MONEY IRAs

Use the Backdoor Roth IRA Before It Disappears

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Making a nondeductible IRA contribution, then converting that newly created IRA to a Roth can limit your tax liability.

Few investors appreciate just how revolutionary the Roth IRA was when it first became available almost two decades ago. Traditionally, retirement accounts have been a method of deferring taxable income, with contributions to traditional IRAs and 401(k)s not included in current-year income, but with eventual withdrawals in retirement subject to income tax. The Roth IRA’s truly tax-free treatment of retirement savings has appealed to millions of investors, but because of income limits on making contributions, many high-income savers don’t have direct access to Roth IRAs. Starting in 2010, the opportunity to create a backdoor Roth IRA became available even to those who were locked out by income limits. Yet with some lawmakers seeing backdoor Roth IRAs as an abuse of the retirement vehicle, you should consider using the strategy now while it’s still available. Let’s take a closer look at the backdoor Roth IRA, why it’s so valuable, and why some people want to make it disappear.

Sneaking into a Roth through the backdoor
Back when Roth IRAs first came into existence, high-income individuals found themselves locked out of the new retirement accounts. Even now, single filers with adjusted gross income above $131,000 aren’t allowed to make Roth IRA contributions, and for joint filers, a limit of $193,000 applies. Moreover, conversions from traditional IRAs to Roth IRAs weren’t allowed for those with incomes above $100,000. The combination of those factors created an insurmountable barrier to high-income savers wanting Roth access.

In 2010, though, lawmakers repealed the income limit on Roth conversions. That opened the door to Roth IRAs for high-income individuals for the first time, but it came with a hitch: Most of the time, when you convert a traditional IRA to a Roth, you have to pay income tax on the converted amount. Given how high the tax rates are for these upper-income taxpayers, paying Roth conversion tax isn’t a very attractive proposition.

The backdoor Roth IRA gets around this problem by taking advantage of another tactic: the nondeductible regular IRA. Most high-income individuals aren’t eligible to deduct their traditional IRA contributions because of similar income limits, but nondeductible traditional IRAs are available to anyone with earned income. Therefore, the two-step method for the backdoor Roth involves making a nondeductible IRA contribution and then converting that newly created IRA to a Roth.

If your nondeductible IRA is the only traditional IRA you own, then the Roth conversion doesn’t create any tax liability. That’s because the IRS recognizes the fact that you didn’t get a tax deduction for your initial nondeductible IRA contribution, and so it essentially gives you credit for that contribution when considering the tax impact of the rollover.

Setting up for a backdoor Roth IRA
For many savers, though, the nondeductible IRA isn’t their only traditional IRA. If you have made past IRA contributions and got tax deductions from them, then the IRS requires you to treat the conversion of your nondeductible IRA as if it came pro rata from all your IRA assets. That will subject part of the converted amount to tax.

However, there are a few things you might be able to do to rearrange your finances to use the backdoor Roth IRA strategy. Many employer 401(k) plans allow workers to roll their IRA assets into their 401(k) accounts, and money that’s in a 401(k) avoids the pro-rata tax problem because of its being an employer plan rather than an individual IRA. Similarly, those who are self-employed can use self-employed 401(k) arrangements and provide for the same asset movement to set up their tax-free backdoor Roth.

Get it done
The sense of urgency about backdoor Roth IRAs comes from the fact that policymakers have increasingly seen the strategy as a form of unfair tax avoidance. The Obama administration’s proposed budget for fiscal 2016 included changes that would put a halt to the backdoor Roth IRA by preventing Roth conversions involving funds from nondeductible IRAs or voluntary after-tax contributions to 401(k) plans. The budget proposal hasn’t become law and likely won’t, but in future, lawmakers might well target the backdoor Roth as something that unfairly benefits high-income taxpayers.

For now, though, the backdoor to a Roth IRA remains open, and high-income individuals should look closely at their financial situation to see if they can take advantage of it. Having tax-free retirement money available to you can be extremely valuable, and the backdoor Roth is the best — and often only — way for people subject to income limits to get the benefits of this retirement vehicle.

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MONEY Taxes

7 Ways to Save on Taxes When You’re Between Jobs

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Low-income years are a unique opportunity to take advantage of the 0% capital gains rate, among other savings.

Over your career, you will probably face a year or more with limited income. Believe it or not, these situations present powerful savings opportunities, generally only for a limited time. Here’s what to know to take advantage, especially regarding your taxes.

The tax tips below are several of the most common opportunities if you find yourself off to graduate school or taking time out of the labor market (voluntarily or otherwise).

Exploit the Roth. A Roth individual retirement account is generally a powerful long-term financial opportunity in a year of unusually low income. Because of the tax-free growth, the economics of a Roth IRA contribution or conversion work best when you enjoy a long time for your investments to grow; a low tax rate at the time of the contribution or conversion; or potentially higher personal income tax rates in the future.

To qualify to make Roth contributions, you must earn income during the tax year that includes wages and salaries but not investment earnings. If you’re a student and depending on the financing costs, you might want to borrow an extra $5,500 from student loans for annual Roth contributions.

Roth conversions can be an even better opportunity if you hold existing IRAs or 401(k)s accounts from prior employment, creating taxable income you can offset using deductions and credits or that incurs tax at unusually low rates. Deductions and credits can sometimes allow you, if your income’s low enough, to convert assets to a Roth for free.

Sell your winners. Low-income years also present a unique opportunity to take advantage of the 0% capital gains rate. Taxpayers who use the filing status single and with taxable income below $37,450 and married taxpayers making less than $74,900 qualify for this rate.

