h2>
<h3>1. Consider opening a 401k retirement account</h3>
<p>When you first start a job, you would most likely be offered a 401k retirement plan to invest in. It is a company-sponsored plan offered by most employers along with an employer match wherein You can contribute a maximum of $22,500 per annum along with a further $7,500 (if you are over 50) in 2023. It is advised that you try and max out your contributions and if not, try and contribute as much as you can since employers match employee contributions either wholly or partially, up to a certain limit.</p>
<h3>2. Eliminate debt</h3>
<p>Debt can eat away at your savings and affect your ability to save and invest your money. Thus, ensure that you get rid of debt as soon as possible. Some of the most common forms of debt include student loans, mortgages, credit card debt, etc. Try and pay off your debt so that you do not have to worry about making high-interest payments during retirement. Try and avoid debt in general by limiting your use of credit cards, taking out loans, and more.</p>
<h3>3. Keep your spending in check</h3>
<p>As you begin earning money, you may be tempted to spend on things that you may have always desired but were unable to afford before. This could be luxury goods, a nice vacation, a car, etc. The options are endless. That said, you should try to control the urge and avoid making impulse purchases. Create a budget to keep your spending in check and try to stick to it.</p>
<h3>4. Consult with a financial advisor</h3>
<p>Seeking professional advice can help you streamline your finances and create a viable financial plan suited to attain your goals. You can hire a financial advisor on a fee-only or commission-based model based on your budget and financial needs.</p>
<h2>To conclude</h2>
<p>The main objective of starting to save for retirement early is to ensure you have a significant retirement corpus at the time of retirement. If you start saving from a young age, you have more time to reach your goals. Start small and gradually up your savings rate as you advance further in your career. Make sure you have a retirement plan in place that will allow you to live comfortably during retirement.</p>
<p>Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=why_it_is_advised_to_start_planning_for_retirement_early&amp;pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Discover why it's crucial to start planning for retirement early. Learn about the six key reasons why you should start saving and preparing now.

6 Reasons to Start Retirement Planning Early In Life | Rothira.org

Why It Is Advised To Start Planning For Retirement Early

<p>One of the most common pieces of advice when saving for retirement is to start saving early to build a substantial corpus for retirement. Doing so not only helps you become financially secure and live comfortably in your post-retirement years but also offers you peace of mind. That said, you need to choose the right investments that will allow you to save a significant sum of money, while also adhering to the rules enforced by the Internal Revenue Service (IRS) with respect to income eligibility for retirement savings plans, tax implications, withdrawal restrictions, and more.</p>
<p>Additionally, retirement planning has undergone a significant change over the past couple of decades due to the increased life span of retirees in the United States. This has in turn increased the possible retirement span to 20 years (from the previous held 14 years). This means you would need to save a much higher sum for retirement compared to earlier generations. This change, coupled with rising inflation, could also further complicate your retirement plans. In June 2022, inflation rose to 9.1% in the country, a 40-year record high.<br /><br />The effect of inflation can be offset by saving sufficient funds and choosing investments in retirement that will allow you to build a well-diversified investment portfolio. Invest in instruments that offer you the desired returns while keeping your tax bill low. Ensure that your investments match your risk tolerance, the standard of living, investment horizon, and desired earnings. <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=6_investments_to_consider_for_retirement&amp;pagetype=articles" target="_blank"><strong>Reach out to a professional financial advisor</strong></a> who can help you create a retirement investment strategy based on your risk appetite, and future financial goals and needs.</p>
<h2>Below are some of the best investments for retirees to consider for a comfortable retirement:</h2>
<h3>1. Maximize your contributions to tax-advantaged retirement accounts</h3>
<p>While investing for retirement, you need to understand the differences between different types of investment accounts. You may invest in different options through an online brokerage account, but it does not offer tax benefits. Instead, you could consider investing in tax-advantaged retirement savings accounts, such as a 401(k), IRA, Roth IRA, etc. Compared to a brokerage account, these accounts may lack flexibility when it comes to asset allocation. However, they make up for it due to their significant tax advantages.</p>
<p>You can earn tax-free growth over time by investing your pre-tax income in a traditional IRA and 401k. However, you will have to pay tax at the time of making a withdrawal in retirement when you may be in a lower tax bracket. You can also invest in the Roth versions of the IRA and 401k accounts and earn tax-free returns by investing your after-tax income. Additionally, you can make tax-free withdrawals during retirement subject to certain conditions. Investing in a Roth IRA or Roth 401k would be especially beneficial if you expect to be in a higher tax bracket in the future. You also have the option of converting your traditional retirement accounts into their Roth counterparts if you meet certain requirements set by the IRS.</p>
<p>Both 401ks and IRAs have annual contribution limits that are revised by the IRS from time to time. For 2022, you can make an annual contribution of $20,500 to your 401k (both traditional and Roth). If you are 50 and up, you can make an additional catch-up contribution of $6,500, bringing your total to $27,000. As for your traditional and Roth IRAs, you can contribute up to $6,000 each year along with an additional catch-up contribution of $1,000 if you are 50 years old or above. This brings your total contribution to $7,000 for the year. Further, you must adhere to the income eligibility limits at the time of contributing to a traditional or Roth IRA. You can check the said limits at the IRS website. Ensure that you max out your annual contributions for all tax-advantaged retirement accounts to earn tax-free growth and tax-free returns on your <a href="https://www.rothira.org/articles/11-tips-for-retirees-to-make-their-retirement-savings-last-longer" target="_blank">retirement savings</a>.</p>
<h3>2. Invest in target-date funds</h3>
<p>Similar to mutual funds and exchange-traded funds (ETFs), target-date funds comprise stocks, bonds, and other investments with one key difference. You can invest your money in target-date funds for a fixed time frame after which your asset allocation is adjusted as per the fund investment strategy over a certain period of time. You would be able to make the most of these funds if you have a fair idea about when you will retire. For example, if you plan to retire in 2025, you can search for target-date funds in the market titled &ldquo;Portfolio 2025&rdquo;, &ldquo;Retirement Fund 2025&rdquo;, etc., which have been specially created for retirees who are planning to retire in or around 2025. Herein, the time period is critical as the composition of these funds would change automatically, switching to a more conservative asset allocation, as you near retirement. Moreover, 401ks offer the opportunity to invest in target-date funds. Before investing, do consider the fees and if the fund composition matches your long-term financial goals and needs.</p>
<h3>3. Invest in dividend-paying stocks</h3>
<p>Investing in companies that pay out regular dividends to their investors can help you secure a steady, fixed income for retirement. Dividend-paying stocks are ideal for providing income stability in retirement as they offer a steady retirement income coupled with capital appreciation due to the increase in stock value. If you have a low to moderate risk appetite, dividend-paying stocks can be a good investment for the future. Firms usually pay dividends in the form of shares, cash, or cash equivalent.</p>
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  <p style="font-size: 16px;">Choosing the right financial advisor is daunting, especially when there are thousands of financial advisors near you. We make it easy by matching you to vetted advisors that meet your unique needs. Matched advisors are all registered with FINRA/SEC.  <a href="https://www.wiseradvisor.com/match_advisors.asp?kwd=blog-ad-6-investments-to-consider-for-retirement&amp;utm_medium=middle" target="_blank" style="font-weight: 700;    color: #035184;">Click to compare vetted advisors now.</a></p>                        
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<h3>4. Don&rsquo;t miss out on investing in real estate</h3>
<p>Generally, investors tend to invest in traditional assets such as stocks, bonds, mutual funds, etc., and overlook real estate investments. Real estate can be a considerably profitable investment&nbsp;because it provides income on a regular basis regardless of market performance. However, before investing in real estate, you should understand that you would need to put in substantial resources, effort, and time to make it a success. Real estate investments require exhaustive knowledge and substantial capital investment. In addition, you would need to monitor and manage your real estate holdings to ensure that they remain in good condition. If you invest in real estate, you can rent out the place to earn a fixed retirement income. However, don&rsquo;t forget to account for the ensuing costs like mortgage, maintenance, repairs, and damages.<br /><br />You can also invest in REITs (Real-estate investment trusts) if you do not want to incur the aforesaid costs but want to earn high returns. Considered to be a lower-risk investment option compared to rental real estate, you can invest in firms that either own or mortgage real estate - shopping malls, retail centers, warehouses, apartments, etc. REITs offer a regular income to investors. However, you would have to shell out a fee for the same in lieu of firms taking care of different aspects of owning real estate such as buying, renting, managing, collecting rent, etc. Both ETFs and mutual funds offer REITs as an investment option to their investors.</p>
<h3>5. Consider investing in retirement annuities</h3>
<p>A retirement annuity is an investment instrument that promises regular, long-term income payments for a retiree for their remaining life. It provides financial safety and security during retirement but can be considered illiquid to some extent due to having large up-front costs and early withdrawal penalties. There are different kinds of annuities that you can buy such as:</p>
<ul>
<li><strong>Immediate annuities</strong>: Under immediate annuities, you pay a lump sum to the insurance company. The firm, in turn, pays you a fixed sum of money every month, quarter, six months, or year. Immediate annuities offer regular income during retirement with returns being comparatively higher than cash deposits.</li>
<li><strong>Variable annuities</strong>: If you opt for a variable annuity, you receive a lifetime income rider that adds stability to your retirement portfolio. These annuities generate high returns similar to equity investments. However, with the increased returns, you also open yourself to a much higher threshold of market risk as well.</li>
<li><strong>Deferred annuities</strong>: If you have invested in deferred annuities, you will be eligible to receive income during your retirement years. Though to receive said income, you will have to pay the insurance company in the present.</li>
</ul>
<p>Based on your retirement income needs, you can choose an annuity that best works for you. That said, you should not invest too heavily in annuities. Apart from variable annuities, they tend to offer average returns. Further, there are index annuities available as well that you can use to offset the <a href="https://www.rothira.org/articles/6-tips-to-protect-your-retirement-savings-against-high-inflation" target="_blank">effect of inflation</a>. These annuities offer a minimum guaranteed payment and pay an interest rate based on the market performance of an index such as the S&amp;P 500.</p>
<h3>6. Put your money in Qualified Longevity Annuity Contracts (QLACs)</h3>
<p>A kind of deferred annuity, QLACs allow you to receive regular income payments during the latter years of your life. If you have invested in a traditional 401k or IRA, you have to begin taking RMDs (Required Minimum Distributions) from your accounts when you reach 72 years of age. If you fail to do so, you would have to pay a penalty on the same. With QLAC, you can defer taking out your RMDs till you turn 85 which will allow you to keep your money safe for a longer period of time. In addition, you would be deferring your tax liabilities as well as keeping your tax bill low till the time you begin withdrawing your RMDs. For 2022, you can buy a QLAC for $145,000 that pays out indefinitely. Though QLACs offer you an assured income in retirement, they can be a risky investment if you pass away without using your retirement money. Buying a QLAC locks a certain portion of your retirement funds that you would not be able to use until the expiry of the deferment period which might be much longer than you anticipate living.</p>
<h2>To conclude</h2>
<p>Investing for your retirement needs require knowledge, time, effort, and financial acumen. Finding the best investments for retirees is not always easy. You have to ensure that the investments align with your risk appetite, life stage, and financial preferences at all times. In addition, you may need hands-on expertise and experience to manage your investments. You cannot eliminate risk entirely but can take certain steps to minimize it.</p>
<p>You can consult with a professional financial advisor who can find the right investments for retirement and secure your retirement. These professionals have years of experience and expertise that can help you build a foolproof investment portfolio tailored to your specific financial needs. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=6_investments_to_consider_for_retirement&amp;pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Do you wish to build a well-diversified investment portfolio? This article will help you create a retirement investment strategy based on your financial goals.

Top 6 Investment Options For Retirement Planning | Rothira.org

6 Investments to Consider for Retirement

<p>Due to an increase in the longevity and lifespan of Americans, they are enjoying longer retirements necessitating additional income to live comfortably in retirement. One way you can boost your retirement income is by maximizing Social Security benefits. Social Security is a federal benefits program that offers retirement benefits to qualified retirees including their spouses and children. The program also provides partial replacement income to individuals with disabilities along with their dependents. Officially known as Old-Age, Survivors, and Disability Insurance (OASDI), it serves as a source of retirement income that allows retirees to meet their living expenses.</p>
<p>Simply put, getting the maximum Social Security benefits depend on the age at which the individual begins claiming them. For example, if you started claiming your benefits at age 66 in 2022, you would have received a check for $3,345 per month. However, if you&rsquo;d waited till age 70, you would have received a sum of $4,194 per month. This is the highest benefit that a qualified individual can receive who delays claiming their Social Security benefits. If you wish to maximize your Social Security benefits as per your unique financial needs and goals, <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=maximum_social_security_benefit_what_it_is_and_how_you_can_receive_it&amp;pagetype=articles" target="_blank"><strong>reach out to a professional financial advisor</strong></a> who can advise you on what age you should consider claiming your Social Security benefits.</p>
<p>This article discusses Social Security benefits, how they are calculated, how to maximize them, and its eligibility criteria.</p>
<h2>What is the maximum Social Security benefit?</h2>
<p>Your Social Security benefits depend on a number of factors. First, to qualify for Social Security you need to earn 40 credits or work for a minimum of 10 years. Your Social Security benefits check is calculated by combining your 35 highest-paid years and the age at which you choose to begin claiming your benefits. <br /><br />Maximum Social Security benefit refers to the maximum amount of money you can receive from a Social Security check. The value of the check changes each year and depends on the age of the person drawing the benefit. For example, as per Social Security Administration in 2023:</p>
<ol>
<li>The maximum Social Security benefit at age 62 is $2,570.</li>
&nbsp;
<li>The maximum Social Security benefit at age 67 is $3,636. This is considered to be the Full Retirement Age (FRA). When you reach FRA, you are eligible to receive full Social Security retirement benefits. For folks born in 1955, the FRA is 66 years and two months. The FRA keeps increasing gradually. For individuals born in 1960 and after, the FRA is 67.</li>
&nbsp;
<li>The maximum Social Security benefit at age 70 is $4,559.</li>
</ol>
<p>As you can make out from the above-mentioned figures, if you begin claiming your Social Security benefits at age 62, you will receive a much lower amount compared to if you had waited till FRA. Let us find out how Social Security is calculated.</p>
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<h2>How to calculate Social Security benefits</h2>
<ol>
<li>Combine the total compensation received by you during your 35 highest-earning years. If you have worked for exactly 35 years, each year&rsquo;s annual income is considered. If you have worked for less than 35 years, then a zero value is assigned to the non-working years.</li>
&nbsp;
<li>Adjust the salaries for inflation to find out the current buying power of the total income earned by you. For example, the real value of $1,000 in 1990 will be quite different from its value in 2022 after indexing for inflation.</li>
&nbsp;
<li>Once your total income has been adjusted for inflation, your average indexed monthly earnings (AIME) value is calculated. This is done by dividing the sum of all indexed wages by 420 (number of months in 35 years)</li>
&nbsp;
<li>Once you have calculated your AIME, find out the Social Security benefit value by using the Primary Insurance Amount formula. The formula considers the year the worker will collect benefits, the AIME value, and the cost-of-living adjustment (COLA).</li>
</ol>
<h2>What are the eligibility criteria for claiming maximum Social Security benefits?</h2>
<p>To claim maximum Social Security benefits, your earnings must be more than or equal to the maximum taxable income for at least 35 highest-paid inflation-adjusted years of your working life. For 2023, the maximum taxable income is $160,200 up from $147,000 in 2022. This number is revised every year based on national wage levels and the prevalent rate of inflation. Thus, the value of the maximum Social Security benefit changes each year as well.</p>
<h2>How to get the maximum Social Security benefits</h2>
<p>As stated above, the value of your Social Security benefits check primarily depends on the age at which you retire. According to the Social Security Administration, the value of an average Social Security benefits check was $1,550.48 in October 2022. To receive the maximum Social Security benefit amount i.e. $4,559, you have to be a high-income earner for at least 35 years as well as delay claiming your Social Security benefits till the age of 70. Let us discuss how you can earn the maximum Social Security benefits in detail.</p>
<h3>1. Max out your contributions during your working years</h3>
<p>To maximize your Social Security benefits, you need to first calculate the average of your 35 highest-earning years after adjusting them for inflation. You can significantly boost your benefits at retirement if you contribute the maximum during your working years. One thing you should note is that the value of your Social Security benefits changes annually based on the national average wage.</p>
<h3>2. Delay claiming benefits till age 70</h3>
<p>The value of your Social Security benefits check is at its maximum value at age 70. So, ideally, you should wait till you turn 70 to start claiming your benefits despite having the option to begin making withdrawals at 62 to maximize your Social Security benefits. For 2023, the difference in the amount of maximum Social Security benefit between ages 67 and 62 is $1,066 per month. And if we compare withdrawing Social Security benefits at age 62 and age 70, the difference is a little more than $2,000 per month. This works out to a total of $24,000 per year which is a significant number. Do note that your benefits do not improve further if you defer your withdrawals beyond 70.</p>
<h2>When should you start claiming your Social Security benefits to maximize them?</h2>
<p>As discussed above, your Social Security benefits do not increase in value once you turn 70. Thus, there is monetary benefit in delaying claiming your benefits beyond 70 years of age. Moreover, the decision to withdraw your benefits should be based on your financial plan, present and future financial needs rather than the value of dollar. For example, it would be wise to claim your benefits to pay off your debt or in case of a health emergency.</p>
<h2>To conclude</h2>
<p>The age at which you choose to retire can result in a difference of $2,000 in your monthly Social Security benefits. To maximize your benefits, you must consistently earn a high income for 35 years and delay claiming the benefits until you turn 70. That said, every individual has different needs and goals and may be unable to wait till 70 to maximize their benefits. Consider your age, standard of living, economic status, life expectancy, financial health, among other factors at the time of deciding when to start claiming your Social Security benefits. If you need guidance on the same, do <a href="https://www.rothira.org/articles/4-tips-for-finding-a-qualified-financial-advisor-for-seniors" target="_blank">consult with a financial advisor</a>.</p>
<p>Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=maximum_social_security_benefit_what_it_is_and_how_you_can_receive_it&amp;pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to connect with vetted advisors who can help you understand Social Security benefits and when to claim them as per your unique needs and goals. Provide basic details about yourself, and the match tool will connect you with 1-3 advisors that are suited to help with your unique financial requirements.</p>

This article discusses Maximum Social Security benefits, including their calculation, how to maximize them, and the eligibility requirements.

Maximum Social Security Benefit: What Is It & How To Receive It? | Rothira.org

Maximum Social Security Benefit: What It Is and How You Can Receive It

<p>Financial experts advise clients starting to save for retirement from a young age. Not only does it give you more time to build a substantial retirement fund, but it also helps tackle market volatility over the long term. In addition, due to the increasing human lifespan, there is a risk that you may run out of money during the later years of your retirement. Hence, it is critical to start saving early and to have a contingency plan to help ensure your savings last you in retirement.</p>
<p>To build a substantial retirement corpus, you cannot simply rely on your investments and Social Security benefits. You must look for different ways to stretch your retirement savings and secure your financial future. Consider <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=tips_for_retirees_to_make_retirement_savings_last_longer&amp;pagetype=articles" target="_blank"><strong>consulting with a professional financial advisor</strong></a> who can guide you through how to make your savings last through the later years of your retirement.</p>
<p>This article discusses different ways you can continue saving money after retirement and ensure you do not run out of funds during the latter years of your life.</p>
<h2>11 tips to stretch your savings in retirement:</h2>
<h3>1. Consider downsizing your home</h3>
<p>Downsizing is a good idea if you wish to reduce your expenses and are unsure about your retirement savings lasting through the later years of your retirement. You can also explore living in a retirement community that provides care for retirees. Not only will you receive help in carrying out your daily chores, but you will get to spend time with people your age in the community. Moving to a retirement community will help you better manage your finances and cut down on costs such as property taxes, maintenance costs, utilities, etc. Doing so would also allow you to save more money and spend time on activities you enjoy. Moreover, if you own a large home, it means you most likely have to pay a higher premium amount for your homeowner insurance policy. Downsizing your home would help lower your insurance costs as well. <br /><br />A bigger home means a bigger garage, more furniture, and so on. You can sell your extra cars (if you have any) as well as put on sale any rare or vintage items owned by you. You can make do with one car unless you are still living with your children or other relatives. By selling your car, you can save the money spent on gas and paying auto insurance premiums. Another thing to consider when downsizing is the tax structure of the state you live in. Certain states such as Florida, South Dakota, Alaska, and Nevada charge lower taxes whereas Hawaii, New York, Oregon, California, and New Jersey are a few of the highest tax-paying states. Moving to a tax-friendly state can be a great way to save money.</p>
<h3>2. Re-examine your insurance coverage</h3>
<p>Taking out insurance depends on your personal needs as well as what you can afford financially. Typically, one requires higher coverage at the time of marriage and starting a family. Once your children have completed their education and have started working, you may consider lowering the coverage amount which will lead to lower premiums. That said, you should consider this strategy only if your children and your spouse are financially stable and can fulfill their needs and you are not burdened with debt. If you fall under this category, you can go ahead and lower your coverage amount to avoid overpaying for insurance. You can also reach out to your insurance company to learn ways to save money when you retire. See if your insurance provider can customize your policy based on your needs.</p>
<h3>3. Make use of senior discounts wherever available</h3>
<p>Many places offer discounts to senior citizens at the time of grocery shopping, booking travel tickets, at restaurants, or when you are going to the movies. You can start receiving senior discounts when you turn 50 if you buy a membership with the American Association of Retired Persons (AARP). The organization offers members discounts on multiple services such as insurance, pharmacy, auto rentals, travel, booking hotels, etc. in the United States. AARP negotiates on your behalf to help you avail of these discounts since most businesses do not advertise about them.</p>
<p>Apart from the above-mentioned benefits, seniors are eligible to avail of several other perks such as subsidized travel on public transport, tax deductions if you are 65 and up, penalty-free early withdrawals on IRAs, higher limits on retirement accounts with the help of catch-up contributions, and more. <a href="https://www.rothira.org/articles/seven-ways-to-maximize-your-tax-free-retirement-income" target="_blank">Maximize your savings</a> with the help of these offers while living a quality, financially secure life.</p>
<h3>4. Stick to your budget and cut down on your expenses</h3>
<p>Budgeting becomes even more critical when you retire since you do not have a regular paycheck to bank on. At this point in your life, you are living off your Social Security benefits, retirement savings, dividends, pension checks, or returns from investments made by you. Start by creating a plan for your monthly expenses. Focus on meeting your essential expenses such as groceries, insurance payments, utilities, and more, and cutting down on eating out, frequent vacations, subscriptions to OTT services, etc. A budget allows you to cut down on frivolous expenses while leaving room to indulge in a few guilty pleasures.&nbsp;</p>
<p><a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=tips_for_retirees_to_make_retirement_savings_last_longer&amp;pagetype=articles" target="_blank"><strong>You can also consult with a financial professional</strong></a> on different ways to lower your costs, save on retirement taxes, and decrease your monthly expenses while you are at it. The financial advisor can help you stretch your savings to last the remaining years of your life.</p>
<h3>5. Delay claiming your Social Security benefits</h3>
<p>You can start claiming Social Security benefits from the age of 62. However, each year that you delay drawing them, your benefits go up by 8% until you reach 70 years. You can consider this option if you have enough retirement savings or can work on a part-time basis to support your lifestyle. That said, claiming benefits early may seem prudent if you have an illness to contend with that and need the money to meet your health expenses.</p>
<h3>6. Plan your healthcare expenses in advance</h3>
<p>As you advance in age, you may face several minor and major health concerns. Due to the rising cost of healthcare, you need to create a well-thought-out plan that can help meet any expenses concerning any age-related issues that may crop up in the future. As per a recent study, retired couples of age 65 and above may end up spending over $660,000 on healthcare during the golden years of their life. Though you may not be able to avoid every expense, you can reduce the number of doctor visits, hospital trips, and the need for medications by following a healthy lifestyle.&nbsp;</p>
<p>You would also do well to buy a good health insurance policy when you are young since insurance rates tend to increase exponentially the older you get. Additionally, you need to take medical inflation into account. Insurance costs rose by 6.5% in 2022. A health policy that covers critical illnesses can go a long way toward reducing your medical expenses in retirement.</p>
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<h3>7. Plan your trips and vacations during the off-season</h3>
<p>You can save a considerable amount of money if you travel during the off-season. This tip is true for all people regardless of age. Flight and hotel rates tend to be less pricey. Plus you can explore the place in peace since fewer folks tend to travel during the off-season. You can also use the frequent flyer miles you may have accumulated over the years to go on vacations. Moreover, you can also take advantage of senior discounts offered by airlines to select places around the world to choose your next travel destination. Further, you can make use of credit card points to avail of handsome discounts on travel, shopping, making charitable donations, dining, earning cashback, and more.</p>
<h3>8. Consider working on a part-time basis</h3>
<p>By taking up a part-time job, you can boost your savings, Social Security, and other income sources. Doing so not only helps you keep your emergency fund intact but also pays off your debt (if you have any) without touching your retirement savings. Moreover, by taking up a part-time job, you can build social connections and stay active. This can help reduce stress and heart-related risks.</p>
<p>Further, it may be the case that some retirees may be unsure about their retirement savings lasting till the later years of their life. In this scenario, retirees can look for part-time jobs in their area. Usually, there are several part-time jobs available that they can look for such as caregivers, registered nurses, librarians, insurance sales agents, nutritionists, and more. These jobs are always in demand and popular among the retired.</p>
<h3>9. Create and maintain a diversified investment portfolio</h3>
<p>Diversifying your investments can help lower your risk by spreading it across different sectors, asset classes, and geographies. By maintaining a healthy mix of equity and debt options, you can benefit from steady growth and stable returns. As you grow older, you may look to go for safer investments such as hybrid mutual funds that assure long-term returns. You can also invest in bonds if you are looking for fixed-income options and tax-efficient returns.</p>
<h3>10. Consider delaying retirement by a few years</h3>
<p>This option can be explored by retirees in cases where there is a substantial gap between their expenses and retirement income. By delaying your retirement even for a few years, you can lower the likelihood of outliving your savings. In addition, you can keep making contributions to your retirement plans. This affords you more time and money to prepare for retirement.</p>
<h3>11. Utilize government benefits, such as senior care services</h3>
<p>The government offers several free benefits to people over the age of 65. You can take advantage of medical and care assistance, senior care services, and more through Medicare Savings Programs, the National Council on Aging, and the Social Security Administration. The programs offer financial assistance and can help manage healthcare costs for retirees.</p>
<h2>To conclude</h2>
<p>Saving for retirement requires discipline and a serious commitment. Each year, millions of Americans retire without having sufficient retirement savings. This is not ideal as you may not have enough money saved to live comfortably in retirement. However, it is never too late to build up your savings. You can also delay your retirement by a few years to boost your retirement income. Lastly, you can utilize the tips discussed in this article to boost your retirement savings and make it last through the non-working years of your life.</p>
<p>You can also get in touch with a financial advisor who can help guide you on how to stretch your retirement savings till the remaining years of your life. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=tips_for_retirees_to_make_retirement_savings_last_longer&amp;pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will help connect you with advisors suited to meet your financial needs and goals.</p>

Find out the best tips to boost your retirement savings and different ways you can continue saving money even after retirement to ensure financial security.

Best Tips to Boost Your Retirement Savings To Last Longer | Rothira.org

11 Tips for Retirees to Make Their Retirement Savings Last Longer

<p>An Individual Retirement Account (IRA) is a tax-advantaged retirement savings plan wherein you contribute either pre-tax or after-tax money that grows on a tax-deferred or tax-free basis. An IRA account helps you save for retirement and also avail of tax benefits. You can take a retirement savings contribution credit based on the amount you invest in an IRA. However, to do so you must qualify for a tax credit to contribute to your IRA. To calculate the tax credit, your total gross income and your IRA contribution amount are taken into account.</p>
<p>This tax credit is also known as the saver's tax credit. The saver's tax credit can be claimed by individuals having a low to moderate income who contribute to IRAs and certain defined-contribution plans such as 401(k), 403(b), SIMPLE, SEP, and more. If you need guidance on how you can claim a saver&rsquo;s tax credit on your IRA contributions and its benefits, consider <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=qualify_for_tax_credit_for_ira_contributions&amp;pagetype=articles" target="_blank"><strong>consulting with a professional financial advisor</strong></a> who can advise you on the same.</p>
<p>This article discusses the saver&rsquo;s tax credit, its eligibility criteria, and how you can claim its benefits.</p>
<h2>What is the Saver's Tax Credit?<strong><br /></strong></h2>
<p>The saver&rsquo;s tax credit is a tax break for middle and low-income taxpayers. It is a non-refundable tax credit that can be thought of as a subsidy for retirement savings. You can claim a tax credit of up to $1,000 a year as an individual taxpayer, however, if you are married and filing your taxes jointly, you can claim a tax credit of up to $2,000 per year. To avail of the saver&rsquo;s tax credit, you must make contributions to your IRA.</p>
<h2>What is the eligibility criteria for claiming the saver&rsquo;s tax credit?<strong><br /></strong></h2>
<p>To claim the saver&rsquo;s tax credit, you must be 18 years of age or older and not be a full-time student. You also cannot be claimed as a dependent on another person&rsquo;s tax return if you wish to file for a saver&rsquo;s tax credit. As stated above, you must also make an IRA contribution to be eligible for retirement savings credit. The Internal Revenue Service (IRS) sets income slabs according to which an individual can claim saver&rsquo;s tax credit as per their adjusted gross income (AGI). For 2023, the income limits for claiming saver&rsquo;s tax credit have been revised as follows:</p>
<ul>
<li>Households having a total AGI of $43,500 and below or individuals having an AGI of $21,750 and less can claim saver&rsquo;s tax credit at a rate of 50%.</li>
<li>Households having a total AGI of $43,501 to $47,500 or individuals having an AGI of $21,750 to $23,750 can claim saver&rsquo;s tax credit at a rate of 20%.</li>
<li>Households having an AGI of $47,501 to $73,000 or individuals having an AGI of $23,751 to $36,750 can claim saver&rsquo;s tax credit at a rate of 10%.</li>
</ul>
<p>Do note that any rollover contributions are not taken into consideration at the time of calculating your tax credit. This means that if you switch your job and transfer your retirement funds from one retirement account to another, you will be ineligible to claim a tax credit on those funds. Thus, do not include any rolled over funds while computing your retirement savings credit. In addition, take care to divest any excess contributions made to your IRA account within a stipulated time limit to avail of a tax credit.</p>
<h2>Which retirement accounts are eligible for claiming the saver&rsquo;s tax credit?<strong><br /></strong></h2>
<p>There are several company-sponsored retirement accounts and IRAs that are eligible for a tax credit. These are:</p>
<h3>1. Company-sponsored retirement accounts</h3>
<p>You can claim a saver&rsquo;s tax credit on the following retirement plans:</p>
<h4>401k:</h4>
<p>A 401k is a tax-advantaged retirement savings account offered by employers to their employees. The employees contribute their pre-tax income to the retirement account wherein the employer may match the employee contribution either partially or fully.</p>
<h4>SIMPLE 401(k):</h4>
<p>As the name suggests, SIMPLE 401(k) is a simplified version of a 401(k) offered by small business employers or companies having 100 or fewer employees.</p>
<h4>457(b):</h4>
<p>A 457(b) is a tax-advantaged retirement savings plan offered to employees working in the local and state governments as well as non-profit organizations.</p>
<h4>403(b):</h4>
<p>A 403(b) is a retirement savings plan offered to employees of public schools and tax-exempt organizations. Typically, teachers, professors, nurses, librarians, school administrators, government employees and doctors can open a 403(b) retirement account.</p>
<h4>SIMPLE IRA:</h4>
<p>Similar to the SIMPLE 401(k), small businesses having 100 or fewer employees can use the SIMPLE IRA plan.</p>
<h4>Simplified Employee Pension (SEP):</h4>
<p>A SEP-IRA is a company-sponsored retirement plan that can be opened by sole proprietors, partnerships, and corporations.</p>
<h3>2. Individual Retirement Accounts</h3>
<p>You can claim a saver&rsquo;s tax credit on the following IRAs:</p>
<h4>Traditional IRA:</h4>
<p>A traditional IRA is a tax-advantaged retirement savings account wherein you contribute your pre-tax dollars and your investments grow on a tax-deferred basis. However, your withdrawals are taxed in retirement.</p>
<h4>Roth IRA:</h4>
<p>In a Roth IRA, you contribute your after-tax dollars to earn tax-free growth on your contributions. In addition, you can make <a href="https://www.rothira.org/articles/8-ways-you-can-lower-your-taxes-in-retirement" target="_blank">tax-free withdrawals in retirement</a> provided you meet certain stipulated conditions set by the IRS.</p>
<h4>Achieving a Better Life Experience (ABLE) accounts:</h4>
<p>An ABLE account is a tax-advantaged account that can be set up for individuals diagnosed with significant disabilities before their 26th birthday. Contributions can be made by beneficiaries, friends, or family members.</p>
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  <p style="font-size: 16px;">Choosing the right financial advisor is daunting, especially when there are thousands of financial advisors near you. We make it easy by matching you to vetted advisors that meet your unique needs. Matched advisors are all registered with FINRA/SEC.  <a href="https://www.wiseradvisor.com/match_advisors.asp?kwd=blog-ad-rothira-do-you-qualify-for-a-tax-credit-for-your-ira-contributions&amp;utm_medium=middle" target="_blank" style="font-weight: 700;    color: #035184;">Click to compare vetted advisors now.</a></p>                        
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<h2>How to compute a saver's tax credit?<strong><br /></strong></h2>
<p>To calculate a saver's tax credit, you must apply the appropriate saver's tax credit range between 10% and 50% of the individual taxpayer's AGI. For example, suppose you have an AGI of $21,000 and contribute $1,000 to your IRA. As per your AGI, you are eligible to receive a 50% tax credit on your contribution i.e. $500. That said, if your AGI is $21,000 and you contribute $3,000 toward your IRA, you will receive only $1000 as a tax credit. This is because you can only receive the lesser of either $1,000 or the tax liability you would have had without the credit.</p>
<h2>How to claim a saver&rsquo;s tax credit?<strong><br /></strong></h2>
<p>Fill out the IRS Form 8880 and attach it to Form 1040 and submit them at the time of filing your tax returns. Do remember that the tax credit amount will be based on your IRA contributions and AGI.</p>
<h2>To summarize</h2>
<p>Tax credit can be a source of much-needed relief for low and middle-income taxpayers. It works as an incentive for individuals with low to middle income to set aside some money each month toward their retirement savings goal. The saver&rsquo;s tax credit helps subsidize that effort. That said, before filing for a tax credit, do check if you meet the eligibility criteria. Also, take care to fill out IRS Form 8880 before submitting your tax returns for the year.</p>
<p>Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?kwd=qualify_for_tax_credit_for_ira_contributions&amp;pagetype=articles" target="_blank"><strong>free advisor match service</strong></a> to get matched with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions on your financial needs, and the match tool can help connect you with advisors that are best suited to help you reach your financial goals and requirements.</p>

Learn everything about the saver’s tax credit for IRA contributions, its eligibility criteria, and how it can be beneficial for low and middle-income taxpayers.

What is Saver's Tax Credit For IRA Contribution - How to Get it | Rothira.org

Do you Qualify for a Tax Credit For Your IRA Contributions?

<p>There are a number of factors that are taken into consideration while planning for retirement. These factors include your annual income, age, present and future goals, health, life expectancy, number of dependents, family&rsquo;s needs, debt, and more which play a critical role in devising a retirement plan suited to your needs. That said, you also need to account for inflation as it can severely impact your corpus if left unchecked. Due to the continuously rising prices and the depreciating value of the dollar, inflation is affecting the financial plans of people saving for retirement. Be it the cost of housing, gas, beef, or healthcare expenses, everything is becoming more expensive. The COVID-19 pandemic did not help matters either. The inflation rate touched a high of 9.1% back in June &lsquo;22 and averaged 8% over the last year until October 2022. A high inflation rate is detrimental not only to investors, but also to retirees as they have fewer means of earning money. It is advised that you <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>reach out to a professional financial advisor</strong></a> who can offer you the right retirement planning tips to safeguard your retirement corpus from high inflation. <br /><br />This article discusses the impact of inflation on retirement planning and what steps you can take to protect your retirement savings from inflation.</p>
<h2>What effect does inflation have on retirement planning?</h2>
<p>Inflation not only eats up your savings and reduces the value of your income but it also causes your expenses to shoot up. These factors can have an adverse effect on your retirement planning in the following ways:</p>
<h3>1. Lowers your retirement plan contributions:</h3>
<p>As the prices of goods and services rise due to inflation, your monthly budget also increases forcing you to reduce your other costs, such as savings and investments. While you may be able to lower your discretionary expenses such as eating out, travel, etc., you may not be able to do so with your non-discretionary expenses like rent, water, groceries, gas, electricity, etc. Due to this, you may have to skip contributing to your retirement plan, lower the contribution amount, or exit the investment prematurely. This may be a temporary measure but can have a significant impact on your overall returns at the time of maturity.</p>
<h3>2. Adversely affects your net income:</h3>
<p>Inflation reduces the value of money over time which causes an increase in your monthly expenditure. Your salary may remain the same but your spending power decreases. In addition, it is unlikely that an employer would offer a bonus or hike during a period of high inflation. In fact, there is a higher probability that you may end up losing your job. Several tech giants such as Amazon, Twitter, Meta, and more are laying off employees to reduce their costs. This scenario can affect self-employed individuals even more as they do not have any formal cost of living adjustment.</p>
<h3>3. Reduces your investment returns:</h3>
<p>To combat the impact of inflation, the Federal Reserve hikes the Federal Reserve rate to protect the economy. The subsequent rate hike has a negative impact on companies and their earnings. This means that companies earn lesser revenues, which reduces their profit margins and, thereby, have less money to offer as dividends. In the end, you earn diminished investment returns due to a rise in inflation.</p>
<h3>4. Affects your Social Security benefits adversely:</h3>
<p>Every year the Social Security benefits are assessed and adjusted as per the Cost Of Living Adjustments (COLA). This exercise is carried out to protect people and their benefits from the rising costs of goods and services. As per a study, since the turn of the century Social Security benefits have lost one-third of their purchasing power over the past two decades. Having a period of high inflation can put a significant dent in your benefits check and force you to modify your budget in retirement.</p>
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<h2>What retirement planning tips can you use to safeguard your retirement against high inflation?</h2>
<p>To protect your retirement savings against high inflation, you can employ the following retirement planning tips:</p>
<h3>1. Invest your money in investments that offer inflation-beating returns</h3>
<p>Inflation if left unchecked can quickly eat away your retirement savings, thereby, it is critical that you invest your money in high-yield instruments that can generate inflation-beating returns. You can invest in real estate, currencies, commodities, high-yield bonds, cryptocurrencies, initial public offerings (IPOs), and more that offer high returns but carry significant risk as well. However, if you do not have a high risk appetite, you can invest in gold that offers a hedge against inflation. You can also consider investing in Treasury Inflation-Protected Securities (TIPS) that mimic the inflation rate in the country. The U.S. government issues TIPS which are a kind of U.S. Treasury bond. This investment option is inflation protected meaning with a rise in the inflation rate, the interest rates also increase and with a fall in the inflation, the interest rates also decrease.</p>
<h3>2. Consider delaying your retirement or working on a part-time basis during retirement</h3>
<p>If you are planning for retirement or are already retired, you may want to consider delaying your retirement by a few years if the country is experiencing a high inflationary period. Since inflation can deplete your savings, it is critical that you keep earning money otherwise you risk running out of money during retirement. For example, if you were planning to retire in 2022, you may be better off delaying your retirement by a few years due to the unusually high inflation rate of 8% over the past year. Doing so would allow you to earn more money and grow your retirement corpus. If it is not possible for you to work on a full-time basis, you can opt to work for limited hours. You may not earn as much but you would still be able to contribute to your corpus and meet your monthly expenses.</p>
<h3>3. Build a diversified investment portfolio</h3>
<p>Financial experts advise both new and old investors to diversify their investments. This helps protect against market volatility and ensures the investor can enjoy optimal growth at minimal risk. You can diversify your portfolio by investing in international stocks and bonds. You receive exposure to another country&rsquo;s growth prospects that can help counteract losses from domestic stocks. Pick international stocks based on the company&rsquo;s fundamentals, core principles, government policies, the country&rsquo;s demand and supply situation, and more. Take care to diversify your international holdings as well by investing in different market capitalizations, sectors, etc. When it comes to international bonds, you can earn dividends at a steady clip allowing you to build your retirement fund at low risk. International bonds are similar to domestic bonds except for the fact that they are issued in a different currency. Further, before investing in international stocks and bonds, ensure that you understand the ensuing taxation rules and the risk involved in the said investment.</p>
<h3>4. Lower your expenses</h3>
<p>Cutting back on your expenses can enable you to save more money for retirement and prevent your monthly budget from spiraling out of control in times of high inflation. In a high inflationary period, meeting essential expenses can be tough let alone non-essential ones. To keep your expenses in check, create a budget and stick to it. Keep an eye on every dollar that you spend and try to inculcate financial discipline. Postpone any discretionary expenditure such as a vacation, a new car, etc. to another time. Further, prioritize spending on retirement contributions, debt repayments, and health insurance premiums. These are essential expenses that should not be deferred or cut back on. Skipping or reducing your retirement contributions can affect your future financial security while not paying health or life insurance premiums can leave you in a precarious position should you suffer a health emergency or an untimely death. Not to mention you would have to pay a higher premium if you invest in health or life insurance in your 50s or 60s. Lastly, if you miss out on repaying your debt, doing so will lower your credit score and it will be harder to secure a future loan.</p>
<h3>5. Consider downsizing your home</h3>
<p>Downsizing can be hard for families and children and may also have a bearing on your social standing. That said, if you move to a smaller home you can cut back on your expenses significantly. You can lower your maintenance expenditure and perhaps even do a garage sale to earn some extra money. You can also use the opportunity afforded by downsizing to move to a more modest neighborhood having lower rent, quality schools, affordable supermarkets, etc., or to a location preferably near your place of work to save money otherwise spent on commuting. Retirees may consult with a professional if they are thinking of downsizing. The advisor can assess the value of real estate in their present area of residence to figure out if the prices are rising or falling. If the value of real estate is going up, selling your property and moving to a more affordable city or state can prove to be helpful to cover the gap caused by inflation. At the time of making this decision, do not neglect to compare the taxes of different states and pick one that best matches your needs.</p>
<h3>6. Consult with a professional financial advisor</h3>
<p>A financial advisor can help navigate any twists or turns caused by inflation in your retirement planning. They can assist you with budgeting, tax planning, estate planning, buying insurance, investment planning, and more. In addition, the advisor can help you downsize or relocate to another state or city where you would be able to live comfortably in retirement. Hiring a financial advisor may seem like an additional expense, but it is critical that you understand their value and the fact that it is an investment for your future. A financial expert can help manage your finances and offer their years of experience to make informed decisions. You can hire a professional on an hourly, monthly, or annual basis, on a retainer, or for a one-time project.</p>
<h2>To conclude</h2>
<p>Every retiree wishes for a financially secure retirement where inflation does not play spoilsport. But it is likely that may not happen. This is why it is advised that you follow the retirement planning tips mentioned earlier to minimize your risk. A period of high inflation may be followed by one with low inflation, where you can afford to feel a bit more at ease. However, until that happens, it is advised that you remain vigilant with your money and not make hasty decisions. Moreover, you can also consider hiring a financial advisor who can help guide you on how to safeguard your retirement funds against inflation and generate steady returns during this period.</p>
<p>Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to get matched with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions on your financial needs, and the match tool can help connect you with advisors that are best suited to help you reach your financial goals and requirements.</p>

Read to understand the impact of inflation on retirement planning and what steps you can take to protect your retirement savings from the risk of high inflation.

How To Protect Your Retirement Savings From High Inflation | Rothira.org

6 Tips to Protect Your Retirement Savings Against High Inflation

<p>Planning for retirement is critical when it comes to securing the latter years of life from a financial standpoint. If you start saving from a young age, you will stand in good stead and be able to build a significant retirement corpus provided you are consistent and invest in the right options. However, if you have started saving at a later stage in life, don&rsquo;t lose heart. There are certain strategies you can use to make up for lost time and save enough for retirement. <br /><br />That said, you must account for taxes at the time of retirement planning. Taxes can not only deplete your savings but can also affect your future retirement income. <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>Consult with a professional financial advisor</strong></a> who can help you minimize your tax liability and educate you about different kinds of tax-savings strategies.</p>
<p><strong>In this article, we will discuss some ways you can use to lower your taxability in your retirement years.</strong></p>
<h2>Why is tax planning important when it comes to saving for retirement?</h2>
<p>If you think having saved enough for a comfortable retirement and amassing a substantial corpus means you are through with your job, it may not be entirely true. You need to consider the impact of taxes on your savings and withdrawals to ensure that you can minimize its effect and receive the bulk of your retirement money. <br /><br />Taxes on retirement funds have been consistently rising over the past few years and this trend may continue in the future as well. This may have a twin effect of eating your savings at a faster rate and depreciating the value of your money if the tax rates continue to rise. Further, with the loss of a steady income in retirement, you would have to rely primarily on your withdrawals to meet your expenses. Poor tax planning, in this scenario, can wreak havoc on your finances. Thus, you need to ensure that you lower your taxability to live comfortably in your golden years without worrying about money. <strong><br /><br /></strong>Let us discuss different ways you can lower your tax obligations.</p>
<h2>How to minimize your taxes in retirement?</h2>
<p>An essential aspect of <a href="https://www.rothira.org/articles/retirement-planning-checklist-10-years-from-retirement" target="_blank">retirement planning</a> involves timing your withdrawals to ensure you do not move up a tax bracket and attract higher taxes. Apart from that, you can also take certain measures and use strategies to lower your taxes. These are:<strong>&nbsp;</strong></p>
<h3>1. Understand what can be taxed and what not:</h3>
<p>Contributions to different retirement plans are treated differently when it comes to taxes. While contributions to plans such as 401ks, traditional Individual Retirement Accounts (IRAs), and traditional 403(b)s, etc., are made with pre-tax dollars, the ones to Roth 401ks, Roth IRAs, and Roth 403(b)s, are made with after-tax dollars. This means that you do not pay tax on the former but have to do so at the time of making withdrawals in retirement whereas you pay tax at the time of making contributions to the latter but can make tax-free withdrawals in retirement provided you meet certain conditions. <br /><br />Investments in real estate, stocks, mutual funds, ETFs, brokerage accounts, etc., attract tax on the capital gains made by you. If you know which investments are taxable along with how they are taxed, doing so will allow you to lower your taxability.</p>
<h3>2. Rollover your traditional IRA account to a Roth IRA plan:</h3>
<p>One of the major benefits of converting your traditional IRA account to a Roth IRA account is the ability to make tax-free withdrawals in retirement. However, to do so, you must be 59.5 years of age or older at the time and must have held your account for a period of at least 5 years. Moreover, if you expect to be in a higher tax bracket in retirement, switching to a Roth IRA account would be a wise move for you.</p>
<h3>3. Diversify your taxes:</h3>
<p>Similar to the diversification of investments, you can diversify your taxes as well. Doing so not only allows you to reduce your losses but also helps you lower your taxability. For instance, you can invest in tax-deferred accounts such as a 401k, traditional IRA, etc., where you can defer paying taxes. Herein, you do not pay taxes at the time of making contributions but at the time of making a withdrawal in retirement. You can use the saved money to meet your present expenses or for any other need you wish to fulfill. <br /><br />In a similar vein, you can invest in tax-free accounts such as a Roth IRA, Roth 401k, etc., where you make contributions with your after-tax dollars. This means that you pay taxes at the time of contributing to your retirement account and can make tax-free withdrawals in retirement provided you meet certain conditions set by the Internal Revenue Service (IRS). Investing in a Roth account is beneficial if you expect to be in a higher tax bracket post-retirement.</p>
<h3>4. Switch to a Roth 401(k) account:</h3>
<p>Similar to a Roth IRA, you can roll over your traditional 401k account to a Roth 401k account. The switch will allow you to grow your funds on a tax-free basis plus make tax-free withdrawals in retirement. In addition, you will not be required to take out required minimum distributions (RMDs) when you turn 72. You can keep your funds invested for as long as you wish to do so.</p>
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                         <p> <a href="https://www.wiseradvisor.com/match_advisors.asp?kwd=blog-ad-rothira-8-ways-you-can-lower-your-taxes-in-retirement&amp;utm_medium=middle" style="color:#035184;     font-size: 20px;font-weight: 700; text-decoration: none;" target="_blank">Need a financial advisor? Compare vetted advisors matched to your specific requirements.</a></p>
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<h3>5. Max out your catch-up contributions:</h3>
<p>If you are 50 or above, you can make additional catch-up contributions to boost your retirement savings and save more for retirement. For 2022, you can contribute $20,500 annually to your 401k account. You also have the option of contributing an additional $6,500 if you are 50 years of age or up, meaning you can invest a sum of $27,000 per year. On the other hand, you can contribute $6,000 per year to your IRA account plus an additional $1,000 in catch-up contributions, bringing your total to $7,000 for the year. <br /><br />By maxing out your catch-up contributions, you can make up for shortfalls during previous years of contributions and boost your retirement funds significantly.</p>
<h3>6. Avoid making early withdrawals:</h3>
<p>Making an early withdrawal not only depletes your retirement savings but can also attract a tax penalty of 10%. To avoid the aforesaid penalty, you must be 59.5 years or older at the time of making a withdrawal from your account. This is true for both 401ks and IRA accounts. However, there is an additional condition for Roth accounts. Apart from being 59.5 years of age, you must have held your Roth account for at least 5 years before you can make a tax and penalty-free withdrawal. <br /><br />That said, there are certain exceptions to this rule. You can make an early withdrawal without incurring a penalty in the following situations:</p>
<ol>
<li>You are buying a home for the first time</li>
<li>You have to pay your health insurance premium after the loss of a job</li>
<li>You have to pay the college tuition of your children or grandchildren</li>
<li>You have to pay medical expenses</li>
</ol></br>
<h3>7. Take out your RMDs in a timely manner:</h3>
<p>RMDs refer to mandatory withdrawals that you must take out after you turn 72. Both traditional IRA and 401k accounts require investors to take out RMDs to avoid incurring a penalty of 50% of the amount that should have been distributed. Do note that this penalty would be in addition to any income tax that you will be liable to pay for that particular tax year.</p>
<h3>8. Invest in tax-exempt instruments:</h3>
<p>By investing in tax-exempt investments such as municipal bonds, treasury bills, notes, Treasury Inflation-Protected Securities (TIPS), etc., you can reduce your tax burden considerably. However, keep in mind that these securities offer lower returns compared to stocks or mutual funds.</p>
<h2>To conclude</h2>
<p>Tax planning is an integral aspect of retirement planning wherein you try and ensure that you pay the lowest taxes possible. You need to take into account several factors such as your income, the size of your investments, the timing of purchases, the choice of investments, and retirement plans at the time of making a tax-efficient strategy. Ensure that you make use of tax-saving strategies to lower your tax burden. You can also consult with a financial advisor who can help you find ways to reduce your taxes and boost your retirement savings at the same time.</p>
<p>Reach out to a professional financial advisor in your area who will be able to guide you effectively on how to lower your taxability with the help of tax-saving strategies. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will help connect you with advisors that suit your financial needs.</p>

Tax planning is very important when it comes to saving for retirement. Learn how to reduce your taxes and lower your tax liability in your retirement years.

