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The Best Way to Prepare for Health Care Costs in Retirement

The Best Way to Prepare for Health Care Costs in Retirement

3 MIN. READ

Health care in retirement is a big expense, and it could cost you a large chunk of your retirement money. Smart planning for health care ahead of time will help you better prepare to handle these retirement expenses. Planning a budget for health care costs and enrolling in a health savings account are two ways you can be ready to handle health care costs in retirement. (more…)

Benefits of Charitable Giving in Retirement

Benefits of Charitable Giving in Retirement

3 MIN. READ

As you planned and saved over the years of your working life, you might have also considered those in need. By year-end, you may have made enough charitable donations to qualified organizations to also enjoy the benefits of charitable giving. You felt good by doing good.

Now that you’ve retired, you can still take advantage of many charitable giving tax benefits. Here are some of the ways to do that.

Plan for giving

To start taking advantage of charitable giving during retirement, calculate your taxable income for this year and how much you can afford to give. You can use the standard deduction, which has increased considerably. You can deduct up to $600 in cash contributions to eligible organizations for the 2021 tax year. The maximum deduction for 2022 has not been determined but is likely to be either $300 or $600.

In any case, if you’re not sure how you’ll file or what your income might be, the best place to start is last year’s return. Unless your income or employment status has changed markedly, your prior year return is a good initial guide.

As noted, the IRS permitted standard-deduction taxpayers to deduct charitable donations of $300 in 2020 and $600 in 2021. The deduction should be available for 2022 gifts, although the IRS has not determined the allowable deduction.

Maximize your benefits

Here are other donation types which benefit not only the target organizations but also your own tax bill and pocketbook.

Qualified charitable distribution

You have the option to make a qualified charitable distribution directly from your IRA  to the charity of your choice. By contributing directly from your IRA, you can avoid paying income tax on the distribution. It also works when you must take Required Minimum Distributions (RMD) but don’t need the distribution for your daily living expenses. You can contribute up to the full amount of your RMD avoiding any tax consequences on the RMD for that year.

Form 1040 instructions explain how to account for charitable deductions. If the contribution came from a non-deductible IRA, additional tax documents may be required. Consult your tax professional for additional information.

Charitable gifts of assets

You can also make charitable gifts of assets, such as appreciated stocks or bonds. You won’t have to pay capital gains taxes on those instruments. By donating them, you deduct their appreciated fair market value without raising capital gains by selling them to donate cash to the qualified charitable organization. This allows the amount you would have paid in taxes to stay with the charity, which doesn’t pay taxes.

Once again, you’ll want to consider whether the standard deduction makes this a useful strategy for you or not. If you’re not itemizing, a $300 or $600 stock donation won’t avoid a lot of capital gains taxes.

Donor-advised funds

If you’re planning a lot of charitable giving and have sufficient assets, you can consider creating a donor-advised fund. This method lets you make distributions to the charitable organizations of your choice. A donor-advised fund is a separate account operated by a qualified charitable organization, called the sponsoring organization. The account includes contributions made by various donors.

As the donor, when you make a contribution, the organization has legal control over it. However, you or your representative can still advise about the distribution of funds and the investment of assets in the account.

You can deduct a significant portion of your donor-advised fund contribution. However, you should know that the IRS is aware of abuses related to the use of donor advised funds. So, do your due diligence and talk to your financial advisors to find the best options for you.

Charity still begins at home

As you can see, retiring doesn’t mean you can no longer make contributions to qualified charitable organizations. In fact, with IRAs and other retirement vehicles, it can even be easier to make them.

Another benefit of retirement is that you can make a gift that most charitable organizations are desperate for in today’s busy world — your time. At the beginning of this century, one in four Americans volunteered. Today that number is far less, especially since the pandemic began. Think about ways that you can be of value, both as a giver and a volunteer or even a cyber-volunteer. You’re still feeling good by doing good.

Do You Pay Income Taxes in Retirement?

Do You Pay Income Taxes in Retirement?

3 MIN. READ

As you get closer to retirement, one question that may cross your mind is whether you still have to pay income taxes? This is a key question for retirees since typically they no longer earn a steady income. However, taxes are almost inevitable. So, with the proper planning, you can lower or potentially eliminate your income tax burden during retirement.

