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

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.

Saving for Retirement and Paying for College

It can be a tough decision for most people when choosing the most beneficial way to spend or save money. Many people think choosing to invest in their retirement is a better option than paying for their children’s college tuition and here’s why:

  • Teens applying to college, can apply for student aid. Students are often eligible for scholarships, grants, and loans to help them cover the cost of tuition. Many students work part time during college to help pay for the fees as well. They do have some options when paying for college other than having their parents finance it.
  • While students have alternative ways of covering the cost of college, their parents don’t have many alternatives when it comes to financing retirement. What they save over the years is usually what they will have to live off during their retirement years. Some retirees are lucky enough to find part-time work if they don’t quite have enough money saved up, but some can’t because of age or illness.

You can save for both retirement and still help pay for college by starting early and making retirement the first priority. Before the kids come along and while they are still young, save as much as possible in a retirement account before putting anything in a college savings account. Time and compounding will be on your side.

Mountain West IRA offers many different self-directed IRA options when it comes to retirement accounts. They will have one that can help you save for retirement before saving for the college years.