If you still hold a stock that’s appreciated significantly since grandma gave you the shares years ago, consider selling it at 0% taxes. You can always buy back the stock later, simply increasing your cost basis (the price you originally pay for a stock).

Cash old Savings Bonds. If you received U.S. Treasury Savings Bonds (Series EE, E or I) as a child and still wonder what to do with them, lean years can mark a great time to cash them in.

In most cases, income on these bonds is not taxed until you redeem the bond or it matures. Realizing this income during a year when don’t make much is generally wise.

Research when the bonds were purchased, though, since it might make more sense to hold pre-1995 bonds due to rock-bottom interest rate at that time.

Retirement Savings Contributions Credit. This tax credit, rarely publicized because the qualifying income limits are relatively low, is a powerful opportunity. It essentially rewards you for contributing to your IRA or employer-sponsored retirement plan.

In some respects, the credit behaves like an employer-provided retirement plan match of some percentage of your savings – except here the Internal Revenue Service matches the funds. If you are married and have adjusted gross income (AGI) of less than $61,000 a year, you can qualify for the credit ($30,500 AGI for single filers).

Consider shifting dollars from a savings account to a Roth IRA: You qualify for the tax credit – as much as 50% of the IRA contribution – and you get funds into a Roth IRA.

This credit is unavailable to full-time students; a married couple with one spouse in school and the other working does qualify. You can also use it for your final year of graduate school if you earn income for some of the year of income and are no longer a full-time student at the end of the tax year.

The Earned Income Tax Credit (EITC). You must have limited employment income and less than $3,400 in investment income to claim the EITC, which also depends on the number of qualifying children you claim: $53,267 in 2015 for a married couple with three or more children. Taxpayers without qualifying children must be at least 25 years old; taxpayers with children face no minimum age requirement.

What can make the opportunity so valuable if you earn little: The EITC is refundable. This means that you can receive money from credit, which can be as much as a few thousand dollars, even if your income tax is zero.

Make sure you meet all qualifications before taking this credit.

Run expenses through a 529. These pre-payment plans were established to promote long-term saving for college, but state tax rules provide a loophole that encourages using these plans for short-term savings.

Of the 45 states with an income tax (including the District of Columbia), 35 offer tax deductions for 529 Plan contributions. Most of these states do not have a waiting period on withdrawals. You can funnel graduate school expenses through a 529 plan (even proceeds from a student loan), immediately distribute the funds from the plan and claim a state tax deduction up to the state limits.

If you live in such states as South Carolina and Colorado, where there is no limit on the deduction, or in states like New York with high income taxes, this strategy works well. You can’t claim any education tax credits, such as the Lifetime Learning Credit or American Opportunity Tax Credit, with the same dollars that you use for this 529 tactic, but as long as your graduate school costs exceed $10,000, you can employ the strategy.

Claim the Child Tax Credit. If your employment income falls below $75,000 and you file taxes using the single status ($110,000 if you file married filing jointly), you can claim the child tax credit to reduce income tax up to $1,000 per child. The less your income, the bigger the credit.

As with the EITC, you can receive money for the credit even if you owe no income tax.

Savings are great, of course, but always run the numbers or review the nuances of credits to understand what works best for you.

Jason Lina, CFA, CFP, is Lead Advisor at Resource Planning Group Ltd. in Atlanta.

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MONEY retirement income

3 Retirement Loopholes That Are Likely to Close

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The government has a knack for catching on to the most popular loopholes.

There are plenty of tips and tricks to maximizing your retirement benefits, and more than a few are considered “loopholes” that taxpayers have been able to use to circumvent the letter of the law in order to pay less to the government.

But as often happens when too many people make use of such shortcuts, the government may move to close three retirement loopholes that have become increasingly popular as financial advisers have learned how to exploit kinks in the law.

1. Back-door Roth IRA conversions
The U.S. Congress created this particular loophole by lifting income restrictions from conversions from a traditional Individual Retirement Account (IRA) to a Roth IRA, but not listing these restrictions from the contributions to the accounts.

People whose incomes are too high to put after-tax money directly into a Roth, where the growth is tax-free, can instead fund a traditional IRA with a nondeductible contribution and shortly thereafter convert the IRA to a Roth.

Taxes are typically due in a Roth conversion, but this technique will not trigger much, if any, tax bill if the contributor does not have other money in an IRA.
President Obama’s 2016 budget proposal suggests that future Roth conversions be limited to pre-tax money only, effectively killing most back-door Roths.

Congressional gridlock, though, means action is not likely until the next administration takes over, said financial planner and enrolled agent Francis St. Onge with Total Financial Planning in Brighton, Michigan. He doubts any tax change would be retroactive, which means the window for doing back-door Roths is likely to remain open for awhile.

“It would create too much turmoil if they forced people to undo them,” says St. Onge.

2. The stretch IRA
People who inherit an IRA have the option of taking distributions over their lifetimes. Wealthy families that convert IRAs to Roths can potentially provide tax-free income to their heirs for decades, since Roth withdrawals are typically
not taxed.

That bothers lawmakers across the political spectrum who think retirement funds should be for retirement – not a bonanza for inheritors.

“Congress never imagined the IRA to be an estate-planning vehicle,” said Ed Slott, a certified public accountant and author of “Ed Slott’s 2015 Retirement Decisions Guide.”

Most recent tax-related bills have included a provision to kill the stretch IRA and replace it with a law requiring beneficiaries other than spouses to withdraw the money within five years.

Anyone contemplating a Roth conversion for the benefit of heirs should evaluate whether the strategy makes sense if those heirs have to withdraw the money within five years, Slott said.