Taxes are certain

While retirement ends steady earnings and the daily commute to the office and never-ending Zoom meetings, one thing that remains unchanged is income taxes. Therefore, to plan properly, it’s important to understand what taxes you must pay when you are retired and what portion of your income is taxable. The following are some basics considerations:

  • Some withdrawals from an annuity are taxable. An annuity is tax-deferred, which means you don’t pay income taxes until you begin withdrawing money. The IRS taxes withdrawals depending on whether you have a qualified or non-qualified annuity. Withdrawals from a qualified annuity are taxable. When you make a withdrawal from a non-qualified annuity only the earnings are taxable.
  • Funds from a tax-deferred investment are taxable. 401(k)’s and IRA’s are tax-deferred investments. Contributions to a tax-deferred account are not-taxed while the opposite is true when it’s time to withdraw your money. When you start withdrawing from a traditional IRA, the taxable amount is based on earnings. Any money you from your 401(k) is taxable.
  • Social Security benefits can be taxable. Retirees do not have a steady paycheck coming in, which means there are no federal tax, Social Security, or Medicare to pay. However, believe it or not, your Social Security benefits can be taxed. The taxable amount depends on any other retirement income you receive. According to the Social Security Administration (SSA), the IRS can tax up to 85% of your Social Security benefits.

How to lower your tax bill in retirement

Taxes in retirement could make up a large portion of your expenses, which is one reason to make sure you plan well. Although the part of your income that’s taxable varies, there are several tools you should be aware of that can help decrease or eliminate your taxes in retirement. As you begin your financial planning, consider some of the following strategies:

  • Contribute to a Roth IRA. Think about opening a Roth IRA or, convert a traditional IRA to a Roth IRA. With a Roth IRA, you are not taxed on earnings or distributions in retirement. You must follow certain rules, for example, you must keep the account open for a minimum of five years.
  • Set up a health savings account. Contributions to a health savings account (HSA) account are tax-deductible, and the earnings and withdrawals you make for qualified medical expenses are tax-free. Therefore, an HSA serves two important purposes in retirement: reducing or eliminating taxes and providing an extra income source to cover healthcare costs. For 2022, the maximum contribution individuals can make is $3,650. For families, the maximum is $7,300. Also, those aged 55 and older may qualify for an annual $1,000 catch-up contribution.
  • Take advantage of untaxable income sources. For example, the proceeds you gain from selling your primary home are not taxable. The non-taxable proceeds from a home sale vary depending on whether you are single or married. You can also give some of your assets to family members to lower or avoid estate taxes.

Plan your retirement properly

Whether you’ve already started planning for retirement or are just about to start, it’s never too early or too late to talk to a financial advisor. A financial advisor will help you create a retirement plan that’s best suited for you and can provide guidance by adjusting your current investments. Whether you start early or late, you’ll find that discussing your financial situation with an experienced financial advisor is beneficial in planning for retirement properly. This is especially true with so many investment and retirement options, each with its own unique and often overwhelming tax rules. Contacting a qualified financial advisor will certainly help you figure out if you’re on the right track or if there are other better options available for you.

Learn more about how taxes can affect your retirement by attending one of our Retirement Planning 101 Classes.

Tap Your 401(k)? Get Back On Track!

Tap Your 401(k)? Get Back On Track!

While tapping into your 401(k) is not the first choice that you should make, it is sometimes unavoidable. During the most recent economic crisis, you may have needed to withdraw from your retirement funding in order to make ends meet or cover certain types of expenses. The good news is that you can recover from this in the long run with some prudent actions right now.

The first thing you can do is to immediately begin contributing the maximum amount allowable to your 401(k). This will not only maximize your tax savings, but it can also take advantage of the employer match. In fact, when you do not grab every penny that you can from your employer, you are leaving money on the table. Of course, there are limits to the amount that your employer will match.

While your 401(k) investment options are limited to what your employers offer, there are ways to play catch-up to make up for some of what you lost if you had to withdraw from your account.

You can periodically shift between bonds and stocks depending on your feeling about the market. For example, if you are using an 80-20 split between stocks and bonds, you can go 90-10 when the market has dropped, so you can try to time the market. Then, you can reallocate your portfolio when the market rises again. However, we caution against doing that with more than a small part of your portfolio.

If you tapped into your 401(k) by taking a loan, you should pay it back as quickly as possible to recover account value. When you have a 401(k) loan outstanding, that money is not invested in the stock market and earning returns. The hope is that you are able to pay the money back as opposed to a straight withdrawal so you can avoid having to pay taxes on the money you took out of your account.

