The Differences Between a Traditional IRA and a Roth IRA

Choosing the correct account for yourself and your family may seem complicated and confusing, but you only have a few options when it comes to how you wish to be taxed. Below we share a comparison between a Traditional IRA vs a Roth IRA.

Traditional vs. Roth

  • Traditional: You may potentially receive a write-off on your taxes for contributions, determined by your household income. The funds then grow tax-deferred by revenue and dividends generated from your investments. Upon retirement age (59.5) you can begin distributing funds from your Traditional IRA without penalty, but this income will be added to your gross household income, so you will have to pay taxes on these funds. You can, if you wish, wait to distribute any funds from your account until 70.5 years old. At that point, the IRS rules say you must begin taking Required Minimum Distributions or RMD’s. This is basically the government’s way of saying, you received a write-off when you put these funds into this account we need to make sure to get our taxes before you pass away. I know, somewhat morbid!
  • Roth: You do NOT receive a write-off on your taxes for contributions. The contributions you make to this account are “after-tax dollars.” However, you will get to grow your retirement money tax-free, forever! Like the Traditional IRA, the funds then grow by revenue and dividends generated from your investments. After age (59.5 and 5 years of the account being opened) you can take a distribution that is both penalty and tax-free. This tax-free distribution increases your NET household income. This is also an excellent choice for an estate planning tool, as you do not have to take any RMD’s, at any age. You have already paid your taxes. You are free to do what you wish with your distributions.

* High-income households: your financial advisor may tell you that you do not qualify for a Roth. There is something called a backdoor conversion that you can contribute to a Traditional and not receive a write-off, then convert the next day to a Roth. There is never a no iif this is the account type you want!

These are the primary differences between Traditional and Roth retirement accounts. There are some other rules that may or may not apply to you depending on your household income. Please speak to a Mountain West IRA representative if you wish to learn more.

Are you interested in learning more? Here is a no cost, no obligation webinar for you to check out: Alternative Asset Allocation Model

What Type of Retirement Plan Do You Have?

Do not overlook your retirement and assume your financial planner has your best interests at heart. You need to be educated and take control of your retirement. Over the next month, we will be going in depth about the differences inherent among common retirement terms.

What types of retirement accounts are there?

Employer Plans

  • If your retirement plan is offered through your company, they may call it a 401(k), 403b, 457, Thrift Savings Plan; there are many other names depending on the type of company you are working for. The employer determines if there is the option to contribute to a Traditional account or Roth (I will cover these differences next week). Employer plans often have a pre-determined set of investments that the employees can invest in. Some employers allow for employees to choose high-risk or low-risk and the company’s financial planner will do what best suits that person’s risk assessment. Most companies do not allow for employees to rollover/direct rollover their retirement plan to invest in alternative options. This leaves the employee trapped with the decisions the employer has available.
  • I’m retired, or I have left the company now what?
    Once you are no longer employed by the company, they will prompt you to rollover your IRA to another Custodian, distribute, or some plans may allow you to set up a distribution plan upon retirement. If you are interested in using your retirement account for investing, you will choose a rollover or direct rollover option. At this point, you can establish an IRA with Mountain West IRA and begin looking for an investment! The IRS will see a rollover or direct rollover and, if done in a timely manner, this will not be a taxable event. Most employer retirement plans will not withhold taxes if the funds are going directly into another qualified retirement plan. You should speak to your plan administrator for specific details.
  • You can review the complete IRA Starter Kit process here

Individual Retirement Accounts (IRAs)

  • Individuals who do not have the opportunity to participate in an employer plan should definitely look into IRAs. Even if you can contribute to your employer plan, an IRA may be a better fit for you. You can contribute to a Traditional IRA or in a Roth IRA because you are making the decision. You can also decide if common stocks/mutual funds are the route for you or if alternative assets are a better fit. IRAs are qualified retirement accounts that have contribution limits. However, if you need additional funds for an investment, you can transfer IRAs you currently hold, or rollover funds from your employer plan, to add to the amount you have available to invest.
  • You can look into each type of plan here, or you can watch our webinar on Which IRA is Right for You here.

Are you unsure what type of account you currently have? This information is typically found near your name on the first page of your statement. If you need help, you can submit your statement to accounts@mwira.com, and we can assist you!

How to Double Your Retirement Overnight

The following is a hypothetical model based off of an investors figures he figured on this actual property.

Back in 2007, the average IRA that was transferred to a self-directed IRA was about $200,000. After the crash in 2007-2008. The average value of IRAs decreases to about half, thus putting the current value at $100,000.

We will be walking through this example of a $200,000 IRA in a real-life scenario to show you how you can double your retirement overnight.

