Objective information about retirement, financial planning and investments

 

Roth IRA Conversion – A Good Idea for 2020?

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A Roth IRA conversion can be a good idea for many investors. Whether or not they are a good idea for you in 2020 or in any year will depend upon your unique situation. That said, 2020 is shaping up as a year where a number of factors that could make a Roth IRA conversion desirable for many people are all coming together.

What is a Roth conversion? 

A Roth IRA conversion is a conversion of some or all of the money in a traditional IRA account to a Roth IRA account. The funds converted will be taxed with the exception of value of any after-tax contributions made to the account.

A Roth conversion may also be an option within a 401(k) or a 403(b) plan that offers a Roth option. This will be subject to the rules of the plan, it’s best to check with the plan administrator.

Benefits of a Roth conversion 

The main benefit of a Roth conversion is typically the ability of the account owner to make tax-free withdrawals from the account in retirement if certain requirements are met. A related benefit is tax diversification for someone who holds the bulk of their retirement savings in traditional IRAs or 401(k)s.

From an estate planning perspective, Roth IRAs are not subject to required minimum distributions, which offers a number of advantages for those who don’t need to money from the distributions and who want to preserve their IRA accounts for their heirs.

Due to a combination of circumstances, 2020 might be a desirable year in which to do a Roth conversion if this strategy otherwise fits your situation.

Roth conversions in 2020 

Entering 2020, two factors were already in place that potentially make a Roth conversion desirable:

Based on the circumstances arising out of the coronavirus pandemic, two other factors have emerged in 2020 that serve to make a Roth conversion potentially desirable:

Let’s take a look at these factors in detail.

Lower tax rates 

The lower federal tax rates arising out of the tax reform that began with the 2018 tax year make it cheaper to convert to a Roth, all else being equal. Converting the same amount in 2020 will result in a lower tax bill than under the old tax rates.

The SECURE Act and inherited IRAs 

The SECURE Act drastically changed the rules for most non-spousal beneficiaries of inherited IRAs who inherit these accounts on or after January 1, 2020. In the past these beneficiaries could take required minimum distributions based on their own life expectancy. For beneficiaries who were younger than the original account owner, they were able to stretch out the benefits of tax-deferred growth of these accounts for a number of years.

With the rule changes, most non-spousal beneficiaries now must withdraw the entire value of the account within ten years and pay taxes on the withdrawals. This can vastly diminish the value of the account for these beneficiaries.

Inherited Roth IRAs are still subject to the 10-year withdrawal rule for most non-spousal beneficiaries, but there are no taxes on withdrawals if certain requirements are met.

The decision whether or not you want to do the Roth conversion during your lifetime in order to provide the benefit of tax-free withdrawals for your beneficiaries can be a complicated one. You will need to factor in your own tax situation, was well as the potential tax situation of your intended beneficiaries.

Lower account valuations 

At the time this was written, we’ve seen a significant drop in the stock market from its highs reached in February of 2020, though the market has erased some of these losses over the past couple of weeks.

The advantage of lower account valuations in doing a Roth conversion is that a higher percentage of the account’s value can be converted. For those who wish to convert their entire account they can do so and pay taxes on a lower conversion amount. This offers the potential for growth under the Roth umbrella with tax-free withdrawals of these appreciated funds in retirement.

The waiver of RMDs for 2020 

As part of the CARES Act, RMDs are waived for 2020 for IRAs, 401(k)s and other retirement accounts. This includes not only RMDs for the account holders, but also for inherited IRA account beneficiaries.

Where this can come into play in terms of a Roth conversion is instead of taking the amount of your RMD for the year, you might consider converting that amount to a Roth IRA. You will still pay the same amount in taxes; these dollars will now be in a Roth account allowed to grow tax-free and these dollars will not subject to an RMD for 2021 or beyond.

The Bottom Line 

If a Roth IRA conversion is right for your situation, 2020 is a good year to do the conversion. The factors mentioned above have created a favorable environment for Roth conversions. If you work with a financial advisor they can help decide if a Roth conversion is right for you and to make sure everything is executed correctly if you move forward.