How to Reduce Taxes in Retirement - Tax Planning Strategy | Rothira.org

8 Ways You Can Lower Your Taxes in Retirement

<p>With an increase in life expectancy, many retirees need to prepare for a long retirement ahead of them. As of 2022, the average retirement age is around 64 in the United States. The United States is also home to the highest number of centenarians in the world estimated to be around 97,000. If you retire at the age of 65, as per the Social Security Administration (SSA) you are looking at another 19 to 21.5 years ahead of you. Additionally, at least a third of 65-year-olds can reach 90 years of age and one in seven 65-year-olds may likely live beyond the age of 95 years.</p>
<p>Retirement planning involves preparing for the unexpected. Apart from saving enough money for the future, you also need to plan for a retirement that may last a considerable amount of time, based on different factors such as your health, retirement age, medical advancement in the future, etc. <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>Consider consulting with a professional financial advisor</strong></a> who can help you protect your retirement and ensure you have enough money saved for your golden years.</p>
<p>In this article, we will discuss longevity risk and the different ways in which you can protect your retirement savings.</p>
<h2>What is meant by longevity risk in retirement?</h2>
<p>Simply put, living beyond life expectancy rates is termed a longevity risk. For example, suppose you live beyond 79.05 years of age i.e. the current average life expectancy in the US, you would risk running out of money in retirement. Ideally, both longevity risk and retirement savings should be balanced meaning if you have adequate savings, you can live a financially secure and comfortable retirement. That said, it doesn't usually happen as many people lack the necessary financial discipline to save for retirement and risk outliving their retirement savings. Further, longevity risk can lead to an increase in health expenses and insurance premiums as people of advanced age require better health insurance schemes and long-term care owing to a greater number of health issues.</p>
<h2>What are the different ways by which you can protect retirement savings?</h2>
<p>There are certain steps you can use to ensure you have an adequate retirement corpus:</p>
<h3>1. Start planning for retirement from a young age</h3>
<p>If you begin <a href="https://www.rothira.org/articles/retirement-planning-checklist-10-years-from-retirement" target="_blank">retirement planning</a> from a young age, you can not only lower longevity risk but also take advantage of a longer investment horizon. Doing so allows you to weather market fluctuations and help boost your gains in the end. In addition, you can make the most of the power of compounding to earn significantly more. Having a long-term investment approach is beneficial as it helps reduce the impact of lost opportunities, making untimely exits, and emotional decisions. Herein, your money keeps growing at a steady pace ensuring you have a secure financial future in the long run.</p>
<h3>2. Ensure you have enough saved for retirement</h3>
<p>Having a sufficient retirement corpus would allow you to meet your financial needs post-retirement and ensure you have peace of mind. Consider different factors such as the age you retire at, your tax liabilities, the duration of your retirement, the state you reside in, the number of dependents you have, and more, at the time of planning for a <a href="https://www.rothira.org/articles/8-tips-to-help-make-your-retirement-plan-successful" target="_blank">financially safe retirement</a>. With advancing age, you may also have to pay attention to your health issues. With deteriorating health in your 50s or 60s, your health expenses may shoot up requiring more money. If you are thinking of retiring earlier than the average retirement age, you would need to save more aggressively to ensure you have a substantial retirement fund. Be realistic when it comes to your retirement income goals and pay attention to your health. Further, you can keep a tab on your savings and check if you are on track with meeting your needs with the help of retirement calculators.</p>
<h3>3. Delay withdrawing your Social Security benefits</h3>
<p>You can further boost the value of your Social Security check if you delay claiming it by a few years. Normally, you would be able to start withdrawing your benefits at the age of 66 (if you were born before the year 1960) or 67 (if you were born in the year 1960 or later). However, if you wait till you are 70 years of age, you can increase the value of your Social Security check by 32%. In fact, for every year you do not claim your benefits, your monthly check value goes up by an extra 8%. Compared to the cost of living adjustments (COLAs) for Social Security benefits (which comes at 1.5% per year on average), it is much higher than that. Moreover, if you have enough money saved up for the initial years of your retirement, you can easily wait till you turn 70 to claim your Social Security benefits. Doing so would allow you to mitigate the effects of longevity risk if you live past the average life expectancy.</p>
<h3>4. Plan your withdrawals systemically</h3>
<p>To ensure you do not make an early or untimely withdrawal, you must plan your withdrawals keeping in mind your total savings, the prevalent inflation rate, your changing financial needs, and more. You can easily become complacent looking at your entire retirement savings as a whole but you have to remember that these funds have to last the remainder of your life. Also, you may not have an additional income source other than your investment returns and savings to bank upon. You may also have to grapple with rising health costs, unplanned financial emergencies, inflation, etc., that would further diminish your retirement fund. Avoid making a significant withdrawal in the initial years of retirement as that can leave you financially unprotected later.</p>
<p>You can use the 4% rule to time your withdrawals systemically. Herein, as per the rule, you can withdraw 4% of your total retirement savings in the first year of your retirement after which you can adjust your withdrawals as per the prevailing inflation rate. You can also use any other strategy of your choice but take care to follow a balanced withdrawal rate for your retirement. Having a longer withdrawal rate in the initial years of retirement would help ensure your retirement fund lasts longer.</p>
<h3>5. Add annuity plans to your investment portfolio</h3>
<p>Annuity plans are financial products that offer assured payouts to retirees ensuring financial liquidity for life. These plans are low-risk and provide a guaranteed income stream for life. There are primarily two kinds of annuities &ndash; immediate and deferred. In an immediate annuity plan, you can begin receiving payouts immediately after making a lump sum premium payment whereas, in a deferred annuity plan, you can determine a set date in the future when you would start taking payouts. Before investing in an annuity plan, take care to compare the interest rates of different plans as the rates are fixed at the beginning of the policy term and remain the same for the entire duration of the annuity plan. Hence, choose a plan that offers a high-interest rate to <a href="https://www.rothira.org/articles/6-tips-to-protect-your-retirement-savings-against-high-inflation" target="_blank">beat inflation</a>.</p>
<h3>6. Diversify your investment portfolio</h3>
<p>Your choice of investments plays a critical role in securing your retirement funds. Diversifying your investments helps mitigate risk and save more money, thereby reducing longevity risk. If you want high inflation-beating returns, invest in high-risk, high-profit-generating investments like stocks, real estate, exchange-traded funds (ETFs), equity mutual funds, and even cryptocurrencies. At the same time, you would need to balance the risk by choosing relatively low-risk options such as bonds, government securities, and certificates of deposits (CDs), among others. Do not neglect to invest in tax-advantaged retirement accounts such as 401ks, Individual Retirement Accounts (IRAs), etc. Your money can grow on a tax-deferred basis meaning you would not have to pay taxes in retirement, thereby, protecting the value of your retirement corpus. Moreover, these instruments help inculcate financial discipline and follow a long-term investment approach.<br /><br />You also have the option of investing in other tax-advantaged accounts such as the Health Savings Account (HSA) or the 529 plan that helps save for specific goals such as meeting health expenses or funding college tuition. In an HSA, you can take advantage of tax-deferred growth tax-free withdrawals provided the money is used for qualified health expenses. When it comes to a 529 plan, you can benefit from certain tax advantages such as tax-deferred growth, tax-free qualified withdrawals, and tax-deductible contributions. By investing in the aforesaid tax-advantaged accounts, you can attain different financial goals without them impacting your retirement savings.</p>
<h3>7. Engage the services of a financial advisor</h3>
<p>Financial advisors are qualified professionals who have amassed years of experience, knowledge, and financial acumen and can help you understand longevity risk better. With their expertise, they can help you effectively plan for the future and meet your needs in areas concerning investment planning, estate planning, tax planning, retirement planning, and more. The advisor can also assist in creating a diversified portfolio and maintaining a budget to keep your expenses under control so you do not risk running out of funds. Additionally, as you near retirement, you may need to adjust your portfolio as the focus shifts toward capital preservation. You would also need to account for market fluctuations and rising inflation. Moreover, you would have to refresh your portfolio from time to time, sell off underperforming or loss-making investments and buy new investments. A financial advisor can help carry out all these tasks as well as <a href="https://www.rothira.org/articles/8-ways-you-can-lower-your-taxes-in-retirement" target="_blank">reduce your taxes in retirement</a>, thereby ensuring you have sufficient savings to live comfortably in retirement.</p>

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<h2>To conclude</h2>
<p>Due to medical advancements and increasing life expectancy, longevity risk is becoming a more common phenomenon. It is not uncommon to see retirees struggle to meet their living expenses. This may be due to a lack of planning or circumstances outside their control. Retirees need to plan for a scenario where they may live longer than they may expect to. Sound retirement planning can help you live comfortably in your golden years without worrying about money. Ensure that you start saving from a young age, do not overspend in retirement, and remain consistent when it comes to saving money.</p>
<p>It is advised that you consult with your financial advisor who can help you protect your retirement financially and create a suitable plan to ensure the same. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will help connect you with 1-3 advisors that match your financial needs.</p>

Learn everything about longevity risk and the different ways in which you can protect your retirement savings from it for financial security in retirement.

Longevity Risk in Retirement - How To Protect Your Savings | Rothira.org

7 Ways to Protect Your Retirement From Longevity Risk

<p>To live comfortably in the golden years of your life, you need to plan for retirement well in advance. Not only do you require enough funds to last your retirement but you also need to plan your taxes, withdrawals from your retirement accounts, estate, plus set up an emergency fund, and more. If you start saving in your 20s or 30s, you may have a solid 30 to 40-year window to save funds till you retire. However, this window can be cut short if you plan to retire early or start saving much later in life like in your 40s. If so, you would need to save more aggressively to ensure you have sufficient funds to last your post-retirement years.<br /><br />You do not need to be an expert in financial matters to get your retirement planning underway. Nowadays, you can find quality information from YouTube, books, blogs, financial experts, and more on how to best prepare for retirement. Do a Google search on &lsquo;retirement planning tips&rsquo; and more than 11.5 million results will pop up in less than a second. It can be overwhelming. But you must devise a proper retirement plan to attain your financial goals. In addition, you must be consistent when it comes to saving and investing your income. You can make use of these retirement planning tips to ensure that you are on the right track, plan ahead, monitor your progress, and revise your plans based on your changing financial needs and lifestyle. You can also <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>consult a professional financial advisor</strong></a> who can suggest tips for making your retirement planning successful and help build a significant retirement corpus.</p>
<p><strong>In this article, we will discuss some retirement planning tips that will help you live comfortably in </strong><strong>retirement:</strong></p>
<h2>1. Consider options apart from Social Security benefits:</h2>
<p>On average, Social Security benefits can replace about 40% of your earnings, however, due to the diminishing value of the Social Security benefits check, you should not solely rely on it and explore different avenues of investment for retirement planning. The money contributed by you to the Social Security system is primarily invested in bonds and special U.S. government securities that earn interest and are backed by the full faith and credit of the U.S. government. When interest rates are high or climbing, your money compounds more, however, with a fall in the interest rates the value of your Social Security check would reduce. This has been true for the past few years with interest rates remaining consistently low which has, in turn, impacted the overall Social Security program. This situation has been exacerbated by the increase in life expectancy due to which your&nbsp;Social Security benefits<strong>&nbsp;</strong>pool is unable to cover you for a lifetime. You can counteract this problem by delaying claiming the benefits that would allow you to increase the value of your monthly check. With each passing year that you forego claiming your Benefits, the value of your monthly Social Security benefits checks increases considerably. However, if you claim your benefits before reaching your full retirement age (FRA), the value of your monthly check will be reduced significantly. For example, if you claim Social Security at 62 but your FRA is 66, your monthly Social Security benefits would be reduced by 25%. Do make a note of this at the time of claiming your benefit.</p>
<h2>2. Max out your 401k contributions:</h2>
<p>The 401k is a popular tax-advantaged retirement savings account that can help you save for retirement and build a significant retirement corpus. It is an employer-sponsored retirement plan offered by a company to its workers. The main benefit of a 401k is the employer&rsquo;s match where the company matches the employees&rsquo; contributions up to a certain limit allowing you to save more. The contribution limits are set by the Internal Revenue Services (IRS) and revised from time to time. For 2022, the&nbsp;401k contribution limits are as follows:</p>
<ul>
<li>$20,500 for those aged below 50</li>
<li>$20,500 and an additional catch-up contribution of $6,500 for those aged 50 or up, bringing the total to $27,000</li>
</ul>
<p>It is advised you max out your contributions as the more you contribute, the more you would benefit from employer&rsquo;s match too. It&rsquo;s a win-win situation for you.<br /><br />Moreover, there are two kinds of 401ks - a traditional and a Roth account. In a traditional 401k, you make contributions from your pre-tax income whereas in a Roth 401k, you make contributions from your after-tax dollars. This means in the former, your taxable income is reduced but withdrawals are taxed and in the latter, you receive no tax deduction but you can make <a href="https://www.rothira.org/articles/seven-ways-to-maximize-your-tax-free-retirement-income" target="_blank">tax-free withdrawals</a> in retirement. Roth 401ks are a better proposition for those retirees who expect to be in a higher tax bracket in retirement. <br /><br />Further, the IRS mandates that traditional 401(k) account owners must take mandatory required minimum distributions (RMDs) once they turn 72. Roth 401k owners are exempt from this stipulation. You can take professional help to choose investments for your 401k such as bonds, mutual funds, exchange-traded funds (ETFs), stocks, target date funds, etc., as per your needs and financial goals.</p>
<h2>3. Invest in an Individual Retirement Account (IRA) to boost your retirement fund:</h2>
<p>Other than a 401k, an IRA is another type of tax-advantaged retirement plan available to folks looking to save for retirement. An IRA can be opened by a bank, mutual fund house, broker, credit union, or a life insurance company as well. An IRA can be beneficial for those who do not own a 401k and can be opened by 401k owners as well. There are several kinds of IRAs, however, the most popular among them are a traditional and Roth IRA. The contribution limits for both traditional and Roth IRA are the same. For 2022, the contributions limits are as follows:</p>
<table style="width: 926px; height: 410px;" border="1">
<tbody>
<tr style="height: 64px;">
<td style="width: 270.332px; text-align: center; height: 64px;">
<p><strong>Filing status</strong></p>
</td>
<td style="width: 356.934px; text-align: center; height: 64px;">
<p><strong>Modified Adjusted Gross Income&nbsp;(MAGI)</strong></p>
</td>
<td style="width: 277.754px; text-align: center; height: 64px;">
<p><strong>Maximum annual contribution</strong></p>
</td>
</tr>
<tr style="height: 64px;">
<td style="width: 270.332px; text-align: center; height: 26px;">
<p style="text-align: left;">Single, head of household, or married&nbsp; taxpayers filing separately</p>
</td>
<td style="width: 356.934px; text-align: center; height: 26px;">
<p>Less than $129,000</p>
</td>
<td style="width: 277.754px; text-align: center; height: 26px;">
<p>$6,000 or $7,000 if 50 or older</p>
</td>
</tr>
<tr style="height: 46px;">
<td style="width: 270.332px; text-align: center; height: 46px;">
<p>&nbsp;</p>
</td>
<td style="width: 356.934px; text-align: center; height: 46px;">
<p>$129,000 up to $144,000</p>
</td>
<td style="width: 277.754px; text-align: center; height: 46px;">
<p>Contribution is reduced</p>
</td>
</tr>
<tr style="height: 46px;">
<td style="width: 270.332px; text-align: center; height: 46px;">
<p>&nbsp;</p>
</td>
<td style="width: 356.934px; text-align: center; height: 46px;">
<p>$144,000 or more</p>
</td>
<td style="width: 277.754px; text-align: center; height: 46px;">
<p>No contribution allowed</p>
</td>
</tr>
<tr style="height: 64px;">
<td style="width: 270.332px; text-align: center; height: 47px;">
<p style="text-align: left;">Married taxpayers filing jointly or&nbsp; qualifying widow(er)</p>
</td>
<td style="width: 356.934px; text-align: center; height: 47px;">
<p>Less than $204,000</p>
</td>
<td style="width: 277.754px; text-align: center; height: 47px;">
<p>$6,000 or $7,000 if 50 or older</p>
</td>
</tr>
<tr style="height: 46px;">
<td style="width: 270.332px; text-align: center; height: 46px;">
<p>&nbsp;</p>
</td>
<td style="width: 356.934px; text-align: center; height: 46px;">
<p>$204,000 up to $214,000</p>
</td>
<td style="width: 277.754px; text-align: center; height: 46px;">
<p>Contribution is reduced</p>
</td>
</tr>
<tr style="height: 46px;">
<td style="width: 270.332px; text-align: center; height: 46px;">
<p>&nbsp;</p>
</td>
<td style="width: 356.934px; text-align: center; height: 46px;">
<p>$214,000 or more</p>
</td>
<td style="width: 277.754px; text-align: center; height: 46px;">
<p>No contribution allowed</p>
</td>
</tr>
<tr style="height: 64px;">
<td style="width: 270.332px; text-align: center; height: 43px;">
<p style="text-align: left;">Married taxpayers filing separately</p>
</td>
<td style="width: 356.934px; text-align: center; height: 43px;">
<p>Less than $10,000</p>
</td>
<td style="width: 277.754px; text-align: center; height: 43px;">
<p>Contribution is reduced</p>
</td>
</tr>
<tr style="height: 46px;">
<td style="width: 270.332px; text-align: center; height: 46px;">
<p>&nbsp;</p>
</td>
<td style="width: 356.934px; text-align: center; height: 46px;">
<p>$10,000 or more</p>
</td>
<td style="width: 277.754px; height: 46px; text-align: center;">
<p>No contribution allowed</p>
</td>
</tr>
</tbody>
</table>
<p><br />Similar to 401ks, you must try and max out your IRA contributions. Herein, you have a number of investment options available to you to choose from like money market accounts, mutual funds, ETFs, certificates of deposits, stocks, etc. Select any among them as per your needs and financial goals. &nbsp;</p>
<h2>4. Take into account healthcare expenses:</h2>
<p>Healthcare expenses form a chunk of your expenses in retirement due to advancing age. With rising medical inflation, you may find it challenging to cover the costs of basic medical procedures. You can cover your healthcare expenses by investing in a good health insurance plan that takes care of your long-term care insurance, critical illnesses, etc., allowing you to focus on your health rather than worrying about hospital bills. You can also invest in a Health Savings Account (HSA) i.e. a tax-advantaged account that can help you save for qualified medical expenses in retirement. These expenses include medical costs, prescription drugs, dental expenses, vision care, etc. Both you and your employer can contribute to your HSA. For 2022, the contribution limit for an individual is $3,650 and $7,300 for a family. In addition, individuals aged 55 or above can make an additional catch-up contribution of $1,000 to their HSAs.</p>
<h2>5. Start planning for retirement from a young age:</h2>
<p>It takes a considerable amount of time to build a significant retirement corpus and save for retirement. Hence, it is critical that one starts saving from a young age. This allows you to take advantage of the power of compounding as your money grows over time generating better returns for you. Another advantage of starting retirement planning when you are young is that you have ample time to attain your financial goals. You can break down your goals into smaller, achievable ones and work toward them at your own pace. This allows you to live peacefully without taking on unnecessary stress.</p>

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  <p style="font-size: 16px;">Choosing the right financial advisor is daunting, especially when there are thousands of financial advisors near you. We make it easy by matching you to vetted advisors that meet your unique needs. Matched advisors are all registered with FINRA/SEC.  <a href="https://www.wiseradvisor.com/match_advisors.asp?kwd=blog-ad-rothira-8-tips-to-help-make-your-retirement-plan-successful&amp;utm_medium=middle" target="_blank" style="font-weight: 700;    color: #035184;">Click to compare vetted advisors now.</a></p>                        
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<h2>6. Keep a keen eye on your expenses and budget and track them accordingly:</h2>
<p>You have to be financially disciplined when it comes to retirement planning. One way to ensure you are on track to achieving your goals is sticking to a budget and keeping track of your essential and non-essential expenses. Doing so ensures that you optimally use your money and do not waste it on unnecessary purchases. You may be unable to eliminate your non-discretionary expenses but can still work toward reducing them. For example, instead of taking a cab to work, you can take a bus or do a carpool to cut down your commuting expenses. When it comes to reducing discretionary expenses, you may need to control your impulses and not get swayed by peer pressure to maintain a certain lifestyle. Track your expenses to get a clearer picture of your expenses and find out where you can lower your expenses. Doing so will allow you to prioritize your needs over wants and plan your expenses accordingly in a more efficient manner.</p>
<h2>7. Take steps to counter inflation in your financial planning:</h2>
<p>The inflation rate is 8.5% at present as per the US Department of Labor. Earlier in July, it climbed to 9.1%, the highest it has ever been in the past 40 years. This has largely been caused by the pandemic and the Ukraine-Russia war. That said, inflation can be fueled because of various reasons. Nevertheless, it is critical that you plan for such unexpected events at the time of creating a retirement plan. Keep a buffer for inflation and make use of an inflation calculator to get a fair idea of how much you need to save for the future to live comfortably in retirement. Also, invest in instruments that will allow you to generate inflation-beating returns such as stocks, ETFs, equity mutual funds, etc., to enable you to build a substantial retirement fund.</p>
<h2>8. Seek financial advice from a professional financial advisor:</h2>
<p>Though with a plethora of information available online, you may not either have sufficient time to build financial knowledge or may lack the financial acumen to do so. In such situations, it is best you reach out to a professional who can help guide you through different market conditions such as market fluctuations, recession, inflation, new investment opportunities, etc. The advisor can also help create a retirement plan for you based on your risk tolerance, and short-term and long&ndash;term financial goals. Based on your needs, you can either seek professional advice from time to time or consult on a more regular basis with your financial advisor. &nbsp;</p>
<h2>To conclude</h2>
<p>Retirement planning can be challenging especially if you do not possess the requisite financial knowledge to make decisions. However, with time and the right guidance, you can work toward understanding the intricacies of your plan. Refer to financial journals, read books on financial planning, and consult financial experts to improve your financial acumen. Stay consistent and ensure you invest your money in the right instruments (such as 401ks, IRAs, and HSAs) that not only help you generate inflation-beating returns but also offer tax advantages to help build a significant retirement corpus. Doing so will enable you to reach your retirement goals in time when you are ready to hang up your boots.</p>
<p>You may also consult with a professional financial advisor to receive appropriate guidance and tips on how to make your retirement planning successful and achieve your financial goals. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

You need to prepare in advance to make your retirement plan successful. Here are the best retirement planning tips that will help you retire comfortably.

Best Retirement Planning Tips For Successful Retirement | Rothira.org

8 Tips to Help Make Your Retirement Plan Successful

<p>One of the most popular retirement savings plans in the United States, a Roth IRA is an individual retirement account (IRA) that offers specific tax benefits to its investors. There are primarily two kinds of IRAs - the traditional IRA and the Roth IRA. Both these accounts are tax-advantaged accounts that allow you to save for retirement and build a stable financial future. However, these accounts differ from one another when it comes to their taxability. A traditional IRA is funded from your pre-tax dollars whereas you contribute your after-tax dollars to a Roth IRA. Your withdrawals are taxed in retirement when it comes to a traditional IRA, however, you can make tax-free withdrawals in a Roth IRA provided you fulfill certain conditions mandated by the Internal Revenue Service (IRS). Additionally, you have to take mandatory Required Minimum Distributions (RMDs) after the age of 72 in a traditional IRA. On the other hand, your withdrawals are not subject to compulsory RMDs if you own a Roth IRA account.</p>
<p>The ability to make tax-free withdrawals is one of the most important reasons why a lot of people prefer investing in a Roth IRA. You can live comfortably in retirement without having to worry about those pesky tax issues. That said, just like any other investment, even a Roth IRA has certain fees that you may incur from time to time. Consider Roth IRA fees as a cost of investing but understand that if you are not careful, it can potentially affect your return on investment (ROI). <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>Consult with a professional financial advisor</strong></a> who can help you understand the different Roth IRA fees that you may come across while investing in a Roth IRA account.</p>
<h2>Different Kinds of Roth IRA Fees</h2>
<p>There are several kinds of Roth IRA fees that you may incur during the course of your investment. These are:</p>
<h3>1. Roth account opening fee:</h3>
<p>Though there is no charge when you open a Roth IRA account, the precise fee may depend on each plan administrator. You can consult with your plan provider to know the exact charges that you may incur and then make a decision. For example, even though Fidelity does not charge any account opening or transaction fee, it does levy a 0% to 0.50% maintenance fee. Similarly, Edward Jones charges a $40 annual maintenance fee but does not charge any account opening fee to its Roth IRA account holders.</p>
<h3>2. Account maintenance fees:</h3>
<p>As the name suggests, the account maintenance fee is charged by your plan provider for maintaining your account on a monthly or annual basis. It is also known as the custodial fee. The fee typically varies between $25 and $50 annually. That said, a lot of Roth IRA custodians such as banks, unions, brokers, etc., no longer charge an account maintenance fee. By doing a bit of homework, you can save up on these costs by choosing a plan administrator with minimal or no charges. You also have the option of comparing monthly and annual charges and picking a more cost-effective alternative. Though overall annual fees are lower compared to monthly payments, the latter may be easier on the pocket as you can break down the total fee into small manageable transactions rather than paying the entire fee in one go.</p>
<h3>3. Transaction fees and commissions:</h3>
<p>You have to pay a transaction fee on every transaction carried out by you or your financial advisor on your behalf such as buying or selling securities. This may also include any commission on the transaction incurred at the time of trading stocks or Exchange-Traded Funds (ETFs). The transaction fee generally varies between $5 and $20 for every trade. This can be concerning especially if you trade frequently and stocks and ETFs form the major part of your IRA investments. You can reduce the amount you pay in transaction fees by investing in commission-free investments like mutual funds. You can also use a buy-and-hold strategy to lower your transaction fees. Since a buy-and-hold strategy involves investing in securities with a long investment horizon, very few transactions take place over the course of the investment period. This means that the overall expense is considerably lower due to the low volume of transactions.</p>
<h3>4. Mutual fund expense ratios:</h3>
<p>The mutual fund house charges individual expense ratios on mutual funds. Whether the expense ratio is on the higher or lower end depends on how actively traded the fund is. If the mutual fund is more actively traded, the mutual fund expense ratio will be on the higher side. Each mutual fund has a fund manager who manages the pooled money taken from multiple investors and buys and sells securities such as equity and debt to earn returns for the investors. The aforesaid costs including the cost of the fund manager's services are covered by the mutual fund expense ratio. Typically, expense ratios vary between 0.25% and 2% or more. Passive mutual funds have relatively lower expense ratios compared to actively-traded mutual funds. For example, index funds charge a lower fee compared to active mutual funds as they follow a benchmark index that tracks and mimics the index&rsquo;s performance.</p>
<h3>5. Mutual fund sales load:</h3>
<p>Apart from the expense ratio, mutual funds also charge the sales load or sales fee. Every time you purchase or sell a share, you incur the sales load. This is a one-time fee that is paid only once unlike other kinds of charges. There are two kinds of sales loads:</p>
<ul>
<li><strong>Front end load</strong>: This is charged at the time of buying shares.</li>
<li><strong>Back-end load</strong>: A back-end load is incurred at the time of selling shares.</li>
</ul>
<p>That said, there are certain no-load mutual funds available as well wherein you do not have to pay any charges at the time of buying and selling shares within a mutual fund.</p>
<h2>What impact do the&nbsp;Roth IRA fees&nbsp;have on your returns?</h2>
<p>Any investment expense or fee charged at the time of purchase or sale of investment directly impacts your returns. The lower the fee, the more potential for maximizing your returns; the higher the fee, the lower the returns for you. Moreover, your returns are affected by several other factors like early withdrawals, inflation, market volatility, and more. Though some of the aforesaid factors may be out of your control, you can control the fees paid by you by choosing the right IRA plan provider. As per the U.S. Securities and Exchange Commission (SEC), you can incur a loss of $30,000 or more if you shell out a 1% fee for 20 years rather than a 0.5% fee. Similarly, if you pay a 0.5% fee, your portfolio will suffer a loss of $10,000 over the same time period compared to if you had paid 0.25% in fees.&nbsp;</p>
<p>Thus, it is critical that you select the right custodian for your Roth IRA. The numbers may seem small for each transaction but taken together, may turn substantial over time. Hence, it is important that you choose the most economical option having the lowest fees.</p>
<h2>How can you reduce your Roth IRA fees and boost your returns?</h2>
<p>There are a number of investment instruments you can choose to invest in your Roth IRA such as stocks, ETFs, bonds, money market funds, mutual funds, Certificates of Deposits (CDs), etc. A diverse mix of asset classes can help you generate inflation-beating returns and fetch you the best results.</p>
<p>You can also take certain steps to boost your Roth IRA returns:</p>
<h3>1. Choose low-cost investments:</h3>
<p>The investment fee tends to vary from investment to investment so if the cost is a concern for you, you can go for low-cost investments. As discussed earlier, the fee tends to be on the higher side for active funds compared to passive funds. To reduce your costs, you can pick index funds over equity mutual funds. That said, it is important to understand that equity funds can generate higher returns compared to index funds over a long investment horizon even if the fees are more. Conversely, index funds are tied to the benchmark index they follow, meaning if the benchmark does not perform well, you may not be able to generate high returns even if you have paid lower fees.</p>
<h3>2. Engage the services of a financial advisor:</h3>
<p>Seeking professional advice can go a long way toward ensuring you have enough for retirement. A financial advisor helps choose the right combination of investments, manage them, and makes the most of changing market conditions by investing in the right options at the right time. He can also offer advice based on the prevalent economic trends in the country, such as investing in bonds rather than stocks when the country is undergoing a period of inflation.</p>
<p>That said, you must understand that even though financial advisors can help optimize Roth IRA fees, they do charge a fee for providing their services as well. There are primarily two kinds of advisors - fee-based or commission-based advisors. The former use a fixed fee model wherein they are paid as per every consultation or on a monthly, quarterly or annual basis. On the other hand, commission-based advisors charge a commission for every investment they sell or recommend you buy. Assess the pros and cons of each and decide which kind of advisor would best serve your needs.</p>


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<h3>3. Choose the right custodian:</h3>
<p>You can open a Roth IRA account with a bank, broker, mutual fund house, credit union, or life insurance company. However, the costs vary for each institution. Carry out a Roth IRA fee comparison and choose an option that is the most economical for you. More importantly, your choice of a custodian will determine the kind of investments you can invest in. For example, if you open an account through a credit union and life insurance company, you can invest in low-risk investments such as bonds, CDs, money market accounts, etc. However, if you choose a broker or mutual fund company and open your account with them, you have access to equity options like stocks, ETFs, mutual funds, and more.</p>
<h3>4. Invest with a long-term horizon in mind:</h3>
<p>Choosing to invest for the long-term has several benefits. A long investment term helps minimize risk and allows you to ride out market highs and lows. You have the scope for making up for your loss suffered due to market volatility over a long investment horizon. Doing so negates the need for frequently adjusting your investment portfolio. If you refrain from frequent buying or selling of shares, you would automatically reduce the transaction costs, commissions, sales loads, etc., of your investments. Having a long-term investing approach will allow you to keep your Roth IRA fees low. Ensure that you do not engage in panic selling when markets go down. Seek financial advice from a professional who can help you make informed decisions and does not let your emotions overpower you when it comes to investing.</p>
<h2>To conclude</h2>
<p>At the time of planning for retirement, you need to consider the impact of different fees on your investments and final returns. Apart from Roth IRA fees, other factors such as the rate of inflation, market volatility, the different kinds of investments chosen by you along with the amount invested and duration of the said investments, and similar factors have a significant impact on your returns. So, while it is recommended that you choose investments and fee structures that can result in low fees but also consider other aspects as well that may be just as critical in ensuring a stable and financially secure retirement.</p>
<p>It is advised that you seek out expert guidance on the matter who can help lower the costs and boost your returns. Reach out to a professional financial advisor in your area who can advise you on how to maximize the benefits of your Roth IRA account. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Roth IRA fees may erode your return on investment (ROI) if not handled carefully. Learn about the impact of Roth IRA fees on your investment returns.

How Roth IRA Fees Impact Your Investment Returns | Rothira.org

Can Roth IRA Fees Impact Your Investment Returns?

<p>An Individual Retirement Account (IRA) is a tax-advantaged retirement plan that enables individuals to save for retirement and build a substantial corpus for themselves. An IRA can be opened at a bank, a life insurance company, a mutual fund house, a credit union, or by a broker. There are primarily two kinds of IRAs &ndash; a Traditional and a Roth. The major difference between the two is that withdrawals from the former are taxed as ordinary income in retirement whereas withdrawals from the latter are not taxable in retirement provided you adhere to certain rules mandated by the Internal Revenue Service (IRS). In a traditional IRA, you make tax-deductible contributions which is why you have to pay tax on your withdrawals in retirement. Conversely, in a Roth IRA, you make contributions from your after-tax dollars due to which your withdrawals are tax-free in retirement.</p>
<p>A Roth IRA is a popular investment instrument that you can use to boost your retirement savings. However, to do so effectively, you need to first understand its rules and the different ways it can help maximize your returns. For example, you must be 59.5 years of age and must have held your account for at least five years before you can make a tax-free withdrawal from your Roth IRA. Moreover, the IRS revises the Roth IRA contribution limits every year or so. <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>Reach out to a professional financial advisor</strong></a> who can help you understand the different rules with respect to contribution limits, withdrawals, and more.</p>
<h2>For 2022, the Roth IRA contribution limits as per your filing status is as follows:</h2></br>
<table style="width: 638px;" border="1" width="638">
<tbody>
<tr>
<td style="text-align: center;" width="137">
<p><strong>&nbsp;</strong></p>
</td>
<td style="text-align: center;" width="162">
<p><strong>Filing status</strong></p>
</td>
<td style="text-align: center;" width="172">
<p><strong>Modified Adjusted Gross Income&nbsp;(MAGI)</strong></p>
</td>
<td style="text-align: center;" width="166">
<p><strong>Maximum annual contribution</strong></p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="137">
<p>1</p>
</td>
<td style="text-align: center;" width="162">
<p>Single, head of household, or married taxpayers filing separately</p>
</td>
<td style="text-align: center;" width="172">
<p>Less than $129,000</p>
</td>
<td style="text-align: center;" width="166">
<p>$6,000 or $7,000 if 50 or older</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="137">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="162">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="172">
<p>$129,000 up to $144,000</p>
</td>
<td style="text-align: center;" width="166">
<p>Contribution is reduced</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="137">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="162">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="172">
<p>$144,000 or more</p>
</td>
<td style="text-align: center;" width="166">
<p>No contribution allowed</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="137">
<p>2</p>
</td>
<td style="text-align: center;" width="162">
<p>Married taxpayers filing jointly or qualifying widow(er)</p>
</td>
<td style="text-align: center;" width="172">
<p>Less than $204,000</p>
</td>
<td style="text-align: center;" width="166">
<p>$6,000 or $7,000 if 50 or older</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="137">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="162">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="172">
<p>$204,000 up to $214,000</p>
</td>
<td style="text-align: center;" width="166">
<p>Contribution is reduced</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="137">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="162">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="172">
<p>$214,000 or more</p>
</td>
<td style="text-align: center;" width="166">
<p>No contribution allowed</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="137">
<p>3</p>
</td>
<td style="text-align: center;" width="162">
<p>Married taxpayers filing separately</p>
</td>
<td style="text-align: center;" width="172">
<p>Less than $10,000</p>
</td>
<td style="text-align: center;" width="166">
<p>Contribution is reduced</p>
</td>
</tr>
<tr>
<td style="text-align: center;" width="137">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="162">
<p>&nbsp;</p>
</td>
<td style="text-align: center;" width="172">
<p>$10,000 or more</p>
</td>
<td style="text-align: center;" width="166">
<p>No contribution allowed</p>
</td>
</tr>
</tbody>
</table>
<p>&nbsp;</p>
<p>For 2022, you can make a maximum contribution of $6,000 each year to your Roth IRA account. However, if you are 50 or up, you can make a catch-up contribution of $1,000 bringing your total contribution to $7,000 for the year. <br /><br /><strong>If you wish to maximize the potential of your Roth IRA, consider the below strategies:</strong></p>
<h2>1. Max out your Roth IRA contributions:</h2>
<p>As of 2022, you can contribute up to $6,000 annually to your Roth IRA account. Now, this may not seem much but suppose you save $6,000 every year for ten years, you would have saved at least $60,000 over this period. Once you add the return on your investment and take into account the power of compounding, your account&rsquo;s value will be much, much higher. Doing so consistently will help you stay focused and ensure that you stay on track to reaching your savings goals. Taking the aforesaid example a little further, an investment of $6,000 a year for 30 years means you will have saved a sum of $180,000. This amount will keep on growing year on year with the help of compound interest allowing you to have a financially secure retirement. Maximizing your contributions can go a long way toward reaching your financial goals in time. If you cannot contribute up to the maximum contribution limit, try to contribute at least 50% of it and aim to increase your contribution gradually to 75% and ultimately the full investment amount. No matter how much you earn, try to contribute the maximum you can.</p>
<h2>2. Choose the right investment options:</h2>
<p>You can invest in a number of instruments such as mutual funds, money market funds, exchange-traded funds (ETFs), stocks, bonds, certificates of deposits (CDs), and even cryptocurrencies through your Roth IRA account. Your returns will majorly depend on the investment options you choose so you have to be careful while choosing the investments. Ensure that you compare the returns, past performance, and growth potential of the instruments you are thinking of investing in. In addition, you must also take into account the fees or costs of investment and your risk tolerance. Suppose you have a high-risk tolerance, you may choose to invest in stocks more. But if you wish to balance out the risk, you may consider investing in mutual funds or bonds. Doing so will help distribute the risk and secure your money against market volatility. That said, try not to pick the same investments that you have invested in your investment portfolio outside of the Roth IRA. For example, if you own an FMCG company&rsquo;s stocks outside your Roth IRA, try to pick stocks belonging to other sectors and companies for your Roth account. This will allow you to build a diversified portfolio with a greater potential to earn money. Doing so would also help you minimize risk and allow you to capitalize on different market opportunities. Take professional help from a financial advisor if needed so that you can make an informed decision.</p>
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<h2>3. Select the right plan administrator for your Roth IRA account:</h2>
<p>As stated before, you can open a Roth IRA account in a number of places - a bank, a life insurance company, a mutual fund house, a credit union, or by a broker. The entity you choose to open your Roth account depends on your risk tolerance, investment budget, and financial needs and goals. For example, if you pick a credit union or life insurance company, they may offer you low-risk investment instruments such as bonds, CDs, money market accounts, etc. These investments offer low-risk returns and are considered to be ideal investments for individuals nearing retirement or who may retire in the coming five years or so. You can also go this way if you have recently switched to a Roth IRA and may retire in the near future. However, if you are years away from retirement, going for a mutual fund house or a broker would be more beneficial in the long run. You can invest in high-risk investments such as equity through brokers and mutual fund houses that can help you grow your money and save for retirement. This can also prove useful if you are planning to use your Roth IRA to pay for a child&rsquo;s college tuition.&nbsp;</p>
<h2>4. Take the Roth IRA rules into consideration:</h2>
<p>To derive maximum benefit from your Roth IRA, you must adhere to the rules. Its primary benefit is the ability to make tax-free withdrawals in retirement. To do so, you must be 59.5 years of age. If you make a withdrawal before reaching the said age, the IRS will levy a 10% penalty on the withdrawn amount. In addition, you must also fulfill the five-year rule. This rule states that you must withdraw your money after at least five years of holding your Roth IRA account. This rule is also applicable to Roth conversions. For example, suppose you held your traditional IRA account for 25 years and subsequently decided to switch to a Roth IRA. Herein, you would have to wait five years from the date of conversion to make a tax and penalty-free withdrawal in retirement. If you adhere to the rules, you will ensure that you don&rsquo;t lose your hard-earned money. That said, there are a few exceptions to Roth IRA penalty rules. These are:</p>
<ul>
<li>If you are buying a home for the first time.</li>
<li>If you are paying for the college tuition of your children</li>
<li>If you are adopting a child or having a baby.</li>
</ul>
<h2>To conclude</h2>
<p>Planning for retirement is a critical part of securing your financial future. By adding a Roth IRA to your investment portfolio, you can benefit from tax savings, make tax-free distributions in retirement and even pass on your account to a beneficiary. To utilize a Roth IRA to its fullest extent, you must understand and follow its rules. Take care to be up to date with its contribution limits and be aware of the penalties and withdrawal limitations, etc. Also, ensure that you select the right investment to make the most of your Roth IRA. <br /><br />Reach out to a professional financial advisor who can assist you when it comes to opening or managing your Roth IRA.&nbsp;Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

A Roth IRA is a popular investment instrument that you can use to boost your retirement savings. Learn how to maximize returns when investing in a Roth IRA.

Investing in Roth IRA - How to Maximize Roth IRA Returns | Rothira.org

How to Maximize Your Returns When Investing in a Roth IRA

<p>One of the more popular retirement plans in the US, the Roth IRA was first established in 1997. It is a tax-advantaged retirement savings plan which helps millions of Americans save for retirement. The major benefit of opening a Roth IRA account is the ability to make tax-free withdrawals in retirement. In addition, if you own a traditional 401k or IRA account, you can roll over your account to a Roth IRA plan. However, before you do so, it is critical that you understand the Roth IRA 5-year rule and other stipulations concerning Roth IRAs. For further information on how you can effectively use a Roth IRA account for your retirement savings, <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>reach out to a professional financial advisor</strong></a>.</p>
<h2>What are the major features of the Roth IRA 5-year rule?</h2></br>
<p>1. To make tax and penalty-free distributions from your Roth IRA account, you must be 59.5 years of age and wait for at least five years from the date of opening your account to make a withdrawal. Do note that this restriction is applicable to your earnings from investments and not the initial contributions made to the account.</p>
<ul>
<li>If you make a withdrawal before turning 59.5 but have completed the 5-year period, you will owe taxes on the withdrawn amount.</li>
<li>If you open a Roth IRA account at 57, you will be able to make tax-free withdrawals at 62 years of age after having completed the five-year period. <br /><br /></li>
</ul>
<p>2. The Internal Revenue Service (IRS) levies a 10% penalty on withdrawals if the distribution is made before the completion of five years. That said, if the account owner makes a withdrawal before turning 59.5, the penalty will not be applicable to the said owner. Suppose you convert your traditional <a href="https://www.rothira.org/articles/4-things-to-consider-when-converting-iras-to-roth-iras" target="_blank">IRA to a Roth IRA</a> at 50 years of age. At age 56, you need to take some money out of your account. In this scenario, you will not have to pay a 10% penalty as five tax years have already passed since you first made a contribution to your Roth account. That said, you will have to pay tax on your earnings as you are under 59.5 years of age.</p>
<p>3. All Roth IRA owners have to follow the tax year, i.e., 1st January to 31st December, when making contributions to their accounts.</p>
<p>4. If you have inherited a Roth IRA, you will still have to abide by the five-year rule. Thus, it is advised that you keep a record of any initial contributions made to the account in addition to any other conversions, to avoid incurring taxes on the same. Moreover, if you are not the spouse of the Roth IRA owner, you will have to make a full withdrawal from the account within the next ten years. This rule is applicable in case the beneficiary of a Roth account is not the owner&rsquo;s spouse as per the SECURE Act. However, if the beneficiary is the account owner&rsquo;s spouse, then, in that case, the spouse can make withdrawals as per their wishes and the aforesaid rule does not apply to them.</p>
<p>5. As per the Roth IRA divorce 5-year rule, a Roth IRA account can be considered marital property under certain conditions. This occurs when either you need to transfer some funds to your Roth IRA account or you are planning to make a withdrawal from your Roth account before or after the divorce. The ensuing property division laws of the state will be applicable where you reside at the time of divorce.</p>
<p>Suppose both you and your spouse reside in a community property state such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin; herein, the Roth IRA assets will be divided equally among the spouses. However, if you live in an equitable distribution state (all states except community property states), the court will take the final call and your Roth IRA assets will be divided in a way that&rsquo;s fair to both spouses. You can continue contributing to your Roth IRA even after the divorce up to your annual contribution limit.</p>
<h2>What are the exceptions to the Roth IRA 5-year rule?<strong><br /></strong></h2>
<p>Specifically, the Roth IRA 5-year rule is applicable to the earnings from investments and not the initial contributions. So, if you wish to take out your initial contribution that excludes any investment earnings, you can do so without incurring any penalty. Remember that you must hold your contributions for a period of at least five years to avoid paying any taxes or a penalty. That said, there are certain exceptions to this rule such as:</p>
<ul>
<li>If you are a first-time homebuyer, you can make a withdrawal of up to $10,000 without incurring a penalty.</li>
<li>You can cover your health insurance premiums by making a Roth IRA withdrawal in case you have lost your job.</li>
<li>If you are disabled.</li>
<li>If you are having a baby or adopting a child for the first time.</li>
<li>You can cover qualified education expenses through Roth IRA withdrawals.</li>
</ul>
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<h2>What are the consequences of not adhering to the Roth IRA 5-year rule?</h2></br>
<ul>
<li>You will incur an early withdrawal penalty and have to pay tax if you withdraw money from your Roth IRA account before five tax years have passed. The IRS determines the penalty amount after taking into account certain factors such as your age, period of ownership, annual income, etc.</li></br>
<li>If you have held your account for less than five years and are younger than 59.5 years of age, you may incur a 10% penalty and be liable to pay taxes on any earnings distributed from your account.</li></br>
<li>If you are 59.5 or up but have not held the account for at least five years, you will not have to pay a penalty on the earnings. However, you will have to pay taxes incurred by you on the withdrawn amount.</li>
</ul>
<h2>To conclude</h2>
<p>Making an early withdrawal can lead to a potential loss of future earnings, not to mention other financial implications such as payment of penalties and taxes. This makes it a bad idea. However, you still have certain options that can enable you to make the most of your Roth IRA account. But in order to do so, you must adhere to the Roth IRA 5-year rule. This would allow you to make a penalty-free withdrawal in retirement. That said, if you are in a financial crunch, you may first check if you qualify for any of the exceptions to the five-year rule and lower your financial burden.</p>
<p>You may also consult with a professional financial advisor who can explain the Roth IRA 5-year rule, its exceptions, and clear up any doubts regarding the same. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Understanding Roth IRA 5-year rule can help you effectively use a Roth IRA account for retirement savings. Learn everything about Roth IRA 5-year rule.

