Retirement & 401k

5 Things You May Not Know About an IRA

Do you think you know everything about your IRA? Find out by taking this pop quiz.

First, a little inspiration. Proverbs 18:15 reads, “An intelligent heart acquires knowledge, and the ear of the wise seeks knowledge.” So let’s seek some knowledge about IRAs.

Don’t worry, our quiz won’t count toward your final grade and just to make it easy, these will all be true or false questions.

Question #1: You can’t open an Individual Retirement Account if you already have a qualified retirement plan with your employer. True or false?

It’s actually false. An IRA can be a great way to supplement your retirement savings, even if you have a 401k or 403b with your employer. In 2023, you can contribute up to $6,500 to a traditional or Roth IRA, or $7,500 if you’re 50 or older. You can even have a traditional *and* a Roth IRA, but the combined contributions must not exceed those limits.

Question #2: You can invest in anything in an IRA. True or false?

That one is false. Your IRA isn’t an investment in itself. It’s more like a bucket that holds your investments, which are managed by the account’s custodian. That custodian will offer you a wide variety of investment options, like bonds, money market funds, stocks, and mutual funds, but there are limits. You can’t invest in things like whole life insurance policies, antiques, or physical precious metals (that last one requires a different animal, a self-directed IRA.

Question #3: If you should die, your IRA must go through probate and be distributed to your heirs according to your will. True or false?

That one, fortunately, is also false. Like many financial accounts, your IRA allows you to name one or more beneficiaries to receive those funds in the event of your death. The beneficiary designation supersedes anything specified in a will and prevents the IRA from going through the sometimes lengthy probate process. You do, however, have to keep the beneficiary designation up to date if you go through a major life change, such as the death of a spouse. The custodian can’t read your mind, so making your intentions known with a new beneficiary designation is necessary.

Question #4: At some point, you have to take money out of your IRA. True or false?

Unfortunately, that one is true. Traditional IRAs come with Required Minimum Distributions or RMDs. When you retire, you may not need the income generated by your IRA, and you’d be perfectly content to just let those assets accumulate. Uncle Sam, however, sees it differently. He wants his cut and is only willing to wait so long. That means you’ll have to start taking money out of your traditional IRA by April 1st of the year after the year you turn 73 and a half. In 2033, the age for RMDs will be extended to 75.

Now, if you’re worried that you’ll need a calculator and calendar to figure all that out, don’t worry. IRA custodians are required to send you an RMD notice by January 31 each year and you really want to pay attention to those notices. If you fail to take an RMD on time, the penalty is a whopping 25% of every dollar you failed to withdraw. This is why a Roth IRA is sometimes a better alternative since it’s funded with after-tax dollars and has no required minimum distributions.

Question #5: You can’t borrow from your traditional IRA. True or false?

That is also true. While you may be allowed to borrow from a 401k or 403b, (not advisable, by the way) you can’t borrow from an IRA even for a good cause like buying a house or sending your kid to college. If you withdraw funds from your traditional IRA, the money will be added to your adjusted gross income and taxed at your income tax rate and a large withdrawal could push some of your income into a higher tax bracket. You certainly don’t want to do that.

That’s our pop quiz. We hope you did well. Now pass your papers to the front, please.

Charity, Investing, Retirement & 401k, Saving, Taxes

Year-End Tax Tips

By: Jim Henry, MoneyWise

Christians know that we are “to pay unto Caesar what is Caesar’s,” but that doesn’t mean we can’t take advantage of every legal tax break. You can still take steps to minimize your 2021 tax burden.

If you haven’t maxed out contributions to your retirement accounts, do it now, even though you actually have until April to do it.

This year, individuals can make up to $19,500 in tax-deductible 401k contributions, or $26,000 if you’re 50 or older. You can also contribute up to $6,000 to a traditional or Roth IRA, or $7,000 if you’re age 50 or older.

If you don’t have a Roth IRA, this may be the time to make a Roth conversion. You’ll be converting pre-tax dollars into post-tax money, so you’ll owe income taxes on the funds you convert, but when you withdraw those funds later in retirement, you won’t owe any taxes on it.

This is an especially good strategy if your income was low in 2021. COVID did that to a lot of people. If you expect your income to increase next year, it’s better to pay the taxes now when you’re possibly in a lower bracket.

You can also deduct contributions of up to $3,600 into a health savings account if you have access to one. Also, while there’s no federal deduction for contributions to a 529 education savings plan, many states do offer tax incentives. Consider opening a 529 plan.

