Video Series: Setting Up a Roth IRA

In Part II of the video series, we will talk about just how one should start a Roth IRA.  Roth IRA’s are an essential tool to have when it comes to retirement planning.  The money you place into your Roth IRA and the earnings that accumulate over time are never taxed.  When you reach your retirement years, 401k’s, pensions and social security are all taxed.  This is why it is important to have a non-taxed account to supplement your retirement years.  Ramit explains Roth IRA’s below and where you can begin funding your very own account.

Budget Smart, Invest Wise

The Potential Retirement Cap

In his plan for the 2016 budget, the president and his administration are seeking to disrupt the current retirement process.  A number of retirement topics were mentioned such as Social Security, the elimination of a “back door” Roth, and a cap on the amount eligible in a person’s retirement accounts.

For the subject of this post, I will discuss the president’s plan to limit the amount held in retirement accounts for an individual.  Presently, an individual can have an unlimited amount in retirement accounts.  This includes employer-sponsored 401k’s, traditional IRA’s, and Roth IRA’s.  The only limitations currently imposed on retirement accounts are the amount you can contribute.  This includes$5500 ($6500 for people over 50) for IRA’s and $18,000 ($24,000 for people over 50) for 401k plans.  These limitations are currently set so that individuals don’t stash all of their retirement savings in tax-free or tax-deferred retirement accounts.  The government has to make its money somewhere.

The 2016 budget proposal would now not only put a limit on the amount of contributions you can put into a retirement account, but also on the amount held in your various retirement accounts.  The proposed limit: $3,400,000.  For a younger person saving for future retirement, this amount might seem astronomical.  However, I am here to tell you that it is not.  Granted a lot has to happen for this limit to take effect.  It has to be voted on and passed, and then I would assume the government would adjust this number to reflect inflation, roughly 3% a year.  If, and again this is a big if, this law were to be put into place it would impact roughly 10% of 401k plan participants according to Forbes.

Example:

Take the proposed limit on retirement accounts: $3,400,000 and adjust it for inflation of 3%.  In 40 years this inflation adjustment amount would be approximately $11,000,000.

Mike is a 25 year old with $20,000 in retirement assets.  This includes an employer-sponsored 401k plan along with a Roth IRA.  Mike will contribute $18,000 a year to his 401k and get an employer match of $3,000.  He puts in $21,000 a year into his 401k.  Additionally, he contributes the maximum $5,500 into his Roth IRA every year.  Mike spreads this amount out evenly over the 12-month year.  When Mike turns 50, he contributes the new limit, $24,000 in an employer-sponsored 401k with a $3,000 match and $6500 in a Roth IRA.  Assuming Mike’s portfolio returns 10% a year, Mike will have over $15,000,000 in his retirement accounts, more than what would be allowed.  He would then have to divert some of those funds to a taxable brokerage account, or be forced to spend it.

Sure, the example of Mike listed above is an outlier.  Many of us can only dream of having so much set aside for retirement.  The fact is that some people DO!  We can agree this would be a good problem to have, but nonetheless a problem.  Are you aggressive enough with your retirement planning that you have to worry about this law possibly being passed?  I am!  And for that reason, my vote is against it.

Budget Smart, Invest Wise

How to Double your Retirement Income

bankingsense.com
bankingsense.com

You get a job with a company that offers a 401k with a match.  What do you do?  You do what you’ve been told to do.  You contribute what you need to get the max contribution from the employer.  For me, I contribute 6% and get a 3.5% match, totaling to 9.5%.  I am nearly saving 10% of my salary in my early 20’s.  I’m doing a good job of preparing for retirement right?…  Well yes and no.  ALWAYS, I repeat ALWAYS, contribute what you need to your 401k to get your company match.  It’s FREE MONEY.

This is where I will tell you about the easiest way one can double his or her retirement income.  It is through a Roth IRA.  You see a 401k is pre-tax money, so you will pay taxes on your withdrawals in retirement along with whatever social security you are receiving at the time.  Combine social security and your 401k and you will have only 75% (assumming a 25% income tax bracket) of the income you receive during retirement.  A Roth IRA allows you to pay taxes on the money now, so regardless of what tax bracket you are placed in the future you can keep all of the income you withdraw!

Check out the spreadsheet I have attached to truly see how a Roth IRA can double your retirement income.  Keep in mind also with a Roth you never owe taxes and with your 401k you will.

Actionable step for the day, set up a Roth IRA!

To project your retirement income with a 401k and a Roth IRA, simply enter your salary into the cell along with your contribution and your employer match and watch the pie chart on the left shift!  Consider increasing your 401k contribution at work for more income in retirement.

Retirement Calculations

The Perfect “Financial” Christmas Gift

The older we get the less “stuff” we get for Christmas.  As kids our Christmases were often filled with various toys and gadgets.  However, once you reach your 20’s you tend to want bigger items such as iPads, new cell phones and money.

I gifted unto my sister this year what I consider to be the perfect financial gift.  It was a check worth $200.  Now most of the time when we get a check for Christmas or our birthday we think of what we could possibly buy with that money.  This check was different.  I wrote out the check, but I did not date or sign the check.  The check is currently worthless.  Under the “For” spot on the bottom left part of the check I wrote: “Roth IRA”.  The check was given unto my sister with the stipulation that it be used as funds to go towards her opening a Roth IRA.  When she decides to gather up another $800, she will have $1,000 to put towards a low-cost index fund through Vanguard, and I will sign and date the check.  This Roth IRA money will aid in her retirement goals many years down the road.

I would like to think that this gift can one day make her a MILLIONAIRE, and it can.  If she were to open an account with the $1,000 needed and put in the maximum contribution allowed to a Roth IRA, given an 8% annual return on her investment.  She would have an account balance of well over $1 million dollars by the time she is just 60!!!

Maybe you received some money for Christmas or a recent birthday.  My challenge to you is instead on spending it frivolously on the latest iPad or TV, open yourself a Roth IRA.  Vanguard offers low-cost mutual funds that can be started with as little as $1,000.  Be diligent and stay the course, you could turn some Christmas cash into a million dollars!

Budget Smart, Invest Wise

Navigate your way to the proper IRA

Roth IRA: You make after-tax contributions, which allows income to grow and be withdrawn tax free in retirement.

Traditional IRA: You make pre-tax contributions.  Your income is allowed to grow tax free, but you will have to pay taxes upon withdrawal based on your income tax bracket at the time.

As the year comes to an end look at making an IRA part of your retirement plan.  Taxes and investment fees are the biggest hindrances to one’s portfolio returns.  Consider a low cost index fund.  I prefer Vanguard but many others offer similar investment options.

The following link describes common IRA mistakes and will allow you to have better insight if you qualify for one:

http://finance.yahoo.com/news/avoid-these-8-common-ira-mistakes-171412790.html