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The Bad News Regarding Retirement Benefits of Baby Boomers
We recently reported how Baby Boomers are meeting the retirement challenges nicely. Unfortunately, all is not as good as it seems. There are some negative findings in the 17th Annual Transamerica Retirement Survey of Workers. These findings state that baby boomers might not be able to work for as long as they wish. It also highlights that baby boomers have low savings, menial backup plans and minimal knowledge of social security.
Why Baby Boomers Won’t Increase their Retirement Benefits by Working Longer?
Many baby boomers expected to increase their retirement benefits savings by working for a few years after retirement but this may not be possible. The reasons may vary from declining health to lack of job opportunities, says the 2016 Retirement Confidence Survey.
Employers are not Aging Friendly
About 47 percent baby boomers accepted in the TCRS survey that their employers may allow them to work past retirement as they are aging-friendly. The rest of them think that they might not be able to keep the job post retirement. About 29 percent admitted that their employers have made flexible transition arrangements.
Savings Difficulty
About 42 percent baby boomers said that their retirement savings are not enough or too low. The median amount they think they need is about $500,000. But when the 4 percent rule is used as a reality check, the annual income would be just $20,000 per year which is not enough to cover the expenses even when the social security income is added to it.
Lack of Financial Counseling and SS Knowledge
It is believed that financial counseling might help in increasing the savings but only 12 percent baby boomers admit that their employers provide any finance related counseling. About 19 percent of baby boomers accepted that they know a great deal about social security and 34 percent expected social security to be the primary source of income post retirement.
Minimal Backup
Only 25 percent of baby boomers have a backup plan in place if they are unable to work until they plan. About 26 percent said that they have only less than $5,000 to take care of a financial setback such as a medical emergency, unemployment, etc. Lack of a backup plan means that more than 28 percent have taken a loan, opted for early distribution or made a hardship withdrawal from IRA or their retirement benefits savings.
Proper Retirement Account Funding Strategies by Jeff Boettcher
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The Importance of Proper Retirement Account Funding Strategies by Jeff Boettcher
If you’re someone who may need to rely heavily on Social Security for your future retirement income, you may want to consider alternative saving methods.
Even if you are one of the lucky few, who are eligible for a Pension from your employer and regardless of how much you will receive from Social Security it is almost always advisable to have additional personal savings in place to secure a comfortable retirement. Although Social Security was created as a financial ‘safety-net,’ today’s reality is that most Americans see Social Security as one of their primary retirement vehicles and therefore have a substantial need to grow their own personal savings to fill in the future income “gaps” that are likely to exist.
One way to increase your future financial comfort and possibly take advantage of either tax-deferred or tax-free savings options is to open an Individual Retirement Account (IRA). By having an IRA, you may be able to defer your contributions from taxation. Any taxes owed on the growth that take place within of these types of accounts can also be put off until the future – or you may even be able to withdraw your funds tax-free depending on the type of IRA you choose.
Having a good overall understanding of the different types of IRA accounts that are available can make a big difference when choose the plan that is best for you, as well as when you make your contributions and you begin to make your withdrawals from the account.
Types of IRA Accounts
There are basically three different types of Individual Retirement Accounts. These include the deductible and the non-deductible Traditional IRAs, and the Roth IRA. While there are a number of similarities among these accounts, there are also several key differences, which may deem one or the other as more beneficial for various investors – depending on their situation, investment time frame, and goals.
Traditional IRA
The Traditional IRA has been in existence since 1974. For many years, this was the only type of IRA that was available. Today, the Traditional IRA can essentially be divided between a deductible and a non-deductible version.
In order to be eligible to contribute to a Traditional deductible IRA account you have to have at least some amount of earned income. If so, there are a number of nice advantages to taking part in this type of account, including:
- Tax deductibility of plan contributions (in full or in part, depending on how much annual income you earn, and whether or not you participate in an employer-sponsored retirement plan);
- Tax deferral of investment earnings.
For the years 2015 and 2016, those who are single tax filers are able to fully fund a deductible Traditional IRA account, provided that their income does not exceed $61,000 per year. If their income is between $61,000 and $71,000 per year, these individuals may partially fund this type of an IRA account. And, if they earn in excess of $71,000, then they will be unable to contribute at all.
If an individual is a married tax filer, and his or her spouse is also a participant in a retirement plan through their employer, then they are eligible to fully fund a deductible Traditional IRA account, provided that their annual income is under $98,000. This type of IRA can be partially funded if their income is between $98,000 and $118,000. However, if their income exceeds, the $118,000 threshold, then the deductible Traditional IRA cannot be funded.
For an individual who is a joint tax filer and whose spouse is not involved in an employer-sponsored retirement plan, a deductible Traditional IRA account can be fully funded if their annual income is below $183,000. This type of IRA can be partially funded if their income is between $183,000 and $194,000, but cannot be funded at all if their income is more than $194,000 per year.