What are the Roth IRA 5-Year Distribution and Withdrawal Rules | Rothira.org

What is the Roth IRA 5-Year Rule? 

<p>While planning for retirement, it is important to have clear goals when it comes to identifying income sources in retirement, making a budget, and the amount of savings you need in retirement to live comfortably. You must also have a clear idea about how you are going to manage your assets and risk. It is advised you begin saving for retirement at an early stage in life to give yourself the best shot at building a substantial retirement corpus.</p>
<p>The amount that you need to save for retirement depends on your retirement goals. Some retirees may wish to travel in retirement while others may want to begin a small business venture to supplement their income. You also need to consider other factors such as the age at which you wish to retire, your annual income, risk profile, etc. There are a number of retirement plans that you can choose from based on your unique financial needs and goals. <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>Consider consulting a professional financial advisor</strong></a> who can explain the benefits and drawbacks of different retirement plans, their taxability, and more, and help you choose the most suitable retirement plan for your financial needs.</p>
<p><strong>Read below to understand the different types of retirement plans in detail:</strong></p>
<h2>What are the different kinds of retirement plans?</h2>
<p>There are various kinds of tax-advantaged retirement plans available that you may consider to save for retirement:</p>
<h3>1. 401k</h3>
<p>A 401k is a tax-advantaged retirement savings plan offered by employers to their employees. Better known as an employer-sponsored retirement account, there are primarily two kinds of 401ks: a Traditional 401k and a <a href="https://www.rothira.org/articles/what-is-a-roth-401k" target="_blank">Roth 401k</a>. The primary benefit of a 401k is an employer match wherein the employer may match the employee&rsquo;s contributions. This can help you build a bigger retirement corpus and boost your savings. The Internal Revenue Service (IRS) sets the contribution limits. For 2022, you can contribute a sum of $20,500 to your 401(k) account. If you are 50 years of age or older, you can contribute an additional $6,500, bringing your total to $27,000. Do note that if you make a withdrawal before reaching 59.5 years of age, the IRS may levy a penalty of 10% on the withdrawn amount.</p>
<h4>Traditional 401k:</h4>
<p>In a traditional 401k, you make contributions from your pre-tax income which means that your taxable income is reduced by the total amount contributed by you to your 401k for the year. Essentially, you do not have to pay tax in the present but you would have to do so at the time of making withdrawals in retirement. Additionally, you must take out the Required Minimum Distributions (RMDs) when you turn 72. Failure to do so would result in a 50% penalty on the amount not withdrawn by you.</p>
<h4>Roth 401k</h4>
<p>Contrary to a traditional 401k, you make contributions to a Roth 401k account from your after-tax dollars. This means you have to pay taxes on your taxable income in the present. However, you can make tax-free withdrawals in retirement provided you are 59.5 years of age and have held your account for a period of at least five years. Moreover, you do not have to take mandatory RMDs if you hold a Roth 401k plan.</p>
<h3>2. Individual Retirement Account (IRA)</h3>
<p>An IRA is a tax-advantaged retirement savings plan that can be opened by self-employed individuals who do not have access to a 401k. You can open an IRA through a bank, an online brokerage, a mutual fund house, an insurance company, or a broker. You cannot make a withdrawal before you turn 59.5. If you do so, you will incur a penalty of 10% on the withdrawn amount. For 2022, you can contribute a sum of $6000 and make an additional catch-up contribution of $1000 if you are 50 and up to your IRA account.&nbsp; There are several kinds of IRAs such as:</p>
<h4>Traditional IRA:</h4>
<p>In this retirement plan, your money grows on a tax-deferred basis. Your contributions are tax-deductible i.e. you make contributions from your pre-tax dollars. However, you will have to pay tax on your withdrawals in retirement as per the prevalent tax rates. In addition, similar to traditional 401ks, you must take out RMDs when you reach 72 years of age. You also have the option of converting your traditional IRA to a Roth IRA account if you expect to be in a higher tax bracket in retirement.</p>
<h4>Roth IRA:</h4>
<p>Unlike a traditional IRA, you make contributions to a Roth IRA account from your after-tax income. This means your contributions are not tax-deductible. However, you will be able to make tax-free withdrawals in retirement provided 5 years have passed since you opened your account and you are 59.5 years of age. Additionally, you are not required to take out RMDs in a Roth IRA account. You have a wide range of investment options available to you to invest in such as mutual funds, bonds, money market funds, exchange-traded funds (ETFs), stocks, certificates of deposit (CDs), cryptocurrency, and more.</p>
<h4>SEP-IRA:</h4>
<p>A Simplified Employee Pension (SEP) is a retirement plan especially designed for self-employed individuals like small-business owners, independent contractors, and freelancers. It follows the same tax rules for withdrawals as that of a traditional IRA. For 2022, a maximum of $61,000 or 25% of compensation, whichever is less can be contributed to the SEP-IRA account. Employees cannot contribute to their accounts meaning business owners must do so on their behalf.</p>
<h4>SIMPLE IRA:</h4>
<p>Savings Incentive Match Plan for Employees IRA is a retirement account available to small businesses having 100 or fewer employees. Contributions to a SIMPLE IRA are tax-deductible in nature and follow the same tax rules for withdrawals as a traditional IRA. Unlike a SEP-IRA, employees can make contributions to their SIMPLE IRA accounts. For 2022, you can contribute a maximum of $14,000 along with a catch-up contribution of $3,000 (if you are 50 and up), bringing your total to $17,000 for the year.</p>
<h4>Spousal IRA:</h4>
<p>Created for married couples, in a spousal IRA a working spouse can make contributions to an IRA on behalf of their non-working spouse. Herein, the non-working spouse can open a traditional or Roth IRA in their own name despite having little to no income. However, to qualify for spousal IRA contributions, the couple must file a joint tax return. Moreover, in order for the working spouse to contribute on behalf of both spouses, their income must be equal to or exceed the total IRA contributions made by them. For 2022, married couples can contribute a sum of $12,000 to their IRAs. However, if you are both 50 and up, you can contribute an additional $2,000, bringing the total to $14,000.</p>
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<h3>3. Thrift savings plan (TSP)</h3>
<p>Created for federal employees and uniformed service personnel, a TSP is a retirement investment program similar to a 401k plan. It offers multiple benefits such as automatic payroll transfers, agency matching contributions, etc. For 2022, you can contribute a sum of $20,500 and make an additional catch-up contribution of $6,500, if you are 50 years of age or older. If you have started a federal government job, you can move your 401k and IRA to a TSP and vice versa if you end up changing your job.</p>
<h3>4. Cash-balance pension plans</h3>
<p>A cash-balance plan offers participants a set percentage of their yearly compensation plus interest charges. It is similar to a defined-benefit pension plan wherein you have the option of a lifetime annuity. The primary benefit of a cash-balance plan is that contribution limits increase with age. For instance, if you are 60 or up, you can save more than $200,000 per year in pretax contributions.</p>
<h2>To summarize</h2>
<p>Based on your financial needs and goals, annual income, employment status, and more, you can invest in a number of retirement plans. You can go for a company-sponsored retirement plan such as a 401k or start one yourself like an IRA. Though each plan may have different benefits and drawbacks, you can rest assured that it will help you save for retirement and build a substantial retirement corpus. It is advised that you begin saving for retirement as soon as possible due to rising inflation and depleting benefits of Social Security programs.</p>
<p>Reach out to a professional financial advisor in your area who will be able to explain different types of retirement plans, their pros and cons, taxability, contribution limits, and more. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

It is crucial to choose the perfect retirement plan to achieve your financial goals. Learn everything about different types of tax-advantaged retirement plans.

Different Types of Tax-Advantaged Retirement Plans | Rothira.org

4 Kinds of Retirement Plans Explained

<p>Planning for retirement is vital to ensuring you have enough money saved to live comfortably during your golden years. To ensure your future financial security, you must consider different ways to secure your assets and income in retirement and take measures to protect your retirement corpus from external factors such as market volatility, inflation, etc. <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>Reach out to a professional financial advisor</strong></a> who can help you come up with a strategy to protect your assets and grow your savings to help secure a comfortable retirement. Read below to understand how you can safeguard your retirement assets and income.</p>
<h2>What are the different ways by which you can protect your assets and income in retirement?</h2>
</br>
<h3>1. Set aside funds for healthcare expenses</h3>
<p>As per Fidelity Retiree Health Care Cost Estimate, an average 65-year-old retired couple would need $300,000 in post-tax savings to meet their healthcare costs in 2021. This figure does not include long-term care costs that you may incur. Due to rising life expectancies and medical care costs, it is imperative that retirees focus on long-term care and save enough funds to meet their healthcare expenses. Long-term care costs form a critical part of retirement planning and must be prioritized when discussing retirement planning with family and your financial advisor. Hence, it is important to maintain a separate fund for long-term care expenses to ensure you do not dip into your retirement savings.</p>
<h3>2. Ensure you take tax liabilities into account</h3>
<p>Taxes can be complicated and difficult to navigate especially if you are unfamiliar with them and do not possess the requisite knowledge to manage them. Hence, it is advised to hire an expert who can help sort out your tax affairs and minimize the effect of taxes on your retirement savings and assets. The professional can help you understand the tax implications on your inheritance, estate, capital gains, etc., and prevent them from eating into your retirement funds. He can also create a tax strategy that takes into account all present and future taxes that your retirement savings and assets may be subjected to. So, if you wish to negate or minimize the impact of taxes on your retirement corpus, it is advisable to consult with a financial advisor who can offer appropriate guidance.</p>
<h3>3. Take the necessary steps to counter inflation</h3>
<p>Inflation leads to an increase in the prices of goods and services that leads to a decline in the purchasing power of money. With a rise in inflation, your future purchasing power is negatively affected. For retirees, even a moderate inflation rate can spell trouble. For instance, if you have invested heavily in debt instruments, there may be a good chance that inflation may negatively impact your portfolio returns.</p>
<p>As an investor, you must calculate the effects of inflation and annual COLA (cost-of-living adjustments) on your investment portfolio. Also, factor in Social Security, and certain pensions, annuities, and investments like commodities, Treasury Inflation-Protected Securities (TIPS), growth-oriented stocks or ETFs, real estate securities, and more, to counteract inflation. This will help protect your returns as well as your retirement assets.</p>
<h3>4. Make long-term-care insurance a part of your retirement plan</h3>
<p>Long-term care (LTC) insurance typically covers nursing-home care and in-home care for people 65 or older or those who are suffering from a chronic condition that requires constant supervision. It is private insurance that offers more flexibility and options compared to Medicaid and can be purchased by anyone who can afford to pay for it. If you do not want LTC costs to make a dent in your retirement savings later down the line, it is advised that you buy LTC insurance to avoid the same.</p>
<h3>5. Assess your ideal retirement age and plan towards it</h3>
<p>Put a number on what age you wish to retire and work toward building a substantial retirement corpus that will see you through your retirement years comfortably. The longer you wait to start your retirement planning, the lower your retirement corpus will be. Moreover, if you have a few decades to go before you decide to hang up your boots, you may have higher risk tolerance. This would allow you to invest in high-risk assets such as equities, real estate investment trusts (REITs), commodities, high-yield bonds, currencies, and more. Doing so will help you generate sufficient funds to boost your retirement savings. That said, as you advance in age, your risk appetite may decrease and your focus may shift towards asset protection and capital preservation. Thus, it is important to be sure about the age that you wish to retire and put in your best efforts to amass a substantial retirement corpus by the time you reach the said age. If you need help assessing how to have enough saved before your retirement, consider speaking with a financial advisor who can provide effective strategies to grow and manage your savings.</p>

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<h3>6. Estimate your average retirement expenses</h3>
<p>Make an estimate of how much you will be spending in retirement. This estimate would help you determine the size of corpus and savings needed for you to live comfortably during your golden years. A lot of retirees assume that their annual expenses will be considerably lower post-retirement, however, this assumption can be flawed. Though it is advised to clear all debt before reaching retirement, it is safe to say that some retirees may still be paying their mortgage or making debt repayments. Further, they may incur unexpected medical costs, buy a home, or may wish to pay for their children's/grandchildren&rsquo;s college tuition. To meet these expenses, an average retiree may require more funds than they may have anticipated at the time of coming up with a retirement plan. Thus, you should take the aforesaid expenses into consideration at the time of devising your overall retirement strategy.</p>
<h3>7. Avoid making unplanned withdrawals</h3>
<p>Using up your retirement funds too quickly can spell disaster and may leave you with insufficient money for the later years of your retirement. As your retirement nears, it may be best to plan your withdrawals so you do not fall astray of retirement plan withdrawal rules and attract penalties for the same. Be it a 401(k), traditional, or <a href="https://www.rothira.org/articles/how-does-a-roth-ira-grow-and-earn-interest" target="_blank">Roth IRA</a>, each retirement plan has different rules and is subjected to different withdrawal rates and taxes. To avoid taxes eating away your retirement funds, you need to take certain steps to lower your taxability and your withdrawals in accordance with the prevalent rules. For example, you can make tax-free withdrawals if you own a Roth IRA account provided you are 59.5 years of age and have owned the account for at least five years at the time of making a withdrawal.</p>
<h2>To summarize</h2>
<p>Typically, you should look to work on a retirement plan that allows you to generate inflation-beating returns and helps you protect your retirement assets and maintain your portfolio's value. Identify different ways through which you can best grow your portfolio and protect your retirement income and assets. Take timely steps to negate market volatility and make the most of opportunities that present themselves.</p>
<p>If you have any concerns or doubts, reach out to a&nbsp;financial advisor&nbsp;who can guide you effectively on how to best safeguard your retirement assets and income and ensure you live comfortably during your retirement years. &nbsp;Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will help connect you with advisors that match your financial needs.</p>

It is crucial to secure your assets and retirement income for financial security. Here are the best and easiest ways to protect your assets and retirement savings.

Easiest Ways To Protect Your Retirement Assets and Savings | Rothira.org

7 Ways To Protect Your Assets and Income in Retirement

<p>Financial advisors advise starting saving for retirement from a young age. Even though you may be earning a lot less at the beginning of your career, you can use the power of compounding to your advantage and save enough money for retirement. However, as you near retirement age, you can reassess your corpus to find out whether you have amassed enough money to live your golden years comfortably or not. A sobering statistic that you may find interesting - almost 40% of retirees run out of money during their retirement.</p>
<p>There are several reasons why this may occur - increasing cost of healthcare, rising inflation, or unfavorable changes to policies related to 401(k)s, IRAs, income taxes, etc. You must keep track of any changes occurring in the market and minimize their impact on your retirement fund. Be vigilant and take measures to ensure your savings last your retirement. If you wish to protect your retirement savings against market volatility and exigencies, <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>consult with a professional financial advisor</strong></a> who can advise you on the same.</p>
<p>In this article, we will discuss various reasons that may cause you to run out of money in retirement.</p>
<h2>What are the reasons that may cause you to go broke in retirement?</h2>
<p>There can be a number of reasons why folks are not able to stretch their savings and run out of money in retirement. Let us discuss them in detail.</p>
<h3>1. Being trigger happy with your investments</h3>
<p>Investing in the stock market can be a risky proposition as the market experiences ups and downs on a regular basis. If you panic and end up diluting your stocks during a market downturn, it can negatively impact your financial future as you may lose a steady source of income for the future. To counteract market volatility, you can rebalance your investment portfolio and reduce your market exposure as you start nearing your retirement age. You can reduce your stock holdings and reinvest in bonds, treasury bills, mutual funds, or other low-risk investments. That said, do not completely divest your stock investments as they can help you generate inflation-beating returns and boost your savings.</p>
<h3>2. Overexposure to stocks</h3>
<p>Recklessly diluting your stocks is not a great idea but neither is increasing your exposure to equity. Investing in stocks is a tricky affair at the best of times despite offering the opportunity of generating exponential returns. You may face market volatility, crashes, bear runs, and more that increase your risk exposure. Overinvesting in stocks can prove to be calamitous for your retirement savings if the market experiences a huge crash like the Great Recession of 2008 or your chosen stock takes a big dive.</p>
<p>You can however take some steps to mitigate the risk and safeguard your retirement corpus by following certain investment strategies such as the asset allocation by age rule. Herein, you hold a percentage of stocks equal to 100 minus your age. For example, if you are 30 years old, you should hold 70% of your portfolio in stocks; if you are 45, 55% in stocks, and so on. Further, ensure you do not overly invest in one asset class, sector, industry, or stock. Diversify your stock holdings to spread and mitigate your risk.</p>
<h3>3. Living luxuriously or beyond your means</h3>
<p>As per the Employee Benefit Research Institute report, 46% of retirees tend to overspend during their first two years of retirement compared to what they spent just before hanging up their boots. This may be due to a large sum of money being available to them and partly due to the loss of a steady paycheck. This tendency needs to be checked to avoid draining your finances prematurely. Moreover, ideally, you should have cleared off any debt such as a mortgage or a loan before reaching your retirement. If not, you would need to create a budget to account for the same and your monthly expenses including taxes, healthcare costs, etc. A budget would help you keep track of your expenses and use your corpus judiciously.</p>
<h3>4. Being dependent on a single income source</h3>
<p>Having only a single source of income is not considered wise because if you end up losing your job or your business suffers a huge loss, you would have to rely on your savings to meet your living expenses. This is not ideal. Hence, it is critical that you develop a passive income source such as dividends, rent, royalty, etc., that will allow you to meet your expenses. Financial experts advise diversifying income sources in the event that if one income source dries up, you will have other income streams that you can rely on. You can consider a mix of pension, Social Security benefits, 401k or IRA distributions, along with other investments to have multiple sources of income in retirement. You could also pick up a part-time job, work as a freelancer, or monetize a hobby of yours to boost your income.</p>
<h3>5. Not planning for healthcare costs</h3>
<p>With advancing age, you may need to spend a considerable sum of money on healthcare costs. If you have not taken out a medical insurance policy, medical expenses can make a significant dent in your retirement corpus. In addition, invest in long-term care as well. Due to rising longevity, you may live longer than you may have anticipated and may run the risk of running out of money in the latter years of your life. Long-term care insurance covers nursing-home care and home health care for retirees age 65 or older or those having a chronic or disabling condition that requires constant care.</p>
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<h3>6. Neglecting tax planning</h3>
<p>Tax planning forms a critical aspect of retirement planning. If you do not account for taxes properly, a significant portion of your retirement corpus may get drained by them. All your investments including stocks, bonds, real estate, IRAs, 401(k)s, etc., attract heavy taxes. Moreover, the state you live in has a major impact on your tax bill as each state has different tax laws concerning income tax, sales tax, property tax, and more. Consider consulting a professional financial advisor who can help you minimize your tax liability and avoid any unexpected tax bills in the future.</p>
<h3>7. Overlooking insurance planning</h3>
<p>Being underinsured is as bad as being over insured. Thus, you must invest in proper health coverage to meet your future health expenses. Start with Medicare, a national program that subsidizes healthcare services for people aged 65 or older. There are four parts to Medicare:</p>
<ul>
<li>Medicare Part A helps pay your hospital bills related to inpatient hospital stays and procedures, home health care, and care at a nursing facility.</li>
<li>Part B helps cover expenses for outpatient care such as doctor visits including preventive services, ambulance services, certain medical equipment, and mental health coverage.</li>
<li>Part C also known as Medicare Advantage covers costs related to insurance while traveling outside the United States as well as dental, vision, and hearing care.</li>
<li>Part D helps cover the costs of prescription drugs.</li>
</ul>
<p>That said, insurance coverage is not limited to healthcare and you can also avail of accidental insurance to increase your safety net. Take care to review your insurance coverage and ensure that you are not underinsured to avoid using your retirement savings for covering your healthcare expenses.</p>
<h3>&nbsp;8. Taking out a loan from your retirement account</h3>
<p>Sometimes due to unannounced financial emergencies, you may have to take out a loan from your retirement account. Financial experts advise against borrowing from your retirement plan as doing so may seriously deplete your corpus. Inspite of this, almost one-third of retirement account holders tend to make this mistake and borrow money against their 401k, IRAs and other accounts. Further, you need to adhere to withdrawal rules at the time of making a distribution, otherwise, you may be liable to pay taxes and penalties that may end up having a negative impact on your retirement fund.</p>
<h3>9. Failing to create an emergency fund</h3>
<p>As stated above, emergencies can come unexpectedly and throw your retirement planning for a toss. This is especially true when you have retired and do not have a steady paycheck to bank upon and lack a passive source of income. Most experts suggest saving three to six months worth of expenses so that you do not need to sell your stock investments or make an early withdrawal from your retirement account. Having an emergency fund in place can offer you peace of mind and not dip into your retirement savings.</p>
<h2>To summarize</h2>
<p>To adequately plan for retirement, you need to consider and take into account several factors such as the current rate of inflation, taxes, whether you have passive income sources or not, healthcare expenses, buying insurance, retirement lifestyle, and more. It is critical that you plan for retirement and build a significant retirement corpus to live comfortably during your golden years of life. Take care to boost your savings by deploying tax-saving strategies and be careful when it comes to making withdrawals from your retirement accounts.</p>
<p>You may also consult with a professional financial advisor who will be able to guide you effectively on how to protect your retirement assets and income so that you do not end up running out of money in retirement. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

You need to take serious measures to save for your retirement or else you will run out of money. Here are the top reasons why you might go broke in retirement.

Top Reasons You Will Go Broke and Out of Money in Retirement

9 Reasons You Might Go Broke in Retirement

<p>It can be challenging to manage your finances when the market is experiencing a downturn. Your expenses shoot up as the inflation begins to rise while the value of your investments starts going down. Due to some of the recent and ongoing global crises such as the Covid-19 pandemic and the Russia-Ukraine war, investors are facing one economic debacle after another. That said, you cannot get sucked in and lose sight of your aim - long-term financial planning to secure your financial future. Hedge your bets on long-term investments. By focusing on the long-term, you can sail through short-term market volatility and attain your future financial goals. Both the <a href="https://www.rothira.org/articles/what-is-a-roth-401k" target="_blank">401(k)</a> and Individual Retirement Account (IRA) have been two extremely popular long-term investment instruments for investors in the United States. When the market is facing a downturn, an IRA may offer you a different option to consider.</p>
<p>Simply put, an IRA is a tax-advantaged retirement saving account that investors can open to save and invest to secure their financial future. There are primarily two kinds of IRAs &ndash; traditional and Roth. The major selling point of a Roth IRA is the ability to make tax-free withdrawals in retirement. You also have the option of converting your traditional IRA to a Roth IRA. This may be a prudent idea especially when the market is down. To understand how a Roth conversion works, its benefits and drawbacks, and would it be a wise investment for you or not, <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>consult with a professional financial advisor</strong></a> who can advise you on the same.</p>
<p>In this article, we will discuss everything that you need to know about a Roth conversion and the things you should keep in mind when converting your traditional IRA to a Roth IRA.</p>
<h2>What is meant by a Roth conversion?</h2>
<p>To put it succinctly, a Roth conversion is a transfer of retirement funds from a traditional IRA or 401(k) to a Roth IRA account.</p>
<p>In a traditional IRA, you contribute your pre-tax dollars toward investments that can grow tax-deferred, however, your withdrawals are taxed in retirement as per ordinary income. You can make withdrawals after reaching 59.5 years of age. On the other hand, in a Roth IRA, you contribute your after-tax dollars allowing your money to grow tax-free. You can <a href="https://www.rothira.org/articles/seven-ways-to-maximize-your-tax-free-retirement-income" target="_blank">make tax-free withdrawals in retirement</a> after reaching 59.5 years of age and having held your Roth IRA account for at least five years.</p>
<p>If you expect to be in a lower tax bracket post-retirement, a traditional IRA would be a preferable option for you since you receive immediate tax relief and save money in the present. However, if you expect to be in a higher tax bracket in the future, then you should opt for a Roth IRA account. This would allow you to pay tax in the present and draw tax-free money in retirement. Further, you are not required to take out mandatory distributions in retirement in a Roth IRA, however, the Internal Revenue Service (IRS) mandates that you must take Required Minimum Distributions (RMDs) after the age of 72 if you own a traditional IRA account.</p>
<p>For 2022, you can contribute $6,000 to your IRA account. But if you are 50 years of age or older, you can make an additional catch-up contribution of $1,000, bringing the total to $7,000. This limit is applicable to both traditional and Roth IRA accounts.</p>
<p>There are several benefits of a Roth conversion. That said, it is important to know when you should go for a Roth conversion to benefit from it.</p>
<h2>What happens to your IRA if the market crashes?</h2>
<p>You can invest your money in several traditional forms of investments like stocks, mutual funds, exchange-traded funds (ETFs), bonds, certificates of deposit (CDs), and money market funds in your IRA. However, you can also invest in alternative investments such as cryptocurrency through Bitcoin IRAs. In a <a href="https://www.rothira.org/articles/things-to-know-about-self-directed-roth-iras" target="_blank">Roth self-directed IRA (SDIRA)</a>, you can invest in real estate, franchise businesses, gold, and partnerships. Through these investments, you can accumulate wealth but keep in mind that since all of these investment options are linked to the market, if a market crashes your investments will also lose their value. <br /><br />Let us run through this scenario so you can understand what happens when a market falls. Your stock prices plummet, mutual fund returns take a sharp nosedive, and your ETF returns decrease. Though you may cover some of your losses through bonds, your overall returns may still be lower than what you may expect or want them to be. Your IRA value can significantly reduce depending on the prevailing market forces. That said, you can recoup your losses in time when the market recovers and bounces back. An IRA is a long-term investment vehicle that affords you that opportunity.</p>
<h2>Should I convert my IRA to a Roth IRA?</h2>
<p>The primary reason behind choosing to go for a Roth conversion is to save taxes in the future. Most folks are of the opinion that their present tax output is high. Considering this is the view when they are earning an income, it should be no surprise that people want to save money on paying taxes in retirement when their income would most likely come from investment returns and savings. This is a limited pool of funds, hence, any kind of taxes that are levied on your retirement money would create a shortage of funds. If you pay tax now, you would not have to do so during your retirement years, especially when you would most likely not have a stable source of income. Doing so would help protect your limited savings pool. That said, you need to understand certain aspects of this decision before you take the step:</p>
<h3>1. Go for a Roth conversion only if you have sufficient funds to pay taxes right now:</h3>
<p>At the time of Roth conversion, you need to pay taxes owed on the money that was growing tax-deferred till now. These funds will be taxed as per your current annual income. If you are a high-income earner, chances are you will already be paying a high amount of income tax. By converting your traditional IRA funds, you will further increase your tax output. This can be challenging especially if you do not have sufficient funds. In addition, if there is an ongoing market downturn, you need to consider other factors too. First among them is employment. Currently, economists are saying that a recession may soon be approaching. If and when that happens, it may result in unemployment, inflation, and salary cuts. We are already experiencing record levels of inflation. If you lose your job or have to take a pay cut, you would require funds to offset the loss of an active income. Going for a Roth conversion at this point in time may be tricky as you may not have enough money to cover the taxes.</p>
<h3>2. Consider converting to a Roth IRA if you have a lower income in the year of conversion:</h3>
<p>As stated above if you receive a pay cut, you may find it difficult to pay the due taxes on the conversion. Do note that these taxes need to be paid upfront. That said, you can benefit from this turn of events. Since your IRA funds will be added to your ordinary income and taxed accordingly, if at the time of conversion you are in a lower tax bracket, paying the taxes on the IRA money will not increase your tax burden significantly. So, if you have taken a hit on your income and it is lower than expected, you can think of switching to a Roth IRA account and reducing the impact of the tax hit.</p>
<h3>3. Consider a Roth conversion only if you expect your future tax rate to be higher:</h3>
<p>Choosing to go for a Roth conversion depends on what you expect to happen when you reach retirement. If you expect you would be in a lower tax bracket during your golden years, then it is better to stick to a traditional IRA. Your priority should be to lower your taxes. Consult a financial advisor who can assess your investment choices and the returns that they are likely to generate. If you are on your way to building a significant retirement corpus, your money will not be taxed during your retirement if it is kept in a Roth IRA. If you go down this road, not only will you avoid paying taxes in the future but also enjoy a higher monthly income after retirement.</p>
<h3>4. Consider a Roth conversion if you wish to leave a legacy for your heirs:</h3>
<p>One of the major plus points of owning a Roth IRA account is that you do not have to take obligatory RMDs. Unlike traditional IRAs where you have to start taking mandatory distributions from the age of 72, you can leave your Roth funds untouched if you have enough savings to meet your retirement expenses. You can leave your Roth IRA account to your family after your demise to meet their financial needs. Furthermore, your beneficiaries will not have to pay any taxes on the said funds if your IRA has been open and active for at least five years. Otherwise, your heirs may have to pay a 10% penalty on the withdrawn funds.</p>
<h3>5. Opt for converting your traditional IRA into a Roth IRA if you are not retiring soon:</h3>
<p>A Roth conversion would not be ideal for you if you plan to retire in less than five years and would require your IRA funds in retirement. As per IRS rules, all IRAs have a five-year rule. This rule states that all account holders have to wait for at least five years after the account is opened to withdraw their money. Irrespective of the fact that you owned a traditional IRA before for a number of years, the five-year rule will come into effect at the time of a Roth conversion. This is because the conversion is treated as a new account. Say, for example, you converted your traditional IRA in 2021, you would be able to make a withdrawal only in 2026, provided you are 59.5 years of age at the time of withdrawal. In case you retire before 2026 and make a withdrawal from your Roth account, a 10% penalty would be levied on the withdrawn money.</p>
<p>Apart from these factors, if you opt for a Roth conversion when the market is down, it would be advantageous for you. Let us discuss this in more detail.</p>
<h2>Is opting for a Roth conversion when the market is down a good decision?</h2>
<p>Yes, it is. The timing is ideal to consider a Roth IRA conversion. At the time of converting your traditional IRA to a Roth IRA, not only do you have to pay tax upfront on all your pre-tax contributions but also on the earnings accrued by you. This can be a significant payment and largely depends on your term of investment and the kind of investments made in your traditional IRA. But during a market downturn, the value of your IRA investments falls. For instance, suppose you had $150,000 in your traditional account when the market was up. At this time, you would have had to pay tax on the entire sum of $150,000. But if your investments fall to $100,000 due to market volatility, you would be required to pay tax on the $100,000 and not $150,000. Simply put, the lower the value of your investments, the lower the tax levied on them. By taking advantage at the time of a market downturn, you lower your tax liability compared to when the market was performing well and the value of your investments was higher.</p>
<p>Now when the market would recover, your investments in all likelihood would recover as well. You can then again be well on your way to attaining your financial goals with the added benefit of having paid off a significant tax liability. Moreover, not only would you have saved taxes but can look forward to making tax-exempt withdrawals and not having to take mandatory RMDs in retirement.&nbsp;<br /><br />Do note that the year in which you make a Roth conversion, that year&rsquo;s modified adjusted gross income (MAGI) may increase. This is important because MAGI can affect the monthly premiums for Medicare Part B since the premiums are calculated on the basis of the last two year&rsquo;s MAGI. Hence, a Roth conversion may lead to a higher premium in 2024.&nbsp;</p>
<h2>Can a 403b be rolled over to a Roth IRA?</h2>
<p>A 403b is a retirement savings plan created exclusively for employees of public schools and tax-exempt organizations. For 2022, you can make a contribution of up to $20,500 each year, and if you are 50 or older, you can make an additional contribution of $6,500, bringing the total to $27,000. You can invest in money market accounts, mutual funds, and annuities through your 403b plan.</p>
<p>You also have the option of converting your 403b plan to a Roth IRA by either transferring your 403b funds to your Roth account or withdrawing the money and then subsequently depositing it in your new Roth IRA. This must be done within a period of 60 days. Do note that both these actions attract taxes so make sure you have studied the implications of a Roth conversion thoroughly before taking the decision.</p>
<h2><strong>To conclude</strong></h2>
<p>Opting for a Roth conversion can help you save money since you can make tax-free withdrawals in retirement while most other investment instruments are taxed in retirement. In addition, you would be able to lower your immediate tax liability if you go for a Roth conversion when the market is going through a down cycle. That said, you must understand the different aspects of a Roth conversion before considering such a decision.</p>
<p>Do reach out to a&nbsp;financial advisor&nbsp;who can offer you better clarity on the benefits and drawbacks of a Roth conversion, and precise tax implications for you.&nbsp;Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Managing your finances is quite challenging in down-market scenarios. Read to find out if it is a good time for a Roth conversion when the market crashes.

Is it a Good Time for Roth Conversion When Market is Down?

Is a Down Market A Good Time for a Roth Conversion?

<p>Age plays a vital role in our lives and as we grow older, it has an effect on our interests, hobbies, finances, and health too. It is critical that you find the right kind of help that can allow you to sail through your new phase of life in a smooth manner. <br /><br />Due to increased life expectancy, the number of people over the age of 65 is also steadily increasing in the US with each passing year. The United States Census Bureau released a study in 2020 which revealed that the percentage of people aged 65 and more has significantly increased (by as much as 34.2%) since 2010. Even the median age has seen an upward trend rising to 38.5 years in 2020 from 37.2 years in 2010. What these numbers show is that a major chunk of the population of the United States is made up of senior citizens.</p>
<p>Financial planning is as essential for senior citizens as it is for the working population who are saving for their retirement. There is a concerted effort to shift towards capital preservation when an individual is nearing retirement to safeguard their savings. Even post-retirement, you may need financial advice due to changing financial needs with time. Moreover, continuously rising inflation also plays a part in the decision. Thus, it is critical that you <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>engage the services of a senior financial advisor</strong></a> who can guide you on how to continue saving and investing your money. With professional financial advice for seniors at your disposal, you can live a stress-free and financially secure life. If you are on the hunt for the best financial advisor for seniors but are unsure of where and how to find them, do give this article a read and follow the suggestions mentioned herein.</p>
<h2>How to find a financial advisor for seniors<strong><br /></strong>Let us discuss some ways to find the best financial advisors for seniors:</h2>
<h3>1. Seek recommendations for a suitable financial advisor:</h3>
<p>One of the easiest ways to find good recommendations for financial advisors in your area is to reach out to your friends and family members. You can enquire about good senior financial advisors who are more common than you might think. A word of advice to you - ensure that you take suggestions from people you trust. This way you can be relatively certain of the advisor&rsquo;s credibility and trustworthiness. In addition, exercise caution and do not simply hire someone just because they were recommended by someone you know. Conduct a meeting with them to assess their performance. Discuss your needs with them and ensure that you and the professional are on the same page. Make a decision after having a frank discussion with them where you communicate your concerns and expectations from them right at the beginning to eliminate the possibility of disagreements later on.</p>
<h3>2. Try and find a fiduciary advisor:</h3>
<p>There are primarily two kinds of financial advisors - fiduciary and non-fiduciary. Fiduciary financial advisors are legally bound to place their clients&rsquo; best interests before their own interests. If you <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>hire a fiduciary financial advisor</strong></a>, you can take confidence in the fact that all investments and financial decisions are being taken for your benefit. If however, you choose to hire a non-fiduciary advisor, you open yourself up to the possibility of being exposed to a certain amount of bias. Non-fiduciary advisors generally earn their fees through commissions. They work with banks or investment companies and may recommend certain financial products and services to earn a commission through their sale. These investments may or may not be beneficial for you thereby, it is advised that you exercise caution and consider hiring a fiduciary to safeguard your interests.</p>
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<h3>3. Explore online databases for certified advisors:</h3>
<p>Online databases are a good platform to search for the best financial advisors for seniors. You can concentrate your search to identify potential advisors living in your area and as per your requirement. Some of the options that you can try are:</p>
<h4>a. Certified Financial Planners (CFP):</h4>
<p>You can browse the CFP directory to search for a Certified Financial Planner. A CFP offers an exhaustive range of financial services such as <a href="https://www.rothira.org/articles/retirement-planning-checklist-10-years-from-retirement" target="_blank">retirement planning</a>, Social Security planning, budgeting, retirement health care, elderly care, inheritance, tax planning, and more. This database allows you to modify your search and search for a professional within 5 miles to 100 miles from your location depending on your preference and convenience.</p>
<h4>b. Financial Planning Association (FPA):</h4>
<p>If you are looking for a financial advisor who practices locally within your state, then the FPA is the right directory for you.</p>
<h4>c. National Association of Personal Financial Advisors (NAPFA):</h4>
<p>If you have your heart set on hiring a fee-only fiduciary financial advisor, then the NAPFA is the perfect directory for you. The directory offers you the convenience of picking an advisor based on your location.</p>
<h4>d. <a href="https://www.wiseradvisor.com/financial-advisors.asp"><strong>WiserAdvisor&rsquo;s Financial Advisor Directory</strong></a>:</h4>
<p>This particular directory allows you to search for vetted financial advisors residing near your area. The advisors are pre-screened and you do not have to shell out a match fee. Moreover, you are under no obligation to hire an advisor.</p>
<p>Directories serve as a great source of finding credible, vetted, and reliable financial advisors. You can find trusted advisors from the comfort of your home by accessing the online databases of the aforesaid directories.</p>
<h3>4. Verify the credentials of the financial advisor:</h3>
<p>Since the advisor would be managing your finances, you need to ensure that you hire someone that you trust and can rely on. Make sure that you verify the advisor&rsquo;s qualifications and certifications before hiring one. Some of the certifications that you can look for in a senior financial advisor are:</p>
<ul>
<li>Personal Financial Specialist (PFS)</li>
<li>Certified Financial Planner (CFP)</li>
<li>Chartered Financial Analyst (CFA)</li>
<li>Retirement Income Certified Professional (RICP)</li>
<li>Certified Retirement Counselor (CRC)</li>
<li>Certified Investment Management Analyst (CIMA)</li>
</ul>
<p>Additionally, you must also check the past performance of the advisor. Ask the advisor the number of clients that he manages at any given point in time to gauge whether he would be able to offer you the required time and attention you want. Do try and find out if any lawsuits, complaints, or criminal allegations have been made against the advisor. You can also check past clients' feedback on Google or the official website of the advisory firm to make an informed decision.</p>
<h2>What should you keep in mind when engaging the services of a senior financial advisor?</h2>
<p>When you are considering hiring a professional financial advisor for seniors, you must pay attention to the following:</p>
<h3>1. Do not make any large upfront payments:</h3>
<p>Seniors are vulnerable to many kinds of fraudulent financial schemes and scams. Before hiring someone, conduct a thorough check about their credentials and look into their past records. If the professional asks for a large sum of money upfront promising a large profit in a short span of time, do your due diligence first. Try to verify the legitimacy of the claim. You could also go for a one-time consultation first and hire the advisor on a longer contract if he meets your expectations.</p>
<h3>2. Have faith in your instincts:</h3>
<p>Do not doubt your instincts. If you are feeling unsure of a person&rsquo;s intentions, do not work with them. Your instincts may not be right at all times but they will offer you peace of mind. It is important that you make financial decisions when you are not feeling stressed. It is better not to engage someone with whom you have a mismatch in how you wish to attain your ideas and goals. The good thing here is that there are a plethora of qualified financial advisors available to choose from, and you can make an informed decision at your own pace and time.</p>
<h3>3. Take care to verify the reliability of sources:</h3>
<p>If you are searching for a professional financial advisor on the Internet, browse reliable and verified sources only. There are multiple frauds prowling the Internet who may be looking to scam you out of your money. Stay away from unverified websites. It can be risky if you hire someone from an untrustworthy source.</p>
<h2>Why do you require professional financial guidance for seniors?</h2>
<p>Let us explore some reasons why you require the services of a senior financial advisor:</p>
<h3>1. Create a plan for managing your healthcare expenses:</h3>
<p>Healthcare expenses form a core part of your retirement expenditure and if you are not adequately covered to handle them, it may become a source of stress and worry for you. You can consult with a senior financial advisor on how to manage your healthcare-related expenses. He can recommend certain strategies such as:</p>
<ul>
<li style="list-style-type: none;">
<ul>
<li>Insurance like long term care insurance, critical illness insurance, general health insurance</li>
<li>Federal Medicare plans like Medicare Part A, B, C, and D</li>
<li>Health savings account (HSA)</li>
</ul>
</li>
</ul>
<h3>2. Create an estate plan:</h3>
<p>Death is an unpleasant thing to consider and generally people do not wish to think about their own demise which is why they either delay or refrain from creating an estate plan. However, you need to pay extra attention to it once you go past 60. You may need to revise the plan and will if your relationship has undergone a change such as if you have either gotten divorced, remarried or widowed. Similarly, you may wish to alter your estate plan if your children get divorced, widowed, or remarried, or if they have biological or adopted children. Family feuds can also cause a change in your estate plan as you may wish to add or remove certain beneficiaries or alter their inheritances due to any recent events that may have occurred. All these changes must be made and reflected in your estate plan at the earliest. A senior financial advisor can help you carry out the needed modifications.</p>
<h3>3. Help ensure that you remain financially stable for the rest of your life:</h3>
<p>It is important that you have certain streams of income in retirement so that the money keeps flowing in. A financial advisor can prove useful here as he can help create other streams of income for you such as investments in low-risk investments (like debt funds) and fixed income instruments (like bonds, commercial papers, certificates of deposit, and more). By doing so you would have a steady stream of revenue coming in without exposing yourself to too much risk. You could also explore options to rent or lease your real estate property to earn some additional funds.</p>
<h3>4. Deploy retirement-appropriate strategies:</h3>
<p>You need to be careful when using your retirement funds. If you end up using them too quickly, you may risk running out of money during the later years of your retirement; and if you are too frugal, you may become unhappy and not enjoy the latter years of your life. Hence, it is essential that you reach a suitable compromise. Create a withdrawal strategy with help from your senior financial advisor w.r.t. your Required Minimum Distributions (RMDs) so that you do not fall foul of penalties and are able to stretch your savings through your retirement.</p>
<h3>5. Minimize your taxes:</h3>
<p>Even after retirement, you are liable to pay taxes on your income. Thus, you must employ tax-saving strategies to lower your tax burden. With the help of an advisor, you can reduce your tax output, maximize your investment gains, and effectively use your money without it getting eroded by inflation or taxes.</p>
<h2>To summarize<strong><br /></strong></h2>
<p>If you have turned 60, you must take care to employ measures to secure and safeguard your finances. Hire a senior financial advisor who can create a customized strategy for you to meet your unique financial needs and goals and offer you timely advice to protect your funds against market volatility.</p>
<p>To get in touch with a fiduciary advisor who may help you create customized and prudent investment strategies to secure your wealth in retirement, use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a>. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your needs and goals.</p>

Financial planning for seniors is important for a stress-free and financially secure life. Here are the best tips for finding a qualified financial advisor for seniors.


Expert Tips to Find Best Qualified Financial Advisor for Seniors

4 Tips for Finding a Qualified Financial Advisor for Seniors

<p>For many retiring early seems like a distant dream, one that is out of reach. But that is no longer the case with a discernible change in the attitudes and mentality of the younger folks who seek a healthy balance between their personal and professional lives. They do not associate retirement with old age. It was assumed that someone who is retired must at least be in their 60s, however, that view is changing as a sizable number of folks are considering taking early retirement. They wish for comfort in their lives, seeking peace of mind and a stress-free life instead of spending a substantial part of their lives slogging in their workplace.<br /><br />The FIRE (Financial Independence, Retire Early) movement has played a significant role in changing people&rsquo;s beliefs about retirement. FIRE is based on the idea that an individual can opt for early retirement in their 40s and 50s provided they have been careful about financial planning. In FIRE, the investment philosophy focuses on aggressive saving and investing money in high-return-bearing investments. The aim here is to attain early retirement even if you have to compromise on your lifestyle in the present. There is an increased focus on maximization of savings rate among people who wish to retire early. They tend to live frugally till their retirement however this way of living may not be appealing to everyone. That said, having to live within your means is not without certain advantages. You can take a step back and focus on living peacefully with your loved ones without the stress of having to meet deadlines, constant work pressure, or having to earn substantial amounts of money. If you require assistance with building a significant retirement corpus that will allow you to take early retirement, <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>consult with a professional financial advisor</strong></a> who can advise you on the same. Now how successful your early retirement will depend on the investment strategies that you choose to deploy. It is advised that you start saving from a young age and choose the best investments to live comfortably in your retirement years. Let us find out how you can achieve this.</p>
<h2>What strategies can you employ to take early retirement?</h2>
<p>There are several retirement investment strategies that you can choose that will allow you to take early retirement. Some of these strategies are:</p>
<h3>1. Plan for early retirement from a young age:</h3>
<p>Early retirement is an ambitious goal considering if you retire in your 40s and live till your 70s/80s, you are looking at 30 to 40 years of retirement without a stable source of income. This means that you need to accumulate a substantial amount of savings that can last you for the aforesaid period of time. You have to factor in the impact of inflation on your savings as it will negatively affect the value of the dollar and reduce your purchasing power in the future. So, to negate this effect, you need to create a significant retirement corpus that can generate inflation-beating returns. To achieve this, you need to start investing from a young age and employ rational retirement investment strategies. You can reap several benefits if you start investing early, the foremost being, that you have a longer time horizon at your disposal. Since you are not pressed for time, you can create a well-researched plan and carry it forward to success. In addition, a longer time frame allows you to harness the power of compounding where you can reinvest your profits back into the market. Doing so enables you to earn higher returns on your investment. Lastly, the sooner you begin, the more wealth you can build for yourself and your family. You should optimally invest your savings, salary, bonuses, and gifts. Time plays the most critical role in achieving your goal of early retirement.</p>
<h3>2. Maximize your savings:</h3>
<p>For those seeking early retirement, their focus should be on saving more and spending less. This is a hard bargain to strike as you would have to give up some of your dreams and desires and live your years frugally. That said, you would need to inculcate this habit and start saving every possible dollar. This goes beyond simply saving 20 to 30% of your salary in the bank. You would need to fundamentally change your lifestyle to achieve early retirement. For example, you may need to switch to buses instead of taking a cab, forego eating out or only do so on special occasions, shop at thrift stores, and more. The measure and degree of austerity you practice depend on your current income and how much money you wish to have at retirement. The principles remain the same for everyone and only the degree of frugality varies. If your aim is to secure your retirement financially, you may have to stop using credit cards, cut down on socializing with your friends and family, start carrying your lunch to work, avoid all kinds of debts, cancel all travel plans, and more. Since you need to save significantly more for early retirement, you may have to double your efforts as well to achieve your goal.</p>
<h3>3. Discover advantageous ways to invest your money for retirement:</h3>
<p>To build a significant retirement corpus, you need to invest your money as well. You cannot build a financially secure life on savings alone. You need to pick the right investment instruments to invest your money. Consider mutual funds for instance. Considered to be one of the safest modes of investment for retirement, they offer two forms of investment: systematic investment plans or SIPs and lump sum investments. You can choose either of the two options. It is advised that you go for SIPs as it is considered to be more beneficial. Through SIPs, you can gradually build your wealth over time via several tiny investments that yield returns over time.<br /><br />That said, you cannot ignore high-risk and high-reward investment instruments such as equity. Equity can help you generate the significant wealth needed for early retirement. Along with direct equity, you can also select equity mutual funds, gold, exchange-traded funds, and REITs (real estate investment trusts) to build a well-diversified portfolio. A well-diversified portfolio having a higher concentration on equity can help generate high returns while also providing a buffer against risk to produce better returns in the long run.</p>
<h3>4. Don&rsquo;t neglect to account for health expenses:</h3>
<p>Health expenses may very well constitute a large part of your retirement costs. With growing age, your health may decline and you may contract certain illnesses or health issues. You must plan for costs related to medicines, long-term care, hospitalization, ambulance, surgeries, alternative medicine, therapies, etc., during your retirement years. A health savings account (HSA) can be an effective tool when it comes to dealing with health expenses in retirement. There are several benefits associated with opening an HSA such as tax-free earnings, tax-deductible contributions, and making tax-free withdrawals provided they are for medical purposes. Do keep in mind that HSA withdrawals become tax-and-penalty-free only if you are 65 years of age or above. If you take early retirement in your 40s or 50s or anytime before you turn 65, you would lose this benefit and will have to cover your health expenses on your own.</p>
<p>You can also consider taking out a health insurance plan that covers all kinds of medical costs, critical illnesses, long-term care, and more. Further, instead of relying on your employer&rsquo;s plan, you should buy health insurance for yourself. The biggest risk associated with an employer plan is that the moment you lose or retire from your job, you will lose the health insurance cover at the same time. Also, there is less scope for customization in an employer-sponsored plan. It is advised that you buy your health insurance at a young age to get a more affordable rate. The older you are at the time of buying health insurance, the more expensive it is for you. Hence, it is considered prudent to buy an insurance plan at a young age.</p>
<h3>5. Engage the services of a financial advisor:</h3>
<p>To achieve early retirement, you may need help from a qualified financial advisor who can offer you professional guidance and assistance. You can do so by employing wise retirement investment strategies. These strategies will not only help you build wealth but also allow you to secure your financial future. Along with this, you will also need to pick out safe investments to mitigate risk. Not everyone possesses the necessary financial acumen or expertise to achieve this. This is where a professional financial advisor comes into the picture. He can help you achieve your financial goals by maximizing your savings through the deployment of the right investment strategies. The advisor can work with you to reduce your debt and create a budget that allows you to live within your means. <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>Consulting with a professional financial advisor</strong></a> can help you get out of the planning mode and start putting things into action. Some folks may feel that an advisor&rsquo;s fee is an avoidable expense, especially at a time when they are focused on saving every dollar for their retirement. Consider the fee as an investment rather than an expense. You are paying for their timely guidance and financial expertise that would allow you to attain your goals sooner than you may have envisioned. Further, there are various kinds of advisors that you can choose from based on your needs and goals. You can hire them on an hourly rate, a retainer, or commission model, etc., and manage your expenses at your convenience.</p>
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<h3>6. Purchase a house:</h3>
<p>A home is a great investment for early retirees as it is considered to be one of the safest investments for retirement. There are several benefits of owning real estate such as the value of a real estate asset appreciates faster than most other assets which make it a good hedge against inflation. It also offers you security and protection. In addition, a home also allows you to generate more wealth either through renting it out or giving it on lease. It serves an important role in providing you with financial security in retirement. You could also sell your home if you require money to meet any financial obligations that you may have. Having a home is a significant investment that can take you one step closer to your retirement.</p>
<h3>7. Account for all miscellaneous expenses and losses:</h3>
<p>Most folks rarely fail to consider the bigger expenses but it is the smaller cash outflows that tend to escape unnoticed and unaccounted for. Retirement can be a long phase of your life where you must account for every expense no matter how insignificant you may think it may be. You can manage these expenses by taking out insurance for them. So, apart from health insurance, you should also buy life insurance, car insurance, disability insurance, homeowners insurance, etc. You can protect yourself against emergencies through insurance, not to mention they also help in reducing costs. Compare different plans to find out the one that would be easy on your pocket. <br /><br />You also need to find ways and strategies to reduce your risk exposure. Unexpected events having global ramifications such as the Covid-19 pandemic and the Russian invasion of Ukraine can mess up your plans and even affect your means of livelihood. You need to be careful when it comes to risk management especially if you are planning to retire early. You should consider investing in traditional retirement planning vehicles such as a 401(k) retirement account or an individual retirement account (IRA). Though these instruments may not be ideal for early retirees due to having a minimum age limit of 59.5 years for withdrawals, these retirement plans can still serve an important role in your investment portfolio. These plans offer multiple benefits such as tax-free earnings and grow along with tax benefits that can serve you well in retirement. No matter if you retire early or at the age of 65, investing in an IRA or a 401(k) is considered to be a great investment as it offers financial liquidity and financial safety to its investors.</p>
<h2>To conclude</h2>
<p>To secure early retirement, you need to exercise caution and prepare an exhaustive plan. The sooner you begin, the better the results will be, provided you have employed the right retirement investment strategies. However, not everyone is cut out for early retirement. You need to work hard, be diligent and disciplined, not to mention extremely focused to achieve your goal. This may not be possible for everyone. Also, some may choose to work till their official retirement age and beyond because they enjoy working and it gives them a sense of accomplishment and purpose in life. In the end, it is your call to determine what it is that you want to do and what course of action would work best for you.</p>
<p>If you want to get in touch with a fiduciary advisor who may help you understand the impact of a Roth IRA conversion on your taxability, withdrawals, and more, use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

With sound financial planning, you can retire as early as your 40s & 50s. Here are the best tips on how to retire early by building sufficient wealth for retirement.

