Are You On the ‘If I’m Lucky’ Retirement Plan?

March 16, 2016

The other day, a friend asked me if contributing 18% of her salary into her 401(k) was enough to be saving for retirement. Instead of giving a simple yes or no answer as was expected, I had to answer with a question of my own, “Are you on track to retire?” Finding the answer to that question can seem complicated, but it doesn’t have to be. And unless you actually know whether or not you’re on track, it’s tough to make other financial decisions that may compete for your dollars. Continue reading “Are You On the ‘If I’m Lucky’ Retirement Plan?”

Two Calculations That May Surprise You

March 11, 2016

As the political season continues to drag on and presidential candidates drop out, we are inevitably going to be faced with a decision that makes many of us say “THIS is the best we can do from a pool of 300 million people?” Yet, the day will be upon us shortly and we will make a choice.  One of the things that I found interesting and a little bit fun was this political quiz that calculates how much you agree with the different presidential candidates on certain policy questions. The answers surprised me a little bit (and I’m not going to share how the quiz came out for me) and I’ve shared it with some friends to see where they landed. Continue reading “Two Calculations That May Surprise You”

5 Ways You’re Messing Up Retirement in Your 20’s

February 17, 2016

I know how far off retirement seems when you’re bogged down with student loans and credit card debt while being more concerned about buying a house and having kids (let alone putting THEM through college) in the coming years. Retirement seems more like something your parents and your boss should be worried about. I’m right there with you! But I also know that whether or not you are actually able to retire in that distant-feeling future can be a direct result of your financial behavior in your 20’s. Here are the 5 things that I see 20-somethings do that can really mess up their chances for a comfortable retirement. Continue reading “5 Ways You’re Messing Up Retirement in Your 20’s”

Don’t Let a Backdoor Roth IRA Become a Trapdoor IRA

February 03, 2016

Updated February, 2018

I was talking with a married couple the other day who were happy that they both made high incomes but unhappy that they could not contribute to Roth IRAs and enjoy some tax-free income later in retirement. According to IRS rules, married couples who file their taxes jointly cannot contribute to a Roth IRA when their combined incomes exceed certain amounts.

However, they perked up a bit when I mentioned the possibility of still contributing to a Roth IRA – even with their high incomes – using an idea called a “backdoor” Roth IRA. It works like this: even though the IRS has an income limit on Roth IRA contributions, there is no income limit on Roth IRA conversions from a traditional IRA. So step one would be to open traditional IRAs (one for each of them) and contribute up to the annual maximum amount to each traditional IRA.

Step two would then be to convert their freshly funded traditional IRAs into Roth IRAs and pay tax on any growth that took place inside the traditional IRAs between the time they deposited money into them and the time they converted them to Roth IRAs (which should be close to nothing, assuming the steps are done within a week of each other). That’s how the “backdoor Roth IRA” works in its simplest form. But there may be a catch…

Pre-existing traditional IRA balances complicate matters

As with any financial strategy that may sound a little too good to be true, the backdoor Roth IRA strategy comes with an expensive gotcha if not done properly. Thanks to the IRS pro-rata rule, taxes on a converted traditional IRA are due not just on the funds being converted, but may also be due on any other non-Roth, never-taxed IRA monies, too.

As with any financial strategy that may sound a little too good to be true, the backdoor Roth strategy comes with an expensive gotcha if not done properly

For instance, suppose you also had a 401(k) from a previous job worth $45,000 that you rolled into a traditional IRA after leaving that job. Using the backdoor Roth IRA strategy, you deposit $5,500 of after-tax money into a separate traditional IRA and then quickly convert that $5,500 to a Roth IRA.

At first, it seems this conversion is tax free since the $5,500 traditional IRA didn’t grow to more than the original $5,500 before you converted it to a Roth IRA. The catch is that the pro-rata rule requires you to consider all untaxed traditional IRA money that you have, not just the money that you are converting when calculating any tax you may owe on the conversion.

Running the numbers

In this case, the after-tax $5,500 IRA contribution would be approximately 11% of your total traditional IRA funds ($5,500/[$45,000 + $5,500]), which means the IRS will assess taxes due against 89% of the $5,500 conversion. Instead of a $5,500 Roth IRA conversion that was more-or-less tax-free (no growth in the account yet), you will instead owe taxes on just over 89% of the $5,500 or $4,895, which would be taxed as ordinary income.

Avoiding the trapdoor

So how does one avoid this backdoor trapdoor? Ideally, anyone considering a backdoor Roth IRA should avoid rolling over any old 401(k) dollars into a traditional IRA until the calendar year after the conversion. If you’re going to use this as an ongoing strategy, you could either leave old 401(k)s in their old plans or roll them into your existing 401(k). If you’ve already rolled an old 401(k) into an IRA, you may be able to roll these funds into your current 401(k), assuming the plan allows for these incoming rollovers.

What if you have a traditional IRA that you’ve made past contributions into from years past? Well, you’re out of luck. You can still do the backdoor Roth IRA, but it won’t be tax-free.