Photo by Carlos Muza on Unsplash

Concerned about the stock market’s volatility? Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting back on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement. We can design a full coaching program or do a one-time call to discuss your situation.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Required Minimum Distributions in 2020 – What You Need to Know

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This was already a year of change for those impacted by required minimum distributions (RMDs). The SECURE Act signed into law at the end of 2019 includes some significant changes in RMDs starting in 2020. The CARES Act (passed in the wake of the coronavirus pandemic) included additional changes that apply only to 2020. Below is a discussion of some major changes for required minimum distributions in 2020 and what you need to know.

The CARES Act and RMDs

The CARES Act is a stimulus package geared in large part to providing relief for businesses, but it did contain some portions directed at individuals. One such piece is the waiver of RMDs for 2020.

This waiver includes 2020 RMDs for those who reached age 70 ½ prior to January 1, 2020 and were required to take them, this includes those who reached age 70 ½ in 2019 and who would have been required to take their first RMD on April 1 of 2020.

The waiver also applies to those who otherwise would have needed to commence their RMDs this year due to reaching the age of 72 as mandated by the rules in the SECURE Act. This effectively delays the commencement of their RMD a few years beyond their expectations prior to the SECURE Act.

The waiver applies to RMDs from IRAs, 401(k)s, 403(b)s and other types of retirement plans. Additionally, the waiver applies to those who would otherwise be required to take their RMD as the beneficiary of an inherited IRA.

Those who wish to make charitable contributions using the qualified charitable distribution (QCD) feature of their normal RMDs from an IRA can still do so. The amount donated to charity will still be exempt from federal taxes up to the donation limits. A benefit of doing this in 2020 is that it can serve to reduce their IRA balance and potentially lower the amount of future RMDs.

For those who have already taken their 2020 RMD, there ae some limited options to take advantage of the waiver. One is to take advantage of the 60-day rollover rule. This would allow you to redeposit the distribution back into a qualified retirement account such as an IRA or a 401(k). The 60-day rule is a bit complex so be sure that you consult with your financial advisor and your account custodian or administrator to be sure you don’t violate the rule and incur an unwanted tax hit.

Those who took their RMD from an inherited IRA account are out of luck. There is no 60-day rollover rule for these accounts.

For those who wish to or need to make withdrawals from their retirement accounts they can of course continue to do so. There were other changes to retirement accounts enacted under the CARES Act, including relaxed rules on 401(k) loans and on withdrawals from retirement accounts to help those impacted by COVID-19.

RMDs and the SECURE Act 

This was already a year of change for required minimum distributions. The SECURE Act raised the age to commence RMDs, called the required beginning date (RBD), from IRAs, 401(k)s and other retirement accounts from 70 ½ to 72 for those who turned 70 ½ on or after January 1, 2020. For those who would normally have commenced taking their RMDs in 2020 upon reaching age 70 ½, this pushed the requirement back by two years.

QCDs

The SECURE Act did not change the age for qualified charitable distributions from age 70 ½, so even though they do not have to take their RMDs until age 72, those who wish do so can still make a charitable contribution via a distribution from their traditional IRA account up to the $100,000 limit and the distribution will not be subject to federal income taxes.

Inherited IRAs 

One of the biggest changes for IRAs in the SECURE Act pertains to inherited IRAs. Non-spousal beneficiaries of inherited IRAs prior to January 1, 2020 could stretch these accounts using RMDs based on their life expectancy. To the extent the beneficiary was younger than the original account owner this could allow them to stretch the RMDs out for many years while the value of the IRA grew tax-deferred.

Under the SECURE Act, most non-spousal beneficiaries of an IRA will now be required to withdraw all funds from the account within a ten-year period. This means that in many cases a higher percentage of the account will go towards taxes than in the past. For example, if a parent passes their IRA to an adult child, that child will need to take a full distribution from the account within ten years and pay the income taxes that will be due. If this child is in their 40s or 50s and in their peak earning years, the amount of any distributions will be added onto their earned income and potentially be taxed at a much higher rate than they would have been in the past.