You may be able to lower your adjusted gross income by giving to your local church or qualified ministries. It’s more difficult to get a deduction that way since the standard deduction for an individual was raised to $12,550, or $25,100 for married couples filing jointly. However, there is a temporary provision still in place this year that allows you to take a $300 deduction ($600 for joint filers) for making an eligible gift. Make sure you take it on your 1040 but keep in mind that it has to be a cash contribution.

Don’t forget to take your Required Minimum Distributions (RMD). The IRS requires you to take a certain amount of money out of your pre-tax retirement accounts each year once you’re 72 or older. Failure to do so is costly. You’ll pay 50% in taxes on every dollar you fall short of your RMD.

If you must take an RMD, consider making a Qualified Charitable Distribution (QCD) with some or all of the money. You’ll bless your favorite ministry while satisfying your RMD, without owing taxes on that money. Check with your retirement plan manager for details on how to make a QCD.

If you have a Flexible Spending Account (FSA) at work, make sure to use all of the money you’ve contributed to it this year. In most cases, the money in your FSA is “use it or lose it.” Spend it all on qualified items before the expiration date. Check with your HR Department for more details.

2021 has been a great year for the markets, but if you happen to own stocks that didn’t do well, maybe even lost value, now’s the time to consider tax-loss harvesting. With this strategy, you sell stocks that have declined in price to realize a loss. You can then use that loss to offset capital gains made on other investments this year.

If you were extremely unfortunate this year, and actually sustained more losses than gains, you can take an additional deduction of up to $3,000 against your taxable income in 2021. If you lost more than that, you can rollover those losses into future years, up to the $3,000 annual limit each year.

Finally, make an appointment to meet with your CPA or tax advisor to make sure you haven’t missed any deductions and to plan for lowering your tax burden next year. Don’t wait until the tax season crunch. If you don’t have a tax advisor, go here to get a Certified Kingdom Advisor in your area.

Take advantage of these tips and you’ll be “paying unto Caesar” only what the law requires!

Retirement & 401k, Saving

6 Reasons Why You Shouldn’t Wait Until You Make More to Save More

By: Art Rainer

“I don’t make enough money to save for retirement.”

This is a common reason people provide, especially those just starting out in their careers, for not saving. Their plan is to start saving when they feel like they are making enough money.

Unfortunately, this mindset often leads to a stressful financial future. And it could have been avoided.

Here are six reasons why you shouldn’t wait until you make more to save more:

1. The Bible teaches us that saving is wise.

Proverbs 6:6-8 says this—Go to the ant, you slacker! Observe its ways and become wise. Without a leader, administrator, or ruler, it prepares its provisions in summer; it gathers its food during harvest. Throughout Scripture, we are taught that we should capitalize on times of abundance to get us through times of scarcity. For retirement, this means taking advantage of a paycheck to get you through a time when you no longer receive income from an employer.

2. Habit-building starts now.

Habitually setting aside money for the future does not magically begin when you have more income. The best way to ensure you will actually take advantage of a higher salary is to regularly save now, regardless of your paycheck’s size.

3. Great income is often followed by greater expenses.

When people get a raise, savings is not normally the first to increase. Expenses do. We make more so we spend more. The financial margin remains thin, even with a greater income.

4. For some, “enough” never happens.

Sometimes, this happens because their career never takes off as they hope. Other times, even though their income has increased, they don’t feel like they make enough.

5. Compounding.

It is said that a reporter once asked Albert Einstein what he considered to be the greatest invention of all time. His response? “Compound interest.” Compounding is earning money on your earned money. And the best way to take advantage of compounding is to start early. Remember this formula:

A little bit of money + A lot of time = A lot of money.

6. The mantra, “It’s never too late to start all over again,” won’t be as comforting as you think in the future.

Certainly, you can start habitually saving at any point. But you can never truly recapture lost time. Every month you delay saving is a month you never get back. It is a month that you are never able to take advantage of compounding. When you delay your retirement savings, you make your climb to retirement steeper.

Don’t wait until you make more money to save more money. Start now. Make it your goal to place 15% of your gross income into retirement savings. Whether you make much or little, now is the time to save for retirement.

Retirement & 401k

SECURE Act 2.0 – Saving for Retirement

By: Jim Henry

The SECURE Act signed into law by President Trump in 2019 made it easier to save for retirement. Congress is now trying to upgrade that legislation with a bill that pundits are calling the SECURE Act 2.0.

The official name is the Securing a Strong Retirement Act of 2021 and it’s already been approved by the House Ways and Means Committee, with a full House vote expected soon.

What makes the SECURE ACT 2.0 unusual is that it seems to have broad bipartisan support in both the House and the Senate and stands a good chance of landing on President Biden’s desk later this year, where he’s likely to sign it. Retirement advocacy groups and the financial services industry also appear to favor the new bill.