Even though your income exceeds the limits, you can still contribute to a Roth IRA. You just have to use the backdoor. However, the key to a tax-free backdoor Roth IRA contribution is making sure there are no other untaxed traditional IRA dollars lurking in the background, ready to turn your backdoor Roth IRA into a taxable trapdoor IRA.

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The Five Biggest Myths About Saving Money?

December 10, 2015

When one of my colleagues recently sent me an article titled “The Five Biggest Myths About Saving Money, According to a Millennial,” I was intrigued. After all, it can be fun to bust myths, especially about something as important as saving money, and hearing a Millennial perspective is interesting, both because I might be one myself (I was born in 1979 and Millennials are sometimes described as being born in the late 70s and other times in the early 80s so maybe I’m actually something called an Xennial) and because they (or we) are the future. The article features the views of Ethan Bloch, the 30-yr old founder of Digit, an online financial company. Here are the “myths” about saving that Bloch aims to correct: Continue reading “The Five Biggest Myths About Saving Money?”

Financial Rules Of Thumb: Retirement Savings

November 11, 2015

Continuing my financial rules of thumb series, this week let’s talk about a question that pretty much every person has asked me on our Financial Helpline: How much should I be saving for retirement and how much do I need total? While the answer varies depending on each person’s circumstances, goals and ultimately their values, there are some rules of thumb for those who either don’t feel like running a retirement estimator calculation or who just aren’t quite sure yet what their goals are. Continue reading “Financial Rules Of Thumb: Retirement Savings”

How To Save For Retirement Without Your Employer’s Help

November 05, 2015

At Financial Finesse, we help people make the most of their employer’s benefits to improve their retirement preparedness. But we recently received a comment on one of our Facebook posts from someone whose company doesn’t offer retirement benefits. If you’re in a similar situation, what can you do? Here are some options: Continue reading “How To Save For Retirement Without Your Employer’s Help”

Do You Still Believe These Financial Fairy Tales?

October 23, 2015

I was talking with one of my friends about a recent experience she had while watching a movie that is a twist on an old Disney fairy tale. It made her question some of the “financial fairy tales” that she believed, based on her life experience. Here’s her story: Continue reading “Do You Still Believe These Financial Fairy Tales?”

Downsizing Your Retirement Expenses

October 12, 2015

As people get closer to retirement, priorities change. The financial resources spent on home improvements and the time and energy necessary to maintain a full-sized home often become a little more of a burden. As kids leave the house and launch into their careers and start building their own families, there’s often a bunch of unneeded space. Continue reading “Downsizing Your Retirement Expenses”

Financial Rules Of Thumb: Saving For College

October 07, 2015

Have you ever heard the rule of thumb that says you should wait 30 minutes to swim after eating? Or don’t leave your Christmas lights up past Martin Luther King, Jr. Day? Perhaps you’ve read some of the arguments both for and against the edict to drink 8 glasses of water per day. And of course, there’s the rule that gets a lot of kids in trouble: question authority. But while these rules may not always ring true, generally speaking, they are good guidelines for getting you through life a little easier. Continue reading “Financial Rules Of Thumb: Saving For College”

Good Things Come To Those Who Wait

October 01, 2015

I was recently talking to my parents about Social Security and was surprised to discover that they had no idea they could delay their benefits past their retirement.This is important because it’s usually the best strategy yet most people collect at the earliest age of 62. Here are some reasons why delaying might make sense: Continue reading “Good Things Come To Those Who Wait”

Passive Income Strategies For Retirement (And Now)

September 28, 2015

Last week, I had lunch with my good friend Brian who just happens to be a local realtor. Normally when we hang out, it is on the soccer field so as a result, we don’t get to discuss business too often. However, our recent discussion was a little different because we actually had time to talk about some passive income strategies. Continue reading “Passive Income Strategies For Retirement (And Now)”

5 Retirement Questions You Need To Ask

September 21, 2015

When do you plan on retiring? When I ask this question during financial wellness workshops and webinars, I find that most people have at least a ballpark idea of when they would like to have the freedom to quit work. In fact, some people completely light up with a lightning fast response of “yesterday, today, or tomorrow” when I ask about that desired retirement date. For most of us, retirement is a top financial priority and there can be a difference between “desired” retirement dates and the actual realistic target date for retirement. Regardless of what your vision of the ideal retirement may look like, here are five basic questions that should be at the heart of all retirement planning activities: Continue reading “5 Retirement Questions You Need To Ask”

Four Retirement Myths I’m Hearing

September 18, 2015

Answering calls to our Financial Helpline, I’ve heard some myths or assumptions about retirement and I always enjoy hearing the buzz out there from people contemplating retirement. My thought is – if I’m hearing this from a few people, there are potentially thousands or millions who have the same thought. So, for those who believe some of these things, I’ll share some of the myths/assumptions I’ve heard recently and then give you my $.02.  Continue reading “Four Retirement Myths I’m Hearing”

3 Under-Rated Retirement Accounts

September 03, 2015

One of the most common questions we get is how to prioritize funding different types of retirement accounts.In an ideal world, we would max them all out but most of us need to figure out which ones should take priority. I recently read this article that attempts to answer that question. While I generally agree with the points, there are three things that this article and many similar articles I’ve read tend to underestimate: Continue reading “3 Under-Rated Retirement Accounts”