Helping Without Hurting Your Retirement

By Holly Gallagher, September 10, 2017, Traverse City Record Eagle

A large portion of the millennial generation has come of age during complex and challenging economic conditions. While the economy and job market have begun to improve, the headwinds that millennials have faced in starting their careers and making long-term financial plans have led to a few trends that are affecting their parents’ generation as well.

Many parents of adult millennial children find themselves wondering how much they should help their kids. Providing financial support to a family member can affect their own retirement plans.

Staying in the nest longer

One way young adults are staying afloat is by staying in their parents’ homes. By providing free or cheap housing, parents arguably are preventing their young adult children from falling into greater debt. The expectation, of course, is that these young adults will progress in their careers and eventually have enough earning power to achieve financial independence. But can you count on this happening? More important, what’s the exit strategy?

Footing the bill

If you’re still on the hook for financial support for your young (or not-so-young) adult child, you’re not alone. According to a 2014 American Consumer Credit Counseling survey, more than one-third of U.S. households provide regular financial assistance to adult children including paying rent, repaying student loan debt and covering car payments and cell phone bills.

Even if you haven’t dipped into your IRA to pay for your daughter’s wedding (and, please, don’t do that), these smaller amounts — a couple of thousand or even a few hundred dollars at a time — can have a detrimental effect on your retirement savings if they continue over the long term.

Is it a loan or a gift?

Another element to consider when providing substantial financial support to your child is the annual IRS gifting limit. For 2016, couples can gift up to $28,000 before having to report the amount to the IRS. In some instances, the same limit can be applied if you loan the money to your child (e.g., as a down payment on a house), but either consider it interest-free or charge below-market interest. For any amounts over these limits, you’ll be on the hook for taxes.

It’s important to note that gift and estate tax rules differ from state to state, and each situation is different. Consult with a qualified tax professional about the impact to your tax bill.

Setting a precedent

As parents, your goals are noble and well-intentioned — but do your actions foster the habits that will lead to financial success and independence? Or are they possibly setting the expectation that you’ll continue to fund a lifestyle that your children may never be able to afford on their own?

Learning to live within our means can be a challenge at any income bracket, and cutting your kids off financially or enabling bad habits is a tough line to tread. Here are some compromises you might consider:

  • Charge rent. Don’t necessarily expect market value for your accommodations, but you have the right to set boundaries that keep both parties feeling comfortable with the arrangement.
  • If not rent, pick an expense and be consistent. Among utilities, groceries and other expenses, there are many different ways your millennial can be accountable for at least some household needs.
  • Set boundaries. Separate wants from needs — you don’t need to finance your kids’ vacation or spa visits.
  • Live within your own means. Unless you want to end up on their doorstep someday when your retirement funds run out, be disciplined about sticking to your budget and savings plan.

Above all, make sure to discuss your actual spending needs both as a family and with your financial and tax professionals. You’ve put time and effort into building a sustainable retirement plan. Don’t derail your hard work by giving away more than you can afford.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


These Are The Top 10 States For Retirement

By Alana Stramowski, January 3, 2017, Homehealthcarenews.com

The majority of older Americans wish to age in place, but aside from living near family and friends, they also are looking at other factors to choose where they want to live as they age.

The best states for retirement were found based on life expectancy, tax friendliness ranking, violent crime rate per 100,000, the cost of living index and health care costs, according to a recent study from MoneySavingPro.com.

Taking the No. 1 spot on the list is Idaho. The state has a life expectancy of 79.5 years, a tax friendliness ranking of 28, violent crimes per 100,000 is 212.2, a health care cost per capita of $5,658 and a cost of living index rating of 88.2.

Following Idaho is Utah in second place. Utah has a life expectancy of 80.2, a tax friendliness ranking of 27, violent crimes is 215.6 of 100,000, a cost of living index rating 92.4 and a health care cost per capita of $5,031, which is the lowest on the top 10 list.

The states with the best tax friendliness rankings are Alaska in first place and Colorado in second place, the study found.

There are also a few warmer-weather climates on the top 10 list, which many seniors strive for. Those states include Hawaii, Arizona, Kentucky and Georgia.