3. “Aggressive” strategies for Social Security
Obama’s budget also proposed to eliminate “aggressive” Social Security claiming strategies, which it said allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.

Obama did not specify which strategies, but retirement experts said he is likely referring to the “file and suspend” and “claim now, claim more later” techniques.

Married people can claim a benefit based on their own work record or a spousal benefit of up to half their partner’s benefit. Dual-earner couples may profit by doing both.

People who choose a spousal benefit at full retirement age (currently 66) can later switch to their own benefit when it maxes out at age 70 – known as the “claim now, claim more later” approach that can boost a couple’s lifetime Social Security payout by tens of thousands of dollars.

The “file and suspend” technique can be used in conjunction with this strategy or on its own. Typically one member of a couple has to file for retirement benefits for the other partner to get a spousal benefit.

Someone who reaches full retirement age also has the option of applying for Social Security and then immediately suspending the application so that the benefit continues to grow, while allowing a spouse to claim a spousal benefit.

People close to retirement need not worry, said Boston University economist Laurence Kotlikoff, who wrote the bestseller “Get What’s Yours: The Secrets to Maxing Out Social Security.”

“I don’t see them ever taking anything away that they’ve already given,” Kotlikoff said. “If they do something, they’ll have to phase it in.”

MONEY retirement planning

9 False Moves That Could Derail Your Retirement

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For many of us, retirement is a great unknown. In your 20s, it seems so far away that it’s easy to figure you’ll start saving when you have more money. Of course, if you wait until you have “extra money,” you might never start at all.

But 20-somethings aren’t the only ones who do things that sabotage their retirement. Their parents may be putting their own retirement at risk by, for example, borrowing money to pay for a wedding, just when they should be turbocharging their own savings, especially if they started late.

So what are we to do? We don’t know that we’ll live to be 85 and still healthy enough to travel, or that the stock market will crash just before we retire. And yet we hope to plan as if we do know. Some of us dream about retirement — and many of us sabotage it at the very same time. Here are some money moves you may regret down the road.

1. Raiding Your Home Equity

Home equity can seem like a a piggy bank when you’re short on cash. And a “draw period” on a home equity line of credit before repayment of principal is due can make it feel almost like free money. Worse, it feels like you are borrowing from yourself. After all, you built up that home equity, right? But if you spend it now, you won’t have it later. And should you decide you want to sell or get a reverse mortgage at some point, that decision can come back to haunt you. You will walk away with less from a sale or be eligible for lower payments from a reverse mortgage. Either way, Retired You could suffer from the decision.

2. Unplanned Roth IRA Withdrawals

Some experts recommend Roths as vehicles to save for a first home or as a place to park an emergency fund because the money grows tax-free. If you have planned to use the money for a first home, you can withdraw up to $10,000. It can also come to your rescue for unforeseen expenses (particularly tempting because, after five years, you can withdraw principal penalty-free). Its flexibility is both an advantage and a temptation, since raiding your retirement account now robs you of those funds and their compounding interest down the road.

3. Failing to Put Away Anything

For many of us, it’s easier to wait to save until we’re “more established” or until we’re making a little more money. Why aren’t we saving? Because there’s no extra money! The problem, of course, is there may well never be any extra money. Most of us don’t come to the end of the month and try to figure out what to do with all the money that’s left. Saving needs to be in the budget from the beginning. It’s often easiest to automate this.

4. Helping Adult Kids Financially

But they’re your children. And everyone makes mistakes. (Or maybe they think you did when you didn’t save thousands for a wedding.) There are exceptions, of course, but if you do help out financially, be sure you minimize your own costs or that you do not jeopardize your own retirement. It’s not usually a good idea to let them grow accustomed to a parental supplement. Relationships and money can be fraught, too. So think very carefully before you make your help monetary.

5. Co-Signing for a Child or Grandchild

They are just starting out and don’t have much of a credit history. Or they want to take out private student loans, and all that’s standing between them and next semester is your signature. The car they are financing, the lease they are signing … if your signature is on it, you are on the hook. If they pay late, your credit could be affected. And should you need a loan, this obligation will count as your debt for purposes of determining eligibility. Student loans can be particularly risky. In many cases, they can’t be erased in bankruptcy. If you have already co-signed on a loan, it’s important to check your credit regularly to see how it’s affecting your credit.

6. Failing to Have a Plan B

You probably hope or assume your good health (and that of your spouse, if you are married) will continue. You may be planning to stay with your current employer until you reach full retirement age. But people fall ill, or they get laid off before they planned to leave the workforce. Do you have a reserve parachute? Your standard of living won’t be as high, but knowing that you have a plan can make the situation a little less worrisome.

7. Poor Investment Choices

Even if you’ve managed to sign up for the 401(k) at work or to open an IRA for yourself, choosing the wrong funds or failing to diversify can set you up for failure. A target-date fund can be useful, but only if you choose the appropriate target. (If you’re in your 50s and choosing a 2050 target retirement date, you may get really lucky and see big gains — but you could also see big losses and not have much time to recoup them.) Likewise, it’s smart not to put all your nest eggs in the same investment basket. Do your own research or find a planner to find a mix you are comfortable with and that is appropriate for your age and goals.

8. Not Making Changes When Needed

Are your investments changing with your goals? And are you keeping track of all of your investments? If you’ve had several jobs (and several 401(k)s), it’s a good idea to do some consolidation. Keeping track of funds in several investment houses can make figuring out minimum withdrawals much more difficult once you are retired. Keep accounts organized.