The investor purchased a rental property at the height of the market in the name of his IRA. The investor is utilizing a self-directed IRA where he can purchase alternative assets, NOT taking a distribution from your retirement account.

The property was purchased for $180,000 in a self-directed IRA coupled with a non-recourse loan. The investor was able to leverage the funds in his IRA to purchase an investment property.

What the investor had to put down on this property to qualify for a non-recourse loan was $63,000. The remainder was a loan from the bank in the investor’s IRA. The IRA will have a mortgage and a deed of trust that goes inside of the IRA. The investor does not own the property, the IRA does.

The market value on the day that IRA closed on the property increased the value to $217,000. Let’s break down how this happened; $180,000 on the property and $37,000 cash. The day before the value was $100,000.

If you recall the original value before the crash was $200,000, then the market crashed which brought the value of the IRA to $100,000. The current value was able to double overnight by using other people’s money through a non-recourse loan.

When the investor calculated this investment he chooses to calculate the value of the investment now and projected value in the future to determine when and if he would like to sell the property.

The investor projected about a 3% capital appreciation on this property per year. This percentage is based on the market value of the property at the time of purchase ($180,000). The property should make about $5,400 per year and the investor plans on holding this property for 10 years. After 10 years, the capital gain is estimated to be $54,000.

At this point, we are 10 years after the purchase. The investor’s calculations are almost spot on, the calculations fell a little below 3% but has caught up recently. The original idea was to sell this property after 10 years.

The value of the property and cash in the self-directed IRA is now $271,000. Remember, the investor started with only $100,000 in this IRA. You may be saying, “yes, but there is a loan on the property.” You are correct. However, the investor paid more than the minimum of $700 per month on the loan. This property is currently producing $1,350 per month in income. The net income has been about $900 after setting aside money for property taxes, management fees, and repairs that must be paid by the IRA. After 10 years of paying more than the minimum, the balance is now at $40,000. If the property would have been sold at 10 years for the IRA would receive $231,000 – the investors IRA only put $63,000. That is about 30% per year average annual return on this investment in a tax-sheltered self-directed IRA.

Here is a table to show how the IRA doubled overnight:
2007 IRA account value $200,000

 

After crash IRA account value $100,000

 

Investment Property Purchased:
Funds from IRA $63,000

 

Funds from non-recourse mortgage $117,000

 

New value of IRA + Cash Funds $180,000 + $37,000

 

Long-term Investment Calculation*:
Capital Appreciation at 3% times 10 years $54,000

 

10-year appreciation $271,000

 

Loan Payment at $900 per month (-$40,000)

 

IRA Tax Advantages Appreciation $231,000

 

*Estimated by investor, not advice

If you would like to learn more please visit our webinar, Alternative Asset Allocation Model 

7 Facts to Consider About Retirement Planning

Retirement planning is a greatly advanced process, and we unequivocally urge retirees not to endeavor through it alone. Notwithstanding the danger of outlasting your advantages, you have other cash predators to avoid, like taxes, expansion, stock market and loan fee unpredictability, human services, government disability, and much more. These are seven facts to consider about retirement planning.

1. Growth Potential

It’s safe to state you need your cash to develop. However, the genuine motivation behind why you need your advantages for development is not to wind up well off, but rather to guarantee that you can keep pace with things like expansion, taxes, arranged out of date quality, innovation changes, rising healthcare costs, and so forth. If you need your income to keep pace with expansion, then you ought to request an all-around diversified portfolio to keep pace with your changing lifestyle over the long run.

2. Safety Provisions

The two greatest monetary feelings of trepidation most investors and retirees face are losing cash and coming up short on cash. These feelings of dread are reasonable, as well as the most basic! We generally tell our customers that 90% of our occupation is dodging huge misfortunes. If you are taking income from your retirement resources and endure significant misfortunes in your portfolio, it can be annihilating… and furthermore they drastically increment the probabilities of coming up short on cash. In this manner, each customer ought to request a retirement plan that contains clear systems to appropriately protect you against expansive venture misfortunes and outlasting your income.

3. Tax Efficiencies

A fruitful retirement plan ought to involve two pieces. In the first place, your cash ought to develop with as meager (or no) tax outcomes as could reasonably be expected. Second, your income ought to be gotten in the most tax-proficient way that is lawfully conceivable. In all actuality, we can’t beat the phenomenal rival (the IRS). However, our occupation as money-related professionals is to fill in as ace experts in helping our customers maintain a strategic distance from pointless taxation.

4. Income Growth Potential

Altogether for your income to develop, your advantages must develop at a rate that surpasses your withdrawal rate. This implies, as much as some of you would prefer not to hear this, putting a segment of your money in the stock market which assumes an indispensable part in your retirement plan.