These are the top 10 best states for retirement:

1. Idaho

2. Utah

3. North Dakota

4. Hawaii

5. Arizona

6. Colorado

7. Kentucky

8. Georgia

9. Iowa

10. Kansas

On the flip side, the 10 worst states for retirement were revealed, according to the study. The worst is West Virginia. The state has a life expectancy of 75.4, a tax friendliness ranking of 46, 302 violent crimes per 100,000, a health care cost per capita of $7,667 and a cost of living index rating of 103.7.

The worst 10 states for retirement are:

50. West Virginia

49. Tennessee

48. South Carolina

47. Alaska

46. Nevada

45. New Jersey

44. Massachusetts

43. Texas

42. New York

41. Wisconsin

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


How to Save for Retirement in Your 40s

By Rodney Brooks, Jan 8, 2017, THE STREET.COM

Many people wait until later in life to start saving for retirement. It gets complicated with kids and aging parents, but Gen X can find a winning strategy.

Beginning your retirement savings in your 20s and 30s is a great strategy, recommended by many financial planners. But many people wait until their 40s – after they have settled into family life with marriage, automobiles, kids and first homes. That’s just the reality. But it’s still not too late to begin savings habits that will pay off handsomely once you reach retirement age.

“As you get into your 40s, chances are you are making a little more money, starting to hit stride in your career, and maybe you have kids,” says Tom Mingone, founder and managing partner of Capital Management Group. “You may have discretionary income.”

The most effective method to save is out of your paycheck, through your 401(k), he says. “The best way to save is a direct deduction out of your check,” Mingone says. “Extra money is like extra closet space. There is no such thing. You use what you have. Pay yourself first. Have money coming out on the 1st or 15th (of the month). You will get used to living on less.”

In their 40s is when people have a job history and higher income, says Laurie Blackburn, first vice president, Investments at the Speck – Caudron Investment Group of Wells Fargo Advisors in Alexandria, Va. ”It is time to start maxing out your IRA and 401(k) contributions, if they haven’t,” she says. “If you start younger, you can increase that amount every year.

A lot of 401(k)s have a built-in escalator – 3% (contribution rate) goes to 4%. Every year, your contribution increases 1 percent, till you are maxed out.” By the time you are in your 40s, you should be maxed out, she recommends. Next up, you should look at your asset allocation and risk tolerance, she says.

Bob Stammers, director of investor engagement for the CFA Institute, says that even though their 40s are top earning years for many, it is also the time when people have many claims on their income, especially things like their kids’ college tuition. For that reason he says he would like to see the retirement system go from annual dollar limits to lifetime limits.

“At different times of people’s lives they have significant income they can contribute to retirement plans,” he says. “For most people, it’s in their 40s. People need to think about maintaining their lifestyles and put away any windfall or increase in salary.” Of course, many people in their 40s start to consume more, because they’re earning more. “Those that don’t get disciplined about savings habits and tracking expenses don’t have money they can put toward retirement,” Stammers adds.

Mingone says no matter which stage you are in life, you also need to think about taxes.”You always want to be aware of your tax bite,” he says. “We think of saving for retirement in three bucket – taxes now, taxes later and taxes never,” he says. “Taxes now are mutual funds. You pay taxes now on gains. Taxes later are things like 401(k) and IRAs. You get a deduction, but you don’t pay taxes now. You pay taxes later. Taxes never are things like Roth 401(k), Roth IRA and life insurance. If you structure it property, all you income will be tax free.” He says it’s also important to be actively manage your investments at the end of the year: Harvest your losses and minimize earnings. “You don’t want to be taxed heavily,” he adds.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


No Savings, No Backup Plan, No Fairy Godmother: How to Handle a Financial Disaster

By Susannah Snider, Oct. 18, 2016, US News & World Report

A financial disaster is hard enough to navigate. But it gets even harsher when you have no emergency fund or backup plan to help you work your way out of it. So, what’s an unlucky person to do after, say, a broken-down car or job loss leaves you short on cash and high on stress?

Fortunately, the financially unfortunate have access to a range of resources for patching up a financial disaster, experts say.

But keep in mind that all of these choices have their downsides. “Ideally you wouldn’t choose any of these options,” says Stephanie C. McElheny, a certified financial planner and assistant director of financial planning at Hefren-Tillotson in Pittsburgh. “None of them are good options – it’s just lesser evils.”

Here’s how to handle a money mishap when you have no backup plan – and no fairy godmother to boot.