9. Taking Social Security As Soon As You Can

In many cases, it’s better to wait. Your payment will be higher, although if you take it younger, you will get it for more years. Claiming it the minute you can may be tempting, but if you come from a family with a history of people living well into old age, consider whether you think the smaller checks will be worth it. (You can calculate a “break-even” age of how long you would have to live to collect as much as you would have had you started younger — so that checks from then on truly are additional money.) Conversely, if no one in your family has ever turned 80, you may want to opt for the earlier payout. And, of course, your financial situation when you retire will have a say. If you can’t make ends meet without Social Security, then you should take it.

Another mistake? Making all your plans — including retirement — for later. A life of sacrificing for a “later” that may or may not come is not much of a life. They key is balance. We’re not suggesting you never take a vacation, never give to a cause that is close to your heart or buy the car you’ve desperately wanted (and can now afford) so that years of self-denial will pay off someday … maybe. But it is good to know that if you live a long life, you’ll have the financial resources you need.

Read next: Can You Pass This Retirement Quiz?

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MONEY College

6 Financial Musts for New College Grads

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Nail these moves and you're on your way to financial success.

You did it! You passed your finals, you graduated from college, and you even landed the coveted job you have been working so hard to get. So now what?

Many grads are carrying student loans that will be weighing them down for years to come. Since you’re facing plenty of new expenses—moving, rent, furniture, a suitable office wardrobe—now is a great time to make a financial plan. Here are six things every new graduate should do:

1. Make a budget

A good starting place for your monthly budget can be easily remembered as “50-30-20.” When you receive your first paycheck, sit down and figure out what your monthly take home pay will be. Out of that, put 50% toward needs such as rent, utilities, and groceries. Thirty percent goes toward “wants” such as shopping, entertainment, restaurants, and fun. The final 20% goes to your savings and debt repayment. If your student loans are substantial, you may have to flip the percentages so that 30% goes towards debt repayment and 20% toward wants. By following this plan, you can quickly put a dent in those loans.

2. Manage your debt

Student loans often have multiple tranches with varying interest rates that can be fixed or variable. Your best option is to pay off the loans with the highest interest rates first, though that practice is far less common than you might think. When the time comes to start repaying, access your student debt details online to figure out the interest rates for each tranche. Pay the minimum towards the balances with the lowest interest rates and make your largest debt payments on the balance with the highest interest rate. The biggest mistake you can make is paying the minimum into each loan and waiting until you “make more money when you’re older” to deal with them.

3. Prepare for emergencies

An emergency savings account is the best way to plan for the unexpected. What would you do if your car breaks down and you need $800 to get it fixed? If your laptop stops working and you need one for work, how will you buy a new laptop? What would you do if you lost your phone? People often go into debt to cover unexpected expenses, but it’s a problem that can be solved with a little planning. By contributing a small amount of each paycheck into a conservative investment saving account, you can be better prepared to pay for life’s inevitable emergencies.

4. Take advantage of a 401(k) match

Most employers offer 401(k) retirement plans and many offer some form of a match. A traditional 401(k) is an employer-sponsored retirement plan that allows you to save and invest a portion of your paycheck before taxes are taken out, thus decreasing your tax liability. When an employer offers a match, they are matching your contributions, often up to a certain percentage of your income. By choosing not to fully participate in these programs, you are effectively turning down free money from your employer.

Some employers also offer a Roth 401(k), where your contribution is made with after-tax dollars (meaning that you pay the taxes now) and the funds grow tax-free for retirement. The Roth 401(k) is often seen as the better option for younger investors who are typically in a lower tax bracket and who would not get as much benefit from a tax deduction today as they would in retirement.

5. Open a Roth IRA

Similar to a Roth 401(k), a Roth IRA is an individual retirement account allowing you to invest up to $5,500 for the 2015 tax year. These accounts are often considered ideal for younger investors, who may benefit from decades of tax-free compounded growth. Investing $5,500/year from age 22 to age 30 may create an account of more than $1 million when you’re using those funds in your retired years. If you invested the same amount annually but waited until your 30s to start, your account might be worth half as much. For Roth IRA contributions in the 2015 tax year, your modified adjusted gross income must be less than $116,000 if you’re single (or a combined $183,000 if married.)

6. Automate your savings

By setting up automatic transfers from your checking account to your Roth IRA and emergency savings, you’re effectively drawing money straight from your paycheck. This allows your plan to be put into action with minimal maintenance and oversight on your end.

Congratulations, graduate! With these six tips you could be on your way to a successful financial future.

Voya Retirement Coach Joe O’Boyle is a financial adviser with Voya Financial Advisors. Based in Beverly Hills, Calif., O’Boyle provides personalized, full service financial and retirement planning to individual and corporate clients. O’Boyle focuses on the entertainment, legal and medical industries, with a particular interest in educating Gen Xers and Millennials about the benefits of early retirement planning.

MONEY Taxes

Start Saving on Your 2015 Taxes Now

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It's never too early to get a leg up on Uncle Sam.

Though the ink’s barely dry on your return for 2014, getting an early start on tax planning for 2015 can save you both money and stress next April. Here are five techniques to keep in mind.

1. Tax-loss harvesting. If you already realized a large capital gains tax in 2015 or anticipate one later this year, this tactic might help. Loss harvesting involves selling an investment at a loss and simultaneously buying a similar, substitute investment.

Let’s assume that you purchased $10,000 worth of oil company ABC stock last year. Due to lower oil prices, your investment drops in value to $7,000. If you take no action and oil prices rebound, raising the stock price, you receive no tax benefit for the temporary $3,000 loss from your stock.