Beneficiaries, known as eligible designated beneficiaries, will still be able to take distributions from an inherited IRA using RMDs. These beneficiaries include:

  • Surviving spouses
  • A minor child of the deceased IRA account owner
  • A beneficiary who is no more than ten years younger than the deceased IRA account owner
  • A beneficiary who is deemed to be chronically ill

This provision is expected to result in changes to the estate planning of many IRA account owners in the coming years.

The Bottom Line 

Between the planned changes under the SECURE Act and the unplanned changes under the CARES Act, those normally faced with taking RMDs have a number of changes to be aware for 2020 and beyond. It’s a good idea to consult with your financial or tax advisor to ensure that you understand how these rules apply to your situation.

How has the volatility in the stock market impacted your investments and your financial plan? Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring for the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo by Sharon McCutcheon on Unsplash

Time Well Spent: Choosing an IRA or a Restaurant?

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Actually both can be a good use of your time in the right amount.  Living near a major city like Chicago, the dining choices are innumerable.  The worst that can happen is you have a bad meal should you choose the wrong restaurant.  Contrast this with choosing the wrong place for your IRA account and/or the wrong investments and you may end up with less in retirement than you had hoped for.

According to a recent survey by TIAA-CREF:

  •  Americans are more likely to spend two hours selecting a restaurant for a special occasion (25 percent), buying a flat screen TV (21 percent) or tablet computer (16 percent) than on planning an IRA investment (15 percent).
  • Fewer than one in five (17 percent) Americans are contributing to an IRA – a decline from 22 percent in 2012 – potentially missing tax and savings benefits.
  • What’s more, fewer than half (47 percent) of those not contributing say they would consider an IRA, down from 57 percent in 2013.
  • Even among those who already have an IRA, more than half (55 percent) said they spent an hour or less planning for the investment.

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According to the TIAA-CREF survey:

“An IRA can be an incredibly powerful savings tool that can boost retirement security and offer immediate tax and savings benefits. IRAs can also serve as a valuable supplement to an employer-sponsored plan and help fund a first home or education,” said Doug Chittenden, Executive Vice President, Individual Business at TIAA-CREF. 

Despite these benefits, the survey found that fewer than one in five (17 percent) of those surveyed currently contribute to an IRA, a decline from 22 percent in 2012. 

The survey reveals that the number of Americans who would consider an IRA as part of their retirement strategy has fallen sharply since 2013. Fewer than half (47 percent) of those not contributing say they would consider an IRA, down from 57 percent in 2013. 

It is possible that a lack of understanding is responsible for low IRA contribution levels. More than one-third (35 percent) of respondents do not understand what an IRA is or the difference between an IRA and an employer-sponsored plan. This percentage is even higher among the Generation Y (age 18-34) population surveyed (45 percent). 

“More and more people are unaware of the ultimate value an IRA can have in a building a stable and secure retirement,” said Chittenden. “Americans today bear much more responsibility for their retirement savings than previous generations did. There is a pressing need to educate Americans from all age groups and income levels on the long-term retirement benefits that IRAs provide through compounded investment growth and tax savings.” 

Even among those who already have an IRA, more than half (55 percent) said they spent an hour or less planning for the investment. 

Sixty percent of those who are contributing to an IRA also have an employer-sponsored plan such as a 401(k) or 403(b). Among those with both plans, more than half (53 percent) say they contribute to their IRA regardless of whether they have reached the contribution or matching limit of their employer-sponsored plan. This means they could be leaving money on the table if they are diverting money to their IRA before contributing enough to get their employer match. 

How does an IRA fit with my retirement planning strategy? 

TIAA-CREF is absolutely right in that an IRA can be a great tool in your retirement planning strategy.  If someone has access to a 401(k) or similar workplace retirement plan I generally suggest they contribute at least enough to capture any employer match offered.  This is true even if their 401(k) plan is lousy.

Beyond that it makes sense to contribute more than the amount needed to receive the match if your employer’s plan offers a menu of low cost solid investment choices.  Although 401(k) plans receive a lot of bad press, in fact there are many excellent plans out there.  One advantage to investing for retirement via a workplace retirement plan is the salary deferral feature.  This makes regular savings and retirement investing painless.