Sell your stuff. A quick way to find extra cash without tapping credit is to hawk your belongings. “There are lots of options to get rid of your stuff,” writes Niv Persaud, a certified financial planner and managing director of Transition Planning & Guidance, a boutique financial advising firm in Atlanta, in an email.

Consider peddling your hand-me-downs on eBay, Craigslist and at secondhand stores. Heck, if you can survive without your car – and you’re in dire financial straits – consider letting it go.

Land a part-time job. If you’ve got time to spare, look into applying for a side gig. ”With the holidays around the corner, many retailers are looking for additional help,” Persaud writes. “Another option is [to] use your skills on sites, such as Fiverr, Elance, etc. You can also bite the bullet and babysit for friends [and] family or take care of their pets when they’re out of town.”

By cutting costs and using the debt snowball method, this duo slashed thousands in 25 months.

Slash spending. Carve out room in your budget by trimming expenses wherever possible. If housing is a major budget-buster, for example, consider getting a roommate, says Jamie Ebersole, a certified financial planner in Wellesley Hills, Massachusetts.

Do what you can to cut down on eating out and shopping. Re-negotiate or cancel unnecessary monthly bills, like your cable bill, to make your last dollar go further.

After you’re done digging your way out of this financial hole, consider continuing these good behaviors until you’ve built up at least six months of living expenses in an emergency fund.

“It’s best to just be proactive and have that emergency reserve, so this can be avoided, or at least mitigated [in the future],” McElheny says.

Work with your creditors. If your financial disaster revolves around debt, you may be able to negotiate a gentler repayment plan or reduced monthly bill – and carve out some extra room in your budget.

“Actually talk to your creditors,” Ebersole says. “Most creditors are willing to work with you if you’re upfront with them and aren’t trying to hide it.”

Tap your home equity. If you’re house-rich but cash-poor, borrowing against your home’s value can help you fund major, unexpected expenses, like medical bills, with a relatively affordable loan.

Consider a home equity line of credit, a type of revolving credit in which your home serves as collateral. A lender will set your credit amount based on the home’s appraised value, the balance owed on the mortgage and your ability to repay, including your credit history, according to the Consumer Financial Protection Bureau. Or consider a home equity loan, which provides a fixed amount of money, which you repay over a set time period.

Credit card expert Beverly Harzog offers some unusual tips in her new book ’The Debt Escape Plan.’

Borrow against your insurance policy. You can access relatively affordable debt by tapping the cash value of your life insurance policy, experts say. In this case, the insurance company will essentially lend you money while holding your policy as collateral.

Keep in mind, however, that if you fail to repay your loan – and it balloons to exceed the policy’s cash value – your policy could lapse and trigger a major tax bill.

Tap your retirement savings. If you have a 401(k) plan, you can borrow up to 50 percent of its vested account balance, or up to $50,000, whichever is less. So, to borrow the full $50,000, you’ll need to have at least $100,000 in your plan. Loans borrowed against your 401(k) must typically be repaid within five years. And failure to repay on time can leave you saddled with penalties and fees.

Savers who have been squirreling away money in a Roth IRA for at least five years can withdraw their contributions penalty-free. “You can always take out the principal without paying any taxes on it,” Ebersole says.

Bottom line: Even if you can repay loans taken from your retirement accounts on time, you’ll miss out on the gains you would have realized had you left those funds to grow on the investment market.

Borrow from your 529. Contributors can withdraw any funds placed in a 529 plan, which is for educational expenses, Ebersole says. But withdrawing money for noneducational expenses isn’t ideal since it can trigger taxes and a 10 percent penalty on the account’s earnings.

As with borrowing from a retirement account, dipping into your college savings account will cost you the returns you would have seen had you let the funds grow on the market.

Ask family and friends. ”Family and friends are always a good place to go if you don’t have any other options,” Ebersole says.

Don’t forget that mixing loved ones and loans can make for a potentially toxic combination. “Borrowing money in any capacity from family has the potential to backfire and can really strain relationships,” McElheny says.

Declare bankruptcy. Another last resort is to declare bankruptcy. But keep in mind that going through bankruptcy will make it hard to access credit for years in the future, including loans for a child’s college education and other useful debt.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


8 Ways to Safeguard Your Financial Life as You Age

By Teresa Mears, Oct. 20, 2016, US News and World Report

Taking steps when you’re younger can be essential to keeping your money safe in your later years. We’ve all heard the horror stories about elderly people being fleeced of their life savings, falling prey to con artists or losing their homes because they never got a bill for their real estate taxes.