If you sell your ABC stock and buy a substitute simultaneously (say, in oil company XYZ), you can use the $3,000 to offset gains on your tax return and participate in the stock price recovery that accompanies eventually rising oil prices.

You can use this strategy with individual securities (stocks) or with diversified bundles of securities, such as mutual funds and exchange-traded funds. Either way, you can lower your capital gains liability and possibly achieve greater after-tax returns.

2. Optimized charitable giving. Increasing your donations in the year that you realize a large capital gain can also help reduce your tax liability.

If you don’t have a favorite charity and need time to research qualified organizations before making a contribution, consider creating a donor-advised fund (DAF) to take a tax deduction in the year that you make the contribution (in this case, 2015) and make grants to your favorite charities in the future.

Funds in a DAF can be invested to grow over time. You can also contribute to DAFs with appreciated securities that are now worth more than when you bought them, giving you two tax breaks: on the charitable contribution and on the unrealized capital gain in the investments.

You can even create a board of advisors for your DAF to get other members of your family involved in grant decisions.

3. Higher retirement plan contributions. For 2015, your maximum deferral to defined contribution plans (to which you kick in a set fraction of your pay) increased to $18,000, and the catch-up contribution for those 50 and older increased to $6,000 — a total of $24,000 in potential tax deferrals.

Consider increasing your contributions to match these limits, which can also reduce your taxable income. Contact your plan administrator for more information.

4. A Roth individual retirement account conversion. Such switches from an existing IRA or employer-sponsored plan were once only available to investors with modified adjusted gross income (MAGI) of less than $100,000. Congress eliminated that restriction in 2010, making Roth IRA conversions available to nearly all investors regardless of marital status or income level.

You can benefit from a Roth IRA conversion if you expect your taxable income to be significantly lower or your deductions to be significantly higher in 2015, or if you’re in a lower tax bracket now than your expected retirement tax bracket.

Best to be proactive: Ask your tax advisor to prepare a projection regarding your optimal amount to convert before December. If necessary, you also have until Oct. 15, 2016, to re-characterize your Roth IRA back into a traditional IRA.

5. Maximized company stock options. If you’re in an employer-sponsored stock option plan, start tax planning before the year in which the options mature to retain the most flexibility and savings.

If your options mature or start vesting in 2015, meet with your financial advisor to prepare tax projections. Planning ahead helps you get ready to take advantage of future tax savings as well as regulate your cash flow.

Integrating tax planning with your investment management optimizes your after-tax returns and enhances your whole financial plan, both in this year and in those to come.

Lora Murphy, CPA, CFP, CDFA, is a consultant with Wipfli Hewins Investment Advisors LLC in Milwaukee.

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MONEY Ask the Expert

Why a High Income Can Make It Harder to Save for Retirement

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Robert A. Di Ieso, Jr.

Q: My employer’s 401(k) plan considers me a “highly compensated” employee and caps my contribution at a measly 5%. I know I am not saving enough for retirement. What are the best options to maximize my retirement savings? I earn $135,000 a year and my wife makes $53,000. – E.O., Long Island, NY

A: It’s great to have a six-figure income. But, ironically, under IRS rules, being a highly compensated worker can make it harder to save in your 401(k).

First, some background on what it means to be highly compensated. The general rule is that workers can put away $18,000 a year in pre-tax income in a 401(k) plan. But if you earn more than $120,000 a year, or own more than a 5% stake in your employer’s company, or are in the top 20% of earners at your firm, you are considered a “highly compensated employee” (HCE) by the IRS.

As an HCE, you’re in a different category. Uncle Sam doesn’t want the tax breaks offered by 401(k)s only to be enjoyed by top executives. So your contributions can be limited if not enough lower-paid workers contribute to the plan. The IRS conducts annual “non-discrimination” tests to make sure high earners aren’t contributing disproportionately more. In your case, it means you can put away only about $6,000 into your plan.

Granted, $120,000, or $135,00, is far from a CEO-level salary these days. And if you live in a high-cost area like New York City, your income is probably stretched. Being limited by your 401(k) only makes it more difficult to build financial security.

There are ways around your company’s plan limits, though neither is easy or, frankly, realistic, says Craig Eissler, a certified financial planner with Halbert Hargrove in Houston. Your company could set up what it known as a safe harbor plan, which would allow them to sidestep the IRS rules, but that would mean getting your employer to kick in more money for contributions. Or you could lobby your lower-paid co-workers to contribute more to the plan, which would allow higher-paid employees to save more too. Not too likely.

Better to focus on other options for pumping up your retirement savings, says Eissler. For starters, the highly compensated limits don’t apply to catch-up contributions, so if you are over 50, you can put another $6,000 a year in your 401(k). Also, if your wife is eligible for a 401(k) or other retirement savings plan through her employer, she should max it out. If she doesn’t have a 401(k), she can contribute to a deductible IRA and get a tax break—for 2015, she can contribute as much as $5,500, or $6,500 if she is over 50.

You can also contribute to an IRA, though you don’t qualify for a full tax deduction. That’s because you have a 401(k) and a combined income of $188,000. Couples who have more than $118,000 a year in modified adjusted gross income and at least one spouse with an employer retirement plan aren’t eligible for the tax break.

Instead, consider opting for a Roth IRA, says Eissler. In a Roth, you contribute after-tax dollars, but your money will grow tax-free; withdrawals will also be tax-free if the money is kept invested for five years (withdrawals of contributions are always tax-free). Unfortunately, you bump up against the income limits for contributing to a Roth. If you earn more than $183,000 as a married couple, you can’t contribute the entire $5,500. Your eligibility for how much you can contribute phases out up to $193,000, so you can make a partial contribution. The IRS has guidelines on how to calculate the reduced amount.