To top the list of improvements, the bill would allow more time to salt away contributions to a 401k or traditional IRA before having to take required minimum distributions and pay taxes on those withdrawals.

The original SECURE Act raised the age for RMDs from 70 to 72 and that was considered a major improvement, but the SECURE Act 2.0 would raise the age for RMDs from 72 to 75. Supporters say that would greatly help Americans, who are living longer. The added flexibility allows more time to build up a bigger nest egg before having to make withdrawals.

Another key feature would exempt some retirees from taking RMD for life if the sum of all their retirement account balances is less than $100,000 when they reach age 75.

The bill would also push employers to make enrollment in retirement plans the “default” position for new workers. When hired, all workers would be automatically enrolled in a retirement plan, but could opt-out if desired. Research shows that employers who automatically enroll employees have greater participation rates.

Yet another provision likely to be extremely popular would help workers pay off student loans while still saving for retirement. Workers could make loan payments instead of contributing to their retirement plan, but could still receive employer contributions. That would essentially mean getting a “matching” contribution without putting anything into a retirement account.

The full House is expected to decide on the SECURE Act 2.0 soon, although a vote hasn’t been scheduled yet.

Investing, Retirement & 401k, Taxes

2020 Year-End Tax Tips

By: Thrivent

Here are some things to consider as you weigh potential tax moves between now and the end of the year.

1. Defer income to next year

Consider opportunities to defer income to 2021, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.

2. Accelerate deductions

You might also look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as medical expenses, qualifying interest, and state taxes before the end of the year (instead of paying them in early 2021) could make a difference on your 2020 return.

3. Make deductible charitable contributions

If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 60%, 30%, or 20% of your adjusted gross income (AGI), depending on the type of property you give and the type of organization to which you contribute. (Excess amounts can be carried over for up to five years.)

For 2020 charitable gifts, the normal rules have been enhanced: The limit is increased to 100% of AGI for direct cash gifts to public charities. And even if you don’t itemize deductions, you can receive a $300 charitable deduction for direct cash gifts to public charities (in addition to the standard deduction).

4. Bump up withholding to cover a tax shortfall

If it looks as though you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for the remainder of the year to cover the shortfall. There may not be much time for employees to request a Form W-4 change and for their employers to implement it in time for 2020. The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are actually taken from your paycheck. This strategy can be used to make up for low or missing quarterly estimated tax payments.

5. Maximize retirement savings

Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2020 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so. For 2020, you can contribute up to $19,500 to a 401(k) plan ($26,000 if you’re age 50 or older) and up to $6,000 to traditional and Roth IRAs combined ($7,000 if you’re age 50 or older).* The window to make 2020 contributions to an employer plan generally closes at the end of the year, while you have until April 15, 2021, to make 2020 IRA contributions.

*Roth contributions are not deductible, but Roth qualified distributions are not taxable.

6. Avoid RMDs in 2020

Normally, once you reach age 70½ (age 72 if you reach age 70½ after 2019), you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans. Beneficiaries of retirement plans are also generally required to take distributions after the death of the IRA owner or plan participant. However, recent legislation waived RMDs from IRAs and most employer retirement plans for 2020 and you don’t have to take such distributions.

If you have already taken a distribution for 2020 that is not required, you may be able to roll it over to an eligible retirement plan. The IRS provided a safe-harbor date (August 31, 2020) to roll over a distribution that was not required because RMDs were suspended for 2020 and that date has passed.

There are other provisions that could allow for a rollover. For example, amounts that are distributed can generally be rolled over as long as the rollover is completed within 60 days. So, for example, if an amount is distributed on November 1, 2020, it may be possible to roll it over during 2020. Also, for someone who takes a coronavirus-related distribution in 2020, it may be possible to roll it over to an eligible retirement plan within three years of the day after the distribution was received.

7. Weigh year-end investment moves

You shouldn’t let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.

Retirement & 401k, Saving

Retirement – It’s Never too Early to Plan

Your Individual Retirement Account and the Benefits

Everyone is going to grow old, it’s inevitable, but not many think of this when they are young and on top of the world. If everyone stopped to think about getting old, they would realize that their income will not always be what it was when they were thirty years old. This would cause them to question how they plan to live when their only income is social security, if they’re lucky. If you haven’t started saving for retirement, you still have time. Ideally, a person should begin their IRA when they are young—the sooner the better.

