Roth IRA: The Great Retirement Diversifier

I cannot stress enough the importance of socking away as much money as you can for retirement as early in your working years as possible. If your employer offers a sponsored retirement plan, at the very least, you should be contributing enough to receive any match that the company offers.

These types of accounts can offer a powerful tax benefit during your working years, since they are tax-deferred.

Yet often overlooked is the impact income tax has on your retirement nest egg. Deferring taxes is beneficial, but you should also look at ways to allow for tax-free income during your retirement as well.

Roth IRAs offer the opportunity for post-tax savings. With a Roth IRA, your contributions are made after tax, which means that although you don’t get an initial tax deduction, earnings on your investments grow tax-free and can be withdrawn tax-free during retirement.

Another big advantage of a Roth is that, unlike 401(k)s and Traditional IRAs, a Roth is not subject to minimum distributions at age 70½. And with many of us living longer, this is an excellent way to be able to continue taking advantage of tax-free growth well into your golden years.

Roth IRAs can also be an excellent savings vehicle for younger people who want to lock in their tax rate, while they are early in their careers and in a lower tax bracket. Although it’s difficult to forecast what tax rates will likely be in the future, it’s not hard to imagine that taxes may go up. So aim to stash away the maximum the IRS allows per year, which is currently $5,500, and for those 50 years old or older, try to add to that the additional $1,000 per year you are allowed.

Not surprisingly, because of the huge tax benefits that Roth IRAs provide there are a fair number of rules that must be followed. For instance, you are not eligible to contribute to a Roth IRA if your adjusted gross income is over $196,000 as a joint tax filer or $133,000 as a single filer.

Roth IRAs can be very helpful for individuals who do not have the opportunity to participate in an employer sponsored retirement plan (such as freelancers, entrepreneurs and 1099 employees).It is also helpful for those who have fully contributed to their employer-matched program and want to continue saving. But, keep in mind that it is wise to take advantage of any matching dollars from an employer sponsored program first, before contributing to a Roth IRA.

If you do have an employer-sponsored retirement plan, check with the plan administrator to learn if a Roth 401k/403b option might be available. If this is the case, you can allocate a percentage of your wages to a bucket that is tax-deferred and a percentage to a bucket that is taxed immediately but will grow tax free and be withdrawn tax free. Later, when it is time to retire, your 401k/403b can be rolled over into an IRA and your Roth 401k/403b can be rolled into a Roth IRA.

Although Roth IRAs can be a good method for achieving tax diversification, there are other options as well, once you hit your contribution limits. There are a number of tax management techniques, in addition to traditional employer sponsored or brokerage retirement accounts that individuals or families with complex planning needs may want to consider. Working with a professional, who can discuss with you your specific situation and what range of options may be available, is always a good idea.

One of the things that I emphasize with my clients is that the measure of success of any financial plan is not just how much income you generate, but more importantly how much of that income you are able to keep, after taxes, in retirement.

Feel free to contact our office if you have any questions or if you would like to discuss how a Roth IRA may help you achieve your financial and retirement goals.

Retirement: Will You have Enough Money?

One of the things that I hear most often when having my first consultation meeting with a new client is their fear of running out of money. In fact, this is the number one concern, even more so since the Great Recession, per Gallup’s April 2016 Economy and Personal Finance survey.

Here is one example of the many conversations that I have had regarding potential threats to my client’s financial success. Recently, a retired couple shared the fact that they are facing an issue, which could derail their “Plan A” – dementia. Their concern is that potential escalating healthcare costs for the spouse who has received an early diagnosis may end up depleting the sizable nest egg they had painstakingly built over their working years, leaving the remaining spouse with very little. How quickly the funds are depleted depends on how fast the disease progresses, and how long the affected individual lives with the disease.

It’s very difficult to be completely prepared for this type of situation. However, there are options that may help to reduce the financial and emotional pain associated with the high cost of extended care for a family member suffering from a disabling disease.

The total cost of healthcare is rising, faster than inflation, and it does not appear that this trend will be reversed anytime soon. This is precisely why it’s so important to discuss healthcare-related situations, and why it is also critical that when helping new clients prepare a plan, we not only address their financial goals, but also their deepest concerns. One of the key aspects of my commitment as a financial advisor is to help provide clients peace of mind as part of the planning process.