You can also make a nondeductible contribution to a traditional IRA, put it in cash, and then convert it to a Roth—a strategy commonly referred to as a “backdoor Roth.” This move would cost you little or nothing in taxes, if you have no other IRAs. But if you do, better think twice, since those assets would be counted as part of your tax bill. (For more details see here and here.) There are pros and cons to the conversion decision, and so it may be worthwhile to consult an accountant or adviser before making this move.

Another strategy for boosting savings is to put money into a Health Savings Account, if your company offers one. Tied to high-deductible health insurance plans, HSAs let you stash away money tax free—you can contribute up to $3,350 if you have individual health coverage or up to $6,650 if you’re on a family plan. The money grows tax-free, and the funds can be withdrawn tax-free for medical expenses. Just as with a 401(k), if you leave your company, you can take the money with you. “So many people are worried about paying for health care costs when they retire,” says Ross Langley, a certified public accountant at Halbert Hargrove. “This is a smart move.”

Once you exhaust your tax-friendly retirement options, you can save in a taxable brokerage account, says Langley. Focus on tax-efficient investments such as buy-and-hold stock funds or index funds—you’ll probably be taxed at a 15% capital gains rate, which will be lower than your income tax rate. Fixed-income investments, such as bonds, which throw off interest income, should stay in your 401(k) or IRA.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: Why Regular Retirement Saving Can Improve Your Health

MONEY retirement planning

Answer These 10 Questions to See If You’re on Track to Retirement

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More Americans are confident about retirement—maybe too confident. Here's how to give your expectations a timely reality check.

The good news: The Employee Benefit Research Institute’s 2015 Retirement Confidence Survey says workers and retirees are more confident about affording retirement. The bad news: The survey also says there’s little sign they’re doing enough to achieve that goal. To see whether you’re taking the necessary steps for a secure retirement, answer the 10 questions below.

1. Have you set a savings target? No, I don’t mean a long-term goal like have a $1 million nest egg by age 65. I mean a short-term target like saving a specific dollar amount or percentage of your salary each year. You’ll be more likely to save if you have such a goal and you’ll have a better sense of whether you’re making progress toward a secure retirement. Saving 15% of salary—the figure cited in a recent Boston College Center for Retirement Research Study—is a good target. If you can’t manage that, start at 10% and increase your savings level by one percentage point a year, or go to the Will You Have Enough To Retire tool to see how you’ll fare with different rates.

2. Are you making the most of tax-advantaged savings plans? At the very least, you should be contributing enough to take full advantage of any matching funds your 401(k) or other workplace plan offers. If you’re maxing out your plan at work and have still more money you can save, you may also be able to save in other tax-advantaged plans, like a traditional IRA or Roth IRA. (Morningstar’s IRA calculator can tell you whether you’re eligible and, if so, how much you can contribute.) Able to sock away even more? Consider tax-efficient options like broad index funds, ETFs and tax-managed funds within taxable accounts.

3. Have you gauged your risk tolerance? You can’t set an effective retirement investing strategy unless you’ve done a gut check—that is, assessed your true risk tolerance. Otherwise, you run the risk of doing what what many investors do—investing too aggressively when the market’s doing well (and selling in a panic when it drops) and too conservatively after stock prices have plummeted (and missing the big gains when the market inevitably rebounds). You can get a good sense of your true appetite for risk within a few minutes by completing this Risk Tolerance Questionnaire-Asset Allocation tool.

4. Do you have the right stocks-bonds mix? Most investors focus their attention on picking specific investments—the top-performing fund or ETF, a high-flying stock, etc. Big mistake. The real driver of long-term investing success is your asset allocation, or how you divvy up your savings between stocks and bonds. Generally, the younger you are and the more risk you’re willing to handle, the more of your savings you want to devote to stocks. The older you are and the less willing you are to see your savings suffer setbacks during market downturns, the more of your savings you want to stash in bonds. The risk tolerance questionnaire mentioned above will suggest a stocks-bonds mix based on your appetite for risk and time horizon (how long you plan to keep your money invested). You can also get an idea of how you should be allocating your portfolio between stocks and bonds by checking out the Vanguard Target Retirement Fund for someone your age.

5. Do you have the right investments? You can easily get the impression you’re some sort of slacker if you’re not loading up your retirement portfolio with all manner of funds, ETFs and other investments that cover every obscure corner of the financial markets. Nonsense. Diversification is important, but you can go too far. You can “di-worse-ify” and end up with an expensive, unwieldy and unworkable smorgasbord of investments. A better strategy: focus on plain-vanilla index funds and ETFs that give you broad exposure to stocks and bonds at a low cost. That approach always makes sense, but it’s especially important to diversify broadly and hold costs down given the projections for lower-than-normal investment returns in the years ahead.

6. Have you assessed where you stand? Once you’ve answered the previous questions, it’s important that you establish a baseline—that is, see whether you’ll be on track toward a secure retirement if you continue along the saving and investing path you’ve set. Fortunately, it’s relatively easy to do this sort of evaluation. Just go to a retirement income calculator that uses Monte Carlo analysis to do its projections, enter such information as your age, salary, savings rate, how much you already have tucked away in retirement accounts, your stocks-bonds mix and the percentage of pre-retirement income you’ll need after you retire retirement (70% to 80% is a good starting estimate) and the calculator will estimate the probability that you’ll be able to retire given how much you’re saving and how you’re investing. If you’re already retired, the calculator will give you the probability that Social Security, your savings and any other resources will be able to generate the retirement income you’ll need. Ideally, you want a probability of 80% or higher. But if it comes in lower, you can make adjustments such as saving more, spending less, retiring later, etc. to improve your chances. And, in fact, you should go through this assessment every year or so just to see if you do need to tweak your planning.