We all think it could never happen to us. But you may want to think again. Research shows that even people who never succumb to dementia lose some of their financial prowess as they age. Unfortunately, they don’t always lose confidence in their ability to manage their own finances. That can lead to financial losses.

People of any age, but especially older people, should take steps when they are young to protect themselves from financial errors later in life. They can include steps such as automating bill pay or discussing financial decisions with a trusted friend or relative before taking any action.

Financial scams often target older people, partly because they have more money but also because they are often seen as more trusting. Even people savvy enough to avoid scams can make financial mistakes because they’re disorganized or forgetful. But they may be too proud to ask for help.

“If you’re in that position, you may be in a state of denial. And you don’t want to [ask for help], and you’re embarrassed,” says Joseph Lucey, president of Secured Retirement Advisors in St. Louis Park, Minnesota. “You want to plan for the worst but hope for the best.” Awareness is the first line of defense to keep older adults safe from fraud.

Among the most vulnerable are widows and widowers whose partners previously handled all the finances. Not only are they dealing with unfamiliar transactions, they’ve lost a trusted partner with whom they could discuss decisions. “Spouses keep an eye on each other. They have somebody else to keep tabs on them,” says Scott Tucker, a fiduciary investment advisor in Chicago.

A 2009 study by the Center for Retirement Research at Boston College found that people made the fewest financial missteps between ages 43 and 63, with 53 being the peak financial age. There are things people of all ages can do to avoid becoming the victim of bad financial decisions, but getting systems in place can be particularly important as you age.

Here are eight steps to take to safeguard your financial life:

Automate transactions. Anyone of any age can forget to pay the mortgage or real estate taxes. Automate as much as you can, from utility payments to mortgage payments to required distributions from retirement accounts. And have anything you can deposited directly into your bank account. Then make a list of what you have automated and let your heirs know where it is. Don’t automate and ignore, however. “You still need to look at your statements, just like you look at your bills,” says Gerri Walsh, senior vice president for investor education at the Financial Industry Regulatory Authority, which maintains a securities helpline for seniors as well as a BrokerCheck service, which allows consumers to check the employment history, certifications and license of brokers as well as any serious complaints. “It’s still important to know what you’re being charged.”

Set up banking alerts. Most banks will alert you if your balance drops below a certain level. You can also set up alerts for large credit card purchases, due dates for bills and reminders to check your statements. Alerts can come via text or email, whichever you’re more likely to see. You can also create calendar alerts on your phone or computer or write reminders on a paper calendar.

Keep your estate planning documents updated. Depending on your situation, you might need a will, a living trust, health care directives, a power of attorney or other documents to let someone else manage your affairs while you’re still alive and to handle your business once you’ve passed on.

Organize your important papers and let someone know where they are. Make a list of assets, gather important documents and passwords and put them in a secure place, perhaps a home safe or waterproof box. Then make sure one of your children or trusted confidante knows where they are in case you’re incapacitated.

Simplify your accounts. Consolidate brokerage and bank accounts. Close accounts that have only small amounts of money. That gives you less to manage. If you have multiple credit cards, use just one so you’ll have only one bill to pay.

Sure, boomers have time and experience on their side, but they could still learn a thing or two about money from millennials.

Don’t make quick decisions. Sales people, both good and nefarious, push for a quick response because they know people are more likely to buy in the heat of emotion. Make a pact with yourself that you won’t make any significant financial move, such as moving your investments to another brokerage firm or buying a new car, without first discussing it with a trusted friend or relative. “Emotion ties into fraud susceptibility,” Walsh says. “When older individuals were invited into a heightened emotion state … they were more likely to be receptive to a fraudulent pitch.”

Consider sharing information. If you want someone else to help monitor your finances, have copies of your statements sent to a trusted friend or relative. Authorize your financial advisor to discuss your finances and concerns with a third party, and request an annual meeting to which you’ll bring other family members or friends. You can also give account passwords to those you trust so they can keep tabs on your financial affairs. But be careful with whom you share your information. “There’s pros and cons,” Walsh says. “Sometimes the issue is stranger danger, and sometimes the danger is family fraud.”