Best Tips on How to Retire Early - Build Wealth in Your 40s & 50s

How to Retire Early: 7 Ways to Build Wealth

<p>Retirement can be quite challenging and overwhelming for people who are used to working day in and day out. Retirees are used to once receiving a fortnightly paycheck to keep them afloat and meet their daily expenses. But retirement comes with a loss of a steady paycheck and the prospect of having to modify their daily routine. However, with the help of retirement planning, you can overcome your loss of income by saving and investing your money in the right investments. It offers you the freedom to live your golden years comfortably without having to rely on others for financial assistance. With robust retirement planning, you can live a financially independent life and build a substantial retirement corpus. The corpus allows you to cover your non-discretionary expenses (like groceries, electricity, gas, healthcare, etc.) as well as your discretionary expenses (such as travel, dining out, shopping, etc.). It also enables you to handle any financial emergencies that may crop up like unexpected medical costs, home repairs, car repairs, and more.</p>
<p><a href="https://www.rothira.org/articles/retirement-planning-checklist-10-years-from-retirement" target="_blank">Retirement planning</a> should be undertaken by every individual regardless of their income, age, net worth, future goals, or family needs. It is a vital component of any financial plan as it has a significant effect on your overall standard and quality of your life. This is why you must seek professional guidance at the time of drafting a retirement plan. If you need help to design a customized retirement plan as per your future financial needs and goals, <strong><a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank">reach out to a retirement advisor</a></strong> who can advise you on the same.</p>
<p>In this article, we will discuss the importance of retirement planning, how retirement advisors assist you, and what criteria you should consider when selecting a local retirement planner to guide you.</p>
<h2>Why is retirement planning important?</h2>
<p>Retirement planning can be helpful in several ways other than simply saving for future retirement expenses. These are:</p>
<h3>1. Can help make taxation planning easier:</h3>
<p>In the rush to create wealth, a lot of folks tend to neglect the subsequent impact of taxes on their accumulated wealth. Having a high income is beneficial as it allows you to live comfortably and cover all kinds of costs including any unforeseen ones. However, a high income also increases your taxability and may adversely affect your cash inflows. Thus, it is critical that you take into account how your retirement income will impact your taxes during your retirement years. For instance, if you choose a traditional Individual Retirement Account (IRA), herein, you contribute pre-tax dollars and subsequently, your withdrawals are taxed in retirement. But if you invest in a Roth IRA, herein, you make contributions from your after-tax dollars that allow you to make tax-free withdrawals in retirement provided you are 59.5 years of age and have held your account for a period of five years. <br /><br />All these considerations are taken into account by retirement planners before choosing a particular instrument for you. For example, a big factor in choosing between a traditional and Roth IRA depends on whether you foresee yourself in a higher tax bracket during your golden years or not. If you expect to pay higher taxes in retirement, a Roth IRA would be ideal for you as you will not have to pay any tax on the withdrawals. But if you expect to pay lower taxes in retirement, then a traditional IRA would be a better option for you. A retirement planner can help explain the finer differences to you and guide you on how to save and invest to meet your future financial needs and goals.</p>
<h3>2. Can help plan your withdrawals better:</h3>
<p>There are a number of reasons why you need to carefully plan your retirement account withdrawals. The timing of withdrawals matters a lot as it sets the course for the rest of your retirement and can significantly affect your overall earnings too. Take Social Security benefits for example. You can start withdrawing your benefits upon reaching your full retirement age, however, if you delay withdrawing till you reach 70 years of age, you can boost your paycheck by an average of 7.4% per year. This is a substantial increase. A retirement advisor can calculate the exact number of years you need to delay collecting your check to maximize your benefits. <strong><br /><br /></strong>Additionally, there are different sets of rules for withdrawals for different retirement accounts. Consider a <a href="https://www.rothira.org/articles/what-is-a-roth-401k" target="_blank">401(k) account</a>. Herein, you can make penalty-free withdrawals upon reaching 59.5 years of age. However, if you make a withdrawal before the age of 59.5, you would be liable to pay a 10% penalty. Moreover, the Internal Revenue Services (IRS) mandates that you take Required Minimum Distributions (RMDs) from your retirement accounts starting from 72 years of age. That said, you are afforded certain exceptions wherein you can make penalty-free withdrawals for qualified expenses. These exceptions are:</p>
<ol>
<li style="list-style-type: none;">
<ol>
<li>Loss of job</li>
<li>Covering higher educations expenses of a child</li>
<li>Suffering from a permanent disability</li>
<li>Medical costs</li>
</ol>
</li>
</ol>
<p>A retirement planner can account for all such rules and exceptions and plan your withdrawals efficiently. Doing so would allow you to avoid paying any penalties and minimize your taxes too.</p>
<h3>3. Can help offset any unforeseen expenses:</h3>
<p>An unforeseen expense can throw your well-planned retirement strategy for a toss. This is why it is critical that you prepare an emergency fund as a part of your retirement plan. You may be forced to use up a chunk of your retirement savings prematurely to cover any instances of theft, home repairs, medical emergencies, a child or relative requiring financial assistance, etc. This may lead to having insufficient funds for your remaining years of life. However, you can offset this predicament by saving for an emergency corpus. You can <strong><a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank">consult with a professional financial advisor</a></strong> who can recommend an appropriate investment instrument for saving that not only offers growth on your money but is also highly liquid. Generally, it is recommended that you must have three to six months' worth of household expenses in your emergency fund. You could also explore different insurance plans such as homeowners insurance, medical insurance, etc., to cover any emergency costs that you may face in the future. </p>
<h3>4. Can help offset the impact of inflation:</h3>
<p>When planning for retirement, you need to factor in the cost of inflation. Due to rising inflation, the cost of goods and services increases while at the same time the purchasing power of the dollar decreases. This may lower the value of your retirement savings requiring you to save a larger sum of money. However, retirement planners can help offset this by choosing appropriate investments for you that can offer enough growth to <a href="https://www.rothira.org/articles/6-tips-to-protect-your-retirement-savings-against-high-inflation" target="_blank">beat inflation</a>. Doing so ensures your savings grow at a high rate offsetting the impact of inflation on them.</p>
<h3>5. Can help lower financial anxiety and stress:</h3>
<p>Planning helps prepare for the unexpected so that you can manage any unforeseen events. Having a retirement plan in place allows you to take care of everything starting from taxes to withdrawals, insurance, medical costs, higher education expenses, emergencies, etc. It offers you comfort and confidence in the knowledge that you will have enough funds to live your retirement years comfortably and take care of your family. You can always go ahead and consult with a retirement advisor who can create a well-diversified investment and retirement savings plan for you that will offer you peace of mind.</p>
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<h2>What are the different kinds of financial advisors that you can hire?</h2>
<p>You can reach out to several different kinds of financial advisors who can help you create a substantial retirement corpus. These advisors differ in many aspects such as the kind of services they offer, their areas of expertise, how they work as well as how they charge remuneration. Let us go through the different kinds of financial advisors that you can hire:</p>
<h3>1. General financial advisors:</h3>
<p>These advisors can offer guidance on several areas of financial planning such as retirement planning, debt management, investment portfolio diversification, tax planning, succession planning, estate planning, and more. You can either go with an advisor who offers specialized services such as a retirement planner or tax manager; or hire someone who can study your finances in detail to give you more comprehensive advice.</p>
<h3>2. Wealth managers:</h3>
<p>Similar to general financial advisors, wealth managers work exclusively for high-net-worth clients. They are considered ideal for wealthy individuals who have amassed extremely large estates and highly valuable assets and investments.</p>
<h3>3. Fee-only advisors:</h3>
<p>Fee-only advisors charge a flat fee to their clients based on the number of hours they have worked for you. The fee can be charged either on an hourly, weekly, or monthly basis. These advisors also work on a fixed percentage of your Assets under Management (AUM). The typical rate of the fee charged is 1-2% of AUM. Please note that the percentage of fees decreases with an increase in AUM. Fee-only advisors are fiduciaries meaning they are legally bound to put your interests before their own.</p>
<h3>4. Commission-only advisors:</h3>
<p>These kinds of advisors charge a commission based on the financial products or services they may recommend you buy. For example, if you make an investment of $5000, they may earn a commission of $500 on it. Since commission-based advisors are not fiduciaries, they may not always recommend an investment that suits your financial goals but rather one that may earn a higher amount of commission.</p>
<h2>How to find the right retirement advisor near you</h2>
<p>Every individual has unique financial needs and goals. A retirement planner assesses your risk appetite, your savings, and investments target, and your retirement goals to best advise you on how to achieve your objectives. Some retirees may wish to travel during their retirement while others would like to spend quality time with their family or contribute towards their grandchildren&rsquo;s higher education costs.<br /><br /><strong>There are certain steps that you can follow in your hunt for a suitable advisor who matches your needs:</strong></p>
<h3>1. Understand your needs:</h3>
<p>The biggest hurdle when it comes to finding the right advisor is that you are unsure about your present and future financial needs. Once you gain clarity about why you require the services of a financial expert, the rest of the pieces of the puzzle would fall into place. For example, are you looking for someone to boost your retirement savings, help lower your taxability, or diversify your portfolio?</p>
<h3>2. Carry out thorough research:</h3>
<p>DO not blindly trust recommendations made by your family and friends. Remember, someone who may be the right fit for them, may not be the best choice for you. Find out about any local retirement planners in your area. You can use certain online tools such as an <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>advisor match tool</strong></a> to find qualified advisors. Interview prospective advisors to find one who best matches your needs and has the right credentials, certifications, experience, etc. Once you have narrowed down your options, select the best financial advisor from the remaining advisors.</p>
<h3>3. Ensure the chosen fee structure is suitable for you:</h3>
<p>Retirement advisors primarily use two kinds of fee models i.e. fee-based and commission-based to charge their clients. At the time of hiring a professional, do go through the pros and cons of their fee structure carefully before moving ahead with your decision. Find out how the fee model impacts your budget and if the tradeoff is worth the investment.</p>
<p>Retirement planning is a long-term process wherein the sooner you start saving, the better off you will be in terms of reaching your retirement savings target. Do not delay hiring a retirement advisor until you are only a few years away from retirement. Hire one when you are young so the advisor can help you create a customized retirement plan that will allow you to earn a substantial sum of money.</p>
<h2>To conclude</h2>
<p>Through retirement planning, you invest and save funds to ensure you have comfortable and stress-free retirement years. It allows you to build a financial safety net wherein you can meet your living expenses without having to look for help from others. Herein, retirement advisors play an important role by helping you reduce your taxes, increase your returns, minimize penalties, be prepared for emergencies, and more. Try and find retirement advisors near you who can help you achieve your goals with minimal hassles. Further, ensure that the advisor complements your investment philosophy and suits your budget.</p>
<p>If you want to get in touch with a fiduciary advisor who may help you create a customized retirement plan to boost your savings and reach your savings target, use the <strong><a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank">free advisor match service</a></strong> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Retirement planning is a very challenging and complicated task. Learn how to find the best retirement advisor near you that suits your financial needs & goals.

Tips on How to Choose the Best Retirement Advisor Near You

How to Find the Best Retirement Advisors in Your Area

<p>There are several kinds of retirement savings accounts that you can invest in based on your risk profile, investment horizon, and future goals. The most popular retirement accounts among these are the 401(k) and the Individual Retirement Account (IRA). These accounts have served the needs of many retirees enabling them to save for their future retirement expenses. Simply put, a 401(k) is a company-sponsored retirement plan that the employer offers to the employee whereas an IRA is a tax-advantaged retirement savings account that can be opened at the bank, with a broker or union.</p>
<p>There are several kinds of IRAs available to choose from including traditional IRA, Roth IRA, SEP-IRA, and SIMPLE IRA. Each IRA serves a unique purpose. Take the traditional IRA for instance. If you pick this retirement plan, you contribute pre-tax dollars and do not pay any taxes on your earnings until your retirement. However, you will have to pay tax on your withdrawals as per your taxable income for the concerned financial year. For a Roth IRA, you contribute after-tax dollars, and similar to a traditional IRA, you do not have to pay any taxes on your earnings until your retirement. But you can make tax-free withdrawals in retirement provided you are 59.5 years of age and have held your Roth account for a period of five years. Coming to SEP-IRA, this retirement account is primarily used by small businesses or self-employed individuals. It adheres to the same tax rules that a traditional IRA does. Additionally, SIMPLE IRA or Savings Incentive Match Plan for Employees also caters to small businesses and self-employed individuals. It follows the same tax rules for withdrawals as a traditional IRA and allows employees to make contributions to their accounts. If you wish to learn about different types of retirement plans along with their pros and cons, <strong><a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank">reach out to a professional financial advisor</a></strong> who can guide you on the same.</p>
<p>If you pick a traditional IRA, you have the option of rolling over your account into a Roth IRA. Roth in-plan conversions happen quite often.</p>
<p><strong>In this article, we will discuss what you need to know when considering a Roth IRA conversion. </strong></p>
<h2>What is meant by a Roth IRA rollover?&nbsp;</h2>
<p>A Roth IRA rollover or conversion means the transfer of cash and other assets from one retirement plan to another i.e. from a traditional IRA, SEP-IRA, SIMPLE IRA, or a 401(k) to a Roth IRA. You should keep note of the following things when converting a traditional 401(k) or IRA into a Roth account:</p>
<ul>
<li>At the time of conversion, you will have to pay income tax on the funds you convert. This occurs due to the fact that you make tax-deductible contributions in traditional IRA accounts but must contribute after-tax dollars in a Roth account. Hence, you need to cover the difference in taxes that you owe upon conversion. These taxes must be paid in the same year the conversion takes place. Doing so would likely place you in a higher tax bracket for the concerned year.</li>
<li>When going for a Roth in-plan conversion, you can either opt for a complete or partial conversion. If you decide to convert the entire value of your account, you would owe taxes on the entire account's value. You can lower your tax burden by opting for partial conversions. This would ensure you do not fall into a higher tax bracket for your overall income for the year. It is advised that you consider a partial rollover especially if you have a high corpus amount in your traditional retirement account.</li>
<li>To figure out how much you would owe in taxes, you must file Form 8606 at the time of converting your account. You can also take the help of a Roth IRA conversion calculator. It offers precise and error-free results based on which you can determine whether to go for partial or complete conversion.</li>
</ul>
<p>As stated above, there is a five-year rule that you must adhere to when opening a Roth account. As per this rule, you cannot make any drawings from a converted Roth IRA for up to five years after the conversion. If you end up making a withdrawal in the first five years, you will have to pay a 10% penalty on the amount withdrawn. In the case of partial conversions, the rule is applied to every conversion meaning each of the partial conversions will be penalized separately. For example, say you converted $2,000 in 2021 and $3000 in 2022, you would not be able to withdraw the $2,000 until the year 2026 and $3000 until 2027. However, if you do make a withdrawal, you will have to pay a 10% penalty on each individual conversion to the Internal Revenue Service (IRS). Thus, do make a note of all your partial conversions if you wish to avoid paying the penalty.&nbsp;</p>
<p>The five-year rule comes into effect on the 1st of January of the year of the conversion. Further, the penalty is only charged on the earnings made by you and not your contributions.</p>
<h2>What are the different pros and cons of a Roth IRA?&nbsp;</h2>
<h3>Benefits of a Roth IRA rollover:<strong><br /></strong></h3>
<p>There are several advantages of a Roth in-plan conversion. These include:</p>
<h4>1. Can make tax-free withdrawals:</h4>
<p>Arguably, the most attractive aspect of a Roth IRA retirement plan is the ability to make tax-free withdrawals. Though you do not get an immediate tax break with a Roth IRA, however, you can reduce your taxes in retirement. A Roth conversion is especially helpful if you expect to be in a higher tax bracket in retirement. If you have owned your Roth account for five years and are 59.5 years of age or older, your withdrawals will not be taxed or added to your taxable income.</p>
<h4>2. Can make withdrawals for certain exceptions:</h4>
<p>You can break the five-year rule of a Roth IRA account in certain cases. These are:</p>
<ul>
<li style="list-style-type: none;">
<ul>
<li>First-time homebuyers can withdraw up to $10,000 for making the down payment on their first house.</li>
<li>If you want to pay for higher education expenses for yourself, your spouse, children, or grandchildren, you can withdraw up to $10,000 for the same.</li>
<li>You can withdraw money to pay for health insurance premiums. You won't be charged a penalty on the same.</li>
<li>If you are unemployed, you can withdraw money from your Roth IRA to meet your living expenses.</li>
<li>You can also make a penalty-free withdrawal in case your medical expenses add up to more than 10% of your Adjusted Gross Income (AGI).</li>
</ul>
</li>
</ul>
<h4>3. Don't have to pay Required Minimum Distributions (RMDs):</h4>
<p>Roth IRAs do not have mandatory RMDs unlike traditional 401(k)s and IRAs. This means that you are not mandated to withdraw your Roth IRA funds when you reach 72 years of age. A Roth IRA offers great flexibility wherein you have the power to either withdraw your money should you choose to or let it sit in your account as per your needs.&nbsp;</p>
<h4>4. Can save taxes:</h4>
<p>If you are not careful, you may end up paying higher taxes in retirement than you did in your working years. Your retirement income can include the following:</p>
<ul>
<li style="list-style-type: none;">
<ul>
<li>your life's savings</li>
<li>capital gains from stocks</li>
<li>dividends from bonds</li>
<li>insurance payouts</li>
<li>Social Security benefits</li>
</ul>
</li>
</ul>
<p>If you opt for a Roth conversion, you can avoid paying taxes on your traditional IRA or 401(k) in retirement. Suppose you have a considerable amount of savings and investments, you may very well fall into a higher tax bracket in the future. Make a list of your expenses in retirement and accordingly plan for a Roth IRA rollover. Not having to pay RMDs as well as the ability to make tax-free withdrawals may lead to a more financially comfortable life. Further, paying taxes in the present may be a more financially prudent decision as you will be paying them on your income. In addition, if you wait till retirement to redeem your investments and realize your capital gains, you may lower your tax liability too.</p>
<h4>5. Can diversify your investments:</h4>
<p>Many people believe that diversification is limited to the kind of assets you invest in, their returns, and the associated risks. However, you must be heedful of tax diversification as well. If you have all your money invested in traditional retirement savings accounts, you may consider shifting some of those funds to a Roth account. For example, if you own a traditional IRA and 401(k) account, you may consider going for a Roth IRA rollover. Doing so will not only allow you to diversify your taxes but also enable you to take advantage of the exceptions mentioned above. This can prove immensely beneficial in case of any financial emergencies that you may experience in the future.</p>
<h4>6. Can be more beneficial for your beneficiaries:</h4>
<p>The IRS mandates that non-spouse beneficiaries, such as children or grandchildren, must withdraw the entire account's value within a period of ten years of inheriting it. The important thing to note here is that the beneficiaries are not obligated to pay any tax on the withdrawn amount. This means that you can leave your heir or beneficiaries the entire value of the account and secure their financial future.</p>
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<h3>Drawbacks of a Roth IRA Rollover:<strong><br /></strong></h3>
<p>Despite the many benefits of Roth IRA, a Roth IRA may not be suitable for you due to the following reasons:</p>
<h4>1. Your tax liability may increase in the present:</h4>
<p>Having a Roth IRA account increases your tax burden in the present. This is further amplified if you are in a high tax bracket now. A Roth conversion is particularly helpful if you foresee yourself being in a higher tax bracket in the future and reducing your taxes in retirement. If you do not expect that, you would be better off going with a traditional retirement account.</p>
<h4>2. You may have to defer achieving other goals:</h4>
<p>Having a higher tax rate in the present may result in deferment of your other goals. There are a lot of things to take care of during your pre-retirement years. From having to pay off debt like student loans, home loans, etc. to saving for your children&rsquo;s college tuition, tackling financial emergencies, travel, and saving for retirement. If you shift your entire focus on achieving one goal such as saving for retirement, it may lead to compromising on attaining other goals. A higher tax rate at the present may also lead you to lower your investment and savings rate while having to reduce your expenses at the same time. Further, it may play spoilsport with your emergency fund and put the brakes on your financial progress in general. This may lead you to become stressed and lose your peace of mind.</p>
<h4>3. Your Medicare premium may cost you more:</h4>
<p>Your Modified Adjusted Gross Income (MAGI) plays an important role in determining your monthly premium for Medicare Part B and Part D. To calculate your monthly Medicare premium, your MAGI for the last two years before enrollment is considered. For example, if you signed up for Medicare Part B and Part D in 2021, your MAGI for 2020 and 2019 will be considered to determine your monthly premium. This means that your initial Medicare premiums may cost you more if you choose to go for a Roth in-plan conversion. The good thing is that the premium is decided every year and may decrease with a decline in your annual taxable income.</p>
<h4>4. You may lose protection against creditors:</h4>
<p>Compared to IRAs, 401(k) accounts are afforded better protection against creditors. Though the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 does provide federal bankruptcy protection to traditional and Roth IRAs, as of April 2022, it limits the protection to a sum of $1,512,350 per person. These limits are revised every three years and adjusted for inflation. They are applicable to all kinds of IRAs, including rollovers. However, if you have a high corpus value and are concerned that you will be targeted by creditors, you may not entirely be in the clear with respect to creditors. You may get a favorable ruling in bankruptcy courts and receive protection to higher values if the courts find it fair, but keep in mind that there is no law that governs this. Hence, there is always a likelihood of losing your money.</p>
<h4>5. Your Social Security benefits may be taxed:</h4>
<p>If you have already begun claiming Social Security benefits, if you opt for a Roth IRA conversion, your taxable income for the year will increase and you would have to shell out tax on your contributions made so far as well. Doing so would not only place you in a higher tax bracket but also increase your Social Security tax rate.&nbsp;</p>
<h2>What are some Roth conversion strategies for retirees age 65 and above?</h2>
<p>If you are thinking about converting your 401(k) or traditional IRA into a Roth IRA at the age of 65, you may either be retired or fast approaching retirement. There is no age limit for undertaking a Roth conversion. You can go for a Roth conversion at any age and stage of your life. Did you know that most retirees give serious consideration to a rollover in their early years of retirement?</p>
<p>If you are one of such people, you need to take a long, hard look at your income. The most beneficial time to go for a Roth conversion is when you are earning a relatively low income. Doing so would not only keep your taxes at a minimum but also allow you to receive a larger benefit during your retirement years.</p>
<p>That said, you need to consider the expenses that occur when you roll over your account. It may take a while before you can benefit from the ensuing tax break. Firstly, the year you carry out the conversion, your tax liability will increase that year due to having to pay taxes on the funds converted by you. You can take the help of a Roth IRA conversion tax calculator here that will allow you to compute your current tax rate to make an informed decision.</p>
<h2>To conclude</h2>
<p>Understanding the various benefits and drawbacks of Roth IRAs will allow you to figure out what happens when you go for a Roth conversion. Most folks tend to focus on the visible tax breaks that they will receive while ignoring the impact of the rollover on other aspects such as your retirement accounts, Social Security benefits, additional goals, age, Medicare, and more. If you neglect to factor in the impact of the conversion on the aforesaid aspects, you may find it more challenging to attain your goals. So, do try and consider the different pros and cons in detail before making your decision.</p>
<p>If you want to understand the impact of a Roth IRA conversion on your taxability, withdrawals, and more, use the <strong><a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank">free advisor match service</a></strong> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Changing a traditional 401(k) or IRA into a Roth account should be based on financial goals. Read this article on the pros and cons of a Roth IRA conversion.

Traditional IRA to Roth - Pros and Cons of Roth IRA Conversion  

What are the Pros and Cons of a Roth IRA Conversion?

<p>Launched in 1997, a Roth IRA is a tax-advantaged Individual Retirement Account wherein you contribute after-tax dollars to make tax-free withdrawals later dependent on meeting certain conditions. Herein, your contributions and the earnings on those contributions grow tax-free. However, you must be 59.5 years of age and have held your Roth IRA account for a period of five years to be able to make tax-free withdrawals. One of the primary benefits of opening a Roth IRA account is that it is an ideal investment for individuals who expect to be in a higher tax bracket in retirement. It is also helpful when it comes to reducing your taxability. <br /><br />If you wish to avoid incurring a penalty, you must adhere to the Roth IRA 5-year rule. The guidelines are time-sensitive and strictly enforced by the Internal Revenue Service (IRS). If you wish to gain a thorough understanding of the Roth IRA 5-year rule, <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>consult with a</strong> <strong>professional financial advisor</strong></a> who can advise you on the same.</p>
<p><strong>In this article, we will discuss the 5-year rule of Roth IRA in detail:</strong></p>
<h2>What is meant by the 5-year rule of Roth IRA?</h2>
<p>As per the Roth IRA 5-year withdrawal rule, you must wait at least five years after opening your account before you can make any tax-free withdrawals from your account. This period begins from the date you make your first initial contribution towards your Roth IRA account.</p>
<p>That said, you need to fulfill certain requirements even after completing a five-year holding period. To make tax-free withdrawals from your Roth IRA account, you must be 59.5 years of age or older. Suppose, you open your Roth IRA account at the age of 57. To make a tax-free withdrawal, you need to first hold the account for five years meaning you can make a withdrawal at age 62 without having to pay any taxes.</p>
<p>Additionally, you must understand that there are certain rules associated with the Roth IRA 5-year rule, the foremost being that it follows the US tax-year system (from 1<sup>st</sup> January to 31<sup>st</sup> December). The additional rules are:</p>
<ul>
<li>The five-year rule only applies to your earnings, interest, dividends, capital gains, or any other income your investments have accumulated. You can withdraw your contributions made to the Roth IRA account at any time without incurring a penalty.</li>
<li>You may have to shell out different taxes and penalties in the event of making an early withdrawal.</li>
</ul>
<h2>Does the Roth IRA 5-year rule have any exceptions?</h2>
<p>As stated above, the Roth IRA 5-year rule does not apply to your contributions and you can withdraw them before completing a five-year holding period without incurring any taxes or penalties. This rule does not apply to any income accrued from your Roth investments. That said, there are certain exceptions where you can withdraw from your Roth account without having to pay a penalty.</p>
<p><strong>These are:</strong></p>
<ul>
<li>You can withdraw up to $10,000 from your Roth account if you are either buying or building a home for the first time.</li>
<li>You can cover the college tuition costs for yourself, your spouse, kid, or grandchild.</li>
<li>You can get any medical expenses reimbursed if they make up for more than 10% of your adjusted gross income along with any other health-related expenses.</li>
<li>You can pay your health insurance premiums if at the time you are unemployed.</li>
<li>If you have become permanently disabled, you may be allowed further consideration.</li>
</ul>
<h2>What is meant by the Roth IRA conversion 5-year rule?</h2>
<p>The rules differ slightly when it comes to Roth IRA conversions. Herein, each conversion has a separate five-year waiting period. Let&rsquo;s say you converted $25,000 to a Roth IRA in 2019, this means that you cannot make a qualified withdrawal until 2024. If you made a further conversion of another $25,000 in 2020, you will have to wait a further five years i.e. until 2025 to make a qualifying distribution.</p>
<h2>Does the 5-year rule apply for inherited Roth IRAs too?</h2>
<p>Yes, it does. If you have inherited a Roth IRA, you must find out the date of the initial contribution, conversion, or rollover. This would save you from the unpleasant surprise of having to make an unexpected tax payment in the coming tax year. In addition, as per the SECURE Act, if you inherit a Roth IRA and are not the account owner's spouse, you must withdraw all the deposited funds within a period of ten years from the date of inheritance. However, if you are the spouse, you have the freedom to spread out the withdrawals across your lifetime. Doing so would allow you to space out your withdrawals efficiently as well as avoid paying any taxes or penalties on the withdrawn money.</p>
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<h2>Are there any repercussions if you break the Roth IRA 5-year rule?</h2>
<p>Simply stated, if you make a withdrawal from a Roth IRA account that was opened less than five years ago, only the part withdrawn from your investment earnings may be taxed and subject to an early withdrawal penalty. The tax and penalty amount are dependent upon your age, income, and ownership period of the account. Typically, the IRS levies a 10% penalty on early withdrawals.</p>
<h2>What happens to non-qualified distributions in a Roth IRA?</h2>
<p>Here, a non-qualified distribution refers to a distribution that does not meet the criteria set by the IRS for a qualified distribution i.e. the account owner must be 59.5 years of age and the account should be at least five years old. Non-qualified distributions may be subject to tax and a 10% early withdrawal penalty. Here, the penalty and tax are levied on the earnings and not the contributions.</p>
<p><strong>There are certain exceptions to this rule, such as:</strong></p>
<ul>
<li><strong>To pay unreimbursed medical expenses</strong>: You can use your Roth IRA distribution for paying any unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI) for 2021 and prior tax years.</li>
<li><strong>To pay for medical insurance</strong>: If you have lost your job and become unemployed, you can use your Roth IRA distribution to pay for medical insurance.</li>
<li><strong>To pay qualified higher-education expenses</strong>: If you use your distribution for paying your or your dependent&rsquo;s qualified higher education expenses such as tuition, fees, books, supplies, and equipment needed to enroll in the college.</li>
<li><strong>To pay for childbirth or adoption expenses</strong>: You can use your Roth IRA distribution for paying any expenses related to childbirth or adoption provided they do not exceed $5,000 and are made within one year of the said event.</li>
<li><strong>If you are suffering from a mental or physical disability</strong>: You can make a tax-and-penalty-free Roth IRA withdrawal if you have a severe physical or mental disability that prevents you from working. To qualify for this exemption, you must show medical proof ascertaining the same.</li>
</ul>
<h2>To conclude</h2>
<p>The Roth IRA 5-year rule is a mandatory prerequisite for making a tax-free withdrawal later in retirement. It is advised that you carefully understand all the aspects discussed here to avoid attracting any penalties on your Roth IRA earnings. That said you can withdraw your contributions even before reaching the age of 59.5 or having ownership of your Roth IRA account for 5 years. The Roth IRA 5-year rule is only applicable to your Roth investment earnings. Ensure that you go through all the terms and conditions at the time of opening your Roth IRA account or converting your 401(k) or traditional IRA account to a Roth IRA account.</p>
<p>If you want to understand the Roth IRA 5-year rule effectively to make tax-free withdrawals in retirement and how a Roth IRA might fit in a suitable financial plan for your financial needs, use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Tax-free withdrawals from Roth IRA will get you the maximum retirement corpus. Learn about the Roth IRA 5-Year Rule and how to avoid recurring penalties.

Know About the Roth IRA 5-Year Rule & Avoid Recurring Penalty

Things to Know About the Roth IRA 5-Year Rule

<p>Benjamin Franklin once famously said that in this world nothing can be said to be certain, except death and taxes. All of us pay tax to the government be it directly or indirectly. Any individual who runs a business or is employed contributes money towards taxes during their working years. The expectation is that their tax bill would reduce during retirement due to the loss of a steady source of income. However, that may not be the case, and you may have to shell out a hefty tax bill in retirement too, if you have not taken steps to reduce your tax bill. You have to take your income from sources such as Social Security benefits, retirement accounts, pensions, and other savings into consideration while calculating your tax even if you do not have any earnings from a job or business. <br /><br />While <a href="https://www.rothira.org/articles/retirement-planning-checklist-10-years-from-retirement" target="_blank">planning for retirement</a> you cannot ignore the impact of taxes on your retirement savings. Typically speaking, the major sources of income during retirement are:</p>
<ul>
<li>Social Security benefits</li>
<li>Distributions from retirement plans like an IRA (Individual Retirement Account) or a 401(k)</li>
<li>Earnings from investments and savings</li>
</ul>
<p>You also need to take your tax filing status into account while calculating your tax bill. Did you know that almost 85% of your Social Security benefits may be taxable depending on your retirement income and tax filing status? In addition, any withdrawals made from a traditional IRA or a 401(k) are also taxable.<br /><br />You need a concrete financial plan to generate tax-free retirement income and reduce your state and federal taxes simultaneously. If you wish to learn how you can lower your taxability in retirement and maximize your tax-free retirement earnings, <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>consult with a professional financial advisor</strong></a> who can guide you on the same. <br /><br /><strong>Herein, we will discuss seven effective ways to generate tax-free retirement income:</strong></p>
<h2>1. Do not forget to max out your retirement account contributions:</h2>
<p>An effective way to reduce your taxes in retirement is by making regular contributions to your tax-advantaged retirement accounts such as an IRA or 401(k). Herein, you can contribute pre-tax dollars to earn tax-free growth. For 2022, you can contribute up to $20,500 in a 401(k) and an additional $6,500 if you are over 50 years of age, bringing your total to $27,000 annually. Additionally, you can also benefit from matching 401(k) contributions offered by your employer to reach your retirement savings goal sooner. For an IRA, you can contribute up to $6,000 in 2022 and an additional $1,000 (if you are 50 and up), bringing your total contribution to $7,000 per year. However,&nbsp; traditional tax-free retirement accounts such as 401(k)s and IRAs are not considered to be ideal retirement savings instruments. To <a href="https://www.rothira.org/articles/8-ways-you-can-lower-your-taxes-in-retirement" target="_blank">lower your taxability during retirement</a>, you can consider investing in the Roth versions of these retirement accounts. By investing in <a href="https://www.rothira.org/articles/what-is-a-roth-401k" target="_blank">Roth 401(k)</a> and Roth IRA, you can contribute after-tax dollars, earn tax-free growth over time, and make tax-free withdrawals during retirement, provided you are 59.5 years of age and have held your Roth account for a period of at least five years. It is advised that you maximize your contributions to both retirement accounts as the contribution limits for Roth accounts are the same as their traditional versions. If, however, you are already saving in a traditional retirement account, you have the option to rollover your funds to their Roth counterpart. Do note that you will have to pay the ensuing taxes at the time of conversion.</p>
<h2>2. Settle down in a tax-friendly state:</h2>
<p>During retirement, you not only have to pay federal taxes but also have to shell out a significant sum in state taxes too. The state that you reside in has a considerable impact on your retirement taxes<strong>.&nbsp;</strong>For example, some states offer tax benefits for retirement accounts but around 22 states do not offer any tax exemption for traditional IRA or 401(k) withdrawals. That said, some states are more tax-friendly compared to other states. These are Tennessee, South Carolina, Arkansas, the District of Columbia, Hawaii, Colorado, Nevada, and Delaware whereas Texas, Vermont, Nebraska, New York, Iowa, Kansas, Illinois, and New Jersey are some of the most non-tax-friendly states in the United States. Say, you move to a tax-friendly state during retirement, doing so would help you reduce your tax liability by approximately $10,000 or more annually compared to living in a non-tax-friendly U.S state. Take Delaware for instance. It has no estate or inheritance tax, low-income tax rates (between 2.2% and 6.6%), and an average joint state and local sales tax of 0%. Further, if you reside in either Alaska, Tennessee, Texas, Florida, Nevada, Washington, South Dakota, New Hampshire, or Wyoming, you would not have to pay any state-level personal income taxes. You would have to pay tax on interest and dividends only. You also have the option of earning your retirement income in one state and then shifting to another state to lower your tax bill. For example, say you receive your pension in California which charges high taxes on its residents and shift to Florida for your retirement years where you would not have to pay any state taxes on your pension.</p>
<h2>3. Review your investment portfolio:</h2>
<p>Any capital gains (whether short-term or long-term) accrued by you during your working years and in retirement are taxable by nature. Moreover, you have to pay similar taxes on capital gains made from mutual funds, dividend earnings, accrued interests, etc.,<strong>&nbsp;</strong>during retirement as before. However, by restructuring your portfolio, you may be able to lower your investment-related taxes as well as preserve your capital. For example, you could opt for a more balanced portfolio composed of municipal bonds, dividend stocks, etc., in place of a more aggressive stock investing strategy. You do not have to pay any taxes on municipal bonds. However, do keep in mind that they may impact your combined taxes on Social Security benefits. You could also invest in dividend stocks. These stocks are essentially qualified dividends received from publicly-traded U.S. companies and foreign corporations with the major benefit being that qualified dividends are taxed more favorably compared to regular dividends. The tax rate varies between 0 to 20% and depends on your taxable income during retirement. You can also <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>reach out to a professional financial advisor</strong></a> to learn about tax-saving strategies and lower your annual tax bill. Further, your advisor can help you invest in tax-saving assets through your tax-free retirement accounts. You could also seek advice on capital gain offsetting strategies and how you can use any losses incurred by you on the sale of securities and related property to offset the capital gains earned in the year. You can use your losses to offset up to $3,000 of your ordinary income provided you have more capital losses than gains. You could also offset future potential profits by the previous year's losses by carrying forward your capital losses to another year to lower your retirement taxes.</p>
<h2>4. Use your Social Security benefits strategically:</h2>
<p>The IRS allows you to withdraw your Social Security benefits from the age of 62. If you opted to take early retirement, you may be banking on Social Security to fund a major part of your retirement expenses. This may be ill-advised as in reality Social Security benefits are insufficient to fully support your retirement lifestyle. Moreover, since your Social Security benefits are also taxed, it reduces your take-home check as well. But you need not fret as you can use certain strategies to reduce your Social Security tax payments during retirement. Firstly, if Social Security is your sole source of income in retirement, you will pay zero taxes because your taxable income falls below the minimum tax threshold. That said, if you have alternate sources of income such as an IRA, a pension plan, a 401(k), etc., you will have to shell out tax on your Social Security. Additionally, you have to take into account the retirement income of your spouse and your tax filing status when calculating your Social Security taxes. If you need help figuring out your tax liability, you can go through this <a href="https://www.irs.gov/forms-pubs/about-notice-703">worksheet</a> prepared by the IRS. If you are a high-income earner, you could end up paying taxes on up to 85% of your Social Security benefits. There is a workaround to this scenario. Some tax-friendly states such as Texas, and Florida, among others, do not charge any tax on Social Security drawings. While others offer deductions, and credits, enabling you to reduce your adjusted gross income, and in effect, your tax liability.</p>
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<h2>5. Do not neglect to invest in life insurance or annuities:</h2>
<p>Investing in life insurance policies or annuities is another way to boost your tax-free retirement income. In layman&rsquo;s terms, when you invest in a life insurance policy, you are investing in insurance and premiums. The premiums are used for savings and investments. You can use the cash value from these life insurance plans to generate tax-free retirement income. Do note that this is dependent on the kind of policy taken out by you. You can also invest in annuities such as immediate annuities where a portion of your premiums is treated as the return on principal, and the other part as interest. You only have to pay tax on the interest in this scenario. You can also opt to invest in a Health Savings Account (HSA). Herein, you get multiple tax advantages - you contribute before-tax dollars, you get tax-free earnings, and you can make tax-free withdrawals. This comes with the caveat that HSA funds can be used for an eligible purpose only such as specified medical expenses. If you use your HSA funds for ineligible medical or non-medical expenses, you will have to pay tax on your drawings. Moreover, any individual below the age of 65 or not disabled, must pay a 20% penalty. There is a limit on how much you can contribute towards your HSA. For 2022, you can contribute $3,650 for self-only HSA and $7,300 for a family. Investing in HSA offers dual benefits - you can lower your annual tax bill and make future medical costs affordable.</p>
<h2>6. Do consider the impact of Required Minimum Distributions (RMDs):</h2>
<p>It is generally advised to keep your funds in your tax-advantaged retirement accounts for as long as you can. By delaying your withdrawals, you can accumulate significantly higher returns and lower your taxability at the same time. However, you cannot do so for an indefinite period of time. Retirement accounts have certain rules when it comes to withdrawals such as RMDs. Herein, you must take out minimum distributions from your retirement savings accounts after reaching a specific age. For example, you must take RMDs from your IRA and 401(k) when you reach 72 years of age as mandated by the IRS. The amount that you must withdraw is calculated based on your life expectancy and account balance. The IRS levies a penalty if you fail to take RMDs in full or by the due date. You must pay a penalty of 50% on the RMD amount you do not withdraw from your retirement account. Keep in mind that until you rectify the mistake the penalty will remain applicable and it is in addition to the taxes owed by you on distributions taken out by you. Thus, it would be in your best interest if you keep a check on your RMDs and ensure that you make timely withdrawals to avoid paying any hefty penalties and reduce your tax outlay at the same time. &nbsp;</p>
<h2>7. Ensure that you spread your withdrawals over a longer period of time:</h2>
<p>Till the time you turn 72, you do not have to take out RMDs, however, you can begin withdrawing your funds at the age of 59.5. Doing so would also allow you to lower your tax bill as you can spread the tax bill over a longer period. This would be particularly helpful if you are considering taking early retirement as you can start drawing a small sum from your retirement accounts to spread the tax across a longer number of years. This is doable if you have alternative sources of income (such as part-time work, your own business, etc.) to support your retirement years and do not solely depend on retirement accounts to meet your expenses.</p>
<p><strong>Note</strong>: There are certain sources of income that do not fall under the tax umbrella during retirement. These are:</p>
<ul>
<li>Your alimony amount is not taxable provided the divorce occurred after 2018.</li>
<li>If your parents give you a gift, it cannot be taxed too.</li>
<li>Any life insurance proceeds received by you as a beneficiary are also free from taxes.</li>
<li>In the event of a sale of your primary home, you can claim a tax benefit of up to $250,000 if you are a single tax filer. This amount increases to $500,000 if you are a married couple and file your taxes jointly.</li>
</ul>
<h2>To summarize</h2>
<p>You cannot escape taxes in retirement. However, you can significantly lower your tax bill if you follow the strategies spelled out in the article. With that said, keep in mind that there is no get out of jail free card. A particular strategy may work for you but may not suit someone else&rsquo;s financial situation. Each individual has a unique financial situation, hence, it is advised that one should deploy a customized tax strategy to maximize their tax-free retirement income.</p>
<p>It may be beneficial for you if you reach out to a professional financial advisor who can create a customized tax-free retirement income plan for you after assessing your financial condition, preferences, life stage, tax filing status, and more. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.</p>

Retirement tax planning strategies will reduce the impact of taxes on retirement savings. Here are the best ways to maximize your tax-free retirement income.

Seven Ways to Maximize Your Tax-Free Retirement Income

<p>Retirement planning can be challenging as you are saving for a time in the future based on your current lifestyle expenses. To do so, you have to take into account the rising inflation, future healthcare expenses, and set aside money for any future endeavors such as starting a business or traveling around the world. Needless to say, it can be tricky to measure the extent of your expenses in retirement. Moreover, the kind of lifestyle you live today may very well undergo a transformation over the course of time and so will your income and expenditure. This may result in insufficient retirement savings forcing you to live frugally, having to count every penny that you may have. You may however <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>reach out to a professional financial advisor</strong></a> who can advise you on how to build a customized retirement plan that takes into account your future goals, risk tolerance and can be modified with advancing age. You can however determine your future retirement needs.</p>
<p><strong>Let us discuss seven ways by which you can assess your retirement expenses:</strong></p>
<h2>1. Evaluate your current expenses to gauge your future retirement expenses:</h2>
<p>If you stick to your current lifestyle, you can have a fair idea about your future expenses barring any financial or health emergencies that you may encounter in the future. Your non-discretionary expenses such as rent, utilities, food, clothing, etc. may remain the same and act as a benchmark to estimate your future expenses when you are nearing retirement. Make a budget of your estimated monthly expenses. Also, do not forget to factor in any ongoing insurance premiums, loan repayments, or contributions that you are making to retirement accounts. By the time you retire, you most likely will not be making these payments however do account for them. This will act as an extra financial cushion for any unforeseen expenses such as healthcare costs, long term care costs, travel expenses, etc. that you may incur in the future during your retirement years.</p>
<h2>2. Factor in your tax liability and investments when saving for retirement:</h2>
<p>Once you reach retirement, it does not mean that your taxes magically disappear. You are still liable to pay taxes on the investments and savings that you may have accrued over the years. However, there are certain ways you can deploy to minimize your tax liability. If you have invested in a Roth IRA account, you can make tax-free withdrawals in retirement provided you have held the account for at least five years and are of 59.5 years of age or above. On the other hand, if you have invested in a traditional <a href="https://www.rothira.org/articles/what-is-a-roth-401k" target="_blank">401(k)</a> account, your withdrawals will be taxed as per the prevailing tax rate wherein your withdrawals in retirement will be added to your annual income. Based on the sum of your yearly income and withdrawals, you will be placed in the corresponding income tax slab for the relevant financial year. Since the majority of people start contributing to retirement accounts at a much younger age, you can predict your tax expenses that you will accrue in retirement. Doing so would allow you to select an instrument for saving based on your future saving goals and targets. The more you save on taxes, the higher your savings in retirement.</p>
<h2>3. Make a list of all your income sources to estimate your living expenses in retirement:</h2>
<p>There are several sources of income that you can set up to live comfortably in retirement such as your savings, investment returns, rental income, inheritances, Social Security benefits, etc. These make up your total income in retirement. Once you have this number, you can find out how much money you should ideally be spending in retirement. The most popular suggestion given by financial experts is to follow the 4% rule. As per this rule, you can take out 4% of your funds from your retirement savings every year. However, you need to factor inflation into your plan as the spending power of the dollar may decrease with a rise in inflation in the future. </p>
<h2>4. Take into account inflation when estimating the cost of living in your retirement expenses:</h2>
<p>As mentioned above, you need to factor inflation in your budget so as to correctly estimate how much money you will need to live comfortably in retirement. It can be tricky trying to figure out the exact percentage of inflation over the years. But there is a workaround to this problem. Look at the data over the past ten or more years to identify the prevailing rate of inflation during the said years. This can be helpful when it comes to figuring out the future rate of inflation. Even though this is not an exact science, it can still prove to be beneficial in identifying how much a commodity will cost in the future enabling you to save accordingly for your retirement years. </p>
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<h2>5. Factor in your family needs and future expenses:</h2>
<p>If you are the breadwinner in your family or have a number of dependents that you have to look after, you may have to save extra for them. This includes saving for the college tuition of your children, travel expenses, etc. Covering healthcare costs of a physically or mentally disabled child can also be a significant expense. Moreover, if your parents or siblings stay with you, you have to take care of their healthcare or long term care costs too. All of the aforesaid expenses need to be accounted for when you plan for retirement.</p>
<h2>6. Create an emergency fund:</h2>
<p>An emergency fund provides a safety net not only during your working years but also during retirement. Typically, it is advised that the fund should have enough money to cover three to six months of living expenses. The fund can be used to tackle any unforeseen expenses such as health emergencies, home renovation or repairs, loss of job, etc. An emergency fund can offer you peace of mind safe in the knowledge that you have enough funds tucked away to keep you afloat in times of financial distress. Do not neglect to account for an emergency fund when you are making an assessment of your retirement expenses.</p>
<h2>7. Calculate your retirement expenses with the help of an online retirement calculator:</h2>
<p>You can make use of online tools such as a retirement calculator to estimate your future retirement expenses. The tool can help you identify how much money you need to retire, how retirement can affect your monthly living expenses, and whether your current retirement savings are adequate to retire or not. These online calculators offer an estimate based on information provided by you giving you an approximate sum of retirement expenses that you will be spending during retirement.</p>
<h2>To summarize</h2>
<p>It is essential that you find out how much funds you will have for your retirement to ensure that you do not run out of funds later. Having an estimation of your funds not only offers you peace of mind but also allows you to make an adjustment should your priorities or future goals undergo a revision with your changing life situation. It is no secret that it becomes harder to earn money as you grow older. Thus, you need to consider all future possibilities that may occur.</p>
<p>You can either use an online retirement calculator to figure out your probable future expenses by making a list, or enlist the services of a professional financial advisor to design a suitable retirement planning strategy to ensure you live your golden years comfortably. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to search for fiduciary advisors near you. Answer a few simple questions about yourself and the match tool will help connect you to 1-3 financial advisors based on your financial requirements. <br /><br /></p>


Retirement planning may be challenging due to expenses like inflation, healthcare & traveling. Read this article on 7 ways to assess your retirement expenses.