Estate planning is not easy. It isn’t just about having a will and naming beneficiaries on your IRA and 401(k). There are other considerations. Unfortunately, we don’t know our future and it could be complex. Some pre-planning in this area can be helpful vs. waiting until the situation occurs, especially when it comes to helping make sure that you don’t deplete your entire nest egg.

Each person presents a different challenge, has a different set of goals and a different set of assets to help support those goals. They may have different health issues or different ideas when it comes to the transfer of wealth to the next generation or they may not even have another generation to pass their wealth on to. I always start off planning for the ideal situation, “Plan A” if you will. But life has many twists and turns, so it is critical that a plan anticipates some changes.

You may never be able to be totally prepared, mentally and financially, for every possible change that you might face over the (hopefully) many years of retirement, but it is valuable to have previously discussed how you might handle some of these scenarios.

One of the ways that we help our clients address these challenges is through educational workshops.

For example, last Fall, I invited estate planning attorney Albert Hehr from Meyers, Roman, Friedberg & Lewis to my 2016 Economic Update. During those sessions, Al reviewed all of the basic estate planning documents in detail, including why each one was needed and the ramifications for not having them. As part of that discussion, he specifically highlighted the dramatic financial impact that an extended illness can have on a couple’s financial status. He explained that while it can wipe out the financial assets of a single person, it can be extremely disastrous for a couple. It’s not uncommon for a healthy caregiving spouse, who did everything they could to care for their partner, to not only end up emotionally and physically exhausted, but to also end up financially ruined because they depleted their entire retirement savings.

Al and I have met with several of my clients regarding the importance of having proper and current estate planning documents in place well before a serious illness, divorce, or death of a loved one takes place. The true value of proper estate planning, is that it anticipates many situations, including those mentioned above, and outlines steps to take should one of them occur.

It is important not to put off sitting down with a financial advisor who can help create a plan that addresses your financial goals. As an expert, they can incorporate investment strategies that help ensure you and your family have enough money to support your long-term financial goals, thereby increasing your probability of success.

My mission as an advisor, is to help reduce or eliminate surprises and the concern with running out of money. If you need a plan, would like a second opinion or just have questions, don’t hesitate to contact me. I’m here to help.

Inherited IRA: Don’t Let it Become a Tax Disaster

These days people are concentrating more and more of their assets in their IRAs. In fact, sooner or later most people will ultimately wind up having almost all their investment assets tied up in IRAs.

Since we all know about the two certain things in life (death and taxes), it’s becoming increasingly important to beware of the rules regarding inherited IRAs.

Ignorance of these rules can lead to tax disasters, as was evidenced in a recently published tax court
case that reveals important lessons for all of us in this complex area. Don’t let this happen to you!

Let’s go through some of the events in this case and see what lessons we can learn. The basic facts of the case are pretty simple: Thomas Ozimkoski changed his will a few months before his death to leave the bulk of his property to his wife, Suzanne.

Unfortunately, Susan was his second wife and she did not get along with his son, Thomas Jr., who chose to contest the will in probate court. Even worse, even though Thomas updated his will, he never bothered to update his IRA beneficiary form – in fact it appears that he never filled one out in the first place. As we’re about to see, this led to all sorts of problems.

Lesson #1: Always Fill Out Your IRA Beneficiary Form (and keep it updated)
If Thomas had named Suzanne on his IRA beneficiary form, that money would have passed directly to her and would have totally bypassed his probate estate. Since he never filled out his form, the money instead had to go through probate, where it was subject to Thomas Jr.’s will contest action. Money that has to go through probate is subject to all sorts of problems such as creditor claims, statutory delays, etc. In contrast, IRA assets that have a clearly designated beneficiary on the form will totally avoid probate in the first place. So Thomas’ IRA money would never have been subject to the will contest if he had just filled out that form. Big mistake on his part!