Sign up for the Do Not Call registry. That won’t end all nuisance, fraud and solicitor phone calls, but it will reduce the number of them. Refuse to answer other calls from people you don’t know or immediately hang up, and decline offers from strangers who call trying to sell you something, “fix” your computer or otherwise try to separate you from your money.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


You Got a Pay Raise, Here’s How Not to Blow It

By Jeff Reeves, September 26, 2016, USA Today

Congratulations, you’re (probably) getting a raise!

According to Aon Hewitt’s 2016 U.S. Salary Increase Survey of more than 1,000 companies, base pay will rise 2.8% on average in 2016 and is expected to rise 3.0% in 2017. And that’s on top of the 5.2% boost in median household income — up to $56,516 in 2015 — that the U.S. Census Bureau recently reported.

Of course, that’s the average. Unsurprisingly, the report from talent firm Aon Hewitt indicated that “low performers” will typically get nothing in the way of raises.

And bigger picture, certain industries are looking better for employees than others. Aon Hewitt found the 2016 budget for salary increases at property and casualty insurers was the brightest, with a 3.3% bump on average, while the outlook for workers in the oil and gas industry was the bleakest, with just a 1.5% increase in overall salary budgeted.

Getting a bigger paycheck is always good news. But finance experts say running right out and spending that extra cash may not be the best idea.

“If you have more money coming your way, I recommend you siphon it off,” said Charles Sizemore, chief investment officer of Sizemore Capital Management in Dallas. “Continue to spend at your current levels, and use the excess to save and invest.”

So where, exactly, should you put that cash instead of buying a new flat screen or a tropical vacation?

Here are some ideas:

Build emergency savings: A staggering 66 million Americans have zero saved up for an emergency like car repairs or a broken fridge. “An ideal savings cushion is enough to cover six months of expenses,” said Greg McBride, chief financial analyst at Bankrate.com. “Getting to this goal will certainly take time, but it is important to have a direct deposit from your paycheck into a dedicated savings account and increase the amount of that deposit with each pay increase.” This fund won’t just help you replace a broken appliance, but also help you avoid troublesome financing options, such as payday lenders or credit cards that can charge high fees or interest.

Increase your retirement fund. After a rainy day fund, the next must-have to finance is your retirement fund. That means taking advantage of a tax-deferred account like a 401(k) — particularly if your employer matches the funds you contribute. “In addition to building a nest egg for the future, you’re getting a tax break today,” said Sizemore, since contributions to a 401(k) lower your total taxable income and IRA deductions are tax deductible.

Pay down debt: If you have a high-interest-rate loan that’s outstanding, either for credit card debt or a car or tuition, then zeroing out that balance can be one of the most effective investments you can make. “Paying down a 16% credit card balance is a risk-free return of 16%,” said McBride.

To Your Successful Retirement

Michael Ginsberg, JD, CFP®


What Millennials Are Doing Right, and Wrong—About Retirement

By Suzanne Woolley, June 29, 2016, Bloomberg.com

Millennials may be overly confident about their investing skills, but many are handling their 401(k)s with savvy, a new study by Wells Fargo Institutional Retirement & Trust suggests.

More than a quarter of younger workers—28 percent—have at least 10 percent deducted from their paychecks, according to the study. It analyzed the behavior of 4 million employees in the plans the company administers, from 2011 to 2016. Among the older generations, 35 percent of Gen X-ers and 44 percent of boomers were at the 10 percent contribution mark.

Boomers get their own shout-out. If you assume they are the ones earning $100,000 or more, which they likely are, they are the “most improved” group over the study’s five years among those who contribute at least 10 percent. There was a 15.3 percent increase among those making $100,000 or more hitting the 10 percent rate. At the same time, there is a lost opportunity for boomers. Just 7.7 percent of participants 50 and older make the additional $6,000 “catch-up contributions” allowed by the IRS.

Efforts to get employees to start saving earlier and a widespread trend to auto-enroll employees in retirement plans have helped put more people of all ages in the most popular default investments, target-date funds. These funds are widely diversified and automatically adjust asset allocations between stocks, bonds, and other assets based on a person’s age, leading up to a more conservative portfolio at retirement. The survey found that 85 percent of millennials use a managed investment such as a target-date fund, compared with 77 percent of Gen X-ers and 73 percent of boomers.