An IRA can be a great retirement savings vehicle in a number of situations:

  • You don’t have access to a retirement plan via your employer.
  • You have maxed out your contributions to your 401(k) and want to make additional retirement contributions.
  • You are a non-working spouse and your working spouse makes at least income to cover the amount of your contribution.
  • You are self-employed.  Note there are a number of retirement plan options for the self-employed including a Solo 401(k) and SEP-IRA.
  • You are looking to roll over your 401(k) after leaving a job and also possibly to consolidate several old 401(k) plans in one place to make managing these assets a bit easier. 

Considerations in choosing an IRA account 

In a recent post on this blog 3 Considerations When Opening an IRA Account I suggested the following things to consider when opening an IRA account:

When looking at the cost of an account at a particular custodian consider any annual account fees and transaction costs related to the types of investments you are likely to make.  For example:

  • How much is it to trade stocks, closed-end funds, ETFs or other exchange-traded vehicles?
  • Does this custodian offer a large number of mutual funds on a no transaction fee (NTF) basis? 

While researching a good restaurant can take some time and potentially yield some tasty rewards, time spent on finding the right IRA and on retirement planning in general can pay off handsomely down the road.  This can lead to many fine restaurant meals as well.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

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3 Considerations When Opening an IRA Account

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As we head toward April 15 it is now high IRA season for the major brokerage and financial services firms.   You will undoubtedly see many TV commercials and ads by these firms touting the benefits of opening an IRA with their firm.  Here are 3 things to consider as you evaluate your best IRA account options.

Understanding your retirement

How much will this cost me? 

Some firms may charge a fee just to have the account.  This might be on the order of $25 or $50 annually.  If your balance is relatively low this can be a significant bite.  Sometimes these fees are based on the size of your account balance.

Additionally you will want to understand any and all transaction fees.  This might include trading fees for buying and selling stocks, ETFs, or other exchange-traded investment vehicles.  Certain mutual funds might carry a transaction cost as well.

If you are working with a commission-based financial advisor understand how he or she is compensated.  Will the funds in the IRA account they are advocating carry sales charges or high internal fees to compensate them?

Is this custodian a good fit with my investing needs? 

This runs the gamut.  Certainly the fees mentioned above are part of this.  Beyond this look at how you invest and the vehicles in which you invest.

For example if you use ETFs extensively does this custodian offer any commission-free ETFs?  If so are these the ETFs that you would use?

As an example if you were planning on using Vanguard mutual funds exclusively it might make sense to house your IRA there.  On the other hand if you were looking to use funds from a variety of families perhaps a custodian that is more of a fund supermarket like Schwab or Fidelity is more appropriate for you.

Beyond an IRA account is this custodian a good fit for my needs in terms of other types of accounts such as a taxable brokerage account?  Do they offer the full array of services that I might need?  In my experience having an IRA at one custodian plus other accounts scattered around several other custodians is rarely a good idea.

Should I roll my 401(k) to an IRA or leave in my old employers plan? 

One of the primary reasons that investors open an IRA during the year is to roll their old 401(k) account over when leaving a job.

If you are leaving your employer whether to roll your 401(k) balance over to an IRA, leave it in your old employer’s plan, or roll it to your new employer’s plan (if applicable) is a critical decision.

There are good  reasons to move your account balance to an IRA which could include:

  • Your old employer’s 401(k) plan is lousy (as is your new employer’s if applicable).
  • A desire to consolidate all of your various retirement accounts into a single IRA to make management of your investments easier.
  • Access to a wider selection of quality investment options than might be available via your old employer’s plan.
  • Perhaps you are working with a trusted financial advisor and the rollover with allow them to better integrate this money with your overall investment strategy. 

On the other hand two reasons to consider either leaving your money in your old employer’s plan or rolling it into your new employer’s plan (if applicable):

  • The plan offers a menu of low cost institutional investments that might not be available to you via a rollover IRA.  This is often the case with very large employers with tremendous buying power, but also with smaller plans who use a competent outside investment advisor.
  • Similar to the last bullet, the plan offers specific investment options that you would be unable to match in an IRA. 

An IRA, either Traditional or Roth, is a great vehicle to help you win the retirement gamble.  Before opening an IRA account you need to do your homework just as with any investing decision.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

 Photo credit:  Flickr

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