7. Have you done any “lifestyle planning”? Finances are important, but planning for retirement isn’t just about the bucks. You also want to take time to think seriously about how you’ll actually live in retirement. Among the questions: Will you stay in your current home, downsize or perhaps even relocate to an area with lower living costs? Do you have enough activities—hobbies, volunteering, perhaps a part-time job—to keep you busy and engaged once you no longer have the nine-to-five routine to provide a framework for most days? Do you have plenty of friends, relatives and former co-workers you can turn to for companionship and support. Research shows that people who have a solid social network tend to be happier in retirement (the same, by the way, is true for retirees who have more frequent sex). Obviously, this is an area where your personal preferences are paramount. But seminars for pre-retirees like the Paths To Creative Retirement workshops at the University of North Carolina at Asheville and tools like Ready-2-Retire can help you better focus on lifestyle issues so can ultimately integrate them into your financial planning.

8. Have you checked out your Social Security options? Although many retirees may not think of it that way, the inflation-adjusted lifetime payments Social Security provides are one of their biggest financial assets, if not the biggest. Which is why it’s crucial that a good five to 10 years before you retire, you seriously consider when to claim Social Security and, if you’re married, how best to coordinate benefits with your spouse. Advance planning can make a big difference. For each year you delay taking benefits between age 62 and 70, you can boost your monthly payment by roughly 7% to 8%. And by taking advantage of different claiming strategies, married couples may be able to increase their lifetime benefit by several hundred thousand dollars. You’ll find more tips on how to get the most out of Social Security in Boston University economist and Social Security expert Larry Kotlikoff’s new Social Security Q&A column on RealDealRetirement.com.

9. Do you have a Plan B? Sometimes even the best planning can go awry. Indeed, two-thirds of Americans said their retirement planning has been disrupted by such things as major health bills, spates of unemployment, business setbacks or divorce, according to a a recent TD Ameritrade survey. Which is why it’s crucial that you consider what might go wrong ahead of time, and come up with ways to respond so you can mitigate the damage and recover from setbacks more quickly. Along the same lines, it’s also a good idea to periodically crash-test your retirement plan. Knowing how your nest egg might fare during a severe market downturn and what that mean for your retirement prospects can help prevent you from freaking out during periods of financial stress and better formulate a way to get back on track.

10. Do You Need Help? If you’re comfortable flying solo with your retirement planning, that’s great. But if you think you could do with some assistance—whether on an ongoing basis or with a specific issue—then it makes sense to seek guidance. The key, though, is finding an adviser who’s competent, honest and willing to provide that advice at a reasonable price. The Department of Labor recently released a proposal designed to better protect investors from advisers’ conflicts of interest. We’ll have to see how that works out. In the meantime, though, you can increase your chances of getting good affordable advice by following these four tips and asking these five questions.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY Careers

A Good Reason to Tap Your Roth IRA Early

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Alamy

You shouldn't always wait until you retire to pull money from your retirement account.

The Roth IRA is a great tool for retirement savings. But here’s something not as well-known: It’s great for developing your career as well.

Many of my young clients in their 20s and 30s struggle to balance current spending, saving for the next 10 years, and stowing away money for retirement. With so many life changes to deal with (weddings, home purchases, children, new jobs), their financial environment is anything but stable. And their retirement will look completely different than it does for today’s retirees.

To my clients, separating themselves from their current cash flow for the next 30 years feels like sentencing their innocent income to a long prison term.

They ask, “Why should we save our hard-earned money for retirement when we have no idea what our financial circumstances will be in 15 years, never mind 30? What if we want to go back to school or pay for additional training to improve our careers? We might also decide to start a business. How can we plan for these potential life changes and still be responsible about our future?”

The answers to those questions are simple. Start investing in a Roth IRA — the earlier you do it, the better.

There is a stigma that says anyone who touches retirement money before retirement is making a mistake, but this is what we call blanket advice: Although it’s safe and may be correct for many people, each situation is different.

The Roth IRA has very unique features that allow it to be used as a flexible tool for specific life stages.

Unlike contributions to a traditional IRA, which are locked up except for certain circumstances, money that you add to a Roth IRA can be removed at any time. Yes, it’s true. The contributions themselves can be taken out of the account and used for anything at all at any time in your life with no penalty. And, like the traditional IRA, you can also take a distribution of the earnings in the account without penalty for certain reasons, one of which is paying for higher education for you or a family member. (Some fine print: You’ll pay a penalty on withdrawing a contribution that was a rollover from a traditional IRA within the past five years. And you’ll have to pay ordinary income taxes on an early Roth IRA withdrawal for higher education.)

Although you shouldn’t pull money from your retirement account for just any reason, sometimes it’s a smart move.

Let’s say you graduate from college and choose a job based on your major. This first job is great and helps you get your feet wet in the professional world. You’re able to gain some valuable real-world experience and support yourself while you enjoy life after school. And this works for a while…until one day, 10 or 15 years into this career, you wake up and begin to question your choices.

You wonder if this career trajectory is truly putting you where you want to be in life. You think about changing careers or starting a business, but you need your income and have no real savings outside of your retirement accounts.

Now, let’s also say that you were tipped off to the magic of a Roth IRA while you were in college and you contributed to the account each year for the past 15 years. You have $75,000 sitting in the account, $66,000 of which are your yearly contributions from 2000 through 2014. It’s for retirement, though, so you can’t touch it, right? Well, this may be the perfect time to do so.