7 Ways to Assess Your Retirement Expenses

<p>Most Americans spend their lives working hard and saving for their retirement years. Retirement is a time when they can enjoy their life, travel, pursue hobbies, and reconnect with their loved ones. They can learn new skills for their own pleasure rather than for professional gains. Most folks do not foresee working in their retirement or having a part-time job to meet their expenses. Thus, it is advised that to boost your chances of being financially independent during the non-working years of your life, you should consider saving and creating a large retirement corpus for yourself.</p>
<p>There are multiple retirement accounts available such as the individual retirement account (IRA), <a href="https://www.rothira.org/articles/what-is-a-roth-401k" target="_blank">401(k)</a>, health savings account (HSA), thrift savings plan, etc that you can choose from based on your financial situation and needs. Not only do these accounts provide you with security and flexibility but they also offer a reliable option to grow your money. If you wish to learn about the many tax benefits of saving in these accounts to maximize your funds, consider <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>reaching out to a professional financial advisor</strong></a> who can advise you on the same.</p>
<p>The advisor can also guide you on the various rules, restrictions, and limitations pertaining to the withdrawal and contribution of money to these retirement accounts. Withdrawal of funds is subject to certain age limitations and uses that vary from one account to another. The Internal Revenue Service (IRS) also places restrictions on contributions limits to retirement accounts that are revised annually.</p>
<p><strong>Below, we will discuss the catch contribution limits for various retirement plans in 2022: </strong></p>
<h2>What is meant by a catch-up contribution?</h2>
<p>The IRS determines a contribution limit based on which an individual can save a certain amount of money in a retirement plan in a year. However, this general limit is superseded by an extended limit offered to individuals above the age of 50. This is known as the catch-up contribution limit.</p>
<p>Catch-up contributions allow people to save more for retirement and make up for any shortfall in their retirement corpus. Due to the fast-approaching retirement years, you may wish to save more and maximize your savings in the limited number of working years you have got left.</p>
<h2>What are the 2022 catch-up contributions for each retirement account?</h2>
<p>The 2022 catch contribution limits for each retirement account are as follows:</p>
<h3>1. 401(k) retirement account</h3>
<p>A 401(k) is a tax-advantaged employer-sponsored retirement plan where you contribute pre-tax dollars to lower your federal tax bill for the year. <br /><strong><br />The catch-up contribution limits for a 401(k) retirement account are:<br /></strong></p>
<table style="height: 162px;" border="1">
<tbody>
<tr>
<td style="width: 90px;">
<p><strong>Year</strong></p>
</td>
<td style="width: 183.984px;">
<p><strong>Standard contribution</strong></p>
</td>
<td style="width: 184.016px;">
<p><strong>Catch up contribution</strong></p>
</td>
</tr>
<tr>
<td style="width: 90px;">
<p>2021</p>
</td>
<td style="width: 183.984px;">
<p>$19,500</p>
</td>
<td style="width: 184.016px;">
<p>$6,500</p>
</td>
</tr>
<tr>
<td style="width: 90px;">
<p>2022</p>
</td>
<td style="width: 183.984px;">
<p>$20,500</p>
</td>
<td style="width: 184.016px;">
<p>$6,500</p>
</td>
</tr>
</tbody>
</table>
<h3>&nbsp;</h3>
<h3>2. Traditional IRA</h3>
<p>A traditional IRA or individual retirement account is a retirement plan wherein you can contribute your pre-tax income and grow your funds tax-deferred. Since you do not pay any tax at the time of contribution, your withdrawals are taxed as per your current income after the age of 59.5.</p>
<p><strong>The catch-up contribution limits for a traditional IRA are:</strong></p>
<table style="width: 476px;" border="1">
<tbody>
<tr>
<td style="width: 89.3906px;">
<p><strong>Year</strong></p>
</td>
<td style="width: 177.766px;">
<p><strong>Standard contribution</strong></p>
</td>
<td style="width: 186.844px;">
<p><strong>Catch up contribution</strong></p>
</td>
</tr>
<tr>
<td style="width: 89.3906px;">
<p>2021</p>
</td>
<td style="width: 177.766px;">
<p>$6,000</p>
</td>
<td style="width: 186.844px;">
<p>$1,000</p>
</td>
</tr>
<tr>
<td style="width: 89.3906px;">
<p>2022</p>
</td>
<td style="width: 177.766px;">
<p>$6,000</p>
</td>
<td style="width: 186.844px;">
<p>$1,000</p>
</td>
</tr>
</tbody>
</table>
<h3>&nbsp;</h3>
<h3>3. Roth IRA</h3>
<p>A Roth IRA is an individual retirement account wherein you contribute after-tax dollars to earn tax-free returns on your money. You can also make tax-exempt withdrawals in retirement subject to fulfillment of some conditions.</p>
<p><strong>The catch-up contribution limits for a Roth IRA are:</strong></p>
<table style="width: 472px;" border="1">
<tbody>
<tr>
<td style="width: 96.2031px;">
<p><strong>Year</strong></p>
</td>
<td style="width: 182.391px;">
<p><strong>Standard contribution</strong></p>
</td>
<td style="width: 171.406px;">
<p><strong>Catch up contribution</strong></p>
</td>
</tr>
<tr>
<td style="width: 96.2031px;">
<p>2021</p>
</td>
<td style="width: 182.391px;">
<p>$6,000</p>
</td>
<td style="width: 171.406px;">
<p>$1,000</p>
</td>
</tr>
<tr>
<td style="width: 96.2031px;">
<p>2022</p>
</td>
<td style="width: 182.391px;">
<p>$6,000</p>
</td>
<td style="width: 171.406px;">
<p>$1,000</p>
</td>
</tr>
</tbody>
</table>
<h3>&nbsp;</h3>
<h3>4. SIMPLE IRA</h3>
<p>A SIMPLE IRA is a tax-deferred retirement savings plan that can be used by small businesses having 100 or fewer employees.</p>
<p><strong>The catch-up contribution limits for a SIMPLE IRA are:</strong></p>
<table style="height: 138px; width: 485px;" border="1">
<tbody>
<tr style="height: 46px;">
<td style="width: 96.1875px; height: 46px;">
<p><strong>Year</strong></p>
</td>
<td style="width: 182.391px; height: 46px;">
<p><strong>Standard contribution</strong></p>
</td>
<td style="width: 184.422px; height: 46px;">
<p><strong>Catch up contribution</strong></p>
</td>
</tr>
<tr style="height: 46px;">
<td style="width: 96.1875px; height: 46px;">
<p>2021</p>
</td>
<td style="width: 182.391px; height: 46px;">
<p>$13,500</p>
</td>
<td style="width: 184.422px; height: 46px;">
<p>$3,000</p>
</td>
</tr>
<tr style="height: 46px;">
<td style="width: 96.1875px; height: 46px;">
<p>2022</p>
</td>
<td style="width: 182.391px; height: 46px;">
<p>$14,000</p>
</td>
<td style="width: 184.422px; height: 46px;">
<p>$3,000</p>
</td>
</tr>
</tbody>
</table>
<h3>&nbsp;</h3>
<h3>5. Health savings account (HSA)</h3>
<p>A Health Savings Account (HSA) is a tax-advantaged account that can be used to save for qualified medical expenses.</p>
<p><strong>The catch-up contribution limits for an HSA in 2022 are:</strong></p>
<table style="width: 445px;" border="1">
<tbody>
<tr>
<td style="width: 107.25px;">
<p><strong>Type of coverage</strong></p>
</td>
<td style="width: 150.344px;">
<p><strong>Self only</strong></p>
</td>
<td style="width: 165.406px;">
<p><strong>Family coverage</strong></p>
</td>
</tr>
<tr>
<td style="width: 107.25px;">
<p>Standard contribution</p>
</td>
<td style="width: 150.344px;">
<p>$3,650</p>
</td>
<td style="width: 165.406px;">
<p>$7,300</p>
</td>
</tr>
<tr>
<td style="width: 107.25px;">
<p>Catch up contribution</p>
</td>
<td style="width: 150.344px;">
<p>$1,000</p>
</td>
<td style="width: 165.406px;">
<p>$1,000</p>
</td>
</tr>
</tbody>
</table>
<h3>&nbsp;</h3>
<h3>6. 403(b) retirement account</h3>
<p>Primarily designed for the employees of some public schools and other tax-exempt organizations, the 403(b) is a retirement plan used by qualified teachers, librarians, school administrators, nurses, doctors, professors, and government employees. Herein, the catch-up contribution limits are not the same for all individuals investing in the account.</p>
<p><strong>The limits are determined on the basis of several factors. These are:</strong><br /><br />To be eligible to make a catch-up contribution, you must have worked for the same employer for at least 15 years. In addition, the amount shall not exceed:</p>
<ul>
<li>$3,000</li>
<li>$15,000 minus the total amount of the number of catch-up contributions made in the previous years.</li>
<li>$5,000 times the total number of years that you have worked for your employer, minus the total catch-up contributions made in the previous years.</li>
</ul>
<p>Do note that the maximum contribution that can be made to a 403(b) retirement account by both the employer and the employee cannot exceed $61,000 (for 2022) or your total compensation, including benefits, for your most recent year of service.</p>
<h3>7. 457(b) Plan</h3>
<p>Majorly used by state and local government employees, an investor can make a catch-up contribution three years before the year of their retirement in a 457(b) plan. Individuals contributing to a 457(b) plan must adhere to the following rules when making a catch-up contribution:</p>
<p><strong>The catch-up contribution should be less than the following:</strong></p>
<ul>
<li>Twice of the annual contribution limit i.e. up to $41,000.</li>
<li>$20,500 plus the basic annual limit ($20,500) left unused in previous years.</li>
</ul>
<p>Since employer-matched contributions count toward the maximum contribution limit, your total contribution cannot exceed $20,500. This means that if your employer contributes $10,500 to the plan, you can only contribute $10,000 before you hit the maximum contribution ceiling.</p>
<h3>8. Thrift savings plan (TSP)</h3>
<p>Open to only federal employees and members of the uniformed services, a thrift savings plan is similar to a 401(k) plan where they receive similar benefits available to those working in the private sector.</p>
<p><strong>The catch-up contribution limits for a TSP are:</strong></p>
<table style="width: 556px;" border="1">
<tbody>
<tr>
<td style="width: 75.293px;">
<p><strong>Year</strong></p>
</td>
<td style="width: 224.824px;">
<p><strong>Standard contribution</strong></p>
</td>
<td style="width: 234.902px;">
<p><strong>Catch up contribution</strong></p>
</td>
</tr>
<tr>
<td style="width: 75.293px;">
<p>2021</p>
</td>
<td style="width: 224.824px;">
<p>$19,500</p>
</td>
<td style="width: 234.902px;">
<p>&nbsp;$6,500</p>
</td>
</tr>
<tr>
<td style="width: 75.293px;">
<p>2022</p>
</td>
<td style="width: 224.824px;">
<p>$20,500</p>
</td>
<td style="width: 234.902px;">
<p>&nbsp;$6,500</p>
</td>
</tr>
</tbody>
</table>
<h2>&nbsp;</h2>
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<h2>How are catch-up contributions beneficial for investors?</h2>
<p>There are several benefits of catch-up contributions such as:</p>
<ul>
<li><strong>Increased savings: </strong>By making catch-up contributions, you can boost your retirement savings substantially. If you are nearing retirement but do not have enough money saved up, catch-up contributions can help you save additional funds to secure your retirement. For example, if you make the full catch-up contribution of $6,500 each year for a total of 10 years after reaching 50 years of age, you can save a total of $65,000. Added to your pool of retirement savings, it can help you stay afloat for a reasonable period of time. <br /><br /></li>
<li><strong>Increased tax savings</strong>: Making catch-up contributions can be a great way to augment your tax savings. If you maximize your contributions to your retirement plan, you can lower your taxable income for the year. By doing so you would be taxed in a lower tax bracket allowing you to increase your savings while reducing your tax expenses in the present. <br /><br /></li>
<li><strong>Evaluation of your retirement needs</strong>: By making catch-up contributions you stay on top of your retirement planning needs. Doing so allows you to reassess your needs and if needed, make timely changes to ensure that you are on course for meeting your retirement savings goals. <br /><br /></li>
<li><strong>Matching of your contribution by your employer</strong>: As a lot of employers match their employee&rsquo;s contribution to their retirement plans, by making catch-up contributions you can likely earn more if your employer matches your contributions.</li>
</ul>
<h2>How can you make catch-up contributions?</h2>
<p>To be able to make catch-up contributions, you must reach out to your plan administrator or employer (if you have invested in an employer-sponsored retirement plan). You can make catch-up contributions online to your retirement account provided you meet the qualification criteria for the same.</p>
<p><strong>What should you keep in mind when making catch-up contributions?</strong></p>
<p>You must pay heed to the following when making a catch-up contribution:</p>
<ul>
<li>The IRS determines the catch-up contributions. They are not set by your employer.</li>
<li>Investors who are 50 years of age or older are solely eligible for making catch-up contributions.</li>
<li>Since contribution limits are revised quite regularly, it is advisable to stay up to date on the latest limits to ensure you do not miss out on any benefits.</li>
</ul>
<h2>To summarize</h2>
<p>By making catch-up contributions, you not only boost your savings but also your taxability. They are helpful for building a large retirement corpus to meet your expenses in retirement. As most retirement plans offer this benefit, you can choose the one that best fits your needs and contribute to the same. But you need to be careful about staying up to date with the contribution limits as the IRS revises them from time to time.</p>
<p>To get in touch with a fiduciary advisor who may help you understand the benefits of maximizing your contribution limits and reaching your retirement savings targets, use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a>. Answer a few simple questions about yourself and the match tool will help connect you to 1-3 financial advisors based on your financial requirements.</p>

There are multiple retirement accounts based on your financial situation and needs. This article is on catch-up contribution limits for retirement plans in 2022.

What are the Catch-Up Contribution Limits for Retirement Plans in 2022?

<p>Retirement planning is one of the cornerstones for securing your financial future. You have to save money keeping an eye on the future when you would not have a regular, stable income to fall back on. To sail through your golden years comfortably, you need to invest in a retirement plan. The most popular retirement saving plans in the US are the <a href="https://www.rothira.org/articles/what-is-a-roth-401k" target="_blank">401(k) retirement plan</a> and the Individual Retirement Account (IRA). Both these plans are tax-advantaged accounts that help you build a substantial retirement corpus for your retirement.&nbsp;</p>
<p>In this article, we will focus on IRAs. There are several kinds of IRAs available to investors that they can invest in such as traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. There are certain rules mandated by the IRS (Internal Revenue Service) that you need to adhere to. These are:</p>
<ul>
<li>You cannot withdraw any funds from the IRA until you reach 59.5 years of age. If you do, you will incur a penalty of 10% on the amount withdrawn.</li>
<li>The IRS stipulates annual contribution limits for an IRA that are updated each year. For 2022, you can contribute a sum of $6,000 to your IRA account. If you are above 50 years of age, you can contribute an additional $1,000 bringing your total contribution to $7,000.</li>
</ul>
<p>Keeping track of different rules when it comes to IRA contributions can be tricky as you may not have enough time to study and stay on top of changing rules and regulations. Also, you may miss the deadline for making a contribution to your IRA which can affect your savings target. If you wish to understand and know about how to open an IRA account, the different kinds of IRAs, annual contribution limits, tax limitations, and more, <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>reach out to a professional financial advisor</strong></a> who can guide you on the same.</p>
<p><strong>Let us discuss five things you should keep in mind while making IRA contributions:</strong></p>
<h2>1. Traditional IRA vs Roth IRA: Which IRA to choose?</h2>
<p>The two most popular IRAs that investors go for are a traditional IRA and a Roth IRA. The major difference between the two lies in the timing of their tax advantages. In a traditional IRA, you deduct contributions now and pay taxes on withdrawals later whereas, in a Roth IRA, you pay taxes on contributions now to be able to make tax-free withdrawals later. Another difference between the two lies in withdrawals. If you have opted for a traditional IRA, you have to take out mandatory RMDs (Required Minimum Distributions) when you reach 72 years of age. There is no such compulsion for Roth IRAs.</p>
<p>To make tax-free withdrawals in a Roth IRA, you must complete a 5 year holding period and reach 59.5 years of age, whereas, for a traditional IRA, there is no such holding period that you need to adhere to. You can make penalty-free withdrawals at the age of 59.5. In addition, you need to consider the present tax rates and how high you envision the future tax rates would be when you make withdrawals. This is an important consideration since you can choose a traditional IRA if you think your present tax slab is higher and you venture a comparatively lower tax rate post-retirement. Concurrently, if you deduce that your current tax rates are lower and they may increase in the future, then a Roth IRA would be more suitable as an investment after you retire.</p>
<h2>2. Availability of Backdoor Roth IRAs</h2>
<p>Backdoor Roth IRAs are not a special kind of IRA; instead, they are Roth IRAs wherein you can hold funds originally contributed to a regular IRA, subsequently held in a Roth IRA after an IRA transfer or conversion. Doing so allows high earners to invest in a Roth IRA legally and circumvent income limits. If you wish to take this route, you first need to make an initial contribution to a non-deductible IRA and then later convert it to a deductible or Roth IRA. This process is termed as a backdoor entry to the Roth IRA or deductible IRA contribution. Keep in mind that if you choose to go for a backdoor Roth IRA, there would be certain tax implications that you need to consider. Moreover, the U.S. Congress is also considering legislation that would reduce the benefits of backdoor Roth IRAs after 2021.</p>
<h2>3. Option to roll over your traditional IRA to a Roth IRA</h2>
<p>In an IRA rollover, you can convert your traditional IRA to a Roth IRA. First, you have to withdraw funds from your traditional IRA. Once you have received your eligible rollover check, you will have 60 days to transfer those funds into your Roth IRA account. Do note that you need to pay taxes on the transferred money when switching to a Roth IRA since you can contribute only after-tax dollars to a Roth account. Some of the major benefits of rolling over to a Roth IRA are:</p>
<ul>
<li>You are not taxed on any earnings accrued in your Roth IRA. They are tax-free.</li>
<li>You can make tax-free withdrawals as you contribute after-tax dollars when making contributions.</li>
<li>You do not have to pay mandatory RMDs.</li>
<li>Lastly, if you expect your future tax rate to be higher than your current rate, it is wise to switch to a Roth IRA.</li>
</ul>
<h2>4. Annual Changes in Contribution Limits</h2>
<p>Each year the annual contribution limits are updated by the IRS. For the year 2022, the contribution limits for an IRA are as follows:</p>
<ul>
<li>You can contribute a sum of $6,000 to your IRA account. If you are above 50 years of age, you can contribute an additional catch-up contribution of $1,000 bringing your total contribution to $7,000.</li>
</ul>
<p>Do note that you can hold multiple IRAs but the total contribution sum cannot exceed the stipulated amount specified by the IRS.</p>
<h2>5. Availability of a Spousal IRA</h2>
<p>You can also open an IRA for your spouse even if they earn little to no income. If you file taxes jointly, you can contribute the maximum annual contribution limit of up to $6,000 in 2022 ($7,000 if you are 50 years of age or older). Say, for example, the wife is earning $99,000 a year, and the husband is not working, she can contribute the maximum contribution to her own IRA but she can also contribute up to the maximum to her husband&rsquo;s IRA. This will enable you to maximize your tax benefits. One thing to keep in mind here is that you must file taxes as married, filing jointly.</p>
<h2>To conclude</h2>
<p>IRAs are an excellent retirement saving instrument wherein you can save and invest money to build a substantial retirement corpus for your golden years. Not only does it offer you future financial security but it can also serve as an effective source of tax saving for you. Regardless of what you choose, make sure that you understand the pros and cons of the different IRAs available to you. Also, before making a decision, it would be wise to reach out to a financial advisor who can help you understand the benefits and drawbacks of IRAs and which one would suit your financial needs and goals better.</p>
<p>If you wish to understand how an IRA can fit into a suitable retirement plan for your financial goals, use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong></a> to get connected to a financial advisor that may be able to help. Answer a few questions and the free match tool will help match you with 2-3 vetted advisors suited to meet your specific needs.</p>

Retirement plans like 401(k) & IRA are crucial for financial security. This article is about the top things to keep in mind while making IRA contributions.

5 Things to Keep in Mind When Making IRA Contributions

<p>The primary reason behind investing money is to save enough funds for your future retirement. To ensure you build a sizable retirement corpus, you need to consistently pick the right investment options. The important thing is to start saving and putting away money as soon as you can. However, if you begin from a young age, you have more time to harness the power of compounding and reap its benefits.</p>
<p>No matter what life stage you are in, you need to select the right assets to invest your money in. Picking good investment vehicles is essential and you need to take care to spread your money in different asset classes. Doing so would help diversify your portfolio and spread the risk so that you are not exposed to one sector disproportionately. Each asset class has a different level of risk and reward, thus, you should carefully consider before making a purchase. Take into account different factors such as your risk appetite, market volatility, state of the economy as well as your age before you decide how you wish to invest your money. You can <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>reach out to a professional financial advisor</strong></a> to learn about the pros and cons of different investment instruments and select one based on your risk profile and future needs.<br /><br /><strong>Let us discuss different investments that you should make in your middle-age:</strong></p>
<h2>1. Mutual funds</h2>
<p>Though the exact range of middle-age varies, it is usually placed between the ages of 40 and 60. By the time you enter your middle-age, it is expected that you would have already started saving for retirement or at the least are thinking about it. Even though there is no one investment that guarantees safe and secure returns, mutual funds tend to be one of the best investments that middle-aged folks can make to secure a comfortable retirement. The major benefits of mutual funds are:</p>
<ul>
<li><strong>Easy and simple to invest in</strong>: You do not need to be a financial expert to buy mutual funds or understand the way they work. You can invest in mutual funds for an amount as small as $100. You also do not need a broker to invest in them. Moreover, middle-age is a time when you are juggling multiple responsibilities such as saving for your kid's college tuition, building a retirement nest egg, etc. Not everyone has sufficient time to acquire financial knowledge and learn about making complex investment choices. This makes mutual funds a good investment choice for middle-aged investors.<br /><br /></li>
<li><strong>Helps you build a diversified portfolio</strong>: By investing in mutual funds, you can easily diversify your portfolio. Mutual funds are of various categories typically defined by the kinds of securities they invest in, their investment objectives, the level of risk that they carry, etc. You can invest in different kinds of stocks, bonds, money market instruments, and other assets. Mutual funds are a relatively safe and secure way for investors to diversify and grow their portfolio.<br /><br /></li>
<li><strong>Gives you access to a wide variety of investment options</strong>: There are several types of investments available to you wherein you can invest your funds such as target date funds, balanced funds, sector funds and index funds, and more. Index funds can be a cost-effective option for middle aged investors to invest their money in. An index fund is a kind of mutual fund or exchange-traded fund that mimics the composition and performance of a market index.</li>
</ul>
<h2>2. Roth IRAs</h2>
<p>Roth IRA is a tax-advantaged individual retirement account (IRA) wherein you contribute after-tax dollars and benefit from tax-free growth and earnings. It is one of the most popular retirement accounts in America owing its popularity for the major part being able to make tax-free withdrawals in retirement provided certain conditions are satisfied. For 2022, you can contribute a sum of $6,000. If you are 50 years of age or above, you can make an additional catch-up contribution of $1,000, bringing your total to $7,000 for the tax year.<br /><br />There are several advantages when it comes to investing in a Roth IRA. These are:</p>
<ul>
<li>As stated above, you can make tax-free withdrawals in retirement provided you have held the account for a period of at least five years and are 59.5 years of age or older.</li>
<li>There are no required mandatory distributions (RMDs) that you must take out once you reach 72 years of age enabling you to maximize your growth.</li>
<li>You have a wider choice of investment vehicles available to choose from.</li>
<li>If you expect to be in a higher tax bracket in retirement, a Roth IRA is a wiser choice for you.</li>
</ul>
<p>If you would not like to go for a Roth IRA, you have an alternative available - a Roth 401(k). This is an employer-sponsored retirement account wherein you contribute after-tax dollars. Though your earnings are taxed, you can make tax-free withdrawals in retirement. Additionally, you must take out RMDs after you turn 72. For 2022, you can make a contribution of $20,500. However, if you are 50 or up, you can make an additional catch-up contribution of $6,500. This brings your total contribution sum to $27,000.</p>
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<h2>3. Real estate</h2>
<p>Real estate requires a significant sum of money to invest in. If you cannot afford to invest in your own home, you can always consider investing in a real estate investment trust (REIT) fund. With REITs, you get the twin benefits of investing in real estate as well as in publicly-traded stocks. REITs make a great investment option for middle-aged investors because:</p>
<ul>
<li>REITs offer investors with a wide array of advantages such as liquidity, dividend-based income, hedge against inflation and a way to diversify their portfolio. It can not only generate steady returns in the form of rental income but also serve as a great investment tool for effective retirement planning.</li>
<li>Since REITs offer high cash distributions compared to other types of corporate dividends, they are extremely popular with middle aged investors. If you have invested in a REIT, you are protected by law when it comes to receiving investment returns since a company must pay a minimum of 90% of taxable income in the form of shareholder dividends each year to qualify as a REIT. This makes your returns a safer bet.</li>
<li>In times of market volatility and rising inflation, a publicly-traded REIT can be a source of stability to middle-aged investors and their investment portfolios.</li>
</ul>
<h2>To conclude</h2>
<p>To successfully build a robust retirement portfolio, you need to evolve and refine your investment approach to maximize returns and savings. You can invest in high-risk securities such as stocks when you are younger to aggressively target higher returns. You can rebalance and adjust your portfolio as you age and your priorities change.</p>
<p>Once you are in your middle years and nearing retirement, you can shift your focus towards low-risk investments such as bonds to preserve your capital. At this point of time your focus should be on strengthening your retirement savings and securing your golden years.</p>
<p>If you need guidance on which investments you should invest in based on your risk profile and future goals, consult with a professional financial advisor who can advise you on the same. Use the <a href="https://www.rothira.org/match-advisors/search-by-zip?cta=article-show-page" target="_blank"><strong>free advisor match service</strong> <strong>to search for fiduciary advisors near you</strong></a>. Answer a few simple questions about yourself and the match tool will help connect you to 1-3 financial advisors based on your financial requirements. <br /><br /></p>
<p>&nbsp;</p>

Right investment options with a diversified investment portfolio will spread the risk.  Let us explore the middle-age investment options for a secure retirement.

Investments To Consider During Your Middle-Age For A Secure Retirement

<p>If you are planning for retirement, you need to have a fluid strategy that can not only accommodate your diverse needs and wants but also adapt to changes in your personal situation - marriage, having kids, divorce, losing a loved one, health emergency, etc. With each change, your retirement planning checklist also undergoes a revision. This holds true for a change in your professional status as well. If you have received a hike, bonus, stock options, or more, it must be reflected in your retirement plan. On a similar note, if you have suffered a reduction in pay, job loss, etc., you need to modify your retirement goals.</p>  

<p>Time horizon also plays a critical role in setting your future goals for retirement. At a young age when you are at the cusp of starting your career, you have fewer responsibilities. This is an ideal time to hedge your bets and invest in equity. You can invest in riskier investments since you have the advantage of a long investment horizon that can allow you to build a substantial retirement corpus. With growing age, your responsibilities and liabilities increase. This affects your ability and capacity to take risks leading to a shift towards debt instruments that carry lower risk and let you preserve capital. Your focus shifts from capital appreciation to capital preservation. If you wish to boost your savings and build a considerable retirement corpus that will enable you to live your retirement years comfortably, <b><a href="/match-advisors/search-by-zip?cta=article-show-page">get in touch with a professional financial advisor</a></b> who can guide you on the same.</p> 

<p>If you are 10 years away from your retirement, you need a specialized retirement plan. At this time, your focus should be two-fold - to be able to make enough money to cover your retirement expenses but also to ensure the security of your retirement funds to avoid losing them at such a critical time. Herein, we will discuss how you can navigate this phase of your life by creating a retirement checklist to secure the golden years of your life.</p>

<h2>Why should I plan for my retirement?</h2>
<p>If you choose not to work on a part-time basis during your retirement, you would forgo the surety of a monthly check that you banked upon during the working years of your life. With no steady stream of income coming in, you will have to survive on your retirement savings. As per a recent survey, Gen Y plans to retire at an average age of 59, Gen X at an average age of 60, and baby boomers plan to work till they are 68 years old. The average life expectancy of an American adult is 78.99 years. The same study reported that the average American wishes to retire by the age of 62. If you take early retirement, you may be looking at 30 years of life ahead of you. Also, you need to consider deteriorating health as well due to advancing age which would lead to increased expenses for you. Hence, it is essential that you start planning for retirement at the earliest.</p> 

<h2>Retirement planning offers the following benefits:</h2>
<br>

<h3>Stress-free life:</h3>

<p>Financial planning for retirement affords you peace of mind where you feel secure that you would have enough money to live comfortably in retirement. Money is important as it dictates the way you live your life, your lifestyle and provides you with security. Being on top of your finances grants you the opportunity to make decisions and investments that play a critical role in securing your future financial security.</p>

<h3>Liquid funds:</h3> 

<p>Having liquid funds to bank on can help you sail through any unforeseen emergencies. Investing a part of your portfolio in liquid assets ensures that you have enough funds to meet your expenses without having to liquidate your fixed assets or stock options.</p>

<h3>An emergency fund:</h3> 

<p>If you have followed retirement planning advice, you would have allocated funds to an emergency reserve. The amount of money that you should maintain in the reserve varies, however, you should ideally have sufficient funds to cover three to six months of your household expenses. This would come in handy if you ever suffer a job loss, your home needs urgent repairs, etc. </p>

<h3>Better distribution of your assets through an estate plan:</h3> 

<p>Even though no one wants to think about death, it is considered prudent to prepare for your eventual demise or physical or mental incapacitation. Estate planning forms an integral part of your retirement planning checklist wherein you should devise an estate plan that takes care of the financial safety of your loved ones. An estate plan comprises a will, a trust, health care directives, power of attorneys, and more. Its main purpose is to ensure that your accumulated wealth reaches your beneficiaries without a major chunk of it being subsumed by taxes.</p> 

<h3>Effective tax savings strategies:</h3> 

<p>With proper retirement planning, you can employ strategies and pick savings and investment instruments that help lower your taxability. You also need to consider the timing of your withdrawals, how to maximize your Social Security check, switching to a Roth account, etc. Doing so will help ensure you do not end up in a higher tax bracket during retirement when you start making withdrawals from your retirement account. </p>

<h3>Buffer against health costs:</h3> 

<p>As said beforehand, health costs can be a major source of expense for a lot of folks in retirement. Through retirement planning, you can ensure that you meet your expenses via insurance, savings account, long-term care plan, etc.</p>
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<h2>What items should be on your retirement planning checklist when you review your investment plan 10 years before retirement?</h2>

<p>As you approach 10 years till the retirement time phase, you can make significant moves to either strengthen or weaken your finances. If you make the right calls, you can either ensure your future financial security or come to terms with the fact that you may have to live your retirement years with fewer means. Let us go through certain things that you can do if you are planning to retire in the next ten years.</p>

<h3>Examine your retirement savings and investments:</h3>

<p>As most people retire in their 60s, it is safe to assume that you would be well in your 50s, ten years before your retirement. By this time, you would have accumulated significant savings already. There is no magic number that you should have saved by now as every person has a unique set of financial needs. But your savings should align with your retirement goals and be sufficient to cover your current lifestyle. If your savings can support your present monthly expenses during your retirement years, you are good to go. If not, you need to re-evaluate your strategy. Consult with a professional financial advisor on how you can make up for the shortfall in savings and what actions you can take to get back on the right track.</p>

<h3>Boost your savings:</h3> 

<p>As soon as you reach 50 years of age, your main focus should be the maximization of your retirement savings accounts. The IRS allows you to make additional catch-up contributions if you are 50 years old or more enabling you to save more for retirement. For example, in a traditional or Roth IRA, you can make a $1,000 catch-up contribution over the limit of $6,000 annually. By maximizing your contribution limit, you can save an additional $10,000 over the course of the next 10 years. If you contribute to a 401(k) account, you can make an annual contribution of $20,500 each year. However, you can also make an additional catch-up contribution of $6,500 bringing your total to $27,000. These contribution limits are for the year 2022 and may be revised in the future allowing you to contribute even more.</p>

<h3>Eliminate all debt:</h3> 

<p>Buying a home is an important dream for most folks. Those who do not buy one earlier in life, end up purchasing one in their 50s. They are in a better position in their life financially and feel they can finally afford one. However, doing so may leave you saddled with a high-value loan or mortgage very close to your retirement years. Parents also take out loans to finance the higher education costs of their children. They can also use savings from their retirement accounts such as an IRA to finance their children’s education. Doing so also raises your dependence on debt such as credit cards, personal loans, etc. This, in turn, has a detrimental effect on your retirement corpus since a part of your income would go towards reducing your debt rather than towards your savings. Paying high-interest loans can be especially damaging to your retirement planning when you are nearing retirement in the next ten years. Moreover, if you have taken out a student loan for your child, its repayment will most likely take many years and may spill over into your retirement years. Avoid taking on fresh debt 10 years from retirement. This can have a detrimental effect on your financial status. Additionally, if you have prior debt, your focus should be on settling it as a priority.</p>

<h3>Ensure that you have an estate plan in place:</h3> 

<p>A lot of people do not undertake estate planning. There is a misconception that estate planning is only for the wealthy. If you have assets, you need to ensure that you have an estate plan to ensure your wishes are fulfilled after your demise. Estate planning comprises several things most important of which is the drafting of a will. A will refers to a legal document that states how a person wants their property and assets to be distributed among their legal heirs and beneficiaries after death. The absence of a will can result in family feuds. Also, your estate may be dragged to court if you fail to draft a will stating your wishes. This may result in your heirs having to fight against the lengthy and expensive process of probate. You can also set up a trust if you have minors or children with disabilities or you want to place restrictions on your child’s access to your assets up to a certain age. In addition, you can take measures against mental or physical incapacitation by adding health directives to your estate plan. An estate plan also includes the power of attorneys which gives a person the power to act on behalf of another person, the principal. Further, you can lower your taxes by giving gifts or contributing to a charity when bequeathing your estate to your beneficiaries.</p>

<h3>Try and establish multiple streams of revenue:</h3> 

<p>Having several sources of income in retirement acts as a failsafe for you and allows you to stay afloat for a longer period of time. It gives you peace of mind and puts your mind at ease. It also allows you to live comfortably as you know you have multiple sources of income to bank on. The most common revenue stream for retirees is the money they receive from their investments in the form of capital gains, cash flow from dividends, etc. There are alternate sources of income as well such as pensions, Social Security benefits, etc. You can also try and set up a side hustle to make extra bit of money. Despite the official retirement age, a lot of folks either retire before they reach retirement age or continue working beyond it. Having an alternate means of income can be considered as beneficial if you wish to retire at a younger age. For example, you could try and establish rental income for yourself if you invest in a real estate asset. You could also work on a part-time basis to earn extra dollars. You can lay the groundwork for these kinds of assets or income streams around ten years before you retire. Doing so would allow you to not only establish your side hustle, but also build something that can provide you with a steady flow of income in retirement. You should consider consulting with a professional financial advisor on how to create alternate income sources during retirement while planning for the same.</p> 

<h3>Set up a fund for emergencies:</h3> 

<p>An emergency can come unannounced any time and if you are not adequately prepared, it can be a source of considerable stress for you. When you are making your retirement planning checklist, it is critical that you make a plan for setting up an emergency fund. Ideally, an emergency fund should have enough money to cover your monthly expenses for 4 to 6 months. Ensure that you use your emergency fund only for emergencies and for no other purpose. As you approach retirement, there may be a lot of things that are happening around you. Your kids may be coming of age and may require funds for college tuition, travel or for establishing a business, etc. With advancing age, you may develop health issues that may lead to hefty medical bills. An emergency reserve can help you sail through these issues without having to dip into your retirement savings. Moreover, if you do not end up using this fund, it can prove useful in your post-retirement years. An emergency fund offers peace of mind as you feel safe in the knowledge that you have adequate funds should you need them in case of an emergency. Further, it also reduces the chances of you having to rely on others or take on fresh debt to meet your needs.</p>

<h2>To conclude</h2>

<p>By creating a 10-year investment plan for retirement, you can assess where you stand and how ready you are for retirement. By preparing a retirement planning checklist, you would be able to implement strategies that can safeguard your retirement savings ensuring you have enough money saved up to maintain your current lifestyle. 10 years before retirement should be a time for tying up loose ends and ensuring that you have all your bases covered so that you are not left high and dry in your golden years. Ensure that you study these points thoroughly and consult with a professional to chalk up a retirement plan for your needs.</p> 

<p>To get in touch with a fiduciary advisor who may offer you personalized retirement advice on how to create a foolproof retirement corpus, use the <b><a href="/match-advisors/search-by-zip?cta=article-show-page">free advisor match service</a></b>. Answer a few simple questions about yourself and the match tool will help connect you to 1-3 financial advisors based on your financial requirements.</p> 

By preparing a retirement planning checklist, you would be able to implement strategies that can safeguard your retirement savings ensuring you have enough money saved up to maintain your current lifestyle.

Retirement Planning Checklist: 10 Years from Retirement 

<p>A child’s safety and security is the chief concern of nearly all parents. They want the best for their children and wish to see them do well in life. One of the primary concerns for any parent is their child’s financial security. As per a recent study, almost 68% of American parents fear that their children will be in a financially weaker position than they are in the future. This can be due to several reasons such as when you are young, you are more focused on getting through school, submitting assignments, participating in extracurricular activities, and other adolescent challenges. During this time, saving for retirement is not the priority of most teenagers. Moreover, being young, they are not particularly concerned about having to start saving since retirement is a long-term goal. Here is where the parents, grandparents, and other family members can step in. Parents can kick start a savings plan for their kids by investing in effective saving mediums in the present.</p>

<p>A Roth IRA (Individual Retirement Account) is one such medium that can safeguard your child’s financial future as it offers the maximum tax advantages between the accumulation phase and the withdrawal period during retirement. It can also help imbibe financial discipline in your child and make them a fiscally responsible person. Suppose you deposit $10,000 today in your child’s Roth IRA. The funds accumulate returns of 8% each year. Assuming you do not make any further contribution to the account, in a period of 40 years, your child will have amassed $217,000 in their Roth IRA. If you wish to find out how you can incorporate a Roth IRA to secure your child’s financial future and set them up for retirement, <b><a href="/match-advisors/search-by-zip?cta=article-show-page">consult with a professional advisor</a></b> who can advise you on the same.</p> 
<p><b>Let us discuss some insights on how parents can contribute to a Roth IRA for their children and help safeguard their financial future.</b></p>
<h2>What is a Roth IRA?</h2>
<p>A Roth IRA is a tax-advantaged retirement plan where you contribute after-tax dollars and earn tax-free returns on your money. You can also avail of tax-exempt withdrawals, provided you fulfill certain conditions. To qualify for tax-free withdrawals from a Roth IRA, you must hold the account for at least five years and withdraw your funds at the age of 59.5 years or more. If you fulfill these conditions, your drawings are deemed qualified and tax-exempt.</p>
<p>Though a Roth IRA is not thought of as a prime saving vehicle for children, it is still being recognized as one of the most advantageous for children due to the benefits offered by it. A Roth IRA is especially beneficial for those who start earning at a younger age. It is an ideal savings vehicle for kids since they have decades to allow their money to grow backed by the power of compounding. Further, a Roth IRA offers considerable flexibility in terms of withdrawals and usage of funds.</p>
<h2>What is a Roth IRA for children?</h2>
<p>Anyone, irrespective of age, can contribute to a Roth IRA, provided they have an earned income and there is no age restriction to open a Roth IRA. As per the IRS (Internal Revenue Service), earned income refers to any income received from a job or self-employment such as salaries, wages, business earnings, disability retirement benefits, commissions, bonuses, etc. For example, if your child earns money from babysitting or walking dogs around the neighborhood, it will be considered as earned income. As a parent or guardian, you can open a custodial Roth IRA for your minor child at any authorized bank or financial institution.</p> 
<p>The Roth IRA account will be handled by an adult till the time the child is legally eligible to control the account. This means that any and all decisions related to annual contributions, distributions, and investments will be made by the parent or guardian. The legal majority age varies from state to state. Typically, a child can legally take control of their custodial account after reaching 18 or 21 years of age. Even when the parent or the guardian has control over the custodial Roth IRA, the child remains the beneficiary of the account. The Roth IRA funds should be used for the benefit of the child only. Let’s say, your 16-year-old child earns $4,000 each year from walking dogs and mowing lawns in the neighborhood. Suppose you invest this sum in a Roth IRA generating a 10% annual return and the child continues to save $4,000 each year in the account, he can accumulate savings of $1 million before he reaches 55 years of age. In addition, if the child adheres to the Roth IRA withdrawal rules and waits to withdraw his savings till he reaches 59.5 years of age, he can take out all his savings 100% tax-free.</p>
<p>With that said, your child may end up needing more than $1 million in the future to achieve a financially secure retirement. But they would have gotten off to a great start since you began saving in their Roth IRA early. Also, your child can meet other financial requirements through his Roth IRA contributions as well like paying college tuition, buying their first home, etc. Your child can use the Roth IRA funds as required since no restrictions are placed on the usage of money from a Roth IRA. Further, the IRS does not mandate taking out Required Minimum Distributions (RMDs) in a Roth IRA. Not having to take out RMDs can help your child’s Roth IRA grow exponentially over a long period of time.</p>
<p>It should be noted that your child can contribute to a Roth IRA only if they have an earned income and cash gifts, investment returns, or allowance money (even if the child works for it) are not considered as earned income and are ineligible for a contribution towards a Roth IRA. With that said, if you own a business, your child can complete work-appropriate tasks in return for reasonable compensation. </p>
<h2>What are the rules concerning contributions, penalties, and tax for a Roth IRA for children?</h2>
<p>A custodial Roth IRA also has a maximum contribution limit similar to any other Roth IRA. For 2022, you can contribute a maximum of $6,000 to the Roth account. However, if your child’s earned income is lower than the maximum permissible limit, he can only contribute the earned income amount. For example, if your child earns $3,000 through babysitting, he can only contribute $3,000 to his Roth IRA and not $6,000 for 2022. If the child makes a contribution above the limit, he is liable to pay a 6% penalty every year until the error is corrected.</p> 
<p>Additionally, you should keep a written record of your child’s earned income in case he is not filing a tax form for the same. Maintain a record of all receipts and information. This should include information related to the kind of work done, duration of work, employer (for whom the work is done), and payment received. This can be useful information in case the IRS inquires about your child’s earned income.</p> 
<h2>Can parents make a contribution to their child’s Roth IRA?</h2>
<p>Yes, a parent can contribute to their child’s Roth IRA. It can be quite challenging to convince a child to save their earned money for future financial security. A child may wish to spend their money on a fancy new smartphone, the latest gaming console, a laptop, watching movies, college tuition, or buying their first car, etc.</p> 
<p>Thus, if you are unable to convince your child to contribute their earned income in a Roth IRA or you wish your child to have fun using their own money, you can contribute to the Roth IRA on their behalf. As long as the child has earned income, you can contribute up to the amount earned by them. For example, if your child earned $3,000 working during the summer, you can allow your child to use that money for their personal needs and make an equal contribution of $3,000 in their Roth IRA from your earned income. You can either contribute the whole amount or a percentage of what your child earns, such as 80%, 65%, 50%, etc.</p>
<p>It is not important who contributes to the Roth IRA account as long as the contribution comes from an earned income. Also, the child should be able to justify earning the same sum as contributed to his Roth IRA account. You cannot contribute a sum exceeding the earned income of your child to the custodial Roth IRA. For instance, if your kid earned a sum of $2,500 by selling lemonade in the summer, you can only contribute an equal amount or a lesser contribution to their Roth IRA from your money. The sum contributed by you to your child’s Roth IRA cannot be used to derive any tax benefits in your favor. However, this does not affect your contribution to your own Roth IRA. You can contribute up to the maximum of your contribution limit, provided you have sufficient earned income to do so. Say, you had an earned income of $12,000 in 2022, and contribute $5,000 to your child’s Roth IRA, you can contribute $6,000 in your Roth IRA if you are under the age of 50; and $7,000 if you are over 50 years of age.</p>
<p>Additionally, you need to educate your child about the custodial Roth IRA, its functions, investment options, contribution limits, penalties, withdrawal criteria, etc. to help him build financial discipline. Doing so would impress upon him the value of saving money and being fiscally prudent and responsible. It would also allow him to make wiser decisions when he gains control of his Roth IRA when he comes of age.</p>  
<h2>What are the advantages of having a Roth IRA for your child?</h2>
<p>Being a tax-advantaged savings account, a Roth IRA can offer several advantages to children. These are:</p>

<h3>1. Helps to become financially literate:</h3>

<p>By opening a Roth IRA for your child, you help them learn valuable financial lessons about the importance of earning, saving, and investing money to build a financially secure future for themselves. It also allows them to understand important financial aspects like the power of compounding, investing in different classes of assets, the relevance of investment risk, etc.</p>

<h3>2. Facilitates wealth building:</h3>

<p>A custodial Roth IRA helps your child to save for their higher education expenses or build a significantly large nest egg for retirement. The earlier your child starts contributing to a Roth IRA, the greater is the power of the account to accumulate wealth in the long term.</p> 

<h3>3. Offers flexibility in usage of funds:</h3>

<p>A Roth IRA offers greater flexibility and does not impose any restrictions on the usage of funds. The Roth IRA money can be used to pay for your child’s college tuition, cover a financial emergency involving your child, purchase a home for your kid or save for retirement.</p> 

<h3>4. Boosts tax savings:</h3>

<p>Since after-tax dollars are contributed to a Roth IRA, you or your child cannot claim a tax deduction in the present for any money contributed to the Roth account. This works out in your child’s favor as children usually have low annual earnings and little or no income tax is applicable on their earnings. However, when they grow up and start taking distributions, they may be subjected to a higher tax rate. Having a Roth IRA in the present helps them lower their future tax implications as they can make tax-free withdrawals provided they meet the 5-year holding rule and the 59.5 years age restriction.</p>
<h2>To conclude</h2>
<p>A Roth IRA can be a great present for your kid that will allow them to make tax-free earnings from a young age. Not only does this help your child build financial discipline and set a strong foundation for their future, but they would also be thankful to you when they grow up for having set up a Roth IRA for them. If you wish to gain further clarity on how to effectively fund a Roth IRA for your child, consulting with a financial advisor may be a wise idea.</p> 
<p>To get in touch with a fiduciary advisor who may help you understand the benefits and drawbacks of opening a Roth IRA for your child, help build a retirement corpus and suggest an investment strategy, use the <b><a href="/match-advisors/search-by-zip?cta=article-show-page">free advisor match service</a></b>. Answer a few simple questions about yourself and the match tool will help connect you to 1-3 financial advisors based on your financial requirements.</p> 

Through Roth IRA parents can safeguard their child’s financial future with maximum tax advantages between the accumulation phase & withdrawal period during retirement. 