5. Maintain Control

A fruitful retirement plan ought to ensure that you have the income you require, as well as never run out. In past times, this had to be refined through an annuity. The enormous drawbacks to these “old school” annuities were that you would surrender the two most imperative things: control and access to your cash. In other words, an annuity would pay you a settled income forever, but you would no longer have admittance or control to these monies. Impossible!

6. Full Transfer to Beneficiaries

Another normal topic we get notifications of from our resigned customers is the significance of leaving a legacy. At an absolute minimum, each retirement plan ought to request that there is an arrangement set up to guarantee that whatever cash you don’t spend will effectively pass on to your kids, family, and friends, or foundations.

7. Professional Supervision

Retirement ought to be one major excursion, where you get the chance to appreciate everything you adore, like traveling, eating out, purchasing pleasant things, gifting or going through cash with our families, donating, and so on. The exact opposite thing you ought to concentrate on in retirement is stressing over your cash and your budgetary arrangement. In this critical part of our lives, there are professionals out there who are energetic about dealing with you. In this manner, you ought to request to make the most of your retirement, and leave the stresses over your accounts to the professionals.

To sum up, here is our solid proposal: use these facts as a test to put your current money-related professional under serious scrutiny. It is precisely what our financial advisers in Idaho noted from our retirement arranges, and truly, they ought not to consider working with us if we can’t give this to them. We think you’ll concur that these inheritances are basic, as well as they truly aren’t “asking too much.”

5 Myths About Retirement Plans Everyone Should Know

When it comes to retirement planning and personal finances, people often think they are on the right track. The truth is that most people fail to understand the basic ideas about retirement planning and personal finances. Misinformation and blind spots can undermine how your financial security. Misconceptions can badly affect how you save and prepare for the future. You have every possibility to encounter these misconceptions on a regular basis when working with financial experts. In this content, you will find some myths about retirement plans and savings that everyone should know.

Myth 1: I will go back to work if there are not sufficient retirement funds

The longevity of life is a clear view about this myth. It implies that people can simply continue to work past the normal retirement age of sixty-five, which they can, however do you really want to? It is not a wise plan to depend on employment as one of the methods of financing your retirement years. Earlier than planned retirements are often caused by disabilities and health problems, which may not allow you to go back to work.

Myth 2: In retirement, all my bills will be reduced

Most retirees believe that they will fall into the bracket of reduced tax after retirement. Many soon-to-be retirees believe they will be living on a lower income. Many retiree goals are to maintain their standard of living, however have an increase of income. When you pay off or clear your home debt prior to retirement, it implies that such deduction will not count, however you will decrease your cost of living. Your traditional 401(k) or Traditional IRA will be taxed based on the withdrawals from tax-deferred investments. It is a largely estimated task to determine or figure out what tax rates will be in your retirement years. Speak with a tax professional to plan accordingly.

Myth 3: My health insurance will be taken care of by Medicare

Your health care expenses will not be completely covered even if you are eligible for Medicare. Your largest future expenses will be cascaded on health. Medicare does not cover copayments, deductibles, visits to medical experts, out-of-pocket costs for prescriptions, other expenses such as hearing aids, dental visits and eyeglasses. Many people usually believe that when visiting a nursing center Medicare will provide for them. However, in most cases, this scenario is not correct. If Medicare actually qualifies, then you will only be covered for a limited number of days.

Myth 4: I will need less funds when I retire

The money you will spend during retirement may be much more than when working actively. This scenario is actually noticed in the first couple of years. When you are in retirement, you’ll have more free time to carry out leisure activities, travel, hobbies and other important things. For this reason, you will be spending more on your wants than when you were actively working.

(Potential) Myth 5: My retirement years will be funded by social security

The average retiree’s income is simply covered Social Security for only 38% percent. Retirement plans can be complicated if you do not understand the entire concept. It is important to have a schedule to accumulate your own money. This will help make up the gap between your living costs and Social Security during retirement. For your retirement plans, social security should be considered an additional advantage and not the foundation.

10 Tips to Re-Stress Your Retirement Plans

There is a well-known nursery story about an ant who works hard all his life so that after the rains come he can be secure and guarded with all the provisions he needs. The same lesson is to be exercised while retirement making plans is considered. Effective and efficient retirement planning can be equated to early planning. Planning is the key in order to determine how you will spend the rest of the days. Given below are certain guidelines and strategies that are recognized to be useful to many; it might even help you too.

