Category Archives: Retirement

Punt Returns and Roth IRAs

by Sue Danson on November 10, 2023

I’ve been watching my boys play football for years, and I LOVE watching them, but I still struggle with many of the rules.

Recently, I’ve been trying to figure out punt return vs kick return and when you are supposed to touch the ball vs not touch the ball and just let it roll. Go ahead football aficionados, have your laugh.

No matter how many times my husband explains it, or I ask my football guru friend Tricia what is happening, I can never seem to keep it straight.

I mention this because instances like this help me to remember how my clients might feel when I am spurting out planning concepts and recommendations for them.

One topic area that can be difficult to keep straight, even for us advisors, is the rules surrounding Roth IRAs.

Read on to see how I will now differentiate between a punt and kick return.

When it comes to Roth IRAs, there are TWO ways they can be funded and TWO “5-year rules” that must be differentiated when it comes to distributions from the IRA.

But like the punt and kick return, they may seem like the same thing, but they are not, which is what leads to the confusion.

First, some differences between the two ways a Roth can be funded:

ROTH CONTRIBUTIONS

Contributions are made with after-tax dollars.
Contribution amounts are limited each year by the IRS.
If you earn too much (according to the IRS), your contributions may be phased out, or you may not be able to directly contribute to a Roth IRA at all.
Your CONTRIBUTIONS can be withdrawn at any time, penalty free (but the goal is to keep them in!)

ROTH CONVERSIONS

Conversions are typically made from an IRA. You are converting from a “pre-tax” account to an “after tax” account.
Conversions are not limited by amounts or income levels. You can convert as much or as little as you want at any time, regardless of how much you earn (this is the rule that allows for the back door Roth strategy)
Since you are converting pre-tax dollars, you must pay taxes on the amount being converted in the year it is converted.

Now here is where the PUNT RETURN analogy comes in – Don’t touch it, just let it roll.

There are two 5-Year Rules for Roth IRAs.

5-Year Rule #1 – Pertains to Growth only (for both contributions or conversions)

For the GROWTH in your Roth IRA to become what is called a QUALIFIED DISTRIBUTION (tax and penalty free distribution), two conditions must be met:

5-Year Rule #1 – the account must have been open for at least 5 tax years (there are favorable rules around when the clock starts on the 5-years). AND
The IRA owner must be 59.5 or older (or totally disabled; a few other exceptions exist)

Don’t touch it, just let it roll.

5-Year Rule #2 – Pertains to the CONVERSION amounts

The SECOND 5-year rule pertains to whether the amount you converted can be withdrawn penalty free. Unlike Roth CONTRIBUTIONS that can be taken out penalty free at any time, you cannot pull your conversion amounts out before the 5-year clock is up (unless you are 59.5 or older),or you will pay a penalty on the withdrawal.

Don’t touch it, just let it roll.

It’s too much to dive into the specifics on the ”start clock” for the two 5-Year rules, but know that even the start clock rule has rules. But the gist is… Don’t touch it, just let it roll.

Ultimately, the rules for Roth IRAs exist to keep the “spirit of the law” in place to prevent misuse of this type of tax advantaged account.

But when managed effectively, and in the right situations, Roth contributions and conversions can offer great planning opportunities for many clients.

Are You Planning on Living to 100?
YOU SHOULD BE

by Sue Danson on September 9, 2021

Sometimes the Spirit moves me to attend a weekday mass. One thing that is different when I attend mass during the week is the age population. For obvious reasons, there are no young families and typically no working age adults.

What is GLARINGLY different, while not surprising, is the GENDER of those age 70+ in attendance.

You guessed it – WOMEN.

Women live longer than men. It’s that simple.

But when it comes to the financial implications of this fact for women, it’s not simple at all.

Merrill Lynch put out a study back in 2017 about women and financial wellness. Despite the fact that 2017 is feeling like a lifetime ago these days, there are some great points and statistics that I always refer back to.

42% of women fear they will run out of money by age 80. This rises to 60% if they live to 100.
41% of women report their biggest financial regret is not investing more.
60% say that not having the knowledge to invest is their #1 barrier.
87% feel basic financial management should be a standard part of the HS curriculum (I could not agree more).
41% of mothers report that becoming a mom made it harder to advance their career.
2/3^rds of elder care for family members is provided by women.

These last two points in particular point to the paradox that while we often find great joy and sense of purpose in providing care at these various life stages, and would “never trade that time for anything” (I speak from experience on both), it can also be extremely stressful and challenge us financially, both now and in our future.

Adding to this is the fact that some of us may be taking care of partners that age before us, and our mutual savings begins to diminish quickly on care needs arising for them, leaving less for the remaining partner to live out their life comfortably.

Finally, the study also reported almost 30% of women ages 30 to 44, which are important saving years due to the power of compounding, say they have not started planning at all for their future.

As a woman, you should be planning for your financial support at least through age 95.

And retirement and longevity planning shouldn’t be starting AT RETIREMENT, it should be well before, while you are earning an income and have time to make adjustments as needed.

There are always tradeoffs between our lives personally, professionally, financially and emotionally. Finding the balance between all of them is the ongoing challenge we as women continue to face.