Can a Parent Open a Roth IRA for Their Child?

<p>The cost of education in America has increased dramatically over the years. To say it can be burdensome would be an understatement. The average college cost of a four-year public institution has increased by 213% in the past 30 years. If we take up recent numbers, the cost of education has gone up by 29%, with private college tuition costs climbing by 25% in the last decade alone. If you have children or grandchildren who want to go to college, it is quite likely that you would have put some thought into how you can fund their college tuition. An Individual Retirement Account (IRA) is one such option that has been gaining popularity over the last few years.</p> 

<p>An IRA is a tax-advantaged retirement savings account that individuals can open to save and invest in the long term. You can open an IRA at any age; however, you can only contribute to it through earned income. The Internal Revenue Service (IRS) has defined earned income as any income received from a job or self-employment such as salaries, wages, business earnings, disability retirement benefits, commissions, bonuses, assignment work, etc. You can use your IRA to cover education expenses even before you reach retirement age. If you adhere to the rules specified by the IRS, you can use your retirement savings to pay for a wide range of education expenses for you, your spouse, children, or grandchildren without incurring a penalty. To learn more about how you can use an IRA to fund college tuition, <b><a href="/match-advisors/search-by-zip?cta=article-show-page">reach out to a professional financial advisor</a></b> who can guide you on the same.</p> 

<p>In this article, we will cover how you can use an IRA to pay for college expenses, its benefits, how to avoid penalties, and more.</p> 

<h2>How can you use an IRA to pay for college tuition?</h2>

<p>Typically, an IRA is used to fund your living expenses in retirement and ensure you have enough money to last your golden years. However, you can use your retirement funds for other purposes too. There are certain restrictions when it comes to withdrawing funds from your IRA account. If you withdraw money before reaching 59.5 years of age, you are liable to pay a 10% penalty. Do note that this penalty is separate from the income tax that you will have to pay on your IRA withdrawal.</p> 

<p>However, there are some exceptions to this rule. These are:</p>
<ul>

<li>If you withdraw funds for purchasing a home (as a first-time homebuyer) or for funding higher education expenses, these are deemed as qualifying expenses and no penalty is levied by the IRS. However, you would still have to pay income tax on your withdrawals.</li><br> 
<li>Any funds withdrawn from an IRA can only be used for funding your own education in addition to your spouse, children, or grandchildren. The IRS mandates that the student should be enrolled at an eligible institution that falls under the student aid programs offered through the U.S. Department of Education.</li><br> 
<li>You also need to consider the impact of IRA withdrawals on student aid if you plan on applying for it. Any withdrawals made from an IRA are treated as your income in that particular financial year. This can impact your ability to apply for financial aid through Free Application for Federal Student Aid or FAFSA.</li><br>
</ul>

<h2>What is an education IRA?</h2>

<p>Unlike a traditional IRA, an education IRA is a tax-advantaged investment account used for paying higher education expenses. It is also known as Coverdell Education Savings Account or ESA. Under this, parents and guardians can make contributions to an education IRA for a child under the age of 18.</p> 

<p>Let us go through the salient features of an education IRA:</p>
<ul>

<li>Education IRA is similar to a Roth IRA in several aspects, chief among them, both accounts are tax-deferred in nature wherein your investments grow tax-free. You can also make tax-free withdrawals from both these accounts subject to the fulfillment of certain conditions.</li> 
<li>An ESA can only be funded till the time the beneficiary reaches 18 years of age.</li> 
<li>ESA funds are primarily meant to cover college tuition however they can be used to pay for other expenses too such as certain K-12 expenses.</li> 
<li>Any withdrawals made from an ESA are not deemed as income. This means that it does not affect a student’s ability to apply and benefit from financial aid such as FAFSA.</li> 
<li>An ESA has an annual contribution limit of $2,000. If you exceed this amount, you may attract a penalty.</li> 
<li>If the funds held in an ESA are not used for college, then those funds must be distributed to the child who was the intended beneficiary of the account.</li> 
<li>The funds held in an ESA must be completely used before the beneficiary turns 30 years old. If not, it will be subject to tax and penalties.</li>
</ul>

<h2>Can you use a Roth IRA to pay for college costs?</h2>

<p>Yes, you can. The IRS does not restrict using Roth IRA funds for paying college expenses. Moreover, you can make tax-free withdrawals to cover the higher education costs of your child or grandchild without meeting the criteria of reaching 59.5 years of age or completing the 5-year holding period for a Roth IRA account. No penalty will be levied on you. However, you will have to pay the income tax charges as applicable on the earnings portions of the sum withdrawn by you. Further, if you only withdraw the sum contributed by you (not the earnings portion), you can enjoy tax and penalty-free distributions, if used for covering higher education expenses only. There are several benefits of using a Roth IRA for college expenses.</p> 

<p>These are:</p>
<ul>
<li>Your money grows tax-free since you contribute after-tax dollars.</li>
<li>You can make tax-free withdrawals if you are 59.5 years old and have held the account for a period of at least five years. However, as stated above, there is an exemption to this rule. If you withdraw funds from your Roth IRA to pay for college tuition, you do not have to pay a 10% penalty on the same.</li> 
<li>You can use your Roth IRA funds as you see fit without any restrictions. You can either use them to pay for your child’s education or meet any other financial need. Additionally, there is no ceiling placed on qualified education expenses for a Roth IRA. This means that the money that has not been used for funding higher education can be used to support you during retirement.</li>
<li>There is greater flexibility in terms of investment options available allowing you to earn higher returns in the long run. </li>
</ul>

<h2>To conclude</h2>

<p>Using an IRA to cover college expenses may seem like a great idea, however, it should only be used as a last option. This is because using your retirement funds to cover the tuition costs may negatively affect your retirement goals and put a big dent in your retirement savings. If you feel you do not have an alternative, ensure that you have a substantial amount of time left to make up for the withdrawals or a significant amount of funds saved up in other retirement accounts. To get a better perspective on the situation, you can try taking professional help and see what the expert has to say on the matter.</p>

<p>To get in touch with a fiduciary advisor who may help you understand how to use an IRA for education expenses, its benefits and drawbacks, tax implications, and more, use the <b><a href="/match-advisors/search-by-zip?cta=article-show-page">free advisor match service</a></b>. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your financial needs and goals.</p>

Using an IRA to cover college expenses may seem like a great idea, however, it should only be used as a last option.

Can I Use An IRA to Pay for College Tuition? 

<p>A Custodial Roth IRA is an Individual Retirement Account that a custodian (usually a parent or guardian) maintains and runs for a minor having an earned income. It is an ideal saving instrument for children where they can maximize the power of compounding to grow their contributions. The assets held in a custodial Roth IRA are managed by the custodian till the time the child reaches the age of majority i.e. 18 or 21 years of age depending on the state they reside in.</p> 

<p>Custodial Roth IRAs offer flexibility to their investors as they can make penalty and tax-free withdrawals at any time. Your kid can make use of the funds to fund their higher education expenses, purchase his first home or put away the money for retirement. To gain a better understanding of custodial Roth IRAs, their limits and stipulations, taxability, and more <b><a href="/match-advisors/search-by-zip?cta=article-show-page">consult with a professional financial advisor</a></b> who can guide you on the same.</p> 

<p>Let us first learn about the salient features of a custodial Roth IRA, its types, rules, benefits, and more in detail.</p> 

<h2>What is a Custodial Roth IRA?</h2>
<p>As explained above, a custodial Roth IRA is a retirement savings account for kids who can use the account for several purposes such as covering their college tuition, purchase of their first car, or a first house. Since a child has a considerable amount of time to save for retirement, they can build a sizable retirement corpus and put the power of compounding to good use. An important benefit of a custodial Roth IRA is the ability to make a withdrawal at any given point in time.</p> 

<p><b>Some of the essential features of a custodial Roth IRA are as follows:</b></p>
<ul>
<li>Children of any age can contribute to a custodial Roth IRA account as long as they have earned income i.e. any income received from a job or self-employment such as salaries, wages, business earnings, disability retirement benefits, commissions, bonuses, assignment work, babysitting, etc. Parents or guardians can also contribute to the custodial Roth IRA account provided their contributions don’t exceed the earned income of the children.</li><br>
<li>A custodial Roth IRA account can only be set up by a parent or a guardian who is of majority age.</li><br> 
<li>You can choose to open either a traditional IRA or a Roth IRA account based on your financial needs and objectives. Usually, the Roth account is preferred due to being able to make tax-free withdrawals in retirement and it favors people who fall under a higher tax bracket later on in retirement.</li>
</ul>

<h2>What are the different kinds of Custodial IRAs?</h2>
<p>There are two kinds of custodial IRAs that you can choose from - Traditional IRA and Roth IRA. In a traditional IRA, you contribute pre-tax dollars and have to pay taxes at the time of withdrawal during retirement. Whereas in a Roth IRA, you contribute after-tax dollars and can make tax-free withdrawals in retirement subject to certain conditions.</p> 

<p>In both traditional and Roth IRA, your money grows tax-free with the key difference being you must take out required minimum distributions (RMDs) in a traditional IRA whereas there is no such restriction in a Roth IRA. Moreover, if you claim your child as a dependent, an income tax return needs to be filed by the child provided their gross income is more than the amount set up by the IRA. If the child earns less than this set amount, it would place them in the 0% income tax bracket. This would not be beneficial for your child since he/she would be unable to take advantage of the up-front tax deduction of traditional IRAs.</p>

<h2>What are the essential rules for setting up a custodial Roth IRA for children?</h2>

<p>There are three essential rules for establishing a custodial Roth IRA for children. These are:</p>
<h3>1. No prescribed age limit for setting up a custodial Roth IRA</h3>
<p>The IRS has not stipulated any age limit for contributing to a Roth IRA. Any minor can contribute to an IRA, irrespective of their age, provided they have earned income. Any other individual can also contribute to the minor’s IRA as long as they are careful and do not contribute an amount more than the child's earned income.</p>

<h3>2. Any contribution made must be from earned income</h3>
<p>The sticking point to starting a custodial Roth IRA account is income and not age. If the child does not have an earned income, he would not be able to contribute to his account. Earned income here refers to any income received from a job or self-employment. Wages, salaries, commissions along with money earned from a  paper route, babysitting, etc. can be deemed as earned income. Further, a parent or guardian can also contribute and withdraw money from their child’s custodial Roth IRA. However, the contributions must include the share of earned income of the child.</p> 

<h3>3. Contribution limits</h3>
<p>The IRS updates the contribution limits for retirement accounts each year that must be adhered to by the investors. Failure to do so would attract penalties from the IRS till the time the error is rectified. For 2022, the contribution limit for a custodial Roth IRA is set at $6,000, or the total of earned income for the year, whichever is less. For example, if your child earns $4,000 from babysitting, they can contribute up to $4,000 into their Roth account.</p> 

<p>In addition, some parents choose to match their child’s earnings and contribute to their child’s custodial Roth IRA in their stead. For example, if your kid earns $2,000 from his paper route, you can allow them to spend that money as they wish, and put up $2,000 in their Roth account yourself. Further, parents can also contribute a percentage of their child’s earnings, should they wish to, say, 50%. For instance, of the $5,000 earned by your child, you can invest $2,500. You or any other individual can also gift a contribution to your child’s IRA. The important thing here is that whosoever contributes, it should not exceed your child’s earned income for the respective year.</p> 
<h2>How can you open a Custodial Roth IRA?</h2>
<p>You can start a custodial Roth IRA for your child provided your child has earned income and you open and manage the account on their behalf. If your child is a minor (under 18 in most states and under 19 and 21 in other states), being the custodian, you are responsible for making the investment decisions and controlling the IRA assets until your child reaches the majority age.</p> 

<p>The process for opening an IRA is fairly straightforward wherein a custodial Roth IRA account is opened in your child’s name. You will also need to furnish details with respect to your and your child’s Social Security Number, birthdates, and other personal information.</p> 

[See: <b><a href="https://www.financialplanners.net/articles/how-to-find-a-financial-advisor-you-can-trust">How to Find a Financial Advisor You Can Trust</a></b>]
<br><br>
<h2>What are the advantages of a Custodial Roth IRA?</h2>
<p>A custodial Roth IRA offers several benefits to its investors. These are:</p>

<h3>1. Take out early withdrawals</h3> 
<p>A custodial Roth IRA allows its owners to make a withdrawal whenever they want. Compared to other IRAs that enforce strict distribution rules and charge a 10% penalty if the money is withdrawn before reaching 59.5 years of age, a custodial Roth IRA is more balanced. Any earnings made on investment are subject to taxation and may attract a 10% penalty on early distribution. Since you can make a withdrawal at any time, it is a good option for kids and parents who may want to save for their child’s college tuition.</p>

<h3>2. Make tax-free withdrawals in retirement</h3> 
<p>Since you contribute after-tax dollars in a custodial Roth IRA, you can make tax-free qualified distributions in retirement. It is advantageous if your current tax rate is low as it would allow you to grow your earnings at a higher rate. Moreover, since most kids’ earnings are so low that they have to pay either little to no income taxes. This enables them to save taxes on contributions too. A custodial Roth IRA is a wise choice for children since most of them do not earn enough money to take advantage of the up-front tax deduction of traditional IRAs, making it an ideal investment option for them.</p>

<h3>3. Harness the power of compounding</h3> 
<p>As with most forms of investment, if you want to harness the power of compounding, you need to invest for the long term. A custodial Roth IRA is an ideal investment vehicle for children as they can start investing from a young age and let time work its magic. For example, if you contribute a sum of $6,000 just once in a Roth IRA, in 60 years’ time, it would grow to about $200,000 at a 6% investment return and monthly compounding.</p>

<h3>4. Cover multiple expenses due to high flexibility</h3> 
<p>A custodial Roth IRA offers multiple advantages to its investors such as the ability to make tax-and penalty-free withdrawals after investing in the account for at least five years. The aim is to make regular contributions to the account till the time you have accumulated enough savings to last your retirement years.</p> 

<p>It can be used for covering several expenses such as:</p>
<ul>

<li><b>Higher education or college tuition:</b> You can use your custodial Roth IRA funds to cover expenses for college like tuition, books, equipment, board expenses, other supplies, and fees. The IRS mandates that the child will have to pay tax on the earnings, however, they would be exempt from having to pay the 10% early withdrawal penalty if the withdrawn funds are used for educational purposes.</li><br>

<li><b>Buying a home:</b> You can use your custodial Roth IRA for buying a house before reaching 59.5 years of age. If you are a first-time homebuyer, you can withdraw a sum of $10,000 one-time which is tax and penalty-free. This amount must be used as a down payment or for closing costs.</li><br> 

<li><b>Emergencies:</b> In case of a medical or financial emergency, you can withdraw funds from your custodial Roth IRA, however, the withdrawn sum is subject to taxes on the earnings. In addition, you will incur a 10% penalty on an early withdrawal.</li><br>
. 
<li><b>Teach financial discipline:</b> You can use a custodial Roth IRA to teach and inculcate financial discipline in your children along with giving them a head start on saving for retirement. It is a good opportunity for them to learn valuable financial lessons about money, earning, saving, spending, and compounding at a young age.</li>
</ul>

<h2>How to finance your child’s IRA</h2>
<p>As stated earlier, a child can make a contribution to an IRA at any age provided he/she has earned income from either self-employment or their own business. For the year 2022, the maximum contribution a child can make to an IRA for either traditional or Roth IRA is $6,000 or their taxable earnings for the year, whichever is lesser. For instance, if your child earns $5,000 this year, the child can contribute up to $5,000 to their IRA account. However, if your child earns $8,000, then they can contribute only $6,000 as the maximum contribution. If your child failed to earn anything, then they cannot contribute any amount to their IRA.</p> 

<p>The child can contribute to their IRA as long as they have earned income for the year. However, keep in mind that allowance money is not considered as earned income and therefore cannot be used to contribute to the IRA. Although you can pay your children for completing house chores as long as it is legitimate work and you are paying them as per the going market rate.</p> 

<p>Your child receives a W-2 or Form 1099 as proof of earned income. This is not possible for common juvenile jobs like dog-walking, babysitting, yard work, etc., therefore, you would need to maintain receipts to serve as a record of the earned income. The record should include the kind of work done, its duration, details of the individual for whom the work was performed, and the amount earned by the child.</p>

<h2>To conclude</h2>
<p>By investing in a custodial Roth IRA, your child can truly harness the power of compounding. Not only do they get a big jump-start into investing, but they can also invest their money for a long-term horizon, allowing their contributions to earn interest over time, lending them financial security for the future. Investing from a young age also inculcates the importance of financial discipline in children. This habit can serve them in good stead in adulthood enabling them to maintain healthy finances, manage their expenses and taxes, and stick to a budget.</p>

<p>If you need guidance on how you can best make use of custodial Roth IRAs to grow and manage your child’s finances to help secure their financial future, use the <b><a href="/match-advisors/search-by-zip?cta=article-show-page">free advisor match tool</a></b>. Through this tool, you get matched with experienced and certified financial advisors who may be able to guide you effectively as per your unique financial requirements. Answer a few simple questions about yourself, and the free match tool will connect you to 1-3 advisors suited to meet your financial needs and goals.</p>

By investing in a custodial Roth IRA, your child can truly harness the power of compounding.

What is a Custodial Roth IRA and How Can I Open One For My Children?

<p>Whether you are in your 20’s, 30’s or 40’s, it is never too late to start planning for the golden years of your life. Though it is best if you start saving for retirement as early as possible, you need to do your homework and undertake financial planning to best prepare for your present and future financial needs. You must understand that it takes a considerable amount of hard work, long hours and decades of saving money to build a sizable retirement corpus that would allow you to enjoy your retirement years.</p>
<p>So, before investing your money in any financial instrument, do take time to understand the methodology, rate of return, investment options available to you, rules and regulations related to taxation, etc. One of the more popular investment vehicles available to investors is an individual retirement account (IRA). An IRA is a tax-advantaged account used by investors to save for retirement.</p>
<p>First introduced in the mid-1970s, there are a number of different kinds of IRAs you can invest in depending on your employment status - Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. However, you need to adhere to certain income restrictions such as having a qualifying source of income, without which you cannot contribute towards the account. In addition, the stipulations get updated each year requiring you to stay on top of the changing rules to identify whether your income qualifies for contributing to IRAs or not. To understand more about IRAs and how they can fit in your retirement plans, <b><a href="/match-advisors/search-by-zip?cta=article-show-page">get in touch with a professional financial advisor</a></b>.</p> 

<h2>What is meant by earned income?</h2>
<p>Earned income refers to any money received as pay in exchange for carrying out work. This can be in the form of wages, salaries, bonuses, commissions, tips, and in case you are self-employed, net earnings can be deemed as earned income. It also constitutes money received due to long-term disability, union strike benefits and from certain deferred retirement compensation arrangements but only when received before the retirement age.</p> 

<p><b>Let us discuss the different kinds of sources of qualified income that are eligible for IRA contributions:</b></p>

<h3>1. Compensation earned as an employee</h3>
<p>If you are working as an employee then income earned in the form of wages, salaries, tips, bonuses, incentives, and commissions is deemed as qualifying income and considered eligible for contribution to an IRA.</p>
<h3>2. Income generated from self-employment</h3>
<p>If you are self employed then any income generated from self employment or net income from self-employment in trade or business, professional services, or as an independent contractor is deemed as qualifying income. Please note that income from self employment would only qualify as earned income wherein your business activities lead to generation of income. Furthermore, this income must have been subjected to deductions for contributions to an employer plan and self-employment tax adjustments as well.</p>
<p>If you are an independent contractor like a consultant, freelancer, technician, plumber, electrician, driver or any other service provider, any income that you generate due to services provided by you will be deemed as qualifying income. Similarly, if you are a professional such as a chartered accountant, an architect, a doctor, or a lawyer, the income you generate from your professional practice is considered as qualified income.</p>
<p>Further, if you own a business, or you are a sole proprietor, any business income reported under Schedule C of Form 1040 after taking into account adjustments for deductions, is deemed as qualifying income. If you are a member of a partnership firm or a limited liability company, then any income reported in your name under Schedule K-1, is deemed as your self-employment earned income.</p>
<p>With that said, there are certain restrictions on self-employment income. For example, if you have invested in a business and you earn a share in the profits in proportion to your investment, then it will not be considered as self-employment income. Only in cases wherein you actively take part in the running of a business and your activity generates business income, then you can include the money as your earned income. Further, any returns or earnings generated from stock investments made by you cannot be considered as earned income.</p>
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<h3>3. Income from alimony</h3>
<p>&nbsp;As per a special IRA rule, any income generated through alimony payments shall be considered as earned income after deduction of taxes. This rule is only applicable to taxable alimony income and forms a part of divorce decree or separation agreement ratified after 2018. So, in a scenario wherein you do not work and are solely dependent on your alimony payments, it can be deemed as earned income as long as it is taxable alimony. With that said, child support payments are not considered as earned income and cannot be used to pay for <a href= " https://www.rothira.org/articles/what-are-the-roth-ira-contribution-limits-and-changes-for-2022"> IRA contributions</a>.</p>
<h3>4. Combat pay</h3>
<p>If you have served in the United States armed forces and been posted in a combat zone or have been provided with qualifying services outside the combat zone, then you are deemed eligible to receive combat pay. Do note that combat pay is a non-taxable income. In addition, it is the only non-taxable income source deemed eligible for contributions to an IRA.</p>
<h2>What are the income sources not considered as eligible for IRA contributions?</h2>
<p>Retirement pensions, Social Security payments, interest income, annuity benefits, dividend income, unemployment benefits, nontaxable alimony, and child support are income sources that are deemed ineligible and not considered as earned income for contributions to an IRA account.</p> 

<h2>To summarize</h2>
<p>An IRA is a popular and wise investment option for investors looking to plan for their retirement. But it only works if you are eligible to make contributions to it. So, do ensure that when you open an IRA account that you adhere to all the requirements, and the compensation you receive is eligible to make contributions to your IRA account. Do <b><a href="/match-advisors/search-by-zip?cta=article-show-page">consult with a professional financial advisor</a></b> to understand the different kinds of IRAs, its tax benefits, rules pertaining to withdrawal, penalties, annual contribution limits, availability of investment options, and more.</p> 

<p>To get in touch with a fiduciary advisor who may help you with creating an effective retirement strategy for your unique financial requirements, use the <b><a href="/match-advisors/search-by-zip?cta=article-show-page">free advisor match service</a></b>. Answer a few simple questions about yourself and the match tool will help connect you to 1-3 advisors suited to meet your financial needs.</p>

When you open an IRA account, do ensure that you adhere to all the requirements, and the compensation you receive is eligible for IRA contributions.

What Qualifies as Earned Income for IRA Contributions?

<p>Retirement planning can be tricky to undertake due to the availability of several types of retirement accounts. To make the right choice, you need to first assess the pros and cons of each retirement plan and how it would prove helpful when it comes to achieving your financial goals. In this article, we will be focusing on the Roth 401(k) account, a tax-advantaged account that combines the tax benefits of a Roth IRA (Individual Retirement Account) with the traditional 401(k) account. To understand and evaluate the said account, its tax implications, benefits, and more, it would be wise to <b><a href="/match-advisors/search-by-zip?cta=article-show-page">consult with a professional financial advisor</a></b> who can guide you on the same.</p> 

<h2>What is a Roth 401(k) account?</h2>
<p>A Roth 401(k) is an employer-sponsored retirement saving account wherein you contribute after-tax dollars to be able to make tax-free withdrawals in retirement. However, in a Roth 401(k), there are no restrictions placed on you in terms of income to contribute to the account.</p> 

<p>A Roth 401(k) differs from a traditional 401(k), wherein an investor contributes pre-tax dollars that are later taxed at the time of making withdrawals in retirement. It is a hybrid investment vehicle that combines the best features of traditional 401(k) and Roth IRA accounts. A Roth 401(k) is most suited for those investors that expect to be in a higher tax bracket in retirement.</p>  

<h2>What are the new contribution limits for a Roth 401(k) account for 2022?</h2>
<p>The Internal Revenue Service (IRS) has increased the contribution limit for a Roth 401(k) to $20,500 in 2022 from $19,500 in 2021. If you are 50 years of age or older, you can contribute an additional catch-up contribution of $6,500 bringing your total to $27,000.</p> 

<h2>Are there any conditions that need to be met to make tax-free withdrawals from a Roth 401(k)?</h2>
<p>Similar to a Roth IRA account, if you wish to make tax-free withdrawals in retirement, the following conditions need to be met:</p>
<ul>
<li>The account must be held by the investor for a period of at least 5 years. </li>
<li>The owner must be 59.5 years of age or older at the time of withdrawal.</li>
</ul>

<p>However, you can make early withdrawals but you would need to pay a 10% penalty on the taxable part of the non-qualified distributions. In certain cases, the early withdrawal penalty is exempt such as permanent disability, beneficiary withdrawals, etc.</p>

<h2>How is a Roth 401(k) account different from a traditional 401(k) account?</h2>
<p>Though both traditional and Roth 401(k) accounts have equal contribution limits, they vary greatly when it comes to taxation on contributions and distributions. You can invest in both these retirement accounts given that you adhere to the contribution limits. The major points of difference between these two accounts are as follows:</p>

<h3>Taxes on contributions:</h3>

<p>In a traditional 401(k) account, you make pre-tax contributions meaning any sum that you contribute or earnings generated by you are tax-deferred. On the other hand, in a Roth 401(k), contributions by employees are not tax-deferred but are made with after-tax dollars. However, any income earned from investments such as interest, dividends, or capital gains, is tax-free.</p>

<h3>Taxes on withdrawals:</h3>

<p>In the case of a traditional 401(k) account, distributions received at the time of your retirement are treated as ordinary income and thus, taxed accordingly. This is not the case for a Roth 401(k). No taxes are levied on distributions provided they are qualified.</p>

<h3>Withdrawal rules:</h3>
<p>If you make a withdrawal before reaching the age of 59.5 years, both retirement accounts i.e. traditional 401(k) and Roth 401(k) attract a 10% penalty. However, there are some exceptions to this rule. In the case of a traditional 401(k), you have to pay taxes on any earnings generated and contributions withdrawn by you. Whereas for a Roth 401(k), withdrawals of contributions and earnings are not taxed provided you make a qualified distribution. For qualified distributions, you must be 59.5 years of age and hold the account for a period of at least 5 years. If the Roth 401(k) account owner suffers from a disability, the distributions are considered as qualified and no taxes are levied.</p>

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<h2>Is Roth 401(k) a good fit for you?</h2>
<p>If you believe you would be in a higher tax bracket in retirement, then a Roth 401(k) may be a good choice for you. Let us understand this with the help of an example. Say, you are in a lower tax bracket at the present and prefer to pay taxes now to avoid paying taxes on withdrawals in retirement. You make after-tax contributions in a Roth 401(k) in the present, thus, protecting yourself from higher tax liability in the future, assuming you fall in a higher tax bracket in retirement. Moreover, by doing so, you can ensure that you receive your full contributions without having to pay a higher tax rate in the future. For instance, suppose you contribute $5,000 today after taxes in your Roth 401(k) account, you can rest assured that you would be able to withdraw $5,000 whenever needed if you make a qualified withdrawal. That is not the case with a traditional 401(k), where the $10,000 will be adjusted for taxes, as per the future tax bracket.</p>

<p>Investing in a Roth 401(k) helps <a href="https://www.rothira.org/articles/8-tips-to-help-make-your-retirement-plan-successful" target="_blank">prepare for a safer retirement</a> as your contributions are tax-adjusted and have taken care of your tax liabilities. Moreover, you can make your financial plans and adjustments accordingly taking into account your reduced paycheck. Further, a Roth 401(k) would be ideal for you if you do not wish to reinvest your tax savings {that you will make if you invested in a traditional 401(k)}. An added benefit of investing in a Roth 401(k) is that you can receive tax-free investment growth even if you surpass the income eligibility levels of a Roth IRA. Additionally, you can easily convert your Roth 401(k) account into a Roth IRA account to avoid paying RMDs.</p>

<p>Lastly, you can improve your financial liquidity with a Roth 401(k). You can borrow against your Roth 401(k) account balance - up to 50% of the balance or $50,000 (whichever is lower). But you would be liable to pay taxes on the distributions if you are unable to comply with the loan obligations.</p> 

<h2>To conclude</h2>
<p>A Roth 401(k) account offers several benefits to an investor. However, whether you should invest in the account or not depends on your financial condition and overall financial goals and needs. It would be wise to consider all retirement accounts before choosing one that best fits your financial situation and future objectives. Whether you wish to reinvest your tax savings, pay tax now to take advantage of tax-free withdrawals in retirement, or want to have a wider choice and flexibility when it comes to investment instruments; consulting with a professional may be the right call to make an informed decision. </p>

<p>If you wish to understand more about a Roth 401(k) and how it could fit in your retirement strategy, use the <b><a href="/match-advisors/search-by-zip?cta=article-show-page">free advisor match service</a></b> to connect with an advisor who can help you on the same. Answer a few questions about yourself and the match service will help connect you with 1-3 financial advisors that are best suited to meet your financial requirements.</p>

A Roth 401(k) account offers several benefits to an investor. However, whether you should invest in the account or not depends on your financial condition and overall financial goals and needs. 

What is a Roth 401(k)?

<p>Retirement planning is an important part of securing one’s financial future. There are multiple options available to investors when it comes to retirement accounts each with its own particular benefits, limitations, and rules. The Internal Revenue Service (IRS) limits individuals from investing in certain retirement plans based on their income. For instance, high-earning investors cannot invest in a Roth IRA (Individual Retirement Account). Herein, you contribute after-tax dollars and earn tax-free returns on your funds. Apart from tax-free growth, you can also make tax-free withdrawals provided you meet certain conditions. To make penalty-free withdrawals, you must have held the account for at least 5 years and reached 59.5 years of age. Doing so marks the withdrawals as qualified and tax-exempt. In addition, if you invest in a Roth IRA account, you are not mandated to take out Required Minimum Distributions (RMDs) unlike in a traditional IRA and traditional 401(k) where you must take our RMDs by April 1 of the year you turn 72 as mandated by the IRS.</p> 

<p>However, due to income limitations stipulated by the IRS, high-income taxpayers adopt the backdoor Roth IRA approach to invest in a Roth IRA. Herein, a traditional IRA or 401(k) is converted into a Roth IRA. The funds held in the aforesaid accounts are rolled over to the Roth IRA account. A backdoor Roth IRA is not a special type of account. Also, it is not a means to dodge taxes. You may incur higher taxes at the time of setting it up, however, you will receive the future tax savings of a Roth account. <b><a href="/match-advisors/search-by-zip?cta=article-show-page">Consult with a professional financial advisor</a></b> to learn more about how IRAs and backdoor Roth IRAs could fit into your retirement planning and management.</p>

<h2>What are the essentials of Backdoor Roth IRAs?</h2>
<p>For 2022, the maximum Roth IRA contribution you can make is $6,000 if you are under 50 years of age and an additional $1,000, bringing your total to $7,000 if you are older than 50 years. You also have to adhere to the following modified adjusted gross income (MAGI) to be eligible to contribute to a Roth IRA:</p>
<ul>
<li>For single taxpayers, the MAGI is $144,000 for the year 2022.</li>
<li>For married taxpayers filing jointly or widowed, the MAGI is $214,000 for 2022.</li>
</ul>

<p>But if you are using a backdoor Roth IRA, these limits become null and void and are not applicable. Additionally, these limits are the reason why investors prefer using the backdoor strategy as the IRS does not impose any income limits on the conversion of conventional IRAs to Roth IRAs.</p>

<h2>What are the benefits of a backdoor Roth IRA?</h2>
<p>The primary benefits of a backdoor Roth IRA are as follows:</p>
<ol>

<li><b>There are no income limitations</b></li>
<br>
<p>Since a backdoor Roth IRA is not restricted by income limitations, high-income earning individuals can save a considerable amount of money when they convert their traditional IRA to a Roth IRA. While regular Roth IRAs are restricted by income limitations, the same is not the case for a backdoor Roth IRA. This allows investors to contribute a significant amount of their earnings to a backdoor Roth IRA and take advantage of its tax benefits.</p> 

<li><b>There is no tax liability</b></li>
<br>
<p>As mentioned earlier, in a Roth IRA, an individual can make tax-free and penalty-free distributions subject to certain conditions. This is a tax-deferred account giving it a significant advantage over other retirement accounts.</p> 

<li><b>There are no Required Minimum Distributions (RMDs)</b></li>
<br>
<p>This is another important benefit of a backdoor Roth IRA wherein you do not have to take out mandatory RMDs. In a traditional IRA and 401(k), retirees need to withdraw distributions each year by April 1 of the year they turn 72 years of age. You are free to withdraw your funds as per your convenience and there is no restriction on the amount of money that can be withdrawn from a Roth IRA. You can also choose to let your money remain untouched in your account and not withdraw any funds or pass it on to your heir.</p>
</ol>

<h2>How is a backdoor Roth IRA created?</h2>
<p>There are three ways by which you can set up a backdoor Roth IRA:</p>
<ol>
<li>You can open a traditional IRA, contribute money to it, and roll over the contributed funds to a Roth IRA. You can also roll over as many funds as you want at one time, even if it’s more than the annual contribution limit.</li>
<li>Convert your traditional IRA (in its entirety) into a Roth IRA.</li>
<li>If your company 401(k) plan allows conversions, convert your 401(k) account into a Roth IRA.</li>
</ol>

<p>The process of creating a backdoor Roth IRA is explained below:</p>
<ul>
<li>First, you have to open a traditional IRA. High-income taxpayers cannot directly invest in a Roth IRA due to income limitations, however, they can invest in a traditional IRA since it has no income ceilings for participation.</li> 
<li>Next, you have to convert your traditional IRA into a Roth IRA. You can do so by either converting your entire traditional IRA to a Roth IRA in one go or rollover as much money as you want at separate intervals.</li>
</ul>

<h2>What are the tax implications of a backdoor Roth IRA?</h2>
<p>A backdoor Roth IRA is not a tax dodge and does not involve any form of tax evasion. It is a legal way for high-income taxpayers to circumvent the income limits that normally prevent high earners from owning Roth IRAs. Moreover, when you establish a traditional IRA, the funds contributed to the account are taxable. This means that before you can convert your account to a Roth IRA, you have to pay tax on the funds contributed to the traditional IRA. Additionally, if there is a delay in rolling your traditional IRA to a Roth IRA, any earnings made on the contributed funds to the IRA are also taxed by the IRS.</p> 

<h2>To conclude</h2>

<p>Creating a backdoor Roth IRA may seem a straightforward affair at first however you need to exercise caution and clearly understand the tax implications and how you can best maximize its benefits. You also need to take care when converting your account to ensure there is not a significant lag in time between converting your traditional IRA to a Roth IRA as you may end up paying increased taxes on the converted funds. It is advisable to reach out to a financial advisor to better understand the pros and cons of the backdoor Roth IRA strategy and how to implement it without complications.</p> 

<p>To get in touch with a fiduciary advisor who may help you understand the tax implications of backdoor Roth IRAs, their benefits, how they are created, and more, use the <b><a href="/match-advisors/search-by-zip?cta=article-show-page">free advisor match service</a></b>. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your financial needs and goals.</p>

Creating a backdoor Roth IRA may seem a straightforward affair at first however you need to exercise caution and clearly understand the tax implications and how you can best maximize its benefits.

What is a Backdoor Roth IRA?

If you own a Roth IRA, then you must know and adhere to the contribution and income limits set for 2022 by the IRS.

What are the Roth IRA Contribution Limits and Changes for 2022?

<p>A lot of people are increasingly using their retirement accounts interchangeably to meet their immediate or future needs. Retirement accounts such as a traditional and Roth IRA (Individual Retirement Account) have become more popular over the past years due to the flexibility afforded by them. Both traditional and Roth IRAs are also being used by investors as an alternative to a <a href= "https://www.rothira.org/articles/roth-ira-vs-529-plan:-which-is-better-for-setting-up-a-college-fund">529 plan</a> to meet the college expenses of their child or grandchild. Before going into detail about a traditional and Roth IRA, you must understand how they differ from each other with respect to their rules and regulations, tax implications, and more. To know more about Roth IRAs and how they could fit in your retirement saving strategies, you can also <b><a href="/match-advisors/search-by-zip?cta=article-show-page">consult with a professional financial advisor</a></b> who can advise you on the same.</p> 

<h2>Difference Between a Traditional IRA and Roth IRA</h2>

<p>The major difference between a traditional IRA and a Roth IRA is that in the former you make tax-free contributions and pay tax on the withdrawals later whereas in the latter, you make after-tax contributions and can make tax-free withdrawals, provided you meet certain conditions (you must have held the Roth IRA account for a period of five years at least and be of 59.5 years of age).</p> 

<h2>Implications of Using a Traditional IRA as an Education Fund</h2>

<p>There are certain tax implications which you must consider before considering rolling over your traditional IRA into a 529 plan such as:</p>
<ul>

<li>When you rollover your traditional IRA into a 529 plan, the Internal Revenue Services (IRS) treats it as an addition to your income and is taxed as such. Your withdrawals are added to your gross income for the relevant financial year and taxed as your regular income, sometimes even putting you into a higher tax bracket.</li><br> 

<li>If you make a withdrawal from your account before attaining 59.5 years of age, you would have to shell out an additional 10% penalty on withdrawals. If you are a grandfather, you may be well past this age, however, if not, then in that case you would have to pay this penalty.</li><br> 

<li>Once you have cleared your taxes and penalties, only then you can take out withdrawals towards a 529 plan.</li>
</ul>

<h2>How Can You Rollover a Traditional IRA to a 529 Plan?</h2> 

<p>You can rollover your traditional IRA into a 529 plan in the following two ways:</p>
<ol>

<li>If you wish to make a withdrawal from a traditional IRA before turning 59.5 years of age, you can either pay the taxes and a 10% penalty and open a 529 plan account with the remaining money.</li><br>

<li>Alternatively, you can make a withdrawal from your IRA, pay taxes, and then claim an education exemption to avoid paying the 10% penalty. Subsequently, you can open a 529 account with the funds withdrawn from your IRA.</li>
</ol>

<h2>Do Grandparents Have Any Other Options Available to Them To Fund Their Grandchildren’s Education?</h2>

<p>Grandparents have the following options that they can avail:</p>
<ul>

<li>Grandparents can utilize IRA funds towards paying college fees without having to rollover their traditional IRA account into a 529 plan. If the withdrawn IRA funds are used for expenses incurred on education such as tuition fees, cost of books, other supplies and equipment, you will be exempt from payment of any penalty.</li> <br>

<li>Grandparents can also open a 529 plan where you are afforded much greater flexibility compared to a traditional IRA account. Any withdrawals made from a 529 account are not treated as regular income, thereby, your grandchild is unaffected when applying for Free Application for Federal Student Aid (FAFSA). Further, there are free of any tax implications that usually are a part of retirement accounts. A single grandparent can contribute up to $15,000 each year per grandchild to a 529 account, should they wish to. This amount can double up to $30,000 for both grandparents. Moreover, these contributions are also exempt from gift tax. Lastly, several states offer either complete or partial income tax deductions if you contribute towards a 529 plan.</li>
</ul>

<h2>To conclude</h2>
<p>Rolling over a retirement account into a 529 plan can be tricky due to the existing taxes and penalties in place, especially for grandparents who may be nearing retirement or are already retired, by the time their grandchild goes to college. As a grandparent you have to be careful of using your retirement savings lest it leave you financially strapped, with little money left for yourself.</p> 

<p>Before taking up a major decision like converting your IRA into a 529 plan, consider the financial implications of your decision on your current and future financial goals and objectives. If you wish to go ahead with your decision to rollover your IRA into a 529 account, <b><a href="/match-advisors/search-by-zip?cta=article-show-page">consult with a professional financial advisor</a></b> to understand how best to go about doing so.</p>   

<p>To get in touch with a fiduciary advisor who may help you understand the process of rolling over a traditional IRA into a 529 college plan, use the <b><a href="/match-advisors/search-by-zip?cta=article-show-page">free advisor match service</a></b>. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your financial needs and goals.</p>

Rolling over a retirement account into a 529 plan can be tricky due to the existing taxes and penalties in place, especially for grandparents who may be nearing retirement or are already retired, by the time their grandchild goes to college.

Implications of Rolling a Traditional IRA into a 529 Plan for Your Grandchild

<p>People invest and save their money with a view to secure their financial future along with that of their families. Many a time, one generation manages to build a substantial legacy for their upcoming generations, which their descendants are able to take advantage of and have smoother and more fulfilling lives. But, to reach that level of wealth accumulation, simply saving money won't get you there. You need to consider several aspects related to your finances such as taxation, your choice of investments, retirement accounts, etc. In addition, you also need to decide your beneficiaries in case of your demise.</p>

<p>Retirement accounts such as 401(k)s and IRAs (Individual Retirement Accounts) are popular investment instruments among investors who wish to leave an inheritance to their heirs, as these retirement accounts offer many benefits. If you invest in a Roth IRA, you do not have to pay RMDs (Required Minimum Distributions). Moreover, you can make tax-free withdrawals provided you have completed a five year holding period and reached 59.5 years of age. Do note that you make after-tax contributions in a Roth IRA. Whether your heirs may or may not be able to enjoy the tax-free status of this account depends on how you have managed your Roth IRA. To know more about Roth IRAs and their implications on estate planning, <b><a href="/match-advisors/search-by-zip?cta=article-show-page">consult with a professional financial advisor</a></b> who can shed some light on the matter.</p>

<p><b>Let us go through 3 estate planning mistakes that you must avoid if you have invested in a Roth IRA or 401(k) account:</b></p>
<ol>
<li><b>Not naming a beneficiary</b></li>
<br>
<p>Not naming a beneficiary is an extremely common mistake made by investors when it comes to estate planning. This field is generally found empty when filling up important sections in most IRAs. This primarily happens because a considerable amount of people open their IRAs quite early in life (usually before getting married and having children) and then forget about it. With the passage of time, they forget to revisit their IRA to assign a beneficiary.</p> 
<p>Not naming a beneficiary can prove to be an expensive decision since one’s inheritance depends upon a will. If you fail to write a will, your heirs will have to go through a lengthy process of hiring a lawyer, going to court hearings, investing time, money, and effort to get hold of your inheritance. </p>
<p>It is advised that you name a beneficiary as and when you open your IRA, whether it is your parents or siblings. As and when you marry, divorce, have children, or remarry, ensure that you make the desired changes in your IRA. By doing this, you will ensure that your spouse and children get their inheritance and rights without having to undergo any unnecessary hassles or issues. </p> 
<li><b>Selecting the wrong beneficiary</b></li>
<br>
<p>Naming the wrong beneficiary is an avoidable mistake as well. A lot of married folks name each other as beneficiaries in their respective IRAs and 401(k)s, but this may not be the right call when it comes to Roth IRAs. In a Roth IRA, you can name a younger beneficiary such as your children that will enable you to extend the distribution period for 10 years under the SECURE Act. Moreover, in cases wherein the beneficiary is either chronically ill, disabled, under the age of 18, or is no more than 10 years younger to the original owner, the deadline for distribution can be extended further throughout their lifetime.</p> 
<p>In Roth IRAs, you can make tax-free withdrawals subject to meeting certain conditions stated above and you can benefit further, since wealth appreciation is not taxed upon the death of the original owner. With that said, you do need to take cognizance of taxation rules that may apply to younger beneficiaries in line to inherit your Roth IRA funds. <b><a href="/match-advisors/search-by-zip?cta=article-show-page">Reaching out to a financial advisor</a></b> for guidance on the same may prove to be helpful. </p>
<li><b>Not taking out RMDs at regular intervals</b></li>
<br>
<p>RMDs refer to minimum amounts that a retirement plan account owner must withdraw each year starting with the year that he or she reaches 72 years of age (70 ½ if you reach 70 ½ before January 1, 2020), if later, the year in which he or she retires. The RMDs need to be taken at regular intervals as mandated by the Internal Revenue Service (IRS) failing to do so would result in stiff penalties.</p> 
<p>When the original account owner has passed away, sometimes the heirs neglect to take out these distributions in a timely manner. If the beneficiary is not the spouse of the original owner, then as per stipulated rules, they need to start withdrawing RMDs with effect from 31st December of the next year in which the original owner died. If the beneficiary fails to take out the RMD at regular intervals then:</p>
</ol>
<ul>
<li>He/she may be forced to withdraw the complete amount within a period of 5 years. This period can be extended to 10 years if the beneficiary withdraws RMDs at regular intervals.</li> <br>
<li>If the beneficiary has failed to adhere to the stipulated norms concerning withdrawals of RMDs, he/she would be liable to pay hefty taxes amounting to 50% of the amount not withdrawn.</li>
</ul>
<h2>To conclude</h2>
<p>When it comes to managing your finances, it is highly recommended to exercise due diligence and caution to ensure that you have enough to meet your present needs as well as for your future financial needs. It is also essential to ensure that you undertake estate planning to take care of tasks such as making a will, setting up trusts or making charitable donations to limit estate taxes, naming an executor and beneficiaries, and setting up funeral arrangements. <b><a href="/match-advisors/search-by-zip?cta=article-show-page">Consult with a financial advisor</a></b> who can help you ensure that your affairs are in order and in tune with your wishes in case of your demise.</p> 
<p>To get in touch with a fiduciary advisor who may help you avoid making mistakes when it comes to estate planning, use the <b><a href="/match-advisors/search-by-zip?cta=article-show-page">free advisor match service</a></b>. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your financial needs and goals.</p>

When it comes to managing your finances, it is highly recommended to exercise due diligence and caution to ensure that you have enough to meet your present needs as well as for your future financial needs.