Finally, another thing that you can do to get your retirement plan back on track is to take advantage of the ability to make catch-up contributions to your 401(k) when you turn 50. The law allows you to give up to make a special contribution beyond the money that you are already allowed to set aside. For 2020, this amount rises to $6,500. While you may not receive an employer match on this money, it is a way to contribute additional money to your retirement from your pre-tax dollars. When you take advantage of catch-up contributions each year until retirement, it could add hundreds of thousands of dollars to your nest egg.

Before you take money out of your 401(k), you should have a plan for getting your retirement back on track. You will need to make sure that you are disciplined and return to saving at the first possible opportunity. The most important thing to remember is that a dollar today grows several times over thanks to the power of compounding. To the greatest extent possible, you do not want to miss out on that. We are here to help guide you to a plan that fits your desired future, contact us today.

Don’t Let Short Term Events Change Your Investment Goals

Don’t Let Short Term Events Change Your Investment Goals

Events like the coronavirus and this year’s presidential election are always impactful when it comes to investor markets, but you need to be careful about investment decisions made solely on market movements. You can keep your long-term goals and continue building wealth if you follow certain tips.

With every change in the world, there always seems to be the temptation to make an impulsive financial decision, especially when it comes to investing. This year especially was difficult for investors who made such decisions when the coronavirus hit hard and upended the stock market bringing a lot of panic selling with it. Events like the coronavirus and this year’s presidential election are always impactful when it comes to investor markets, but you need to be careful about investment decisions made solely on market movements. You can keep your long-term goals and continue building wealth if you follow certain tips.


Hold Steady When There’s A Sudden Dip
The COVID-19 recession was not a typical recession since a global pandemic is a rare event, but there will always be future corrections and recessions when economic activity reaches its peak and has to slow down. A recession certainly can cause a drop in your portfolio, especially during a volatile stock market period, but this is often only temporary. Unless a company whose stock you own is actually in danger of going bankrupt and becoming insolvent, chances are it’s going to rebound and perform a lot better once the market stabilizes again. In fact, a market dip could be the perfect time to buy more stocks or mutual fund shares.

Watch Out For Bubbles
Sometimes certain industries show promise of becoming the future of consumer demand, but they can end up being bought into too prematurely at times. For example, back in the early 2000’s, many investors were buying into new web-based companies and those they expected to become tech giants, and as a result too many stocks became overpriced and caused market bubbles. When your investments start becoming unusually high valued, it’s usually a good idea to sell off overvalued assets and place your funds in more stable assets until the market cools.

Pay Attention To Government Regulations
One issue you do need to be aware of is government actions in response to major events that could impact your investments. For example, the Dodd-Frank Act greatly affected the real estate market, and new tax regulations are always affecting how investors allocate their assets. It’s important to stay informed about how regulations will affect various industries, especially sectors like energy and manufacturing, and consider whether you need to diversify more out of those industries. You should also consider how capital gains taxes and dividend taxes affect your assets, and also move assets around between tax-deferred accounts and standard brokerage accounts.

Be Aware Of The Federal Reserve’s Interest Rate Changes
Another thing that influences the stock market is the Federal Reserve, and when it adjusts the federal funds rate, the market can move up and down. It’s often discussed that when interest rates go up and the stock market trends down, the bond market is the place to go. But before you consider adjusting your portfolio into bonds, consider where you are in your career, and when you expect to retire. Bonds tend to bring in much lower earnings, and they are not a great hedge against inflation. If you’re interested in other investments during interest rate changes, and you’re willing to take on a little risk, you might consider investing in alternative assets such as real estate or even precious metals.

Have A Budget For Retirement And Plan What You’ll Do When You Have To Take Distributions
Remember, if you own certain retirement accounts, you have to take minimum distributions from it by a certain age as specified by the IRS  https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds. The good news is they’ve bumped the age back from 70 1/2 to 72 for certain individuals. But once you start taking those distributions, you need to make sure they are being budgeted wisely so you can guarantee income will last all throughout your retirement.

Does your plan meet all your retirement needs? Schedule an appointment now with one of our advisors for a complimentary review of your retirement plan.

Doug Ybema- Grand Rapids Office https://go.oncehub.com/DougYbema)


Randy Knapp- Okemos Office https://go.oncehub.com/IntegrityFinancial)