“We’re seeing the first generation that had the full, out-of-the-gate use of tools like auto-enrollment and target-date funds, and it’s really getting people into plans early and getting them diversified,” said Joseph Ready, head of Wells Fargo Institutional Retirement & Trust. “Whether they’re astute about the market or not, these things will help people take advantage of, hopefully, longer-term returns from the equity market over the next 35 to 40 years.”

When younger savers do fiddle with their 401(k) accounts, some of them are making smart tax moves. Sixteen percent of millennials elected to use a Roth 401(k), compared with 12 percent across all generations. Contributions that go into a Roth are after-tax, so starting one when you’re young and in a low tax bracket is a good strategy.

For all that, there’s room for improvement among millennials. If 28 percent are deferring at least 10 percent of their pay, seven out of 10 aren’t. Employers can help by automatically escalating employee contributions each year and doing so at a higher rate. Employers have been concerned about being too aggressive with this strategy, and those that do it typically increase the contribution rate by 1 percent annually.

Wells Fargo’s Ready urges employers that use auto escalation to bump employees up by 2 percent a year to get them up to that 10 percent savings goal faster. Wells Fargo data show that if employers bump the auto-increase rate from 1 percent to 2 percent, there’s no big difference in the rate of employees who opt out of the increase. And it makes a huge difference in how prepared they are to retire, Ready said.

Employees can take matters into their own hands, of course. Every time a raise or a promotion comes along, make it a point to increase your savings rate, whether through your 401(k) or in a separate savings account. That use of today’s rewards will yield a far more meaningful return tomorrow.

To Your Successful Retirement!

 Michael Ginsberg, JD, CFP®


5 Huge Roth IRA Advantages You Need to Know

By Motley Fool, June 3, 2016

Saving for retirement isn’t easy, but I probably don’t need to tell you that. We’ve been hearing it on a pretty consistent basis from every survey and study published by finance-based firms.

For example, according to GOBankingRates, a third of Americans have absolutely nothing in retirement savings, and another 23% have between $1 and $1,000. On the flipside, its survey showed that fewer than 1 in 5 Americans has in excess of $200,000 set aside for retirement.

A separate study conducted by the Insured Retirement Institute showed that a whopping 45% of baby boomers hadn’t yet begun saving, which is very scary given that their leverage to grow their nest eggs is substantially reduced by waiting.

And if you still don’t believe this data, all you have to do is look at the published personal savings rates in the U.S. from the St. Louis Federal Reserve for confirmation. As of May 2016, personal savings rates were just 5.3%. Comparatively, consumers in most developed nations save in the high single digits to mid-double digits.

Roth IRA advantages you need to know

But, arguably the greatest retirement tool available is within reach of nearly all Americans: the Roth IRA. Roth IRAs have inherent advantages that very well could help get Americans of all ages on the right track for retirement, assuming you fall under the income requirements that allow you to contribute. You can find these requirement on the IRS website, but the rough gist is that only about the top 10% of income earners will be excluded from opening or contributing to a Roth IRA — although upper-income earners are probably more likely to have saved a decent amount toward their retirement, anyway.

For the remainder of Americans who qualify, here are the five huge Roth IRA advantages you need to know.

1. Tax-free income in retirement

The clearest advantage of choosing a Roth IRA over any other retirement tool is that any investment gains within a Roth are completely free of taxation for the life of the account. Contributions to a Roth are based on after-tax dollars, meaning you’ll receive no upfront tax deductions for your contributions. By comparison, employer-sponsored 401(k)s and traditional IRAs require you to pay federal taxes once you begin making withdrawals during retirement. In return, these tax-deferred accounts allow you to invest with before-tax dollars, thus reducing your current-year tax liability.

However, the back-end benefits could be enormous with a Roth. Because of time and compounding, you could wind up saving yourself from having to pay five or six digits’ worth of cumulative taxes during your retirement. Furthermore, with a Roth you’ll have less chance of being hit with a Medicare premium surcharge or having your Social Security benefits taxed, since Roth IRA distributions don’t count toward your income. With life expectancies lengthening, and medical costs outpacing inflation and wage growth, being able to keep more of your income in retirement is important.

2. No minimum required distribution

Nearly as important as never having to pay tax on your Roth IRA distributions is the fact that Roth IRAs have no minimum withdrawal requirements once you reach retirement age.