Avoid Making These 3 Estate Planning Mistakes With Your Roth IRAs and 401(k)s

<p>Creating a retirement corpus for yourself with sufficient savings to carry you through your golden years can be challenging. It involves having knowledge on different kinds of retirement accounts, the associated tax benefits and liabilities, contribution rules and withdrawal limits, along with the various growth opportunities afforded by them. In addition, you have to ensure that you choose the right investment vehicle for your unique financial needs and goals. If you end up with insufficient retirement savings, this can put your future financial security in danger. Alternatively, if you end up living frugally to make sure you save enough funds for retirement, it can lead to frustration and discontentment, as you may have been making compromises with your standard of living to save the required amount for your retirement corpus.</p>
	
<p>Many employers offer a 401(k) to their employees. A 401(k) is an employer-sponsored retirement account wherein you can save for retirement and benefit from the power of compounding. However, not all your employers offer a 401(k), and if that is the case with you, you may consider investing in an Automatic Individual Retirement Account (IRA). You also have the option of <strong><a href="/match-advisors/search-by-zip?cta=article-show-page">consulting with a professional financial advisor</a></strong> who can help you explore different retirement options and come up with a strategy to save for retirement. The advisor can also discuss different retirement plans with you, their pros and cons, taxation, etc based on which you can make an informed decision.</p> 

<p>With that said, let us discuss automatic IRAs in detail.</p> 

<h2>What is an automatic IRA?</h2>
<p>An automatic IRA is an alternative option for investors to save for retirement who were not given the opportunity to enroll themselves into an employer-sponsored traditional retirement account like a 401(k) account or a pension plan. There is less paperwork involved in an automatic IRA and any individual can invest in it irrespective of the kind of job or industry they work in.</p> 

<p>The first state to launch an auto-IRA program was Oregon under its state-sponsored IRA program, OregonSaves in the year 2017. Over the years, several states such as California, Illinois, Connecticut, and Maryland have launched similar programs in their respective states. If you live in a state wherein an automatic IRA is not available, you can either wait for them to launch one or go ahead and open one yourself.</p> 

<h2>Can I enroll in an automatic IRA myself?</h2>

<p>Yes, you can. Enroll yourself in an auto-IRA by following these steps:</p>
<ol>
<li>To open an automatic IRA, first, you need to have an earned income.</li>
<li>Select the kind of IRA you wish to invest in: a traditional IRA or Roth IRA.</li>
<li>Once you have opened your account, you need to select the ‘auto funding’ feature.</li>
<li>Choose the frequency of transfers to be made to your account i.e. on a monthly, quarterly, half-yearly or annual basis as per the annual contribution limit of the IRA set by Internal Revenue Services (IRS) each year.</li>
</ol>

<h2>How does an automatic IRA work?</h2>

<p>Most retirees in the US bank on their Social Security benefits to see them through their retirement. However, based on multiple studies and evidence given by retirees, Social Security benefits are not sufficient to live comfortably in retirement if they are your only means of income. This is why you need a retirement or pension plan to ensure you can meet your expenses in retirement.</p> 

<p>Let us discuss how an automatic IRA works:</p>
<ul>

<li>Employers who do not offer a sponsored retirement plan need to enroll their employees in a private payroll deduction Roth IRA or a similar retirement account automatically.</li>
<li>If an employer has been in business for 2 years or more and has more than 10 employees on the company payroll, can offer an automatic IRA to their employees.</li>
<li>Though employers must enroll their employees, they are bound by any obligation to make a contribution to their retirement account.</li> 
<li>In an automatic IRA, the contributions are made by the employees and are deducted automatically. Employees have the option to opt out of the auto-IRA plan anytime they want.</li> 
<li>In an automatic IRA, the employee can increase or reduce their contribution by 5% of the default contribution rate.</li>
<li>The automatic contribution can be directly deposited into the retirement account via payroll.</li> 
<li>Employees can invest in target-date funds or some other investment as per their choice.</li>
<li>Employers offering auto IRAs can avail of a temporary <a href="https://www.rothira.org/articles/do-you-qualify-for-a-tax-credit-for-your-ira-contributions" target="_blank">tax credit</a> based on the number of employees who are participating in automatic IRAs in their firm.</li>
</ul>

<h2>What are the advantages of an automatic IRA?</h2>
<p>Auto IRAs offer the following advantages to their holders:</p>
<ul>

<li><b>Similar to a 401(k) account:</b> Automatic IRAs are similar to a 401(k) account and offer a reliable place where investors can save money for their future retirement.</li><br>

<li><b>Can be set up by any employee:</b> Any individual working either in the organized or unorganized sector can start an automatic IRA for themselves.</li><br>

<li><b>Can opt at any time:</b> If you are facing a financial emergency and need to take out money from your auto-IRA account, you can do so and opt out of the account at any time you prefer.</li><br>

<li><b>Availability of auto-enrollment:</b> Once the employer is up for an auto-IRA, the employee is automatically enrolled for an auto-IRA. Once this is done, a portion of the employee’s salary gets automatically deducted and deposited into the IRA.</li><br>

<li><b>No hidden charges:</b> There are no hidden or additional costs incurred by an employee once their automatic IRA account has been set up.</li>
</ul>
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<h2>What are the disadvantages of an automatic IRA?</h2>

<p>Even though the primary purpose of offering employees an automatic IRA is to help them save for retirement easily, they do have certain demerits such as:</p>
<ul>

<li><b>Employers do not contribute to an auto-IRA:</b> As stated above, only employees make contributions to auto IRAs. The employer is not bound by fiduciary duty to contribute to the said IRA.</li><br>

<li><b>Saddled by high administrative fees:</b> In an automatic IRA, high administration fees are levied on the investment returns that negatively affect the overall earnings. For example, OregonSaves charges 1 percent administrative fees on an asset for all kinds of investments which significantly lowers an investor’s returns.</li><br> 

<li><b>Opting out of an auto-IRA may result in inadequate retirement savings:</b> Having the flexibility to opt-out of an auto-IRA can be beneficial for meeting short-term needs and expenses. However, this may affect your retirement savings negatively in the long run. There are no stringent withdrawal rules or penalties in an auto-IRA that may lead to withdrawal of funds before employees have reached their retirement years. This can lead to solely relying on Social Security benefits which as we explained earlier is not a wise strategy.</li><br>

<li><b>Not everyone might end up with a similar corpus:</b> Your earnings depend on several factors such as your age, income, and your discipline to save. If you open an automatic IRA at a young age and contribute on a regular basis, you can create a large retirement corpus for yourself. On the other hand, if you start saving at a later age or withdraw your funds prematurely, you may find yourself with insufficient savings to support you in your golden years.</li><br>
</ul>

<h2>What makes automatic IRAs essential?</h2>

<p>Automatic IRAs are important because of a wide gap that exists between the number of people saving regularly for their retirement and the actual number of retirees in the US. Below are some numbers that highlight the existing problems in the system and how auto IRAs can help reduce this gap.</p>
<ul>

<li>Out of 80 percent of taxpayers who are eligible to make contributions to an IRA, only 11 percent make regular contributions to a retirement account.</li><br>  

<li>More than 50 percent of employees presently employed in the country work in firms having less than 500 employees in total. The smaller the company, the lower is the probability of the firm offering an employer-sponsored retirement plan to their employees.</li>
</ul>

<p>An automatic IRA affords all employees an opportunity to save for their retirement in an orderly manner. According to the latest numbers, almost 400,000 people have invested in auto IRAs with combined assets over $330 million as of September 2021 with a 142 percent increase in the number of active Auto IRA savers compared to the last year, almost 3x increase in contributions as well as an increase of 50 percent in the number of participating employers.</p>

<h2>To conclude</h2>

<p>Automatic IRAs are a good alternative to those employees who do not have the option to contribute to an employer-sponsored plan. They offer a number of benefits to employees but are not without certain limitations as stated above. What works in your favor is the fact that you can opt out of an auto-IRA whenever you want. However, this may not be a wise decision if you do not have supplementary savings to rely on. Similar to the case of Social Security benefits, you need to combine your auto-IRA with other investments to secure your financial future. Reach out to a professional financial advisor who can help you understand and clear any doubts that you may have about auto-IRAs and how you can sign up for one in your state.</p> 

<p>To get in touch with a qualified financial advisor, use <strong><a href="/match-advisors/search-by-zip?cta=article-show-page"> the free advisor match tool</a> </strong>and get connected with 1-3 background-verified financial fiduciaries. You may also set up a free initial consultation with them before deciding to hire one.</p>

Automatic IRAs are a good alternative to those employees who do not have the option to contribute to an employer-sponsored plan. Explore hoe automatic IRA words, what is the advantages and disadvantages.

What are Automatic IRAs? How does It Works, Pros & Cons

What are Automatic IRAs?

By assessing and understanding the way a Roth IRA works, and its growth and interest components, you can use this knowledge to create a desirable retirement savings corpus for your future.

How Does a Roth IRA Grow & Earn Interest?

How Does a Roth IRA Grow  & Earn Interest?

<p>As you grow older with each passing year, the prospect of retirement becomes all the more real. Retirement is a time in life where you have the opportunity to pursue hobbies, travel, spend quality time with your family and friends, and live a relaxed life after you have moved on from the stress and deadlines of work. This is possible if you have planned for your retirement in a financially sound way.</p> 
<p>Most financial experts advise to start saving for retirement as early as possible. Your 20’s are considered to be an ideal time to start saving and investing your money. However, a lot of folks fail to realize the importance of these years and end up wasting them. Only when they are in their 30s or 40s, do they realize their mistake. But not to fret. It is not always possible for one to start retirement planning early in their career. There can be several reasons why you could not start early enough. You may have been struggling to earn enough money or may have lacked the necessary motivation. You could not have had the necessary financial education to plan for your financial future. However, as time goes on, you are left with no choice but to take matters into your own hands.</p> 
<p>Considered to be a great option for retirees or those planning for their retirement, a Roth IRA can help you save and invest your money securely to safeguard your future. If you want to know more about a Roth IRA and its benefits, along with how you can open one, <b><a href="/match-advisors/search-by-zip?cta=article-show-page">consult with a professional financial advisor</a></b> who can assist you with the same. However, if you have been unable to save and are wondering if you can open an IRA after you turn 60, here is what you need to know. </p>
<h2>What is a Roth IRA?</h2>	
<p>A Roth IRA is an individual retirement account where you contribute your after-tax dollars and can make tax-free withdrawals in retirement. Since the money invested by you in a Roth IRA account is not tax-deductible, you have no tax liabilities in retirement as long as you make qualified withdrawals. A Roth IRA would be a wise choice for people who think their taxable income will be higher in retirement than it is in the present. You can open your Roth IRA account with  a bank or a brokerage firm, either online or offline. 
In addition, you do not have to take out mandatory required minimum distributions (RMDs) if you have invested in a Roth IRA. But if you have a traditional IRA or a 401(k) retirement account, you must withdraw RMDs after the age of 72 years. Typically, the first RMD must be withdrawn by April 1 of the following year when you reach 72 years of age. Since you are not mandated to take out RMDs in a Roth IRA, it makes it a more flexible retirement planning tool compared to its counterparts.</p> 
<h2>When can you open a Roth IRA?</h2>
<p>There is no set age limit to open a Roth IRA. So, if you are thinking of opening a Roth IRA after age 60, you may do so. Moreover, you can contribute to a Roth IRA as long as you want, as long as your contribution is made from earned income. There are income limits that must be met in a Roth IRA, failing which you cannot open an account or contribute to one. The income limits for a Roth IRA as of 2022 are as follows:</p>
<ul>
<li>If you are a single tax filer, your modified adjusted gross income (MAGI) should be $144,000 or less to open a Roth IRA.</li>
<li>If you are a married tax filer filing jointly, your joint MAGI should be less than $214,000 to open a Roth IRA.</li>
</ul>
<p>Further, there are no restrictions on how or where you earn an income from. It can be either through working full time or part-time, for a company or through your own business. But your investment returns, pension, dividends, or Social Security benefits are not considered as an income. Though some of these are included in your MAGI, they would not be counted when calculating your income for a Roth account.</p> 
<h2>Should you open an IRA after age 60?</h2>
<p>Since there is no prescribed age limit for opening a Roth IRA account, you can avail several benefits if you choose to open a Roth account. For those investors who wish to contribute to a Roth IRA after the age of 60, they can take advantage of several benefits such as:</p>
<ul>
<li>The yearly contribution limits for a Roth IRA differ for people below the age of 50 and over the age of 50. As of 2022, if you are less than 50 years of age, you can contribute up to $6,000 to the account annually. But if you are 50 years or older, you can contribute an additional $1,000, bringing your contribution up to $7,000. This is beneficial for investors who are 60 years of age or older since they can contribute more and ultimately accumulate more savings. If you plan on working beyond your 60s, you can benefit from this and save up a significant sum of money.</li> <br>

<li>As aforesaid, a Roth IRA does not mandate withdrawal of mandatory RMDs. Therefore, if you open a Roth IRA account after reaching 72 years of age, you would not be mandated to take any distributions. You can decide when or if you want to withdraw your money. You can let the funds remain in the account and not withdraw them at all. The decision rests entirely with you.</li> <br>

<li>If you cash out your IRA after 60, you eliminate any possibility of attracting a penalty. As per the IRS, any withdrawals made from a Roth IRA account before the age of 59.5 years incur a 10% penalty but doing so after reaching the stipulated age does not. You can withdraw your funds as you wish to do so.</li> <br>

<li>You can pass your Roth IRA to a beneficiary or heir without attracting any tax liability. By opening a Roth IRA after age 60, you can take care of your personal goals and needs as well as ensure your children and grandchildren are looked after once you are gone. A Roth IRA is helpful when it comes to estate planning as it offers hassle-free transfers to your next of kin. Additionally, your heirs do not have to pay any tax on the funds received from the Roth IRA.</li> <br>

<li>You also have the option of opening  a Roth IRA for your spouse. One thing to note is that the contribution limits ($7,000 over the age of 50 years regardless of whether your spouse earns an income or not) for a spousal IRA are the same as the other Roth IRAs. Though, to be able to contribute for your spouse you still need to have an earned income.</li>
</ul>

<h2>Things you should consider before opening an IRA after you turn 60</h2>

<p>While a Roth IRA offers several benefits, it may be prudent to consider the following before you open a Roth IRA account:</p>
<ul>
<li>To make penalty free withdrawals from your Roth IRA account, you need to have held the account for at least five years and made contributions to it. It may not seem like a big con if you open your account in your 30s or 40s, however, it can turn into an inconvenience when you are older. If you open your Roth IRA after turning 60, you would have to wait till you reach 65 years of age before you can use your money. To ensure that you have financial liquidity in your golden years, you would need alternative sources of income to rely on. If you are working part-time and contributing to your Roth IRA at the same time, you may need to take out money from your other investments or pension accounts. Doing so would help you cover your other expenses while your income from your job can be used to make contributions for your Roth IRA to meet your future goals. For those investors having a full time job, it would be easier for them to manage their finances despite the 5 year holding rule.</li> 
<br>

<li>You need to be aware of what constitutes your MAGI. Say, for instance, you are using your Social Security benefits, you cannot use that money to contribute to your Roth IRA since it is not considered to be a valid income. However you can use these benefits to boost your day to day finances so you use less of your income. The subsequent saved income can be used to contribute towards your Roth IRA. Now when it comes to utilizing your Social Security benefits, there are two differing opinions here. The first one consists of investors who wish to maximize their Social Security benefits. Rather than withdrawing their benefits at the full retirement age, they wait and delay their withdrawals. Doing so helps them boost the value of their Social Security check. The second group of investors is of the opinion that you should withdraw your Social Security benefits at the earliest opportunity so that you are able to contribute more to your Roth IRA. Both these choices can result in different and unique outcomes. This would rest on how much you contribute, the length of the investment period, your overall financial standing and expenses, etc. There is no one shoe fits all approach here so you may be served better if you assess each situation carefully and make a decision based on what offers you better returns. You may also <a href="/match-advisors/search-by-zip?cta=article-show-page"> reach out to a professional financial advisor</a> and take their opinion on the matter.</li> <br>

<li>If you are working in your 60s or later, you do not have to solely rely on a Roth IRA. You can consider other options like a 401(k) workplace account that will enable you to boost your savings even further.</li> <br>

<li>Further, you have the option of converting your traditional IRA to a Roth IRA after you turn 60. However, do note that you would still be liable to pay taxes on all previous contributions made to the account along with any earnings that you have made.</li><br>

<li>As an investor you can have multiple Roth IRAs but you need to be careful not to exceed the total contribution limits for the year. It stays the same whether you have one or more than one Roth IRA account.</li> <br>

<li>Lastly, you cannot contribute more than you earn in a financial year.</li>
</ul><br>
<h2>To summarize</h2>
<p>As you approach the golden years of your life, it can become quite challenging to live as you did when you were younger due to reduced opportunities and increasing expenses. It can be difficult to find a job after you turn 60, not to mention you may have to spend a lot more on your health expenses. You can consider contributing to a Roth IRA if you wish to have additional savings for your retirement and are able to find work to do so. Since there is no age limit when it comes to opening a Roth IRA account, you can take up this option to safeguard your old age financially. Further, you should be able to use your pensionable income and Social Security benefits to meet your living expenses. If you require help understanding how to use a Roth IRA after you reach 60 years of age and maximize its benefits, you can consult with a financial advisor in your area.</p>
<p>To get in touch with a fiduciary advisor who may help you open a Roth IRA account and explain its various benefits, use the <b><a href="/match-advisors/search-by-zip?cta=article-show-page">free advisor match service.</a></b> Based on your requirements, the platform matches you with 1-3 advisors that may be suited to meet your financial needs and goals.</p>

As you approach the golden years of your life, it can become quite challenging to live as you did when you were younger due to reduced opportunities and increasing expenses.

Can I Open a Roth IRA After I Turn 60?

<p>It is no secret that the cost of education in the US is extremely high. Over the last three decades, the average cost of tuition in a four-year public institution has increased by 213%. If we talk about the past decade only, the average college cost has shot up by 29% with private college tuition costs not far behind having increased by a whopping 25%. Due to the rising cost of education, it would be prudent if you have given thought to how you would want to cover the education cost of your children or grandchildren in the future. A 529 plan is one of the most popular ways by which you can save for college tuition.</p> 

<p>A 529 plan is a state-sponsored, tax-advantaged plan wherein you can invest your after-tax money into bonds and stocks to later withdraw at a later date to pay for qualified education expenses. As per the College Savings Plan Network, there were more than 14 million 529 college savings accounts having an asset value of over $352.4 billion as of mid-2019.</p> 

<p>However, the popularity of the 529 college plan has declined over the past year or so, as its asset value dropped to $293 billion in March 2020. This is significantly low. Being able to use a 529 college savings plan fund for qualified education expenses only, coupled with an increase in popularity of Roth IRA (a tax-advantaged, tax-saving account which you can use to pay for education costs), has contributed to a fall in the popularity of the 529 college savings plan.</p>
	
<p>This is backed by numbers from the 2020 survey which revealed that almost 14% of parents took money out from their retirement plans, like a Roth IRA, a 401(k), etc., to cover college fees and related expenses. This number was only 6% back in 2015. There has been a sustained increase in parents switching to a Roth IRA from a 529 plan due to several factors such as freedom and flexibility of use, a higher number of investment choices, etc. However, some parents choose to invest in both - a 529 plan and a Roth IRA to finance their child’s college tuition.</p> 

<p>If you wish to use your Roth IRA for college expenses, it is advised to first <b><a href="/match-advisors/search-by-zip?cta=article-show-page">consult with a financial advisor</a></b> to understand the benefits afforded by Roth IRA and how you can best utilize the flexibility offered by the plan when it comes to a wider choice of investment options.</p>

<h2>What is a Roth IRA?</h2>

<p>To put it simply, a Roth IRA is a tax-advantaged individual retirement account where you contribute after-tax dollars, and your money grows tax-free. Herein, you can make tax-free withdrawals if you have fulfilled the following requirements: completed a 5 year holding period and reached the age of 59.5 years or above.</p> 

<p><b>Let us discuss some of the key points of a Roth IRA:</b></p>
<ul>

<li><b>Income eligibility:</b> You can contribute to a Roth IRA irrespective of your age provided you earn a taxable income. In 2022, as a single taxpayer, your Modified Adjusted Gross Income (MAGI) should be under $144,000 to be eligible to contribute to a Roth IRA. For married taxpayers, their MAGI should be less than $214,000.</li><br>

<li><b>Contribution limits:</b> You or your spouse can contribute to a Roth IRA provided either you or your spouse has earned a taxable income in the previous year. For 2022, you can contribute up to $6,000 in your Roth IRA which can be bumped up by a catch-up contribution of an additional $1,000 if you are above the age of 50, taking your total contribution for the year to $7,000.</li><br>

<li><b>Withdrawal rules:</b> As stated above, you can make tax-free withdrawals after holding a Roth IRA account for more than five years and having reached 59.5 years of age. You can withdraw your funds at any time but a penalty of 10% would be levied on the sum withdrawn by you. The IRS may waive off the penalty if you use the withdrawn funds for qualified expenses such as the first-time purchase of a home or for postsecondary education expenses.</li><br>
</ul>

<h2>Can a Roth IRA be used to pay for college tuition?</h2>

<p>Yes, you can use your Roth IRA funds for college expenses since there are no restrictions placed on their use. Moreover, you can withdraw funds without incurring a penalty if you are going to use the money to cover the higher education costs of your child or grandchild. However, you would have to pay income tax charges on your earnings portion of the withdrawn funds. But there is a workaround to avoid paying the tax. If you limit the sum withdrawn from your Roth IRA to just the contributions, your Roth IRA distribution becomes both – tax and penalty-free – when used for college tuition.</p>

<h2>529 Plan vs Roth IRA: Which is better for covering higher education expenses?</h2>

<p>Let us go through the pros and cons of 529 plans when it comes to saving for college tuition.</p>

<p><b>Advantages of investing in a 529 plan for college expenses:</b></p>
<ul>
<li>Contributions are made from after-tax dollars and the deposited money can grow on a tax-free basis.</li>
<li>You can make tax-free withdrawals provided you use the withdrawn funds for education expenses.</li>
<li>You can apply for a partial or full tax deduction or credit if you reside in a tax-friendly state that offers tax breaks for using the state 529 college savings plan.</li>
<li>No specific income or age limit however each state sets its own contribution limits.</li>
<li>If you contribute less than $15,000 per beneficiary each year, you can avoid paying the federal gift tax.</li> 
<li>Easy to manage since you have access to limited investment options as you can simply choose a specific mode of investment, make regular contributions, and allow your funds to grow over time.</li>
<li>529 plans do not affect your ability to apply for or receive financial aid. Counted at a rate of 5.64% at the time of financial aid eligibility assessment, any qualified distribution from a 529 plan is excluded, thereby, not shown as income on your FAFSA (Free Application for Federal Student Aid) form. Any student who applies for financial aid needs to reveal their income and any assets they hold on FAFSA. FAFA is used by a majority of schools to award financial aid. Additionally, if the 529 plan is owned by anyone other than the parent or the student, any distribution is treated as untaxed income on the FAFSA form. This makes all distributions subject to a tax of 20%-50%.</li>
</ul>

<p><b>Disadvantages of investing in a 529 plan for college expenses:</b></p>
<ul>

<li>You can make tax-free withdrawals from a 529 plan only if they are for qualified education expenses. The withdrawn funds can only be used for paying – enrollment fees, tuition, certain room and board expenses (on campus), certain rent, food and utility bills (off-campus), computers, software, Internet access, and fees, books, supplies, and equipment for participation in a registered and certified apprenticeship program. If the funds are not used for qualified education expenses, then you would have to pay a penalty of 10% along with income tax on the sum withdrawn.</li>
<li>You have access to limited investment choices that limits your ability to gain potential returns exacerbating the situation if you are a high-risk investor.</li>
<li>Your 529 plan returns may not be enough to tackle education inflation due to insufficient investment returns.</li>
</ul>

<p><b>Advantages of investing in a Roth IRA for college expenses:</b></p>
<ul>

<li>Since you contribute after-tax dollars, your money can grow on a tax-free basis.</li>
<li>You can make tax-free withdrawals for any given reason provided you have completed a 5 year holding period and have reached 59.5 years of age.</li> 
<li>You can make penalty-free withdrawals even without satisfying the aforesaid conditions provided you use the funds to pay the college education costs of your child.</li>
<li>Access to a wider range of investment choices allows you to generate higher potential returns in the long run.</li>
</ul>


<p><b>Disadvantages of investing in a Roth IRA for college expenses:</b></p>
<ul>

<li>Low annual contributions limits set by the IRS. For 2022, an investor can contribute only $6,000 or an additional $1,000 if he/she is above 50 years of age. The contributions may prove to be insufficient to sponsor the college expenses of your child in the future.</li> 

<li>You cannot contribute if you do not meet the income eligibility limit for a Roth IRA. For 2022, if your MAGI is more than $144,000 as a single taxpayer, you are ineligible to contribute to a Roth IRA. If you are a married taxpayer or file taxes jointly, your income should not exceed $214,000 to be eligible for a Roth IRA.</li>

<li>No state exemption is afforded to Roth IRAs, unlike 529 plans.</li>

<li>Even though withdrawn funds from a Roth IRA are not taken into account for financial aid purposes, it can have a bearing on your financial aid package. How? Even though the money withdrawn from a Roth IRA is not taxed, the distributions are treated as your income. These distributions are added to your income on the FAFSA form and are shown as untaxed income.</li> 

<li>If you use your Roth IRA funds to pay for your child’s college tuition, you end up reducing your retirement corpus. Since a Roth IRA has low contribution limits, you can only save a certain specific amount each year. If you end up using a significant chunk on paying for college costs, you would end up hurting your retirement financial security. This is a critical point especially when Social Security benefits are insufficient to fund retirement expenses.</li>
</ul>
<h2>Can you use a grandparent’s Roth IRA for education expenses?</h2>

<p>To answer the question, yes, you can use a grandparent’s Roth IRA to pay for college expenses. Grandparents can pass on their Roth IRA to their grandchild as an inheritance provided the grandchild is listed as a beneficiary on their Roth IRA. In addition, by doing so, the inherited Roth IRA can also clear the probate process. Do note that an inherited Roth IRA will be subject to minimum required distributions. As per rules set by the IRS, non-spousal beneficiaries of an inherited IRA must take required minimum distributions (RMDs) within ten years of the owner’s death. Moreover, the total distribution must be the full amount i.e. 100% of the Roth IRA funds. Any funds withdrawn from the inherited Roth IRA will not be taxed if the account is older than five years. However, if you delay taking out RMDs, the IRS will impose a tax penalty of 50% on the amount due.</p>

<p>Further, to use a Roth IRA for college tuition, the grandparent must list the beneficiary in their Roth IRA rather than their will. If the grandchild is not in the beneficiary form, the Roth IRA would be transferred to the grandparent’s estate. If this occurs, then even if the child is named in the will as a beneficiary, the child will not be considered a designated beneficiary. This may result in estate-distribution issues in the future.</p>

<h2>Can you use both a 529 college savings plan and a Roth IRA for college expenses?</h2>

<p>Both the 529 plan and Roth IRA have their pros and cons. It can be a little tricky to choose one over the other. However, if you have the necessary financial strength to invest in both options, then you should consider doing so. By doing so, the advantages of one plan would compensate for the drawbacks of the other. Additionally, you would be able to take care of your child’s education expenses without jeopardizing your retirement financial security. You may use the funds invested in your 529 plan to pay for college tuition and if needed, can then tap your Roth IRA balance to pay for the remaining expenses. The remainder of the sum in your Roth IRA can stay invested to fund your golden years.</p> 

<h2>To summarize</h2>

<p>Trying to save for retirement while also saving for your child’s college expenses can be a trying experience for most. However, if you combine sound withdrawal strategies along with the right plans, you can do both. You may also look into engaging the services of a professional financial advisor to gain an in-depth understanding of both these accounts – a 529 college savings plan and a Roth IRA – to create an optimal college and retirement funding strategy.</p>

<p>Find highly qualified and vetted financial advisors by answering a few questions about yourself on <b><a href="/match-advisors/search-by-zip?cta=article-show-page"> the free advisor match</a></b> platform. The free match service matches you with 1-3 fiduciary financial advisors that are suited to meet your financial requirements.</p>

Trying to save for retirement while also saving for your child’s college expenses can be a trying experience for most. However, if you combine sound withdrawal strategies along with the right plans, you can do both. 

Can I Use A Roth IRA to Pay for College?

<p>Individual Retirement Accounts (IRAs) are great financial instruments that allow people to funnel their funds into their retirement savings. These accounts offer important tax advantages - investors having traditional IRAs can benefit from tax-deferred savings whereas those having Roth IRAs can take advantage of tax-free income.<p>

<p>Simply put, an individual who has invested in a traditional IRA can use his pre-tax income towards investments that grow tax-deferred till the time of their withdrawal during retirement. Alternatively, an individual who has invested in a Roth IRA can make qualified withdrawals on a tax-free basis provided he meets certain predetermined conditions. It should be noted that contributions made to a Roth IRA are not tax-deductible.</p>

<p>It is a tricky decision to make when it comes to choosing between sticking with a traditional IRA or going for Roth IRA conversion. To make an informed decision, you need to understand how a Roth conversion works and the implications on social security taxation. <a href="/match-advisors/search-by-zip?cta=article-show-page">Consulting a professional financial advisor</a> can help you clear up your doubts about Roth IRA conversion and understand the effect on your present and future tax situation.</p> 

<h2>What is a Roth IRA conversion?</h2>

<p>Typically speaking, a Roth IRA conversion refers to a taxable transfer of funds from either a traditional IRA, Simplified Employee Pension (SEP), or SIMPLE IRA, to a Roth IRA. This transfer allows you to move your funds from a pretax traditional IRA to a post-tax Roth IRA enabling you to grow your after-tax money and making it tax-free at the time of withdrawal.</p> 

<p>Roth IRA contributions are considered to be made with after-tax dollars, allowing you to make tax-free withdrawals during retirement. In addition, you are not required to pay any taxes on any earnings if you make a withdrawal, provided you have held your Roth IRA account for at least 5 years and are 59.5 years of age or older.</p> 

<p>Any citizen of the United States is eligible to convert their traditional IRA into a Roth IRA. However, that was not the case before, with several restrictions placed on Roth IRA conversions that deterred people from going ahead with the conversion. Since the beginning of 2010, most of these restrictions were removed, so income limits and tax filing status are no longer necessary if you are applying for a Roth conversion.</p> 

<h2>Should one consider a Roth conversion?</h2>

<p>There are quite a few benefits when it comes to a Roth conversion. If you expect your tax bracket to go up in retirement, it would make sense to pay taxes at the present at a lower rate compared to the higher rates once you have retired. Also, if you have generated a substantial amount of savings in your retirement accounts, you should consider converting at least some part of the funds, if not all, into a Roth IRA.</p>

<p>In addition, if you do not have a lot of tax diversification in your retirement accounts (i.e. the majority of your wealth and other assets are kept in tax-deferred accounts), it would be prudent to consider a Roth conversion for tax purposes, since your assets won't be taxable at the time of making withdrawals during retirement.</p> 

<h2>5 essential things you must know about Roth conversions</h2>

<p>If you own a traditional IRA account, considering a Roth IRA conversion can be a wise decision if you wish to make tax-free income a reality for yourself. However, before you take this step, there are certain things that must be brought to your attention:</p>
<ol>

<li>You can either opt for a full conversion or a partial conversion of Roth IRA</li>

<p>When converting a traditional IRA to a Roth IRA, you have the option of either converting all your funds or only some portion of them. The funds that you do end up converting are taxed at the same rate as ordinary income. You may consider going for martial conversion of funds to a Roth IRA, as, by doing so, you may avoid being put into a higher tax bracket.</p> 

<li><b>You are liable to pay taxes when making a Roth conversion</b></li>

<p>At the time of making your IRA contributions, if you have received any tax deductions, you’d be liable to pay taxes on it at the time of making a Roth conversion. The exact amount that needs to be paid can differ from person to person and can be verified through the Internal Revenue System (IRS) Form 8606. You may also need to pay additional state taxes depending on the state that you reside in. Do remember that if you happen to make any distributions of converted funds before the completion of a 5 year period following the conversion, you would attract a tax penalty of 10 percent if you are under 59.5 years of age.</p>

<li><b>You can control your Medicare costs through a Roth IRA</b></li>

<p>The premiums paid towards Medicare Part B are based upon the total taxable income of the individual in retirement due to which it can be a bit tricky. Why you may ask? Well, if your income goes up by even a single dollar, you may have to pay hundreds of extra dollars when it comes to your Medicare B premiums. You can circumvent this scenario by investing in a Roth IRA that will allow you to make a completely tax-free income in retirement.</p>

<li><b>Your heirs may benefit from a Roth conversion too</b></li>

<p>One of the major benefits when it comes to Roth IRAs is that they do not have any minimum distribution requirements which is not the case with a traditional IRA. If you do not foresee yourself withdrawing funds from your IRA, you may opt for converting to a Roth IRA. This will allow your funds to grow tax-free undiminished by Required Minimum Distributions (RMDs). By doing this, you will be able to leave a more sizable inheritance for your heirs, who can take advantage of tax-free withdrawals after meeting certain requirements.</p>  

<li><b>You cannot revert your Roth conversion</b></li>

<p>As per a new rule in the Tax Cuts and Jobs Act of 2017, you cannot undo a Roth conversion, which means once you convert your traditional IRA to a Roth IRA, there is no going back. If you are not entirely sure about converting your IRA, you can opt for a partial conversion. This way, you can divide up your savings between both a traditional IRA and a Roth IRA. By doing this, you will achieve flexibility of funds and ensure you receive the best benefits of both kinds of IRAs.</p>
</ol>

<h2>To summarize</h2>

<p>It is considered wise to pay your taxes on your retirement savings sooner rather than later, especially when it comes to Roth IRAs. Though you do make after-tax contributions to a Roth IRA, the qualified withdrawals are fully tax-free. Moreover, Roth IRAs are not subject to RMDs, and thereby, offer you greater control over your taxable income after retirement. It goes without saying that you should consider converting to a Roth IRA to make the most of the multiple advantages that it offers.</p> 

<p>If you feel that you require more information on Roth IRAs before making a decision, <a href="/match-advisors/search-by-zip?cta=article-show-page"> consider hiring a professional financial advisor</a> who can guide you on whether it is a suitable investment option for your retirement needs.</p> 

It is considered wise to pay your taxes on your retirement savings sooner rather than later, especially when it comes to Roth IRAs. 

5 Essential Things To Know About Roth Conversions

<p>A 401(k) account is company-sponsored retirement savings account wherein an employee can contribute a portion of their paycheck which may or may not be matched by the employer. The accumulated funds are invested in various investment options such as mutual funds, stocks, bonds, etc. to supplement your income and sustain you financially when you have retired and no longer have a regular income to maintain your lifestyle.</p>
	
<p>As per a report by the American Benefits Council, 80 million-plus people in the US actively contribute towards a 401(k) plan. As of March 31, 2021, the 401(k) fund had an estimated $6.9 trillion worth of assets. This represents more than one-fourth of the entire $32.2 trillion US retirement market. Herein, the market is composed of several plans including employer-sponsored programs, annuities, defined contribution plans, and individual retirement accounts (IRAs). 401(k) accounts are largely popular due to the tax advantages they offer wherein your 401(k) investment earnings are not taxed until you begin to withdraw them, which primarily occurs after your retirement. 401(k) plans were first introduced in 1978 and since then have become one of the most popular and sought-after retirement plans in the US.</p> 

<p>Even though a 401(k) plan offers several benefits for retirees, it also has its fair share of disadvantages, like strict restrictions, penalties, and tax implications on withdrawals. To circumvent some of these drawbacks, you may consider rolling your 401(k) plan into an IRA. An IRA or Individual Retirement Account is a tax-advantaged retirement savings account that can be opened by any individual, unlike a 401(k) plan which can be obtained only through an employer. If you choose to convert your 401(k) plan into an IRA, you can avail of the following advantages:</p>
<ul>
<li>Access to a wider, more comprehensive range of investments compared to a 401(k) account</li>
<li>Long-term tax-deferred growth of funds</li>
<li>Tax exemptions at the time of withdrawal of funds</li>
</ul>

<p>Though, before going ahead with a rollover from a 401(k) account into an IRA, <a href="/match-advisors/search-by-zip?cta=article-show-page"> consult with a professional financial advisor</a> to understand whether a rollover would be suitable for you or not based on your present financial situation and retirement objectives, and to understand the tax implications this decision may have.</p> 

<p>Before you decide to convert your 401(k) into an IRA, it is best to go through the advantages and disadvantages of such a decision.</p>

<h2>What are the Advantages of Rolling my 401(k) into an IRA?</h2>

<p>A few of the benefits of converting your 401(k) into an IRA are as follows:</p>
<ol>

<li><b>Wider range of investment vehicles available to choose from</b></li>
<p>In a 401(k) account, you have limited options when it comes to investing your funds. Your choices are restricted to mutual funds – equity funds, debt funds, and bond funds. This is not the case when it comes to an IRA. Here, apart from mutual funds, you can also invest in stocks, bonds, ETFs, real estate, etc. In addition to this, you can also purchase or sell your investments any time unlike in the 401(k) plan. A majority of 401(k) plans place restrictions on the number of times you can purchase or sell your investments or rebalance your portfolio.</p>

<li><b>Lower fees and costs compared to a 401(k)</b></li>
<p>IRAs have considerably lower fees and costs compared to a 401(k) such as lower management fees, administrative charges, and fund-expense ratios, and more. Additionally, the transaction costs are also comparatively higher in a 401(k) to an IRA.</p> 

<li><b>Fewer complex rules</b></li>
<p>Compared to a 401(k), in an IRA there are fairly standardized rules mandated by the IRA. For instance, in a 401(k), each employer plan has different terms that add to its complexity.</p> 

<li><b>Lower taxes</b></li>
<p>As mentioned previously, in an IRA you have to pay lower taxes compared to a 401(k). The IRS mandates that 20 percent of distributions be kept for federal taxes in a 401(k) account which is not the case in an IRA. You can either choose to specify a percentage that you may wish to withhold in your account or not keep any tax withholdings at all. Though, it is advised that you should allow a small percentage to be withheld to avoid paying hefty taxes at the end of the year. In an IRA, you can harness the power of compounding since your taxes are deferred and you can select the amount that you wish to withhold for federal taxes rather than an automatic 20 percent.</p>

<li><b>The Roth advantage</b></li>
<p>The major advantage of a Roth IRA is that you can pay taxes at the time of contribution allowing you to withdraw your funds in retirement on a tax-free basis. This entails that you can pay taxes when you're earning a stable income instead of deferring them post-retirement when you won't have a regular income. Additionally, in a Roth IRA, you are not mandated to take RMDs (Required Minimum Distributions) at age 72 either.</p>
</ol>

<h2>What are the Disadvantages of Rolling a 401(k) into an IRA?</h2>
<p>Let us discuss some of the disadvantages of an IRA rollover:</p>
<ol>

<li><b>Non-availability of loans</b></li>
<p>You will not be able to take out a loan from an IRA which you can do if you have a 401(k). This is useful if you need funds on an urgent basis.</p> 

<li><b>Restrictions on withdrawals</b></li>
<p>There are certain restrictions on withdrawals on an IRA such as you cannot make a withdrawal unless you are above 59.5 years of age. If you withdraw money before reaching the cutoff age, you will have to pay an early withdrawal penalty of 10 percent. This is not the case with a 401(k) account as you can avoid paying the 10 percent early withdrawal penalty if you leave your job at the age of 55 or after the age of 55. In addition, you can avail favorable tax treatment on withdrawals if your 401(k) is directed in company stock. This facility is not available to an investor having an IRA.</p>

<li><b>Higher fees to be paid</b></li>
<p>In an IRA, you may have to pay higher account fees compared to a 401(k) where you can buy funds at institutional pricing rates, owing to group buying power.</p>

<li><b>Limited legal protection</b></li>
<p>If you have a 401(k) account, you are better protected against lawsuits, bankruptcy, and creditors since it is covered by federal laws. On the other hand, IRAs are protected only by state laws, which vary from state to state.</p>
</ol>

<h2>When Should You Consider Converting my 401(k) into an IRA?</h2>

<p>You should consider converting your 401(k) into an IRA in the following cases:</p>
<ul>
<li>You believe that you would end up being in a higher tax bracket, or if tax rates are likely to be higher during your retirement.</li>
<li>Your current 401(k) plan is not performing well due to having high-cost investments and underperforming funds.</li> 
<li>You have several 401(k) accounts and it has become problematic to manage them all due to frequent changes in jobs.</li>
<li>You need to rebalance your 401(k) since it has gotten burdened with weak stocks having a low fixed income and needs to counterbalance with bond funds.</li>
<li>You require greater flexibility in terms of withdrawals.</li>
</ul>

<p>Alternatively, you should not opt for a 401(k) conversion into an IRA, if:</p>
<ul>
<li>You are looking at early retirement, thereby, would need early withdrawals.</li>
<li>Your earnings would exceed the income cap placed on a Roth IRA.</li>
<li>You do not want to expose yourself to any kind of legal battle or lawsuit in the future.</li>
</ul>

<h2>Which IRA Should I Rollover to?</h2>

<p>If you are set in your mind that you want to convert your existing 401(k) plan into an IRA, you need to ensure that you choose the right type of IRA for conversion. Let’s go through some of the guidelines:</p>
<ul>

<li>If you envision your taxable income or overall tax bracket to be lower during your retirement, you should go for a traditional IRA. But if you expect your taxable income or the overall tax brackets to be higher during your golden years, then you would be wise to choose a Roth IRA.</li>
<li>If you are a high net worth individual (HNWI) or a high income-earner, you would be better off choosing a traditional IRA since it has no cap on income, unlike a Roth IRA wherein certain income limits act as a deterrent for HNWIs to contribute to it.</li> 
<li>If you wish to take out an early withdrawal and want to avoid paying a penalty, you should consider converting your traditional IRA to a Roth IRA, as you can make early withdrawals provided they meet certain conditions such as first-time home purchase, college expenses, and birth or adoption expenses.</li>
<li>Before you can make a withdrawal from a Roth IRA account, you need to have held the account for at least 5 years and be 59.5 years of age or older. Moreover, there are no minimum time restrictions that need to be met before you take a distribution of money.</li>
</ul>

<h2>How Can I Roll Over My 401(k) Into An IRA?</h2>

<p>You can convert your 401(k) into an IRA fairly easily. Let us go through the steps:</p>
<ol>

<li>First off, you have to inform your 401(k) plan administrator or your company HR explaining that you have decided to rollover your 401(k) into anIRA and get an application form for the same.</li> 
<li>Afterward, contact the concerned custodian of your chosen IRA, be it a traditional IRA or a Roth IRA. You can now go ahead and open an account.</li> 
<li>Once your account becomes active, use the forms sourced from your company HR or your 401(k) plan administrator to request a direct rollover of funds into your chosen IRA.</li>
<li>Once your request gets approved, the administrator will transfer the funds into your new IRA account. You could also request the administrator to furnish you with a check in the name of the IRA. Ensure that the check is not presented as a distribution.</li>
<li>You also have the option of choosing an indirect rollover wherein 20 percent of your 401(k) will be withheld for taxes by the administrator. You may apply for a tax refund at a later date.</li>
</ol>
<h2>Is There a Time Limit to Complete the Rollover?</h2>

<p>If you opt for a direct rollover of your 401(k) plan, typically there is no time limit for completing the rollover. Once your IRA is set up, the funds would be transferred to your new account. However, if you choose to rollover your 401(k) account to an IRA using the indirect method, you have a 60-day limit to complete the rollover. Your 60 days would start from the date you receive your retirement plan distributions. The IRS may waive this rollover requirement in certain situations such as if you missed the deadline due to extenuating circumstances beyond your control. Lastly, you can only do one rollover annually.</p> 

<h2>What are the Taxation and Penalties In a 401(k) Rollover?</h2>

<p>If you go ahead with a 401(k) rollover, you have to take heed of the following taxation and penalties:</p>
<ul>

<li>While converting your 401(k) to a Roth IRA, you would have to pay income tax on the funds transferred by you in the year you make the switch. This can be circumvented at the time of your retirement as you would not have to pay any tax on withdrawals provided you have held the account for 5 years and are above 59.5 years of age.</li> 
<li>When you make the switch to a Roth IRA, then the holding period for the transferred funds becomes zero. You must hold the said account for at least 5 years before you can make a withdrawal. Also, you must be 59.5 years or older to ensure penalty-free withdrawals. If you do not adhere to the said rules, you may be subjected to a 10 percent penalty and income taxes.</li>
<li>If you opt for an indirect rollover, then you must complete the rollover within 60 days from the date you receive your 401(k) distributions. If you are unable to meet the said deadline, then you would be liable to pay withholding taxes (20 percent) and penalties.</li>
</ul>

<h2>Should I Convert my 401(k) Into an IRA?</h2>
<p>Ultimately, only you can answer this question. Choosing to convert your 401(k) plan into an IRA is dependent upon your financial situation and goals. If you would wish to pay lower taxes and fees, have access to a wider range of instruments to invest in, better communication, less number of rules, etc. then you should rollover your 401(k).</p> 

<p>According to studies, an average American needs 85% of their pre-retirement income to live conservatively in retirement. Retirement savings plans such as a 401(k) plan can fail to meet the aforesaid target due to several factors such as the restricted potential to earn higher interests due to limited choice of investments it offers, inflation causing a rise in prices of goods and services in future, and more. Many financial experts are of the view that a 401(k) is not prudent enough in its investment strategy to consistently beat the rate of inflation. Putting all your eggs in the 401(k) basket could possibly leave you with lesser funds than foreseen by you during your retirement years.</p>

<h2>Are There Any Other Alternatives to Rolling my 401(k) Into an IRA?</h2>

<p>Apart from converting your 401(k) to an IRA, you also have these alternatives available to you:</p>
<ul>

<li><b>A 401(k) to a new 401(k) transfer:</b> If you are switching companies, you can rollover the funds in your traditional 401(k) account to a new 401(k). You will not have to pay any taxes on the transfer.</li> 
<li><b>A 401(k) to a Roth 401(k) transfer:</b> You can rollover your traditional 401(k) account into a Roth 401(k) plan wherein you can avail of certain tax advantages such as after-tax contributions up to a specified limit and tax-free distributions during your retirement.</li> 
<li><b>Net Unrealized Appreciation (NUA):</b> Herein, you can own company stocks where you work. Usually, companies engage in this practice to give employees a sense of ownership. NUA refers to the difference between the cost of employer shares and the present market value of the company shares. This means that if you own high-appreciated company shares in your 401(k) holdings, you can use the NUA to your benefit. You can capitalize on favorable capital gain tax rates charged by the IRS on the NUA of the employer at the time of distribution provided you satisfy some specific qualifications.</li>
</ul>

<h2>To Conclude</h2>

<p>At the end of the day, the decision to rollover your 401(k) into an IRA should be made after evaluating the suitability of each account, as per your and financial situation and objectives. Both 401(k) and IRA plans have their pros and cons, thus, you should make an informed decision after doing the necessary research. However, if you feel that the rollover is a complex and complicated affair, you can reach out to a professional financial advisor to help guide you through the conversion process.</p> 

<p>For further guidance on the most suitable retirement account for your needs, <a href="/match-advisors/search-by-zip?cta=article-show-page">use the free advisor match tool</a> and get matched with 1-3 vetted financial fiduciaries who may be able to create a customized retirement plan for you. You may set up an interview with the financial advisors before you decide to engage with one.</p>

At the end of the day, the decision to rollover your 401(k) into an IRA should be made after evaluating the suitability of each account, as per your and financial situation and objectives.

Should You Roll Over Your 401(k) into an IRA?