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Non-Deductible IRAs
If an individual opts to go with a non-deductible IRA account (often called a Non-Deductible Traditional IRA), there are no income limitations when it comes to contribution to this type of account. There are, however, a few considerations to be mindful of in general when investing money into these types of accounts. Some of these considerations include the following:
- Maximum IRA Contribution Limit^ – First, when contributing to an IRA, there will be an annual maximum contribution limit. In 2016, that amount is $5,500 if you are age 49 and younger, and $6,500 if you are age 50 or over.
- Early Withdrawal Penalty^ – A Traditional IRA account will also subject investors to an early withdrawal penalty. This means that if you remove funds from your account prior to turning age 59 1/2, in addition to any taxes that you pay, you will also be subject to an additional 10% penalty from the IRS.
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About the Jeff Boettcher, AIF®
Helping clients grow and protect their wealth has been Jeff Boettcher’s passion since the 1990’s. Mr. Boettcher is also the owner and Co-Chief Investment Officer for BWM Advisory, LLC / Bedrock Investment Advisors, as well as owns and manages the Insurance Brokerage firm (IMO) of Bedrock Financial Services, LLC.
Specializing in Federal Retirees and small business owner retirement planning strategies along with being an expert in retirement income generation, Jeff Boettcher’s knowledge has been incredibly important to both his clients and the hundred-plus independent financial professionals who rely upon Mr. Boettcher’s various companies for the services and advice they need to help their own clients.
To Contact Jeff Boettcher you can visit www.BedrockIA.com or call 800-779-4183.
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- RMD Requirements^ – Based on the Required Minimum Distribution, or RMD, rules, those who own Traditional IRAs will be required to start withdrawing at least a certain amount from their accounts, beginning the years in which they turn age 70 1/2. If you do not comply with the RMD requirements, you could be penalized
- No Additional Contributions^ – When you turn age 70 1/2, you will also no longer be allowed to make any further contributions into your Traditional IRA account.
In addition, with the deductible version of the Traditional IRA, because your contributions have not yet been taxed, and the earnings inside of the account are tax-deferred, all of the withdrawals will be considered to be taxable income. With that in mind, the actual amount of money that is netted out of each withdrawal will depend upon your tax bracket at the time.
Side Note^: Distributions from your Tax-Deductible IRAs can increase the tax rate you pay on your Social Security Income. Therefore, although IRAs can be a great way of saving for retirement they can also have drawbacks and paying higher tax rates on your Social Security could be one of them.
Roth IRA
In 1997, investors were introduced to the Roth IRA. This plan, while it has some similarities to the Traditional IRA account, also has several key differences. First, with the Roth IRA, contributions enter the account after they’ve been taxed. Therefore, there is no tax deduction of deposits.
Another key difference with the Roth IRA is that the funds that are inside of the account grow tax-free^. The money can also, in most cases, be withdrawn on a tax-free basis. This can make a substantial difference in the amount of money that is netted out to the retiree / investor.
Unlike the Traditional IRA, there is also no RMD requirement. Therefore, the account holder will not be required to begin withdrawing funds from the account at age 70 1/2 – or at any age. Nor must they stop making deposits into the account at a certain age.
It is important to note that with a Roth IRA account, there is still a 10% IRS early withdrawal penalty by removing funds from the account prior to reaching age 59 1/2. However, if the funds that are withdrawn are the investor’s initial contributions, there will be no IRS penalty – regardless of the age of the investor as long as the deposits have met certain IRS limitations.
There are also income limits in terms of how much you can actually contribute to a Roth IRA. For example, the table below shows whether your Roth contribution will be impacted by the amount of your modified adjusted gross income:
| If your filing status is: | And your modified AGI is: | You can contribute: |
| Married filing jointly or qualifying widow(er) | < $184,000 | Up to the limit |
| Married filing jointly or qualifying widow(er) | >/= $184,000 but < $194,000 | A reduced amount |
| Married filing jointly or qualifying widow(er) | >/= $194,000 | $0 |
| Married filing separately and you lived with your spouse at any time during the year | < $10,000 | A reduced amount |
| Married filing separately and you lived with your spouse at any time during the year | >/= $10,000 | $0 |
| Single, head of household, or married filing separately and you did not live with your spouse at any time during the year | < $117,000 | Up to the limit |
| Single, head of household, or married filing separately and you did not live with your spouse at any time during the year | >/= $117,000 but < $132,000 | A reduced amount |
| Single, head of household, or married filing separately and you did not live with your spouse at any time during the year | >/= $132,000 | $0 |
Source: IRS.gov (https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2016)
In addition, just like with a Traditional IRA account, Roth IRAs have annual maximum contribution limits. In 2016, these are also $5,500 for investors who are age 49 and younger, and an additional $1,000 for those who are age 50 and over.
For those who own both a Traditional and a Roth IRA, this does not mean that they are allowed to contribute these dollar figures into each of the accounts, but rather the total dollar amount – regardless of how the figure is allocated between the two.