For example, 401(k)s and traditional IRAs mandate that retirees begin making minimum withdrawals after age 70 1/2 (and remember, you’ll pay federal income tax on these withdrawals). A Roth IRA doesn’t require that you begin taking a minimum amount out at any age. In fact, if you’d like, you can allow your account to continue growing in value, thus taking the maximum advantage of the effects of time and compounding. You’ll remain in complete control of the distribution schedule with a Roth.

3. No age restrictions when contributing

A Roth IRA also provides advantages over the traditional IRA when it comes to contribution flexibility. With a Roth, workers and retirees can keep making contributions as long as they’d like. This means millennials, Gen Xers, baby boomers, and even current retirees could all open a Roth and contribute to it right now if they’d like (assuming they fall under the aforementioned income limits). In 2016, contribution limits were $5,500 for those age 49 and under, and $6,500 for persons age 50 and up.

On the other hand, Americans are required to stop making contributions to a traditional IRA in the year they turn 70 1/2. There are no age limits for contributing to a 401(k), but it does require seniors to remain employed in order to keep contributing.

Because people are living longer than ever, being able to contribute into your 70s could still net you, or your heirs, considerable wealth.

4. Access to your contributions

Additionally, Roth IRAs offer a lot of flexibility. Most retirement tools are pretty cut-and-dried when it comes to making contributions and taking distributions. If you take money before you reach the qualifying age, you’ll pay a penalty. Even the Roth IRA has a penalty in place for taking unqualified distributions early.

However, Roth IRAs also have a handful of exemptions that do allow you access to your money completely tax- and penalty-free. For instance, since your contributions to a Roth are in after-tax dollars, you can withdraw the amount you’ve contributed at any time completely penalty-free. This obviously isn’t a great idea given that you could be hampering your ability to grow your nest egg over time, but if you find yourself in a cash crunch, you always have access to the amount you’ve contributed to a Roth.

Other circumstances could also allow for penalty-free withdrawals before reaching age 59 1/2 (the qualifying age for Roth IRA withdrawals). For instance, paying back taxes, being disabled, or covering unreimbursed medical expenses that exceed 10% of your adjusted gross income (or 7.5% for people turning 65 or older in the 2016 tax year) allow for a penalty-free withdrawal.

5. Long-term mindset

Finally — and this isn’t necessarily a unique component of the Roth, but is a big reason why it’s such a great retirement tool — the Roth IRA has a five-year rule in place that encourages a long-term mindset among investors. The five-year rule mandates that five tax years must pass following a contribution before a qualified distribution can be made. This rule discourages account holders from diving in and out of their investments, which over time has proven not to be as successful as buying and holding quality investments over the long term.

If you need to get your retirement on track, arguably the smartest thing you can do is open a Roth IRA.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


Is Early Retirement Right For You?

By Abby Hayes, July 6, 2016, US News and World Report

Many retirement benefits don’t kick in until your 60s, so early retirees face extra hurdles. Early retirement requires a bigger nest egg because you need to pay for more years of retirement.

When you think about early retirement, you might get a dreamy, faraway look in your eyes. Perhaps you envision time spent traveling while you’re still young, or spending more time as a family because you’re no longer working full time. Or maybe you’re picturing walking away from a job you dislike and never dealing with a stressful deadline or boring meeting again.

Early retirement can be an escape from a bad work situation as well as an opportunity to spend time doing the things you truly want to be doing. However, the reality is that early retirement isn’t for everyone. Early retirement is a difficult goal to achieve, and it may not be what makes you happy in the long run. Here are some of the pros and cons of early retirement:

More leisure time. A boost in leisure time earlier in your life is a major bonus of early retirement. You will have more years to enjoy retirement and to tackle all the projects you have wanted to try. You will be able to invest in your family, spend more time with your children and grandchildren.

Less stress. Not working around the clock for an extra 10, 15 or 20 years can significantly reduce your levels of stress each day. You won’t have to rush to get out of the house every morning and sit in traffic during the morning rush hour, or be expected to work late or through the weekend. Now you don’t have to work at all unless you want to.

Finding health insurance. Early retirees often lose their employer-sponsored health insurance, but aren’t yet old enough to sign up for Medicare. If you retire before you’re eligible for government-funded health care at 65, you will need to find another source of health insurance that could cost much more.

Boredom. While relaxing is fun at the beginning of retirement, you might eventually want to find productive ways to fill your time. If you aren’t proactive about setting up social events or volunteering, boredom could creep into your retirement years.