Lesson #2: Inherited IRA beneficiaries have special tax advantages, but ONLY if they are named on the form
As it turns out, Suzanne wound up settling the probate action with her stepson by agreeing to pay him $110,000 from the IRA money. Unfortunately for her, this wound up costing her much more than just $110,000. Rather than leaving the money in the inherited IRA, Suzanne incorrectly rolled that money into her own IRA. Unfortunately, since she was under 59-1/2, this now meant that any distribution taken out of the IRA was not only subject to income tax, but also an additional 10% premature distribution penalty.

If Thomas had named Suzanne as beneficiary on his IRA form, she would have been eligible for much more favorable tax treatment on that money. She could have left it in the inherited IRA, rather than rolling it to an IRA in her own name. If she had done that, she could have spread the distributions over her entire life expectancy, greatly minimizing the tax impact of the distributions. Even better, she would have been eligible to take withdrawals for the rest of her life with no penalty, regardless of her age. That’s because there is an exception to the 10% penalty for money taken out of inherited IRAs…as long as there was a beneficiary named on the form. But since Thomas never filled out his form, Suzanne was out of luck.

So what should you do to make sure your own family never has to face a tax disaster like this? Follow some simple rules.

5 Simple Rules to Avoid a Tax Disaster

1) Name a beneficiary for ALL your IRAs.
2) Name an alternate, in case the first one dies before you.
3) Never name an estate as the beneficiary.
4) Make sure your IRA custodian has a copy of the beneficiary form.
5) Keep the beneficiary form updated as your circumstances change.

As you can see, inherited IRAs are no simple matter. Make sure you know the rules, and in case you feel like you could use some assistance, seek qualified counsel to help chart your course. Don’t let your family go through a tax disaster regarding your inherited IRA!

Can I retire when I want to and still maintain my current lifestyle?

Is it possible for people to retire before 62, even if they don’t have a pension? Can I still maintain my current lifestyle? Everyone always says they don’t want to spend down the principle, so how can you realistically do that without running out of money? What about working part-time? Can that be a viable option? Watch Szarka Financial’s Senior Financial Planner Chuck Conrad, JD, discuss these issues with Fox 8 News Anchor Roosevelt Leftwich.

Retirement Planning – What big lessons did we learn from 2016

What are some retirement risks that people often underestimate, or forget about? What action steps can people take to deal with this risk? What else should people be on the lookout for? Any other underestimated retirement risks? What can be done about this risk? Watch Szarka Financial’s CEO Alex Menassa, CFP®, ChFC®, discuss these issues with Fox 8 News Anchors Roosevelt Leftwich and Autumn Ziemba.

More on Retirement Planning with Alex Menassa

Retirement Planning – What big lessons did we learn from 2016

What big lessons did we learn from 2016 regarding retirement planning? How should people go about putting together their retirement/investment programs? What throws people off course when executing their investment program? Why do so many people make ill-advised changes to their retirement programs? Do you have any advice for people to raise their chances of success with their retirement planning? Watch Szarka Financial’s CEO Alex Menassa, CFP®, ChFC®, discuss these issues with Fox 8 News Anchor Gabe Spiegel.

What Can You Do if You Can’t Add to a Traditional or Roth IRA?

Traditional IRA and ROTH IRA plans are designed to allow investors to accumulate savings through contributions and earnings.

Traditional IRAs allow for deferred taxes until withdrawals are made, but tax liability is triggered when funds are distributed. On the other hand, there are no tax breaks for Roth IRAs when contributions are made, but eligible distributions are generally tax-free. This includes accumulated investment income.

So with Traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take it out in retirement.

Anyone with earned income can contribute to a Traditional IRA, as long as they are younger than 70½. Roth IRAs, however, have income-eligibility restrictions based on a person’s Modified Adjusted Gross Income (MAGI), depending on tax-filing status.

What happens if you are ineligible to participate in a Traditional IRA or ROTH IRA, because for example, you find yourself at the point of maxing out your contribution limits? The current contribution limits are $5,500, and $6,500 for those over age 50, so what might your options be?

If you find yourself ineligible to participate in a ROTH or Traditional IRA, now may be the time to look to old friends for help. The life insurance and annuity business still receive favorable tax treatment on earnings, with the only limitations on deposits being affordability or underwriting.

