Death of the Stretch IRA: Should You Convert to a Roth IRA?

Death of the Stretch IRA: Should You Convert Your IRA to a Roth IRA?

The SECURE Act killed the Stretch IRA. This could mean a nice tax bill for someone you care about. The big question that has come from this: “Should you convert your IRA to a Roth IRA?”

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Death of the Stretch IRA

In December, the federal government passed the SECURE Act. And one of the biggest provisions of that bill was the elimination of the Stretch IRA. This impacts non-spouse beneficiaries of your IRA, 401k or other retirement plan accounts. That means your kids, grandkids, etc. It doesn’t affect spouses.

Under the old rules, your kids could spread out the distributions from an inherited IRA over a long period of time. Now, your kids will have to liquidate those accounts within 10 years.

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Converting Your IRA to a Roth IRA

One strategy you can use to address this is to convert your IRA to Roth IRAs. This means you pay taxes on the amounts you convert now, and the money then grows tax-free. And when certain conditions are met, your kids won’t pay any taxes on their distributions.

Should you convert your IRA to a Roth IRA? The answer is very complicated and will be different for everyone. Here are the key considerations

1. Who Pays Higher Taxes?

Who has the higher tax rate? Converting your IRA to a Roth IRA means you pay the taxes. You have to understand who has the higher tax rate. If your tax bracket is the same as your kids, the conversion may not be worth it. But, if your kids pay taxes at a higher rate, the math changes.

State taxes also matter in this.  If your kids live in Florida where there is no state income tax, that needs to be considered.  Likewise if they live in a high-tax state—like New York—it changes the math.

2. Watch the Hidden Taxes

Pay attention to the hidden taxes? Converting your IRA could impact the taxes on your Social Security benefits. It could also trigger taxes on your Medicare premiums due to the income related adjustments. You’ll want to look at those elements too.

3. Can't Convert Your Required Minimum Distributions

If you are older than 72, you have to be careful. The rules won’t allow you to convert your required minimum distributions. You have to satisfy those before you convert.  This may make it more expensive than you think.

4. Know the Total Costs

Look at the total cost of your strategy. There are some complex strategies you can use to preserve some of the “stretch provisions.” They use some advanced trust planning. You have to weigh the cost of the trust, plus the tax costs of setting them up.

Should you convert your IRA to a Roth IRA? It’s a good question to ask and consider in your plans. But there are a lot of complexities. You should talk to a tax expert and a financial planner to help you look at all aspects.

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Avoid These 4 Big 401k Mistakes in 2020

Avoid These 4 Big 401k Mistakes in 2020

One of the biggest factors in your long-term financial success is avoiding the big mistakes. Unfortunately, we see many of the same common errors that—over a person’s career—can cost thousands if not hundreds of thousands of dollars. Try to avoid these 4 big mistakes in your 401k in 2020

Watch: Avoid These 4 Big 401k Mistakes in 2020

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Mistake 1: Not Maximizing Your Match

Many employers will match your 401k contribution.  If you put money in your account, your employer will too.  We typically see that amount range between 3% and 6% of your pay. 

Unfortunately, we see people who won’t maximize their employer’s match.  Not only are you not receiving all the pay you should, the long-term impact on your nest egg can be huge.    

Mistake 2: Not Saving Enough

Most financial planners suggest you should try to save between 10-15% of your pay for your future. In fact, the amount you save is the biggest factor in your long-term success.

Unfortunately, we see people who limit their savings level well below that. Often times, people will cap their savings in their 401(k) at the point where they maximize the employer match. For most of us, this probably won’t be enough to have the type of retirement we want.

Mistake 3: Not Pursuing Growth

A Nobel Prize winning economist once did a study that showed financial losses feel twice as bad as financial gains feel good. As a result, many people get more conservative with their savings than they should. This means they don’t put enough money in stocks.

Not being aggressive enough can lower your returns over time.  This actually adds more risk to your long-term plans.

Mistake 4: Withdrawing Money From Your 401k

Whether you change jobs or take an in-service distribution, withdrawing money from your 401k gets very expensive.

Most times we see this when people change jobs. Instead of rolling their balance to an IRA or their new employer’s plan, they withdraw the money. This results in taxes, early withdrawal penalties, and the loss of future compounded growth.

If your plan allows for in-service distributions, the costs will be similar.  Most of those distributions will be taxed and penalized.  The penalty applies when you are under age 59 ½.

How Much Will These Mistakes Cost?

How much will these mistakes cost you?  The numbers can be shocking.  The longer you have until retirement, the bigger the cost.  We have a special webinar where we illustrate the potential cost of these 4 mistakes. Click on the button to watch.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Earning Compound Interest

Earning compound interest can make you money.  Potentially it can make you a lot of money.  Today we’ll show you two examples of how you can benefit from compounded returns.

This is part 2 of our Compound Interest Series.  Part 1: Paying Compound Interest, can be found here.  

Watch: Earning Compound Interest

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You can also watch this on our YouTube Channel.

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Free Download: Earning Compound Interest

Compound interest is a tricky subject.  We created a download  you can use to help better understand how you can benefit from compounded returns.  Click on the button to download your copy .

Paying Compound Interest

Earning Compound Interest: The Basics

There are two key components. First is the return you earn. When we are saving and investing, we have many choices. Some investments have greater earning potential than others.

The second key component is time. The longer you can let your money compound the better.

Here is our first example. This is something as a financial planner you learn on day one.

You contribute $2,000 per year at the beginning of every year, and you do this for 40 years—$80,000 total. And you earn the long-term average return of the stock market, which is 10%. It grows to nearly a million dollars.

This was the “pitch” you learned to convince someone to make an IRA contribution. But let’s take a look at how the returns you earn impact the totals.

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The Impact of Time and The Cost of Waiting

We said earlier, time matters. In fact, time might be your biggest asset as a saver. Here is another example from day one of financial planner school.  And it illustrates the cost of waiting to start saving.

Investor A: Save Early

Investor A starts saving $2,000 per year at age 25. She continues that for 20 years and stops. And her future returns average 10% per year.

click image to enlarge

Investor B: Wait To Save

Investor B doesn’t start saving until he reaches age 45. He uses the same investments and earns the same 10% average return.

click image to enlarge

Waiting to start saving means you have to save more to achieve the same result.  In this example, Investor A saved $40,000 total and reached $850,000.  Investor B had to save $13,500 per year, or $270,000 total, to accumulate $850,000 at the same time.  

The impact of compound interest isn’t linear. It’s exponential. And when you understand how it works, you can alter your future for the better. Teaching younger people to save early in life is critical.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Do You Need A Million Dollars To Retire?

Do You Need A Million Dollars to Retire?

For some reason, people are fixated on this big round number. Some people will need at least that much if not more. Others will be able to make it work with less—sometimes much less.
We’ll talk about the factors which determine the answer to the “how much” question. And we’ll give you a brief example of how much income a $1,000,000 nest egg can provide.

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