Early withdrawal penalties. It can be difficult to access the money you’ve saved for retirement if you retire early. If you withdraw money from your individual retirement account before age 59 ½ there is typically a 10 percent early withdrawal penalty. While there are a couple of ways around the penalty, not everyone qualifies. This steep penalty can quickly eat into your retirement savings and make it even more difficult to fund a long retirement.

More years to pay for. When you retire early, your retirement savings needs to last longer. If you retire at 50, you may need to fund another 40 years of retirement using your nest egg. A significant amount of savings is often required to pay for several decades of retirement.

Consider a career change. If you’re tired of your career and want a more laid-back and enjoyable lifestyle, consider a career change. If you make a switch to the right new career, you could gain many of the benefits of early retirement, such as a less stressful life and more time with family, without the drawbacks of early retirement. The key is to figure out how to use your current skill set to transition into a new career. Alternatively, you could launch a completely new career. You might be able to return to school and get new credentials while still working at your current job.

Cut back your hours. There’s no reason you have to go cold turkey from full-time work to full-time retirement. Instead, consider transitioning into retirement gradually. You can start slow by cutting back on your work hours and focusing less on moving up in your career. Another option is to shift to working part time by slowly cutting back your hours and adjusting your lifestyle accordingly. Phasing into retirement can also be a more financially savvy option than retiring early because you still have some money coming in which gives your savings more time to grow.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


When Retirees are Forced to Make Withdrawals

By Ray Martin, July 6, 2016, Moneywatch

When it comes to retirement savings plans, the tax code is your friend. The government provides incentives for you to stash money in special tax-deferred accounts, such as IRAs and employer-sponsored 401(k)s. Money saved in these accounts grows sheltered from taxation, including any dividends, interest and capital gains that it earns.

But at the magic age of 70 ½, all that changes. That’s when the IRS springs a trap for everyone who has been programmed to save all of their working careers. They now must begin taking withdrawals from these accounts.

The sole purpose is to make people deplete their savings to generate tax revenue for the government. This perverse requirement goes by the name of ”required minimum distribution” (RMD). Here’s a basic rundown of how these rules work.

First, don’t think you can fly under the radar, not take a distribution and have it go unnoticed by the IRS. Banks, brokerages and other financial firms that serve as the required trustees and custodians for retirement accounts must report to the IRS annually the amount of the RMD for each taxpayer and for each year a distribution is required.

If you don’t follow these requirements, it can really cost you, resulting in a harsh 50 percent excise tax on the amount of the distribution that’s late or insufficient.

The general rule is that if you have a balance in an IRA, you must begin distributions from it no later than April 1 of the year following the year you turn age 70 ½. Those who turn 70 ½ in 2016 can wait until April 1, 2017 to take their first distribution.

But it might be wise to take the first distribution this year because if you wait until the following year, you’ll also be required to take the distribution for 2017 before year-end, causing you to take two distributions in 2017.

Doing this can raise your taxable income and increase the tax you owe on Social Security; it could even disqualify you from claiming some itemized deductions. Check with your tax or financial adviser to see which tax year is best for you to take the first RMD.

The IRS calculates the minimum amount you must withdraw using a factor from the Uniform Lifetime Table, which is specified in IRS Publication 590. The account value as of the most recent year-end is divided by the factor from the table that coincides with your current age.

For example, the factor for individuals age 70 is 27.4. So if you’re 70 in 2016 with IRA whose value is $250,000 on Dec. 31, 2015, your first-year RMD is $9,124. This is about 3.6 percent of your year-end balance.

Each year, the divisor gets smaller, resulting in an increased percentage that you must withdraw. Most financial firms offer a service that will calculate the annual distribution, withhold applicable taxes and deposit the remaining amount into an account of your choosing. I strongly advise signing up for such a service.

A special rule allows people who continue to work to put off distributions from their employer’s retirement plans. If you’re still working and have a balance in your employer’s retirement plan and aren’t an owner of the business that maintains the plan (a “5 percent owner”), you can wait to start withdrawals until the later of April 1 following the year in which you reach age 70 ½ or when you retire.

If you have multiple IRAs, an RMD must be calculated separately for each one. However, these amounts may then be totaled and taken from any one or more of the IRAs.

If you have more than one account in an employer’s retirement plan, you must calculate and withdraw an RMD from each plan. Aggregation isn’t permitted.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®