1. NEVER Withdraw from Your Retirement Plan

Withdrawing money from your retirement plan is never advisable except in the most extreme situations. Withdrawing from your retirement plan will mean losing the valuable interest that has accrued. This will reduce future interest you earn on that account and keep it from building into a larger nest egg. You could face penalties or early withdrawal fees. Some plans allow you to have withdrawals or loans but you must be extra careful in taking advantage of these withdrawals.

2. Invest in YOUR Future

Invest as much money into your company retirement plan for as long as you can afford it. You should invest enough to get your company matching funds if they are offered. Even small amounts can grow into very large amounts over time. A small sacrifice now, can set you up for success in retirement.

3. Monitor the Investments

Always monitor your investments on a regular basis. Only then will you be aware of any discrepancies or unexpected downturns in your plan. You will also be aware of how your investments are doing. Alternative assets may require more attention than traditional investment choices.

4. Social Security

Do not rely too much on social security. You should always have other means of income as a backup. It is wise to have a retirement plan, an IRA, and personal savings. The more streams of income the better, especially in retirement. Have you ever wondered whether the social security system will survive the coming retirement of the baby boom generation? You should think about this and plan accordingly.

5. Separate the Plans

Each family member should plan for their retirement. Often, only one spouse will have a retirement plan, however you can partner your retirement accounts for better retirement investing opportunities. If something were to happen to either spouse and remaining spouse is a primary beneficiary, they can then merge the IRAs to continue cash flow. You will be setting your family up for long-term success if you plan early.

6. Review the Plan

Alternative assets in self-directed IRAs are more geared towards the hands on investor. If you happen to have a low-maintenance investment, always remember to review your portfolio goals. You may not achieve your ultimate success, if you are not reviewing your portfolio outcome. The bottom line is to take your retirement planning efforts seriously, widen your mind for your investments, save regularly, and always keep your goals in mind. That will insure that you enjoy your golden years comfortably!

7. Get Organized

Gather your financial papers, receipts of charitable contributions and proof of the deductions you intend to claim. Sit down, plan your future and work towards it. You cannot aim for a fruitful retirement without a plan to get there.

8. Find Out What is New

Nearly every year there’s something new about the tax codes. Credits, exemptions and deductions can change so ask your tax professional or do some research to find out about what may affect your circumstances. Always be open to second opinions, as this is your future and your money – take control.

9. Know What You Are Doing

Tax forms can be complicated and confusing, but incorrect information can delay your refund or generate IRS penalties. Tax preparation software programs can take out some of the guesswork. If you don’t trust yourself to do your own taxes, consider going to a reputable tax service or a CPA. Always have a meeting to review your documents this way you can guarantee nothing was missed.

10. Safeguard Your Long-Term Financial Records

You will want to save income tax returns and supporting documentation – such as cancelled checks – not less than six years. And it’s important to save your retirement portfolio account papers indefinitely. Year end is a great time to review your financial situation, revisit your asset allocation and retirement portfolio diversification strategies, and do as much as you can to boost your retirement savings.

7 Flaws Most Retirement Plans Have

Despite the constant news coverage of impending doom in regards to social security, many people are still counting on their social security payments to support them through their retirement. The sad fact is that it simply is not possible because the money is not there. Sadder still is the fact that even if the money were there, it is doubtful that it would be enough to get the average person through their twilight years. Here’s why.

1. Your Expected Retirement Costs:

Choosing the right retirement plans should include an evaluation of your expected retirement costs. These costs are different for each person, the ideal plan for your retirement will allow you to save the amount of money that you expect to need once you retire. Some plans may not offer investment options that will provide the return needed to reach the desired account balance. Make sure that you include all potential expenses faced after retirement; otherwise you could choose a plan that falls short.

2. Your Anticipated Plan Contributions Each Year:

The plan that you choose should factor in your yearly expected contributions and ensure that your retirement goals can be achieved. Some plans may limit allowable contributions to a small amount on an annual basis, and some plans may allow catch-up contributions at 50 years old. Keep in mind, a small sacrifice today may greatly benefit you in the future!

3. Tax Planning Advice:

Finding the best retirement plans should include professional tax advice. The consequences of poor retirement planning can be large tax liabilities, at a time when your income is needed the most. Some plans utilize pre-tax contributions that are taxed upon distribution, while other plans use contributions made on a post-tax basis, so withdrawals are not taxed after retirement. Tax advice can help you choose the right plans for all of your retirement needs and goals.

4. A List of Retirement Goals:

Before deciding on the best plan for your financial security during retirement you will need to create a list of your retirement goals. Will you want to travel? Will you keep a second home? Will you work at a part-time job or take up a hobby with related expenses? Your retirement goals will affect the plan for your future, and the amount of retirement income you will need to live on.