You just can’t put everything there, nor would it be wise to do so, but this may be a consideration depending on your individual circumstances.

Life insurance offers the following benefits (just in case you forgot!):

• Income tax-free death benefits to beneficiaries

• No defined annual IRS limitations on premiums

• No limit on gross income or modified gross income to affect your ability to contribute

• Missed premiums may be “made up” at a later time

• Tax-deferred accumulation

• Distributions using loans and withdrawals are income tax-free when structured properly

• No 10% penalty tax for accessing cash values prior to 59 ½ if structured properly

• Take distributions when needed, if at all

• No required distributions (RMDs) for owners

All signs point to changes in some aspects of IRS rules regarding IRAs, such as RMD on ROTH IRA and a ceiling on accumulation values in IRA accounts, sometime in the future.

Give us a call to schedule a discussion with a Szarka advisor about how this option, and others like it, may help your retirement planning diversification.

Should People be Worried About the Results of This Election?

Now that we know the results of the election, what should you do with your investments? In my opinion, if you were positioned appropriately before the election, it makes sense to retain that same strategy during the transition into the new administration. 

On the other hand, this change may also be a good time to step back and review your overall financial picture. Have your long-term goals changed? Are your investment returns meeting expectations? Reasonable goals, combined with sound planning, can pay dividends regardless of market conditions. According to FINRA (Financial Industry Regulatory Authority), the following 5 steps can help steady your pulse during market downturns and elevate your financial security.

1. Revisit your financial goals.
Set clear, prioritized goals. Good financial goals, tied to a sound long-term financial plan, typically will survive short-term market ups and downs. It is critical that you have a plan that includes annual savings as well as a diversified portfolio based on reasonable returns for the market risk that is appropriate for you.

2. Focus on asset concentration.
Do you have a large position in a particular stock or mutual fund? Significant market movement in that position can illuminate concentration risk, the risk of amplified gains or losses that may occur from having a large portion of your holdings in a particular investment, asset class or market segment relative to your overall portfolio. It’s important to diversify across, and within, the major asset classes to reduce the potential of a significant loss.

3. Focus on your financial security.
Take advantage of day-to-day opportunities to help build your finances for the long term, such as paying your credit-card debt on time and in full, if possible, to avoid paying high interest rates (which are cancerous to your long-term savings plan), and setting aside funds for the unexpected (car repair) or the specific (vacation in Hawaii). If possible, set up automatic contributions; to 401(k) plans, savings accounts and a Roth IRA if you qualify.

4. Understand the impact of higher interest rates.
Yes, the Fed finally started to raise the federal funds rate and might do so again. That will have a positive impact on your savings accounts, but it will likely have a negative impact on your current bond holdings. When interest rates rise, bond prices generally fall. New bonds will have higher interest rates, so it will be better long-term, but you might see a short-term negative impact on the bond portion of your portfolio. Stick with the plan!

5. Protect your money.
Fraud is a growing threat and financial scammers operate in all market conditions. In times of high market volatility, investors may be particularly vulnerable to pitches touting guarantees of “risk-free” returns. Combining a guarantee with a specific amount of money you will make—”this is a safe investment that will earn you $6,000 every quarter”—is a highly effective tactic known as phantom riches. You can avoid fraud by working only with registered investment professionals—use FINRA BrokerCheck ( to find out if a person is registered to sell securities—and by sticking to your pre-determined financial plan.

These steps are just some of the right things to do when it comes to financial matters. Unfortunately, no one can predict what will happen in the various markets. That is what makes it all work. If we knew what was going to happen, we could devise the perfect plan. So, as an alternative, I suggest you define your goals, develop a plan based on reasonable expectations, maintain a diversified portfolio, periodically monitor it and stick to the plan. Let us know if you would like to have your plan reviewed or, if you don’t have one, we can help you develop something that fits your unique goals and expectations.

New IRS Rule Could Provide Relief on IRA Rollovers

Sooner or later, almost all investors will eventually be faced with the decision of whether to roll their 401k (or other employer sponsored retirement plan) into an IRA. The IRS recently issued a new rule that could actually make life a little bit easier for taxpayers in this regard.