<p>People invest in retirement plans so they can live comfortably off the money that has grown over the years. It gives them a sense of relief and comfort knowing they have something they can rely on when they grow old and cannot work to earn any more. Most retirement accounts are structured such that you make contributions during your earning years, but the money cannot be withdrawn until retirement at 60. This gives the money enough time to compound and grow into a corpus. But, what if you happen to require funds before you retire?</p>

<p>Roth IRAs are a great way of growing your money in a tax-free manner, but early Roth IRA withdrawal can lead to penalties and taxes. However, there may be some exceptions where you can withdraw your money from your Roth IRA account prematurely. For more questions on Roth IRAs and how they could fit in your future retirement plans, <b><a href="/match-advisors/search-by-zip?cta=article-show-page">consult a financial advisor</a></b> for more information.</p>

<p>Read on to know more about Roth IRAs and the withdrawal rules involved.</p> 

<h2>Understanding Roth IRAs</h2>
<p>A Roth IRA is a unique type of retirement account that allows the investor’s money to grow tax-free and attracts no taxes upon withdrawal either, provided certain criteria are met. After 59.5 years of age, the investor can withdraw the money from their Roth IRA completely tax-free and penalty-free if the account has been open for more than five years. A Roth invests your money in a portfolio of stocks, bonds, mutual funds, or other investments as per your choice to grow your principal investments into a large corpus over time. While a Roth IRA is similar in its functioning to few other qualified retirement plan accounts, this account offers some special benefits and is generally less restrictive than other accounts.</p> 

<p>Investors can contribute their after-tax savings to a Roth IRA account and save for their retirement years in one of the most tax-efficient manners with a Roth IRA. Contributions can be made at any age, as long as the account holder has earned income. There are, however, certain limits to contributions enforced by the IRS. Presently, an individual cannot contribute more than $6,000 in a year to all IRAs (traditional & Roth) combined. For those over the age of 50, an additional $1000 is allowed per year, taking the maximum contribution to $7,000 as permitted by the IRS.</p>

<p>A Roth IRA may be a great investment avenue for young investors who have a lower annual income and want to earn more in the long run. The money contributed by investors in a Roth IRA is invested in a range of different asset classes, from stocks, bonds, gold, ETFs, mutual funds, and other investment vehicles.</p>

<h2>The Roth IRA advantage</h2>
<p>What makes the Roth IRA a preferred retirement plan is the fact that investors don’t have to pay taxes on the money they withdraw from the account after a certain period. There is no penalty and no taxes on withdrawals if they are made in adherence to the norms. Let's understand why this is a big deal.</p>

<p>As far as contributions are concerned, almost anyone can contribute to a Roth IRA, given their modified adjusted gross income does not exceed the threshold underlined by the IRS. The limit for 2021 is $140,000 for single filers and $208,000 for joint filers.</p>

<p>Taxes have seen an upward growth over time, and the trajectory is still pointing up. The top tax rate of 37% is being considered for a further hike by congress, and should the bill pass, it can add to quite some pains for the investors. It is financially more beneficial to pay taxes now, at 37%, than pay taxes in the future at a higher rate.</p>

<p>Youngsters who have just started earning recently and are considering investing for the future may explore adding a Roth IRA account to their portfolio. An obvious advantage is afforded by the long investment horizon, which grows their money into a large corpus. Additionally, with a low income and a lower income tax rate, young investors can afford to max out their IRA contributions, since their after-tax income is unlikely to be impacted much by tax policy changes.</p>

<p>With that said, even if you do not want to withdraw the funds in your Roth IRA in old age, you can allow the funds to continue growing over the years since, unlike other IRA schemes, there is no mandatory withdrawal feature with a Roth IRA</p>

<p>Another advantage of IRA accounts is that the tax-efficient growth of the funds can continue even after the death of the investor, with the account being passed down to the heirs, who can continue reaping the benefits of a tax-free investment plan. Basically, the income your heirs get from your Roth IRA will also be tax-free - this is also why Roth IRAs often figure in legacy planning.</p>

<h2>Roth IRA withdrawal rules</h2>

<p>Compared to other IRA schemes, the rules for withdrawing funds from a Roth IRA account are fairly simple.</p> 

<p>Below are the norms Roth IRA investors must know before withdrawing money from a Roth IRA:</p>
<ol>

<li>Withdrawals are tax-free when taken after the investor attains 59.5 years.</li>
<li>No penalty is levied if you take money out of a Roth IRA after 59.5 years of age when the account has been open for more than five years. If the account is held for less than five years old, the withdrawal amount will be liable for taxation.</li>
<li>A penalty may be charged if you transfer your Roth IRA account and do not deposit the cheque into the other account within 60 days of the cheque being issued to you.</li>
<li>The contribution amount made to Roth IRA can be withdrawn anytime by the investor without any penalty being charged since the contribution amount is after-tax savings. However, if the investor withdraws the investment earnings from the Roth IRA before 59.5 years of age or before the account is older than five years, a penalty of 10% plus taxes is levied on the withdrawal amount.</li>
<li>Investors can also withdraw the investment earning (interest) in special circumstances as an exception.</li>
</ol>

<h2>The Roth IRA 5-year rule</h2>

<p>Withdrawing money from a Roth IRA may seem like a very simple process compared to the stringent rules of the other retirement planning investment avenues. But there are intricate Roth IRA withdrawal rules in place that you need to follow to avoid fines and penalties. </p>
<p>The 5-year rule for Roth IRAs are applicable in the following areas:</p>
<ol>

<li><b>First Roth IRA contribution</b></li>  

<p>As per this rule, the investor must wait for at least five years after making their first contribution to a Roth IRA if they want to withdraw the investments tax-free without any penalty. The five-year period starts from the day of the tax year for which a contribution was made. For example, if you made a contribution in 2021 to Roth IRA for the 2020 tax year, then the 5-year period will end in 2025 and not 2026. Conversely, this means that if you are over 59.5 years of age but it has not been five years since your first Roth IRA contribution, you can withdraw the funds from your Roth IRA account without any penalty, but you will have to pay taxes on the investment earnings.</p>

<li><b>Inherited IRAs</b></li>

<p>If you inherited a Roth IRA account from anyone except your spouse, you have the option of taking a lump-sum distribution of any amount. The only caveat is that you must withdraw all of the funds in the account within five years as mandated by the IRS. However, if the owner of the account who passed on the Roth IRA to their heir opened the account not more than five years ago, the amount being withdrawn will be liable for taxation.</p>

<p>Inheritors also have the option of spreading out the mandatory minimum distribution they have to take for a period of up to 10 years. Note here that Roth IRAs do not require withdrawals until after the death of the owner. There is no concept of RMDs for Roth IRAs until or as long as the investor is alive.</p>

<li><b>Converting other IRAs to a Roth IRA</b></li>

<p>Many people, especially those with high taxable income, rollover their traditional IRAs into Roth IRAs to make use of its tax advantage. However, investors converting to Roth IRA must ensure that they abide by the 5-year rule before withdrawing the funds from their Roth IRA.</p>

<p>The IRS put the rule in place to prevent taxpayers from abusing the tax-free feature of Roth IRA. Therefore, investors rolling over to a Roth IRA must wait for a full five years, starting from 1 January of the year in which they convert to Roth IRA. Investors converting in the latter half of the year will have to wait for more time to be able to withdraw their funds tax-free.</p>
</ol>
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<h2>Roth IRA withdrawal rules for those aged 59.5 or less</h2> 

<p>You will have to pay taxes and a fine if you withdraw the investment earnings from your Roth IRA if you are under 59.5 years. The investment horizon further influences the withdrawal rule from a Roth IRA.</p> 

<p><b>The following are the two situations in line with the Roth IRA 5-year rule:</b></p>
<ol>

<li><b>If you have held the account for less than 5 years</b></li> 
<p>If you are younger than 59.5 years and your Roth IRA has not been open for at least 5 years, you may be able to take distributions but with a 10% penalty and taxes levied to the withdrawal. The IRS has laid out a few exceptions where investors can take distributions in special situations and avoid penalties (taxes will still have to be paid).</p>

<li><b>If you have held the account for more than 5 years</b></li>
<p>If you have held a Roth IRA account for more than five years and are under 59.5 years of age, you can withdraw the contribution amount from your account at any time without paying any taxes or penalties. However, if you wish to take distributions from the interest earned on the investment, you will be levied both a 10% penalty and appropriate taxes.</p>

<p>Nevertheless, you can claim periodic distributions from your account, avoiding both the penalty and taxes if you qualify for exceptions.</p>
</ol>

<h2>Exceptions to withdrawal from Roth IRA when you are younger than 59.5 years</h2>

<p>As mentioned before, for those with accounts older than 5 years, no penalty or taxes will be charged for these acts. For those with accounts younger than 5 years, both a tax and penalty are charged; however, if the withdrawal is for a qualified exception, the penalty is waived off, and only taxes are charged.</p>

<p><b>The exceptions are as follows:</b></p>
<ol>

<li><b>First-time homebuyer exception:</b> You can take distribution worth $10,000 in your lifetime to buy a house if you or your spouse have not owned a house in the past two years. You could be purchasing or building the house for yourself, with a spouse, or even for your parents. If you are married, your spouse can add in another $10,000 from their Roth IRA distribution in a similar situation.</li><br>

<li><b>Qualified education expenses:</b> You can take distributions to pay for tuition, fees, books, other supplies if you are pursuing higher education. For part-time students, accommodation and boarding are also covered. This can be done for yourself, your children, and your spouse. However, it is important to check with the school first to make sure that your program qualifies for the deduction.</li><br>

<li>To pay for medical expenses that have not been reimbursed.</li><br>

<li>To pay for health insurance when you are unemployed.</li><br>

<li><b>Permanent disability:</b> If a permanent disability makes you incapable of working. You will need to furnish proof of your permanent disability for this.</li><br>

<li>For expenses related to childbirth or adoption.</li>
</ol>

<h2>Roth IRA withdrawal rules for those over 59.5 years of age</h2>
<ol>

<li>If you have held the account for less than 5 years</li> 
<p>If you are 59.5 years or older and have held the Roth IRA for less than 5 years, the withdrawals will only be subject to taxation but no penalties.</p>

<li>If you have held the account for more than 5 years</li> 
<p>If you have held your Roth IRA account for over 5 years and have completed 59.5 years, you can withdraw all of the money in your Roth IRA account which will be tax-free and penalty-free.</p>
</ol>

<h2>Conclusion</h2>

<p>Don’t let contribution and early withdrawal limitations keep you from benefiting from the several advantages of a Roth IRA. Being an account that collects post-tax contribution, it enables you to retire peacefully with a large corpus that you may be able to withdraw tax-free and also penalty-free should you adhere to the rules of the IRS.</p> 

<p>Should your income be high for opening a Roth IRA account, there is a work-around for that too. The IRA permits getting a “back door Roth IRA”. For this, you can use a traditional IRA account and contribute funds to it (which has no limit) and then move it into a Roth IRA account using Roth conversion.</p>

<p>When the Roth IRA withdrawal rules are obeyed, you get a multitude of benefits in your retirement. However, if you have no other option but to dip into your Roth IRA savings to meet some fund requirements, you may check your eligibility and avoid some penalties if you qualify for the special situations as discussed in this article. Having a proper withdrawal plan in place along with consultations from a financial professional can help you protect your assets.</p>

<p>For further assistance while planning for your retirement, <b><a href="/match-advisors/search-by-zip?cta=article-show-page"> use the free advisor match tool</a></b> and get matched with 1-3 vetted financial fiduciaries who may be able to create a customized retirement plan for you. You may set up an interview with the financial advisors before you decide to engage with one.</p> 

Don’t let contribution and early withdrawal limitations keep you from benefiting from the several advantages of a Roth IRA.

A Detailed Guide to Roth IRA Withdrawals

<p>There is no question regarding the popularity of IRAs (Individual Retirement Accounts) for retirement planners. According to a report from the Investment Company Institute, over 43.9 million households in the U.S. own at least one type of IRA. IRAs are popular because of several reasons. In simple terms, these retirement accounts are tax-deferred savings accounts that allow you to save money for retirement. These accounts allow your funds to grow tax-free until withdrawn.</p> 
<p>IRAs are held by trustees and custodians, such as banks, brokerage firms, federally insured credit unions, and other entities approved by the IRS (Internal Revenue Services). These custodians pool your funds and invest them across different financial products of your choice. Most commonly, the investment choices in a traditional IRA include stocks, bonds, mutual funds, and ETF (Exchange Traded Funds). Typically, there are four types of IRAs. In a traditional IRA, you contribute pre-tax dollars, and your funds grow tax-free in the account until withdrawn. In a Roth IRA, you contribute after-tax dollars, and your money grows tax-free in this account without you having to pay any taxes at withdrawal. These are two of the most popular types of IRAs.</p> 
<p>A traditional and Roth IRA offers wide investment choices than an employer-sponsored program like a 401(k). However, these accounts prohibit some assets, which might interest you. If you feel a typical traditional or Roth IRA does not provide you with the investments opportunities you need, you can opt for a self-directed Roth IRA. A self-directed IRA allows you to contribute funds and avail of the same tax advantages as applicable to a standard traditional or a Roth IRA. The difference between a self-directed Roth IRA and a Roth IRA is the type of assets in your portfolio. If you need further assistance in understanding how a self-directed Roth IRA fits in your retirement plan, <b><a href="/match-advisors/search-by-zip?cta=article-show-page"> consult with a professional financial advisor</a></b> who can take you through the same and clear up any doubts that you may have.</p>
<p>Here is everything you should know about a self-directed Roth IRA:</p>	
<h2>What is a self-directed IRA?</h2>
<p>A self-directed IRA (SDIRA) is an IRA that allows you to invest across alternative asset classes, which are not available in regular IRAs. Regular IRAs typically give an option to invest in stocks, bonds, mutual funds, Cash Deposits (CDs), and Exchange-traded funds (ETFs). However, a self-directed IRA allows you to invest in these securities and many other additional alternatives, such as:</p>
<ul>
<li>Real estate</li>
<li>Undeveloped or raw land</li>
<li>Precious metals like silver, gold, etc.</li> 
<li>Debt instruments like tax lien certificates</li>
<li>Promissory notes</li>
<li>Commodities</li>
<li>Water rights</li>
<li>Cryptocurrencies like Bitcoin</li>
<li>Livestock</li>
<li>Limited Liability Company (LLC) membership interest</li>
<li>Franchises</li>
<li>Private placements</li>
<li>Start-ups through crowdfunding platforms</li> 
<li>Foreign currency</li>
</ul>
<p>Available as an IRA or a Roth IRA, a self-directed IRA gives you the same tax advantages as an ordinary IRA. In a self-directed Roth IRA, you make after-tax contributions, and in a self-directed IRA, you make pre-tax contributions. In both cases, your funds grow, compound, and generate dividends tax-free. The withdrawal rules of a self-directed IRA  depend on its type. If you have a self-directed IRA, you pay taxes at the time of withdrawal. However, if you have a self-directed Roth IRA, you do not pay any taxes on withdrawals because your contributions comprise after-tax dollars. Further, you can withdraw penalty-free funds from your self-directed IRA once you are 59.5 years, but you have to pay taxes on the money withdrawn. In a self-directed Roth IRA, you can take your money any time, for any reason, without any tax or penalty. However, you must be 59.5 years and should have held the Roth IRA for at least five years before withdrawing the sum. The rule of RMDs (Required Minimum Distributions) applies to a self-directed IRA too. In the case of a traditional self-directed IRA, you have to take RMDs at age 72. If you have a Roth self-directed IRA, you have no RMDs for the lifetime.</p> 
<p>Further, the contribution limits for a self-directed IRA remain the same as its forerunners. For 2021, you can contribute up to $6,000 in your self-directed IRA. If you are 50 years or older, you can contribute up to $7,000 in 2021.</p> 
<h2>What are the eligibility self-directed IRA rules?</h2>
<p>Anyone of any age can contribute to an IRA, but there are specific income restrictions. The IRS allows you to make contributions from your earned income towards a self-directed IRA. Earned income refers to wages, salaries, self-employment profits, etc., and is exclusive of Social Security benefits or similar help from the government.</p> 
<p>The earned income criterion is also applicable for a self-directed Roth IRA. Further, for 2021, if you are a single filer, you can make a full contribution to a self-directed Roth IRA if your modified adjusted gross income (MAGI) is less than $125,000. You can make a partial contribution if your MAGI is more than $125,000 but less than $140,000. Additionally, if you are married, a full contribution is permissible if your MAGI is less than $198,000. If your MAGI is above $198,000 but less than $208,000, you can make a partial contribution. In another case, if you are married but filing separately, you can make a full contribution if your MAGI is less than $10,000. You can make a partial contribution if your MAGI is above $0 but less than $10,000.</p> 
<h2>How and where to open a self-directed IRA</h2>
<p>Self-directed IRAs are held by custodians or trustees, such as banks. Each custodian or trustee differs from the other in terms of investment options, rules, etc.</p> 
<p>Given below are the names of the organizations that provide self-directed IRA custodians:</p>
<ul>
<li>The Entrust Group</li>
<li>Equity Trust</li>
<li>Madison Trust and Millennium Trust Company</li>
</ul>
<p>The custodians levy charges for establishing and monitoring the IRA funds. However, you are solely responsible for managing the self-directed IRA. The self-directed IRA custodians or trustees only act as a third party for establishing the account and monitoring the investments.</p> 
<p>The primary step in opening a self-directed account is to find a reliable trustee or custodian. Since each custodian differs in their services, investment choices, fees, etc., it is beneficial to research and select a self-directed IRA custodian that best meets your requirements. Once you finalize the custodian, you can pick the investments you want to make after studying the options in-depth.</p> 
<p>Once through, you have to find the broker to purchase the investment and ask your self-directed IRA custodian or trustee to carry out the transaction. But, as an account owner, you are responsible for managing the account, and are solely accountable for the due diligence of your investments and managing your underlying assets. Managing a self-directed IRA requires extensive knowledge about the market and different assets. You should also know how each security functions and the risks associated with the investments.</p> 
<p>Given the complexity involved with a self-directed IRA and choosing investments that best align with your goals, <a href="/match-advisors/search-by-zip?cta=article-show-page"> it is wiser to consult a professional financial advisor</a>. These experts have market and asset knowledge and can help you select the right investments per your risk tolerance, financial objectives, and investment horizon. However, keep in mind that the IRS prohibits particular investments in a self-directed IRA. Some of these assets include collectibles, life insurance, S Corporation stocks, etc. Collectibles include antiques, artwork, baseball cards, alcoholic beverages, stamps, jewelry, rare coins, etc. If you invest in these assets through your self-directed IRA or self-directed Roth IRA, the amount you spend will be considered a withdrawal. Your financial advisor can guide you if you are not violating any rules in your self-directed Roth IRA. If you do not have a financial advisor, this may be a good time to find one. <a href="/match-advisors/search-by-zip?cta=article-show-page"> Use our free advisor matching tool</a> to find the right financial advisor for your needs.</p> 
<h2>What are the benefits of a self-directed IRA?</h2>
<p>There are three prime benefits of investing through a self-directed IRA. These include:</p>
<ol>
<li><b>Potential for higher returns:</b> One of the biggest advantages of a self-directed IRA is that it can help bolster your retirement savings. You get greater flexibility in terms of investments you hold in a self-directed IRA. You can invest in alternative assets like real estate, LLC membership, precious metals, commodities, etc., which are otherwise not permissible in a traditional IRA or a Roth IRA. You also have the option to put your money in high-risk and high-reward investments like cryptocurrencies, early-stage private companies, etc. Investing in these assets gives your portfolio an edge over the traditional or Roth IRA portfolios. You can earn much higher compared to investing in just the stock or bond market. You have the freedom to make investments that align with your passion, knowledge, and experience. However, investing in alternative assets also comes with higher risks, and it is advisable to be cautious before making any decision.</li><br>
 
<li><b>Increased diversification:</b> A major concern for retirees or those nearing retirement age is market volatility and the steeply rising inflation. Stock market volatility coupled with inflation can consume a large share of retirement savings. Hence, for this section of people, a self-directed IRA is a diversification opportunity. Investment in alternative assets implies that your portfolio is secure against downturns or time eroding the value of your money. For instance, investment in gold provides optimal diversification to your retirement portfolio. Gold prices rise with time, offering the much-required financial security against stock market downturns and inflation. Safe investments like gold and cryptocurrency can help diversify your portfolio, but there is no protection against losses. In the short term, investments in gold or cryptocurrency are as volatile as stocks.</li><br> 

<li><b>Tax advantages:</b> Depending on the type of self-directed IRA, you can avail of significant tax advantages. In a traditional self-directed IRA, you can lower your existing taxable income by deferring taxes on contributions in the present, as well as enjoy tax-free growth of savings. Alternatively, in the case of a self-directed Roth IRA, you make after-tax contributions to the account and pay taxes in the present, allow your funds to grow tax-free, and enjoy tax-free withdrawals in the future, subject to specific conditions.</li>
</ol>
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<h2>What are the disadvantages and risks of investing in a self-directed IRA?</h2>
<p>Self-directed IRAs are a good fit for investors who are risk-takers and have considerable market knowledge. However, self-directed IRAs carry a higher degree of risks and downsides than standard IRAs. Some of the disadvantages and risks involved in a self-directed IRA include:</p>
<ol>
<li><b>Lower liquidity:</b> Self-directed IRA or self-directed Roth IRA allow you to invest across different investments, most of which are illiquid. In case of an emergency, you might have to struggle to get any money from your self-directed IRA. Selling alternative assets like gold, real estate, etc., generally takes longer than stocks and bonds. You will have to find a buyer for your alternative investment. Further, if you try to liquidate funds quickly, you could be forced to sell at a lower rate than the market value or even lesser than what you paid for them originally. In contrast, securities like stocks, mutual funds, etc., are highly liquid, meaning you have a better chance to sell them quickly and at the market value in case of an unforeseen emergency. The illiquidity of alternative assets becomes a matter of concern when the RMDs begin at 72 years.</li><br>
 
<li><b>Higher fees:</b> Traditional or Roth IRAs generally do not levy any account management or trading fees. However, in a self-directed IRA, the custodian may charge an account-related fee along with the investment charges for the securities you invest in. For instance, if you invest in gold through your self-directed IRA, you will have to pay the maintenance fee, storage fee, and insurance charges related to the investment. You can also expect to pay about $250 for shifting or changing your self-directed IRA custodian. Hence, before making any investment through a self-directed IRA, be aware of all the fees involved.</li><br> 

<li><b>Prohibited transactions:</b> The IRS restricts owners of a self-directed IRA to hold specific assets like collectibles, life insurance, S Corporation stocks, etc. If you break this IRS rule and invest in any of these assets, you could be liable to pay hefty penalties and taxes. This will defeat the primary purpose of a self-directed IRA, which is to generate potentially higher returns. The IRA tax benefit vanishes when you invest in any of the prohibited assets. Instead, you become liable to penalties and interest. The IRS also has self-directed IRA rules. For instance, you cannot borrow money from an IRA, sell or buy property from an IRA, or use an IRA as security for a loan. These rules are easier to adhere to when you invest through a traditional or Roth IRA. However, the lines are often blurred when you invest in alternative investments like real estate. For instance, if you buy a rental property but use it for your personal purpose, the entire account will be considered distributed to you if the IRS learns of the misuse. You would be liable to pay taxes along with a penalty.</li><br> 

<li><b>High risk:</b> The custodians or trustees of your self-directed IRA only administer and hold your investments. They are not responsible for investigating the quality of the legitimacy of the investment options available in the self-directed IRA. You have to undertake due diligence to understand the investments you choose in your self-directed IRA. For instance, if you buy gold or another precious metal from your self-directed IRA but the gold does not meet the purity standard required for your IRA. Hence, you will lose the investment money on the fraudulent purchase and also incur tax penalties.</li><br> 

<li><b>Low transparency:</b> In many cases, the self-directed IRA custodians and trustees list the purchase price plus expected returns of an investment as its valuation. However, in reality, that is not the sum you get for the asset. As an investor, you have to do a detailed analysis to uncover the actual price and return of the investment.</li>
</ol>
<h2>Is a self-directed IRA the right choice for you?</h2>
<p>After evaluating the pros and cons of a self-directed IRA, choosing it as a retirement savings account depends on your risk tolerance, return expectations, market knowledge, investment horizon, and more. If you aim to finance your retirement with income from alternative assets, consider a self-directed IRA, provided you are investing for the long-term and have considerable knowledge about these alternative assets.</p>
<p>However, if you are a casual, low-risk, and average investor, a self-directed IRA can be a bit complicated for you to handle. With a self-directed IRA, you are at a high risk of making mistakes and falling into a trap leading to fraudulent transactions, hefty penalties, and additional taxes. For most retirement investors, options in a traditional and Roth IRA can create a diversified portfolio. For instance, ETFs available in these standard IRAs are a viable and safer option to diversify your retirement portfolio. An ETF allows you to invest in alternative investments like commodities, metals, private equity, etc. Standard IRAs are easy to open, close, sell, and manage and provide the same tax advantages as a self-directed IRA without any risk of breaching IRS rules.</p> 
<h2>To conclude</h2>
<p>Overall, a self-directed IRA opens up new investment opportunities for your retirement portfolio. However, it is vital to study the pros and cons of these accounts before making any investments. As general advice, experts do not recommend investing your entire savings in alternative assets. However, holding 10% of your money in alternative assets is a feasible bet. If you are serious about using a self-directed IRA for retirement savings, consult a professional financial advisor to help you navigate the process of creating the account and selecting and managing your investments. 
To get in touch with a qualified financial advisor, <b><a href="/match-advisors/search-by-zip?cta=article-show-page">use the free advisor match tool</a></b>. Answer a few questions and get matched with 1-3 background-verified financial fiduciaries. You may also set up a free initial consultation with them before deciding to hire one.</p>

Overall, a self-directed IRA opens up new investment opportunities for your retirement portfolio. However, it is vital to study the pros and cons of these accounts before making any investments.

Things to Know About Self-Directed Roth IRAs (SDIRA)

<p>Retirement planning is a long journey. Assuming you start saving for your retirement in your 20s or 30s, it can still take considerable time for you to accumulate a sufficient corpus. To ensure a comfortable retirement, you must invest in instruments that offer you good returns, tax savings, flexibility, and growth against inflation. When it comes to retirement planning, employer-sponsored retirement plans are usually the first instrument that most people use. If your employer offers such a plan, you are headed in the right direction and can get a good jump start in your investment journey. However, not all jobs offer workplace retirement plans. In addition to this, even with an employer-sponsored plan like the 401(k) account, you may still want to invest more on the side for enhanced financial protection.</p> 
<p>In such a case, an Individual Retirement Account (IRA) can be an excellent option. An IRA is a tax-advantaged retirement account that can be used for long-term savings. There are different types of IRA options that you can choose based on your requirements and tax concerns. Read on further to understand the different types of IRAs, how they work, and what the difference is between a Roth and traditional IRA. You may also<b> <a href="/match-advisors/search-by-zip?cta=article-show-page"> consider consulting a professional financial advisor</a></b> to learn more about the most suitable retirement plan for your needs.</p> 
<h2>How does an IRA work?</h2>
<p>An IRA is a retirement savings account that can be set up at a financial institution, such as a bank, a credit union, or a broker. The Internal Revenue Services (IRS) sets the annual contribution limits for IRAs every year. You can contribute up to the prescribed limits set for that particular year. The annual limit is higher for people aged 50 or over. For instance, for the year 2021, you can contribute up to $6,000 per annum to your IRA. People aged 50 and above are also allowed to contribute a catch up contribution of $1000, bringing the total to $7,000.</p> 
<p>An IRA can offer you tax deferred or tax free growth depending on the type of IRA you choose. Traditional and Roth IRA tax benefits can help in different ways, based on your present and future tax situation. To understand this better, you must know the difference between a Roth IRA and traditional IRA.</p>
<h2>What is the difference between Roth and traditional IRA?</h2>
<p>The main points of difference between Roth IRA and traditional IRA are:</p>
<ol>
<li><b>Taxability of traditional and Roth IRA</b></li>
<p>Both traditional and Roth IRAs offer tax benefits that can help you get a tax break and lower your tax output. However, the only difference lies in when you receive this tax break. In the case of a traditional IRA, the contributions qualify for tax deductions when you file your state and federal tax returns. This means that you get an immediate tax break in the present and get to save money for your current needs. However, the money that you withdraw from your traditional IRA in retirement will be taxed. Your traditional IRA distributions will be added to your taxable income for the year and taxed according to the tax slab you will fall into in the future and the prevailing tax rates at that time.</p>  
<p>In the case of a Roth IRA, you do not get an immediate tax break. There are no tax deductions on your taxable income for any funds that you contribute to your Roth IRA. However, you get to reap Roth IRA tax benefits on your distributions in retirement. Your withdrawals are not added to your taxable income, and you pay no tax on them.</p> 
<li><b>Income limits of traditional and Roth IRA</b></li>
<p>Income limits refer to the income bracket of the investor investing in an IRA. In the case of a traditional IRA, there is no maximum income limit. Anyone with an earned income can contribute to a traditional IRA. However, there are certain income limitations if you or your spouse is also contributing to a workplace retirement plan. In such a case, the tax deductions may be reduced or phased out based on your filing status and income. As of 2021, here are the prescribed limits set by the <a href= "https://www.irs.gov/newsroom/new-income-ranges-for-ira-eligibility-in-2021">IRS:</a><br>

<table style="border-collapse: collapse; width: 100%; height: 85px;" border="1">
<tbody>
<tr style="height: 17px;">
<td style="width: 50%; height: 17px;"><strong>Filing status</strong></td>
<td style="width: 50%; height: 17px;"><strong>Income bracket</strong></td>
</tr>
<tr style="height: 17px;">
<td style="width: 50%; height: 17px;">Single taxpayers with a workplace retirement plan</td>
<td style="width: 50%; height: 17px;">$66,000 to $76,000</td>
</tr>
<tr>
<td style="width: 50%;" width="319">
<p>Married couples filing jointly: Spouse contributing to the IRA is covered by a workplace retirement plan.</p>
</td>
<td style="width: 50%;" width="319">
<p>$105,000 to $125,000</p>
</td>
</tr>
<tr>
<td style="width: 50%;" width="319">
<p>Married couples filing jointly: Taxpayer married to someone who is contributing to a workplace retirement plan.&nbsp;</p>
</td>
<td style="width: 50%;" width="319">
<p>$198,000 to $208,000</p>
</td>
</tr>
<tr>
<td style="width: 50%;" width="319">
<p>Married couples filing a separate return: Taxpayers covered by a workplace retirement plan.</p>
</td>
<td style="width: 50%;" width="319">
<p style="text-align: left;">$0 to $10,000</p>
</td>
</tr>
</tbody>
</table>

<p>Roth IRAs, on the other hand, have very strict income limits for contributions. As of 2021, these are:</p>
<ul>
<li>You can contribute to a Roth IRA as a single taxpayer with a modified adjusted gross income (MAGI) of $140,000 or less.</li>
<li>You can contribute to a Roth IRA as married taxpayers filing jointly, earning a joint MAGI of less than $208,000.</li>
</ul><br>
<p>There are no age limits to contribute to any of the two retirement accounts.</p> 
<li><b>Required minimum distributions (RMDs) for a traditional and Roth IRA</b></li>
<p>Another difference between Roth IRA and traditional IRA lies in the distributions. Traditional IRAs have mandatory Required Minimum Distributions or RMDs. As per the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), if you were 70.5 years of age in 2019, you had to take your first RMD by April 1, 2020. However, if you turn 70.5 in 2020 or later, you need to take your first RMD by April 1 of the year after you turn 72. If you fail to withdraw your RMDs at the right time, you will have to pay a penalty of 50% of the total RMD amount that you missed. The value of each RMD can be calculated as per the life expectancy factor published by the IRS. This can be found on the official IRS website. You can also consult a financial advisor to calculate the value of your RMDs. Further, you can withdraw more than the RMD value as per the life expectancy factor. However, it cannot be lower than the limit. In the case of multiple IRAs, you need to calculate the RMD separately for each IRA that you own. 
There are no mandatory RMDs for a Roth IRA. You can withdraw the funds whenever you like. You can also let the funds remain in the account and not withdraw them during your life if you wish. In such a case, your accumulated funds will be transferred to your next of kin through your estate plan.</p>  
<li><b>Withdrawals in retirement from a traditional and Roth IRA</b></li>
<p>An important point to note here is that while there may be a difference between Roth IRA and traditional IRA in terms of RMDs, other withdrawal rules remain more or less the same for both accounts. Additionally,you can withdraw your earnings only after the age of 59.5 in the case of both traditional and Roth IRAs. If you withdraw your earnings before the age of 59.5, you may have to pay a penalty of 10%. Moreover, to take out penalty free withdrawals from a Roth IRA, you also have to contribute to the account for at least 5 years.</p> 
<p>However, there are certain exceptions. For instance, in the case of a Roth IRA, you can withdraw up to $10,000 of your earnings after 5 years without incurring any penalties if you are a first time home buyer. You can also withdraw your earnings without paying the penalty to cover qualified education expenses. Other reasons for a withdrawal will attract a penalty. However, this penalty only applies to the investment gains and not to your contributions. You can withdraw your contributions anytime without incurring a penalty.</p> 
<p>In the case of a traditional IRA, you can take out penalty free withdrawals before the age of 59.5 only if you are a first time homebuyer or need to cover qualified education expenses. If not, you will have to pay a 10% penalty. This penalty is imposed regardless of whether you withdraw your contributions or investment gains.</p>  
<h2>Traditional IRAs vs Roth IRAs: which one should you choose?</h2>
<p>The suitability of each account would depend on what you are looking for. Both these retirement accounts can offer unique benefits and, at the same time, pose certain limitations. Hence, the final call can only be taken after a careful assessment of your needs and future goals.</p> 
<p>Investing in a traditional IRA can be beneficial in the following situations:</p>
<ul>
<li>If you think you are in a higher tax bracket right now than you would be in retirement, you can consider investing in a traditional IRA. Your money will grow tax deferred, and you will pay tax in retirement when you will be in a lower tax bracket. This way, you will end up saving more money in the long run.</li> 
<li>As of 2021, a single taxpayer can contribute to a Roth IRA with a modified adjusted gross income (MAGI) of $140,000 or less. Likewise, married taxpayers filing jointly can contribute to a Roth IRA with a joint MAGI of less than $208,000. If you do not meet the income eligibility criteria to invest in a Roth IRA, you can go ahead and invest in a traditional IRA. This will help you save more for retirement and also offer tax benefits.</li>
</ul><br>
<p>Investing in a Roth IRA can be beneficial in the following situations:</p>
<ul>
<li>If you think you will be in a higher tax bracket after retirement than right now, you can invest in a Roth IRA. This way, you will pay tax on your contributions now. Your money will grow tax free, and you will not have to pay any taxes on your withdrawals in retirement.</li> 

<li>If you do not want to take mandatory RMDs according to the IRS rules, a Roth IRA can be a better option. With a Roth IRA, the decision to withdraw your money is entirely yours. You can take distributions or not touch your money for the rest of your life – the choice is completely yours.</li> 

<li>A Roth IRA can also be a better option if you want more flexibility in withdrawals. It allows you to take your contributions without paying any penalties. Although the earnings are penalized, you can still access your contributions in times of financial emergencies.</li> 

<li>If you already have a traditional 401(k) retirement account, you may consider investing in a Roth IRA. A traditional IRA offers similar tax benefits as a traditional 401(k) account. So, selecting a Roth account can help you diversify your investment portfolio better.</li>
</ul><br>

<p>It may seem like Roth IRA offers more benefits than a traditional IRA, but its relevance in an investment portfolio can still vary from one investor to another. If you are looking for an immediate tax break, a traditional IRA can be your go to option. Despite the restrictions and limitations in withdrawals, your immediate tax concern will be solved, and you will be able to focus on your other goals better. However, if you are not concerned about your present tax liabilities as much and would rather focus on securing your future, a Roth IRA may be a better alternative. It offers increased flexibility and ease in retirement, along with lowering your tax liability.</p>
</ol>
<h2>To summarize</h2>
<p>Regardless of what you choose, make sure that you understand the pros and cons of both the traditional IRA and Roth IRA present. Knowing the difference between Roth IRA and traditional IRA and the applicable rules can help you make an informed decision. Keep in mind that since retirement accounts are long-term investments, it can always benefit you to consult a professional before you finalize your selection. Talking to a financial expert can help you in picking an instrument that is most suited to your requirements.</p> 
<p><b><a href="/match-advisors/search-by-zip?cta=article-show-page">Use the free advisor match tool</a></b> and get connected with 1-3 vetted financial advisors that may be able to help you invest your money as per your desired financial objectives.</p> 

Regardless of what you choose, make sure that you understand the pros and cons of both the traditional IRA and Roth IRA present.

Roth IRA vs. Traditional IRA: What is the Difference?

<p>In the event of the demise of a family member, management of their retirement account is not likely to be one of the things that first comes to your mind. However, if you are a beneficiary of the deceased person, it is essential that you figure out what it is to be done with their retirement account. A hasty decision or careless planning may cause further grief in the form of taxes and penalties. This is because each retirement account has its particular terms and conditions when it comes to the withdrawal of funds. It is more than likely that you may have to pay a hefty tax if you happen to breach any of the conditions pertaining to the withdrawal of funds. For example, if you inherited a traditional IRA (Individual Retirement Account), you will have to follow the rules and guidelines enforced by the IRS (Internal Revenue Service) on the usage and distribution of funds from the inherited IRA account. Additionally, you’d be required to take RMDs (Required Minimum Distributions) at regular intervals, otherwise, you may incur hefty penalties until the error is fixed. You also need to take into account the fact that IRA withdrawals are also taxable as ordinary income. For further questions or concerns regarding Roth IRA, it is advisable <a href="/match-advisors/search-by-zip?cta=article-show-page">to consult a financial advisor. </a></p>
<p>In the case of a Roth IRA account, there is a significant difference when it comes to withdrawing funds from the account. Simply speaking, a Roth IRA is an individual retirement account wherein after-tax contributions are made, it offers tax-free earnings and tax-free withdrawals. So, if you inherited a Roth IRA account, you can make use of the said funds to your benefit. However, there are certain tax implications that you need to abide by, particularly when it comes to your relationship with the original owner of the Roth IRA and the age of the account. If both these conditions are satisfactorily met, you will be able to minimize the tax component of your inheritance. </p>
<h3>Let’s discuss some of the important implications of the Roth IRA inheritance tax:</h3>
<h3>What is meant by an Inherited IRA?</h3>
<p>In layman’s terms, an inherited IRA refers to an individual retirement account that is passed on to the listed beneficiary after the death of the original account owner. The beneficiary can be either a spouse, family member, unrelated person, or even a trust, estate, or non-profit organization of the deceased person. IRAs serve as a great estate planning option due to their tax benefits. The tax implications for an inherited IRA come into play when the account is passed on to either a spouse or non-spouse. In addition, the kind of inherited IRA, whether it is a traditional IRA or a Roth IRA also plays an important role in determining the tax implications. If you inherit a traditional IRA account, you would likely have to pay taxes on its distributions, however, if you are a beneficiary of a Roth IRA account, your Roth IRA inheritance tax will be minimum, provided you meet certain conditions.</p>
<h3>Does one have to pay taxes on an Inherited IRA?</h3>
<p>A Roth IRA serves as a valuable estate planning tool wherein the tax implications on the beneficiary are minimal and in certain cases, do not exist at all. A Roth IRA includes after-tax contributions so any withdrawal that you make during retirement is completely tax-free provided the Roth IRA account was owned for at least five years from the year the first contribution was made. Thus, it is highly unlikely that you’ll have to pay any inheritance taxes in the event of you being the beneficiary of a Roth IRA account. However, you may have to pay a small amount of tax on the earnings on the Roth IRA contributions but this may only occur if the distributions from an inherited Roth IRA are taken before the expiry of the five-year holding period.</p>
<p>Consider a scenario wherein you were the recipient of an inherited Roth IRA where the original owner of the account passed away in 2020, and the account was opened in 2015 or earlier. In this case, the entire amount of the Roth IRA account that you would have received as an inheritance would be treated as tax-free. This is because the account fulfilled the criteria of the 5-year holding period as mandated by the IRS. This tax-free status for an inherited Roth IRA would also stand true in a scenario wherein the contribution for the year 2015 was made in 2016 since as per rules, both a traditional IRA and a Roth IRA can be sponsored for a financial year, which can be as late as the tax filing deadline for April.</p>
<p>On the other hand, if you inherited a Roth IRA account that was opened in the following years, 2016, 2017, 2018, 2019, or 2020, and the owner passed away in 2020, the Roth IRA funds would be taxable. However, if you wait till the completion of the 5-year holding period, you would be eligible to receive tax-free distributions. Consider the case wherein a Roth IRA account was opened in 2017. The entire Roth IRA balance would become available tax-free from the year 2022 onwards. If the deceased person made a contribution towards his Roth IRA in the year 
2019, then you must wait until 2024 to receive tax-free earnings. </p>
<p>Moreover, this does not mean that you cannot get hold of any tax-free funds from an inherited Roth IRA before the expiry of the 5-year holding period. You can withdraw all the funds from the account except for the Roth IRA earnings. So, when you order your withdrawal, the first distributions are taken out from the regular contributions. The subsequent distributions are taken from conversions and Roth rollovers (per a first-come-first go basis) if any. The last section of the withdrawn funds is composed of earnings on contributions. What this means for you is that you can avoid the Roth IRA inheritance tax before the expiry of the 5-year holding period, provided you only withdraw the contributions and conversions. Speaking of conversions, the 5-year rule doesn’t come into effect if it is an inherited Roth IRA. As per the IRS rules, the beneficiaries of a Roth IRA account are exempt from payment of a 10 percent tax penalty on withdrawal of Roth IRA funds before the reaching age of 59.5. </p>
<h3>Enumerate the tax implications on Required Minimum Distributions (RMD) for a Roth IRA</h3>
<p>It is mandated by the IRS to take withdrawals from your inherited Roth IRA if you are not a spouse of the deceased person failing which a tax penalty of 50 percent would be levied upon you on the sum not withdrawn. This shall be applicable even in a scenario wherein the distribution does not come under the ambit of taxation originally. Alternatively, if you are a spouse, and treat the inherited account as your own, you would have access to other provisions and exemptions not available to non-spouses. </p>
<p>When it comes to an inherited Roth IRA account, your relationship with the original account owner and when the account owner passed away, plays a major role in the taxable amount that you may or may not have to pay on your inherited Roth IRA. </p>
<ul>
<li><b>Based on your relationship: </b>If the beneficiary of an inherited Roth IRA account is a spouse, the IRS lets the spouse use the funds from the inherited account as theirs only. However, if the beneficiary is not the spouse, then different rules apply to them.</li>
<li><b>Based on the death of the account holder: </b>On December 20th, 2019, The Setting Every Community Up for Retirement Enhancement (SECURE) Act, 2019 was enforced wherein the rules for inherited retirement accounts including the Roth IRA, were altered. If your loved one (the original account owner) passed away before December 31, 2019, then the new IRS rules do not apply to you but if the death occurred after the specified date, then they will have to adhere to new distribution rules of the Roth IRA.
</li>
</ul>
<h3>What happens when you inherit a Roth IRA from a spouse?</h3>
<p>If you inherit a Roth IRA account from your spouse, then you’re subject to different rules as per the IRS. These are as follows:
</p>
<ul>
<li>You can either designate yourself as the new owner of the inherited account or transfer the sum to your existing Roth IRA account. However, in order to do this, you must be the sole beneficiary of the inherited account. In this instance, you would have to pay a 10 percent penalty and the Roth IRA inheritance tax, if you withdraw the funds before reaching the age of 59.5 years. 
</li>
<li>You also have the option to create a special Roth IRA known as the beneficiary IRA wherein you cannot make any contributions to the account however you will be mandated to take RMDs. You can also extend your distributions throughout your lifetime. In addition, you’re exempt from payment of a 10 percent penalty for withdrawing funds before reaching the age of 59.5. </li>
<li>Unlike a traditional IRA, you can withdraw your Roth IRA distributions in a lump sum. To avail of tax-free withdrawals, the account must have fulfilled the 5-year rule. Moreover, if you choose to withdraw the funds in cash, you forego the opportunity to get tax-free growth on those funds. </li>
</ul>
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<h3>What happens when a non-spouse inherits a Roth IRA?</h3>
<p>If a beneficiary receives a Roth IRA inheritance from a non-spouse, the account would not be treated as yours. As per the rules, if you inherit a Roth IRA from a person who has passed away in 2020 or later:</p>
<ul>
<li>You can open a Roth IRA account in your name and can transfer the proceeds from the original Roth IRA account into yours. Though, keep in mind that you will be liable to withdraw RMDs beginning from December 31st of the year following the death of the original Roth IRA account holder. In addition, you do not have the discretion of spreading the distributions from this particular account over your lifetime. According to the SECURE Act, all distributions should be made within 10 years of the demise of the original account holder. If there is more than a single beneficiary, the distributions will be carried out as per the life expectancy of the oldest beneficiary. Furthermore, you can withdraw your distributions at any time and the earnings would not be taxed provided the 5-year rule is met. </li>
<li>If you qualify as an eligible designated beneficiary, then you have the option of opening an inherited Roth IRA account that’ll enable you to spread your distributions over time. </li>
</ul>
<p>
There are certain qualifications that one needs to meet to be considered as an eligible beneficiary. These are: 
</p>
<ul>
<li>You inherited a Roth IRA account from your spouse</li>
<li>You are a minor child of a Roth IRA account owner</li>
<li>You have a chronic disability or disease</li>
<li>There was a 10-year age gap between you and the original Roth IRA account holder</li>
</ul>
<h3>What happens if you inherit a Roth IRA from a person who died in 2019 or earlier?</h3>
<p>In such cases, one has the option of:</p>
<ul>
<li>Opening an inherited Roth IRA account provided you take out RMDs. Though, you have the option to spread the RMDs over your lifetime to maximize tax-free growth. </li>
<li>Withdrawing all funds within five years to ensure you don’t have to take any RMDs</li>
<li>Taking a lump sum distribution for the inherited Roth IRA irrespective of the fact when the original account owner passed away. Moreover, if the account has been active for 5 years, you are not bound to pay any taxes or a penalty regardless of your age at the time of drawing the funds.
</li>
</ul>
<h3>To conclude</h3>
<p>If you were the beneficiary of a Roth IRA, there are several ways you can maximize your good fortune. You can either leave the assets in the account for as long as possible to take advantage of tax-free growth or create a special Roth IRA account yourself to spread the distributions throughout your life. You can also withdraw your Roth IRA distributions in a lump sum and invest that sum in a financial product or investment of your choice. However, to take full and proper advantage of the Roth IRA inheritance tax benefit, you need to be fully appraised of the specific rules and regulations concerning the matter. It is advised that you seek the guidance of a professional financial advisor who can help you understand these rules and identify opportunities for you to maximize the growth of the money you received as an inheritance. <a href="/match-advisors/search-by-zip?cta=article-show-page">Use the free match tool </a>and get connected with 1-3 advisors that can help you create an effective strategy to grow your finances. </p>

Tax Implications of an Inherited Roth IRA: What You Need to Know

<p>Converting one’s traditional individual retirement account (IRA) into a Roth IRA is not a new occurrence. Investors tend to jump ship having been attracted by the prospect of tax-free withdrawals from a Roth IRA during their retirement years. Though there are quite a few benefits associated with this conversion, it may not be the best option for you, especially if you’ve managed to save a good retirement corpus for your golden years. At the time of converting a traditional IRA into a Roth IRA, a tax is levied upon the investor that may sometimes push the investor to a higher tax bracket. Thus, one needs to be sure of their decision when it comes to making a Roth conversion. <p>
<h2>Let’s discuss some of the cons related to a Roth IRA conversion:</h2>
<h3>1. Higher taxation:</h3>
<p>You have to consider the big picture when going for a Roth IRA conversion. Tax-free withdrawals are one of the key features of a Roth IRA which attract an investor. However, you need to take into account that you need to pay taxes for the first five years after you convert a traditional IRA to a Roth IRA before you are allowed to make a tax-free withdrawal from your Roth account. Say, for instance, you have managed to save $100,000 in your traditional IRA and are planning to convert that into a Roth account. You would most likely fall under the 24 percent tax bracket, i.e., you would have to pay a tax amount of $24,000. If your savings are higher than this, you would fall under a higher tax bracket, thereby increasing the amount of tax that you are liable to pay. 
</p>
<p>Further, there is a good amount of uncertainty associated with the tax bracket that you may ultimately fall into when opting for a Roth conversion. You may end up being in a higher tax bracket when you could have otherwise been in a lower tax bracket if you had stuck with a traditional IRA. The major drawback here is that you may not be entirely sure which tax bracket you’ll fall into, making the conversion a calculated guess at best that may or may not be the right decision for your retirement plan. 
</p>
<h3>2. Inability to make high-return investments</h3>
<p>
If you convert your traditional IRA to a Roth IRA, there may be a possibility that you miss out on investing in favorable opportunities such as stocks, mutual funds, etc. Once you deposit your money into a Roth account, though it falls under the no tax deduction slab, you are also not able to generate any returns over that money. This may seem like a good idea initially since no taxes are levied; however, with the onset of inflation, the bare minimum cash savings may not seem like a lot of money.
</p>
<p>This situation can have a lasting effect on your finances. Since you may not be able to generate more wealth for yourself, your money may not grow. Additionally, you could miss out on recovering your deductions made at the time of converting your IRA due to the taxes paid at the time of conversion. The chance that you may recover your lost money reduces further when you near your retirement. 
</p>
<h3>3. Inability to monitor withdrawals</h3>
<p>Having the ability to make tax-free withdrawals can both be a blessing and a curse. In a traditional IRA account, there are restrictions placed on the withdrawals that can be made during the retirement period. On each withdrawal made by a retiree, taxes are levied which forces people to be careful when taking money out of their traditional IRAs. However, these restrictions are not present when it comes to a Roth IRA, which allows individuals to make as many withdrawals as they like. It can be a blessing in certain cases, as you can withdraw your funds when facing an emergency; however, the practice does have the drawback of quickly depleting your assets if you are not cautious about it. </p>
<p>Moreover, if you exhaust your assets, you can invite stress, particularly in instances when you do not have an alternative source of income to replenish your Roth IRA funds. You need to be careful about your savings to ensure that your assets are spread over your retirement equitably and invested in a diversified portfolio to be able to continuously create wealth. </p>
<p>
Further, it must be noted that a 10 percent tax penalty is levied on withdrawals in a traditional IRA. This tax is over and above the normal income tax that you will be liable to pay; whereas, in a Roth IRA, no such tax penalty is levied on withdrawals. Letting your funds grow uninterrupted can help you harness the power of compounding but only if you do not make substantial withdrawals. However, knowing that you will not be charged tax when making withdrawals may lead you to become complacent with your funds and delete your savings without exercising proper caution. </p>
<p>Thus, Roth IRA savings may be more beneficial for investors who can exercise discipline and for those who do not touch their savings until they genuinely need the funds for a financial or medical emergency. </p>
<h3>To summarize</h3>
<p>As is the case with most financial products, Roth IRAs have both pros and cons. The cons related to a Roth IRA however can be detrimental for your future retirement, and in some cases may even lead to a reduction in your assets. Moreover, the entire process of converting your traditional IRA to a Roth IRA can be stressful, as it involves you taking calculated risks which ideally should be done after gathering full information. </p>

<p>So, if you are thinking about converting your traditional IRA into a Roth IRA, it might be helpful for you to seek professional guidance from a <a href="/match-advisors/search-by-zip?cta=article-show-page">financial advisor</a> to help clear any doubts that you may have about the Roth IRA conversion. </p>



In this section, you will find articles that will help you learn more about Roth IRAs and retirement related investments that will assist you while planning for your retirement.

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