5. A Professional Financial Planner:

A financial planner can help you choose the best retirement plans for your unique goals and financial needs at this stage in your life. A financial planner will help you to set financial goals, and then outline steps you need to take so that these goals can be easily met. Always remember this is YOUR retirement account, many financial planners say they have your best interest at heart, however at the end of the day YOU have to live off of this account, not them.

If you are knowledgeable in real estate, promissory notes, precious metals, private companies and you know you can increase your return on investment then do it! Find a financial planner that will encourage you to diversify your portfolio. A smart financial planner will know that encouraging diversification is better than an unhappy client.

6. A Good Retirement Calculator:

A good retirement calculator can help you accurately calculate all of the expenses you will have after you retire. This should be one of the first steps in retirement plans so that you do not end up short on funds in your golden years. These tools can help identify unexpected costs and expense that you may not have considered.

7. Your Annual Income Amount:

Some retirement plans have certain restrictions concerning annual income amounts for eligibility. Many 401K plans, IRA accounts, and other retirement options may not be open to high income earners. Some plans may be intended for small business owners or self-employed individuals, while others are intended for high income employees, and still others may be ideal for low-income wage earners. You will need to know the annual amount that you earn to determine which plan is right for your retirement needs. Speak with your tax-professional to discuss the best option for you.

It is best to begin making these plans as early as possible. It is not impossible to recover from poor planning in your younger years. The sooner you begin making plans for your financial retirement the healthier your retirement options will be. The best way to go about this is to define your retirement goals, make plans, and then take your goals and plans to a financial advisor and get his or her input, then follow your plan. Investing smarter is much wiser than investing harder.

Reasons People are Delaying Retirement

Not everyone is excited about the prospect of retirement. Some people feel like they are not quite ready financially, or they just will not know what to do with their free time when they retire. Here are three reasons people are delaying their retirement:

  1. Nest Egg Growth

Once the children leave the nest completely, investors generally have more money to put toward their retirement accounts. Some of these investors might want to take advantage of the extra cash flow and continue to contribute to a retirement account past age 62, the average retirement age in the United States. Traditional IRAs allow investors to contribute until they are 70 ½ years of age, giving them an extra 8 ½ years of investing and nest egg growth. With a Roth IRA, investors can continue to contribute even after the age of 70 ½. Making a contribution in any retirement account will require 1099 or W2 income, however it can be 100% of earned income.

  1. Shorter Retirement

Those who are concerned about the size of their nest egg also take into consideration the possible number of years they will need to finance without a steady income stream. Fewer years in retirement means they have less concerns about making the money stretch and can afford to take trips or support their current lifestyle.

  1. Health Insurance

Employees who are lucky enough to have health insurance provided through their employer might be reluctant to give that up for an individual policy. However, with a Health Savings Account this does not have to be an issue. Contributing to an HSA can lower the stress of health costs during retirement. Visit the Mountain West IRA website to learn more about qualifying for a Health Savings Account.

Age of retirement varies for each individual and can have its benefits whether you want to delay it a little bit longer or get started now.  Taking advantage of a self-directed IRA can be beneficial no matter which route you choose. Talk to a professional at Mountain West IRA today to find out more about the accounts, investment options, and the benefits of self-directed IRAs.

Best and Worst States to Retire in for 2016

In the past, Florida and Arizona have been at the top of the list when it comes to the best places to retire in the United States. However, in 2016, this has changed. In a surprising turn, Wyoming has beaten out all other states on Bankrate.com’s list of best places to retire.

The strange jump to number one by Wyoming is due to its low cost of living, below-average crime and strong well-being scores in the region. States from the western region make up most of the top five:

  1. Wyoming
  2. South Dakota
  3. Colorado
  4. Utah
  5. Virginia

There are many factors evaluated to analyze how well retirees will do in a state. Some of these are weather and climate, nearby amenities, cost of living, taxes, and more. Since retirees have a fixed income, looking at the cost of living is an important factor.

The five lowest ranked states for retirees are:

  1. New York
  2. West Virginia
  3. Oregon
  4. Arkansas
  5. Louisiana

The reasons for the infamous retirement haven, Florida, getting dropped down to number 28 on the list relates to high crime and lower-than-average healthcare ratings. Arizona, the retirement haven in the west, did okay and ranked in at number nine.

Retiring to the beach always seems like a good idea in theory, but nine out of the worst 12 boarder an ocean or the Gulf of Mexico. Virginia is the only coastal state in the top ten states. Apparently retirees are focusing more on cost of living rather than scenery when looking at potential states for retirement. High cost of living could really take a toll on retirement savings.