First, some background. As we have written about many times in the past, fixed pension plans are going the way of the dinosaur. For most people going forward, their major sources of retirement income savings will be their 401k. Depending on where you work, chances are good that you are eligible to contribute to a 401k plan through your employer. And if you move from job to job, you may begin to build up a collection of 401k plans from each employer.

Sooner or later, you’ll be faced with the decision of what you should do with these 401ks and begin considering rolling them into an IRA. Maybe you would like to pull all the 401k money together from the different plans into one IRA account to make it easier to administer and keep track of everything. Maybe you want a wider assortment of investment options than what the 401ks offer, and/or you want just one comprehensive set of investment options that applies to all the money rather than having each of the 401k’s subject to their own individual limitations. Or maybe you’re finally ready to retire and you want total flexibility to take distributions from the entire amount whenever you want, to meet your retirement income needs.  In any of these cases, you could potentially consider consolidating all the 401ks into an IRA by doing a rollover. Of course, this is a decision that must be made on a case by case basis depending on the needs of the taxpayer.

There are generally two ways to accomplish an IRA rollover. Many taxpayers who are not familiar with these rules, who maybe have never done this before, might only be familiar with the first method, known as the “60-day rule”. Under this method, the taxpayer just asks the 401k provider for a total distribution, and the taxpayer then has 60 days to deposit the money into their new IRA.  The problem is that if they miss the 60-day time window the whole thing is considered a taxable distribution rather than a rollover, including being subject to a 10% penalty if the person is under age 59 ½. Certainly an ugly situation in which no one would want to find themselves, but it’s happened to many taxpayers in the past.

Up until now there was almost no way for taxpayers to avoid the harsh consequences of missing the 60-day time window. But under a new rule issued this past August, for once it’s “the IRS to the rescue”!  Under the new rule, if a taxpayer misses the 60-day time period they can actually fix this problem themselves, and at practically no cost. All they have to do is fill out a form asking for a waiver of the time period, provided that the reason for the late rollover is among a specific list of permissible reasons allowed by the IRS. There are 11 acceptable reasons under this new rule, including financial institution error, misplacing the rollover check, mistakenly depositing the rollover into the wrong account, and other misfortunes such as severe damage to a personal residence, death or serious illness of a family member, and incarceration.

It’s not often that the IRS actually issues rulings that are so helpful and, dare we say it, “compassionate”! So this is certainly good news. On the other hand, taxpayers should be aware that this ruling does not change the fact that the rollover has to otherwise be valid in all respects, such as being the taxpayer’s only rollover within a 12-month period.  Also the new IRA custodian will still have to alert the IRS that this is a late rollover, which could invite an audit to make sure that the relief conditions were properly met.

Taxpayers should also be aware that there is a better method to make a rollover that avoids all these problems in the first place, known as a “trustee-to-trustee transfer” or a “direct rollover”. This is actually considered the “gold standard” for how to make a rollover. Under this method, you first have to decide who your new IRA custodian is going to be. Then you direct the 401k plan (preferably by phone if the plan so allows, otherwise via rollover paperwork) to make out a check directly to your new IRA custodian. The key is that the check is not made out to you personally; it’s made payable to “XYZ Custodian, IRA FBO (“for the benefit of”) John/Mary Smith”. That’s what makes it a direct rollover. The check is mailed to your address, and you forward it to your new IRA custodian.  In this case there is no 60-day time limit at all to worry about. You can initiate a direct rollover at any time for 401ks that you’ve had for many years, and take as long as you like to deposit the check into your new IRA (not that you’d necessarily want to wait very long!)

Any time the IRS issues a ruling like this that is actually helpful, it can be considered a victory for taxpayers.  However, there are still plenty of other rules and traps to watch out for. If you are considering a rollover, feel free to contact us for more detailed guidance.

Selecting Long Term Care Policies

With greater numbers of individuals living longer, long term care is becomingly an increasingly vital consideration. Mapping out a way to afford the cost is another important action as well. Mark Stratis, senior financial planner for Szarka Financial explains to Tim Muma the different types of Long Term Care Policies that can help you and your loved ones.

Click here to listen to the full podcast.