Your IRA

IRA stands for Individual Retirement Account. This is the best alternative to begin saving for retirement because it defers taxes on your savings until you retire. This occurs because once you retire your savings are considered your income. However, you will not be taxed on the lump sum you saved up, only what you withdraw during that year. There are limits to how much you can save per year, for example, if you are under the age of fifty you cannot save more than $5,000. This increases the older you get. Two basic requirements for beginning to save for retirement with an IRA are to have taxable income and be under the age of 70.5. Regardless of what IRA you sign up for (Roth, 401K, Traditional, SEP, etc.), check the rules and requirements for that specific plan.

An IRA can also be thought of as a forced savings account, because once you start saving you cannot touch that money. However, there are some exceptions. Traditionally, you will be penalized for early withdrawal with a 10 percent fee and you will be taxed for it as well. If you are over the age of 59.5 you can take money out without facing any penalty. But if you are under 59.5 years old, you can remove money without punishment if you are using it for: college expenses, medical bills, sudden disability and first-time home purchase. There are limits to how much can be taken out early. All of this helps ensure you retire with money and can live comfortably without having to rely on social security.

Job Changes and Your Retirement

In order for an IRA to be successful you must start as soon as possible because it needs time to grow. The compound interest really begins to grow towards the end. Another benefit of IRA’s is that you can rollover different IRAs. If you have an IRA with your current employer and switch jobs, you can take your IRA with you to the new company and add it to the plan they have or move it to a company like Fidelity, Prudential, Vanguard, etc.

IRA’s are simple—you can have the money removed from your paycheck, it is automatic and stress free. Unlike having to manually split your paycheck and budget for it, IRA’s take the work out of saving for retirement.

Do you want to know more about debt and how you can make smart financial decisions now that will help you secure a more prosperous financial future? Sign up for our newsletter for monthly money tips.

Retirement & 401k

401(k) Facts You Need to Know

Your Financial Future and Your 401(k)

Millions of Americans threaten their financial future by failing to roll over 401(k) funds when they change jobs. Too many people see leaving a job as an opportunity to get their hands on the cash they’ve been saving for retirement, but you can do irreparable harm to your financial future by doing so.

When you change jobs, you’ll have to make a decision about what to do with the money you’ve contributed to your employer’s 401(k) plan. There are three major options: leave the money in your former employer’s plan, take the money out, or roll it over.

401K Options

If your vested 401(k) funds total $5,000 or more, your employer is legally required to allow you to leave your funds in the company plan if you choose to do so. This may be a good option for you if you’re happy with the performance of your employer’s plan, it’s a bad time to cash out (you’ve lost money during a market slump, for example), or you have a waiting period at your new job before you’re eligible to roll your funds over into that plan.

Your second option is to take the money out of the 401(k) plan and not roll it over into another qualified plan. If you elect this option, your 401(k) provider will first deduct 20% and send it to the IRS to be applied to your income taxes when you file your return at the end of the year. The taxes deducted may or may not be enough to cover your tax liability. For example, if you’re in the 10% tax bracket, you’ll probably get some money back, but if you’re in the 28% tax bracket, you may owe an additional 8%. If you’re under age 59 1/2 (or 55 in some circumstances), you’ll also owe an additional 10% in early withdrawal penalties.

401K Withdrawal Penalties

Here’s how the above scenario may play out: You’re in the 28% tax bracket and are under 55 at the time you leave your job. You decide to have your 401(k) balance of $100,000 paid directly to you.

$100,000 – 401(k) Balance
– 20,000 – 20% Withholding
– 8,000 – Additional taxes (28% less 20% withheld)
– 10,000 – 10% early withdrawal penalty
$ 62,000 – Balance

IRA Facts

In addition to the federal income taxes listed above, you’ll also have to pay state income taxes on the amount you withdrew, leaving you with approximately 57% of your hard-earned money (assuming a 5% state tax rate).

You can avoid paying current taxes and penalties if you roll the money into your new employer’s 401(k) plan or an IRA. This scenario may look like this:

$100,000 – 401(k) balance
-0 – Taxes withheld
-0 – Additional taxes
-0 – 10% early withdrawal penalty
$100,000 – Balance

You can set up an IRA at most banks or financial institutions or directly with most mutual funds or publicly traded companies. In most cases, this can be done easily online or via mail. Be sure to request that the money be sent directly to the new 401(k) plan administrator or IRA administrator to avoid incurring taxes. Rolling the entire amount over to another tax-deferred plan should provide you with significantly higher retirement funds, especially if you are many years from retirement. If you take the money out of a tax deferred plan, you lose the power of compounding the full amount over the years left until retirement, possibly costing you hundreds of thousands of dollars.

So, if you’re faced with the decision of what to do with your retirement savings when you change jobs, remember: don’t throw away your 401(k)!

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