My Favorite Quotes

This quote from the study highlights one of the reasons I particularly enjoy working with women in my practice.

“Women make more values-based decisions for themselves and their families, rather than just going for the bottom line. When you bring values into the conversation, it makes all the difference”.

-Jeanette Schneider, Senior VP at US Trust

Mega Back Door Roth: This Supersized Option is Good for your Health

by Sue Danson on November 25, 2020

This topic has come up for me twice in the last week, so as is often the case, I’ve made it the topic for my newsletter this month.

I often get asked about the best strategies for saving outside of one’s 401(k).

My first caveat is that one size does not fit all, so what is a great solution for your neighbor may not be the best strategy for your situation.

I’ve highlighted in past newsletters the benefits of saving into an HSA, if you have one.

There’s also the option to contribute to an IRA, but regardless of which type of IRA you are to contributing to (deductible, non-deductible, ROTH, backdoor Roth), you are limited to how much you can contribute each year ($6,000 for 2020, $7,000 if you are over 50).

But what if you are in the fortunate position to be able to save more than this?

Introducing the Mega Backdoor Roth

There’s a little known strategy that I’m seeing as an option with more employers as of late. It’s the option to make after-tax contributions to your 401(k).

This strategy can offer tax diversification in retirement, but there are certain criteria that make it most effective.

It’s known in my industry as a “Mega Backdoor Roth”, but you will not see it described that way in your benefits guide. It allows you to sock away more into retirement than the annual limits on a 401(k) or IRA.

Here’s how it works:

Your 401(k) plan (your employer) allows after-tax contributions. If they don’t, game over.
Your employer offers in-service distributions of these after-tax contributions to a Roth IRA while you are still employed or allows you to move the after-tax potion of your 401(k) to the Roth 401(k) part of the employer plan (if they offer one).

If not allowed, game might be over, but not necessarily. It depends.

I know, you hate when I say that.
You convert the after-tax contributions to one of the above as soon as allowed in order that the growth on your contributions is tax-free. You will now have a Roth IRA in retirement where there are no RMD requirements and distributions are tax free. Game changer.

When MIGHT this strategy be an effective strategy for you?

You already max out on your 401(k) contributions.
You max out on your HSA, if your employer offers one.
You make too much money for traditional IRA contributions to be deductible.
You max out a Roth IRA or backdoor Roth ($6,000 for 2020, $7,000 if you are over 50).

As with most financial planning and tax strategies, there are a lot of ins and outs and I try to stick to top level highlights to educate and make you aware of possible options available to you. Consulting with your financial advisor or CPA is always prudent to determine which strategies are your best fit.

Financial Fitness Tip

Speaking of 401(k)’s, we are quickly approaching the end of 2020 (thank goodness). It’s a good time to check where you are with your 401(k) contributions for the year. You may have dialed back the % you contribute when things got a little coo coo in the markets or you had a temporary need for increased cash flow.

If things are looking brighter in your financial world, increase your % for these last few paychecks of the year and into 2021. And if there was never a hardship yet you are not maxing out, consider increasing it a percent or two now.

Little steps carry us a long way over time.

Things I Love

I will be pulling out my mom’s tattered and stained copy of her mom’s recipe to try to match what my grandmother used to create – a true masterpiece! I can never quite match it (my mother always said the same thing when she made it), but I can try.

And besides, it’s simply the tradition of making it and remembering them both that is my true Favorite Thing!

Happy Thanksgiving!

This Triple Scores You a Homerun

by Sue Danson on July 23, 2020

The Basics of an HSA

An HSA is a savings account for health care expenses tied to what’s known as a High Deductible Health Plan, often offered as a health care option through your employer. This type of account is different from a Flexible Spending Account (FSA), where you can lose any unused portion of your dollars set aside for a given year.

The money set aside in an HSA stays with you forever, similar to how your 401(k) would work. So even if you leave your current employer, your HSA dollars go with you. And like your 401(k), you can invest them.

You own the assets in your HSA forever.

How the high deductible health plan works and whether it is right for your circumstances is a newsletter for another time, but many who currently have this type of plan with an HSA don’t understand the benefits of the HSA in and of itself.

Triple Tax Advantaged

Your contributions are pre-tax, so they lower your taxable income in the year they are made. Think of this tax savings in the same way you think of your pre-tax 401(k) contributions.
You can invest your contributions and they will grow tax free, meaning any growth on the account is also NOT taxable. This works like a Roth IRA in this regard, so for high income earners who are phased out of making Roth contributions, this is an excellent tax savings vehicle that offers the same tax free growth one gets from a Roth.
Withdrawals, AS LONG AS USED FOR QUALIFIED MEDICAL EXPENSES, are 100% tax free.

Boom!!! A Triple Tax Homerun!

Now the caveat is that although you can make contributions to this account on an annual basis to pay for current medical expenses, the goal is to instead pay out of pocket and invest that savings, like you would any other qualified savings account, allowing it to grow tax free for as many years as possible.

With our ever increasing health care costs, this is a great tool for our future selves to have a bucket of tax free money to help cover our future medical care costs.