I recently spoke to a someone who did just this. Actually, his wife did it, but he was part of the decisionmaking process.

The wife has been working for years as a massage therapist for the husband’s company. Things were going quite well, but she had other ideas for her future. She wanted to go back to school to get her degree as a Certified Registered Nurse Anesthetist. The challenge was that this education was going to cost $30,000, and they did not have that kind of money saved.

So, they brainstormed the various options, one being to tap into his Roth IRA money. They determined that this would be a good investment for their future. Once the wife became a CRNA, her annual earnings would rise an estimated $20,000 — money they could easily use to recoup the Roth IRA withdrawal (though the 2015 Roth IRA contribution limit is $5,500 for those under 50 years old).

This decision gave them a sense of freedom. The flexibility of the Roth allowed them to choose an unconventional funding option for their future and gave the couple a new level of satisfaction in their lives.

And, that’s what it’s all about. We have one life to live, and it’s our responsibility to make decisions that will help us live happily today, while still maintaining responsibility for tomorrow.

Whether your savings is in a bank account or a retirement account, it’s your money. Although many advisers will tell you otherwise, you need to make decisions based on what is best for you at various stages of your life. The one-size-fits-all rule just doesn’t work when it come to financial planning. There is no need to rule out a possible solution because society says it’s a mistake.

———-

Eric Roberge, CFP, is the founder of Beyond Your Hammock, where he works virtually with professionals in their 20s and 30s, helping them use money as a tool to live a life they love. Through personalized coaching, Eric helps clients organize their finances, set goals, and invest for the future.

MONEY Ask the Expert

Which Wins for Retirement Savings: Roth IRA or Roth 401(k)?

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Robert A. Di Ieso, Jr.

Q: I am 30 and just starting to save for retirement. My employer offers a traditional 401(k) and a Roth 401(k) but no company match. Should I open and max out a Roth IRA first and then contribute to my company 401(k) and hope it offers a match in the future?– Charlotte Mapes, Tampa

A: A company match is a nice to have, but it’s not the most important consideration when you’re deciding which account to choose for your retirement savings, says Samuel Rad, a certified financial planner at Searchlight Financial Advisors in Beverly Hills, Calif.

Contributing to a 401(k) almost always trumps an IRA because you can sock away a lot more money, says Rad. This is true whether you’re talking about a Roth IRA or a traditional IRA. In 2015 you can put $18,000 a year in your company 401(k) ($24,000 if you’re 50 or older). You can only put $5,500 in an IRA ($6,500 if you’re 50-plus). A 401(k) is also easy to fund because your contributions are automatically deducted from your pay check.

With Roth IRAs, higher earners may also face income limits to contributions. For singles, you can’t put money in a Roth if your modified adjusted gross income exceeds $131,000; for married couples filing jointly, the cutoff is $193,000. There are no income limits for contributions to a 401(k).

If you had a company match, you might save enough in the plan to receive the full match, and then stash additional money in a Roth IRA. But since you don’t, and you also have a Roth option in your 401(k), the key decision for you is whether to contribute to a traditional 401(k) or a Roth 401(k). (You’re fortunate to have the choice. Only 50% of employer defined contribution plans offer a Roth 401(k), according to Aon Hewitt.)

The basic difference between a traditional and a Roth 401(k) is when you pay the taxes. With a traditional 401(k), you make contributions with pre-tax dollars, so you get a tax break up front, which helps lower your current income tax bill. Your money—both contributions and earnings—will grow tax-deferred until you withdraw it, when you’ll pay whatever income tax rates applies at that time. If you tap that money before age 59 1/2, you’ll pay a 10% penalty in addition to taxes (with a few exceptions).

With a Roth 401(k), it’s the opposite. You make your contributions with after-tax dollars, so there’s no upfront tax deduction. And unlike a Roth IRA, there are no contribution limits based on your income. You can withdraw contributions and earnings tax-free at age 59½, as long as you’ve held the account for five years. That gives you a valuable stream of tax-free income when you’re retired.

So it all comes down to deciding when it’s better for you to pay the taxes—now or later. And that depends a lot on what you think your income tax rates will be when you retire.

No one has a crystal ball, but for young investors like you, the Roth looks particularly attractive. You’re likely to be in a lower tax bracket earlier in your career, so the up-front tax break you’d receive from contributing to a traditional 401(k) isn’t as big it would be for a high earner. Plus, you’ll benefit from decades of tax-free compounding.

Of course, having a tax-free pool of money is also valuable for older investors and retirees, even those in a lower tax brackets. If you had to make a sudden large withdrawal, perhaps for a health emergency, you can tap those savings rather than a pre-tax account, which might push you into a higher tax bracket.

The good news is that you have the best of both worlds, says Rad. You can hedge your bets by contributing both to your traditional 401(k) and the Roth 401(k), though you are capped at $18,000 total. Do this, and you can lower your current taxable income and build a tax diversified retirement portfolio.

There is one downside to a Roth 401(k) vs. a Roth IRA: Just like a regular 401(k), a Roth 401(k) has a required minimum distribution (RMD) rule. You have to start withdrawing money at age 70 ½, even if you don’t need the income at that time. That means you may be forced to make withdrawals when the market is down. If you have money in a Roth IRA, there is no RMD, so you can keep your money invested as long as you want. So you may want to rollover your Roth 401(k) to a Roth IRA before you reach age 70 1/2.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: The Pros and Cons of Hiring a Financial Adviser

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