Things to Keep in Mind
When considering the investment into an IRA, it’s important to keep in mind that you can make your prior year’s contribution through April 15th of the following year. In other words, if you have not yet made your 2015 IRA deposit, you can still do so through April 15th of 2016. And, by combining your 2015 and 2016 contributions, means that you could essentially put as much as $11,000 ($5,500 for 2015 and $5,500 for 2016) to work if you are age 49 or younger, or up to $13,000 ($6,500 + $6,500) if you are age 50 or over.
Putting all of the pieces of the retirement planning puzzle together can be difficult. That’s why it is important to work with someone who is not only knowledgeable about retirement, but also someone who is well versed in your specific retirement circumstances. For Federal Employees that means someone who has a background in your very complex retirement package and for small business owners it means someone who knows how IRS rules apply, not just IRAs but to other small business related retirement accounts as well. That way, you can be more assured that the options that you choose will work together in moving you towards your ultimate retirement goals.
Understanding Federal Employees Retirement System – by Jeff Boettcher
Jeff Boettcher Author Page
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About Jeff Boettcher, AIF®
Helping clients grow and protect their wealth has been Jeff Boettcher’s passion since the 1990’s. Mr. Boettcher is also the owner and Co-Chief Investment Officer for BWM Advisory, LLC / Bedrock Investment Advisors, as well as owns and manages the Insurance Brokerage firm (IMO) of Bedrock Financial Services, LLC.
Specializing in Federal Retirees and small business owner retirement planning strategies along with being an expert in retirement income generation, Jeff Boettcher’s knowledge has been incredibly important to both his clients and the hundred-plus independent financial professionals who rely upon Mr. Boettcher’s various companies for the services and advice they need to help their own clients.
To Contact Jeff Boettcher you can visit www.BedrockIA.com or call 800-779-4183.
Disclosure. All opinions represent the judgment of the author on the date of the post and are subject to change. Content should not be viewed as personalized investment advice or as an offer to buy or sell any of the investments discussed. Legal and tax information is general in nature. Always consult an attorney or tax professional regarding your specific legal or tax situation. BWM Advisory, LLC reserves the right to edit blog entries and delete those that contain offensive or inappropriate language. Content will also be deleted that potentially violates securities laws and regulations. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. All investment strategies have the potential for profit or loss. Hyperlinks on this website are provided as a convenience. We cannot be held responsible for information, services or products found on websites linked to ours.BWM Advisory, LLC is registered as an investment adviser with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.
Save around $1000 Dollars On Your Tax Bill
2015 might have come and gone and you might have spent more than you wanted to and you might think that there isn’t much that you can do to reduce the spending effect but if it’s your tax bill that you are worried about, know that there is still time.
Save on your tax bill:
If you are an employee who likes to save for your retirement through a government funded account, then you can put your money in there and save a lot of money on your tax bill. It does differ on the basis of tax rate, but an IRA contribution made at the last minute can help you in saving thousands. Here’s how:
The bigger your tax bracket is, the more you will save. You can contribute up to 5500 dollars to an IRA and can defer the payment of income tax. You will be able to either make your tax bill lower or get an increase the refund that you are owed. Another thing to remember is that if you are over 50 then you can get an even better deal. If you contribute around 1000 dollars or more to an IRA, it will get you a bigger deduction. For example, if you are 55 and you fall in the 25 percent tax bracket; your 6500 dollar contribution is going to help you reduce 1625 dollars.
Another way to get a tax break is via your spouse’s IRA. All you have to do is open two accounts, each on the name of one spouse.
An important thing to note in this regard is that the deadlines differ in every state. So if you are planning to save some money, make sure that you act late but not too late because you don’t want the deadline to end.
Want To Undo A Contribution to Roth? Here’s How
Roth contribution is applicable to a lot of employees from all over the country and annual additions to the fund are a must if you are a participant of the program. But have you made up an earning that is a little too much to go ahead and contribute to a Roth for this year? There are two ways to avoid the contribution and the 6 percent penalty that comes along with it.
Avoid Roth contribution!
The best way to do this is to withdraw all of your contributions and make the inclusion for them as income for this year. Another way to avoid it is to ask your IRA administrator to make the contribution switch and convert the account to a normal IRA. It’s highly recommended to those people who intend to make the transition to get it done before the taxes are filed for this year but if you aren’t up for it yet, know that you have until October of 2016 to make the move.
You can see a substantial reduction in your income (that’s going to get taxed) by changing your scheme to traditional plans such as 401(k) or 457 or even the Thrift savings plan that’s run by the federal government. You will not have to make the Roth contribution in excess this way. Apart from this, you can also make a substantial taxable income reduction if you make a health savings account and make contributions to it.
All in all, it’s always really good to save some of the money that you shouldn’t be losing anyway and there are some good techniques to make sure that your contribution doesn’t make you lose some good hard-earned money. Make sure that you make up your mind quickly so that you don’t have to regret later on.
