How Do I Correct Excess Roth IRA Contributions?

How Do I Correct Excess Roth IRA Contributions?

 

Co-written by: Scott Christensen & Katherine Li

 

Contributing to a Roth IRA is a great way to receive tax benefits for retirement savers. If you already do or are planning to take advantage of this tax savings vehicle, it is important to familiarize yourself with the rules that govern these accounts. The IRS has put in place strict limits regarding the amount that individuals can contribute to their Roth IRAs, as well as income limits for determining who qualifies.

 

If you are a single tax filer, you must have Modified Adjusted Growth Income (MAGI) under $140,000 in order to contribute to your Roth IRA. The amount you can contribute to your Roth IRA begins to phase out starting at a MAGI of $125,000; if your MAGI is greater than $140,000, you can no longer contribute to the Roth IRA. For those who file as married filing jointly, your MAGI must be under $208,000 in order to contribute. The phaseout range in this case applies to those with a MAGI between $198,000 and $208,000. The maximum IRA contribution in either case is $6,000 for those under 50 and $7,000 for those 50 and older.

 

As a result of these strict limits, it is easy for taxpayers to overcontribute. So what happens when taxpayers contribute in excess of their contribution limit?

 

For every year that your excess contribution goes uncorrected, you must pay a 6% excise tax on the excess contribution. In order to avoid the 6% tax penalty, you must remove the excess contributions in addition to any earnings or losses on that excess contribution by the tax filing deadline in April. To determine your earnings on your excess contribution, you can use the net attributable income (NIA) formula.

 

Net income = Excess contribution x (Adjusted closing balance – Adjusted opening balance) / Adjusted opening balance

 

Note: If you find that you have losses on your excess contribution, you can subtract that loss from the amount of your excess contribution that you have to withdraw.

 

Reasons for Overcontribution

 

  • You’ve contributed more than the annual amount allowed.
    • Remember that the $6,000 and $7,000 dollar maximum applies to the combined total that you can contribute to your Traditional and Roth IRAs.
  • You’ve contributed more than your earned income.
  • Your income was too high to contribute to a Roth IRA.
    • Unfortunately, single tax filers who make $140,000 or more and those who are married filing jointly who make $208,000 or more are unable to contribute to a Roth IRA.
  • Required minimum distributions (RMDs) are rolled over.
    • RMDs cannot be rolled over to a Roth IRA.
      • If it is rolled over to a Roth IRA, the amount will be treated as an excess contribution.

 

Removal of Excess Prior to Tax Filing Deadline

 

If you find that you have overcontributed prior to filing your tax return and prior to the tax filing deadline, you can remove your excess contributions before the tax filing deadline (typically April 15) and avoid the 6% excise tax. However, your earnings from your excess contribution will be taxed as ordinary income. Additionally, those who are under 59 and a half will have to pay a 10% tax for early withdrawal on earnings from excess contributions.

  • Keep in mind that it is your earnings that are subject to an ordinary income and early withdrawal tax, not the amount of your excess contribution.

 

If you find that you have overcontributed after filing your tax return, you can still avoid the 6% excise tax if you are able to remove your excess contribution and earnings and file an amended tax return by the October extended deadline (typically October 15). 

 

Recharacterization 

 

Recharacterization involves transferring your excess contribution and any earnings from your Roth IRA to a Traditional IRA. In order to avoid the 6% excise tax, you would have to complete this transfer process within the same tax year. It is also important to note that you can’t contribute more than your total allowable maximum contribution. Thus, you must make sure that you can still contribute more to your Traditional IRA prior to proceeding with recharacterization.

 

Apply the Excess Contribution to Next Year

 

You can offset your excess contribution by lowering the amount of your contribution the following year by the excess amount. For example, say that you contributed $7,000 to your Roth IRA when the maximum amount that you could contribute was $6,000. The next year, you can offset this excess amount of $1,000 by limiting your contribution to $5,000. You are, however, still subject to the 6% excise tax due to the fact that you were unable to correct the excess amount by the tax filing deadline, but you won’t have to deal with withdrawals. 

 

Withdraw the Excess the Next Year

 

If you choose to withdraw the excess the following year, you will only have to remove the amount of your excess contribution, not any earnings. However, you will be subject to a 6% excise tax for each year that your excess remains in the IRA.

 

These rules can be confusing to navigate which is why we recommend involving your tax accountant or trusted advisor in these situations. We are happy to connect you with a Merriman advisor to discuss your situation.

 

 

Sources:

https://www08.wellsfargomedia.com/assets/pdf/personal/goals-retirement/taxes-and-retirement-planning/correct-excess-IRA-contributions.pdf

https://www.nerdwallet.com/article/investing/excess-contribution-to-ira

https://investor.vanguard.com/ira/excess-contribution

https://www.fool.com/retirement/plans/roth-ira/excess-contribution/

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

 

Demystifying Retirement Income

Demystifying Retirement Income

 

You’ve worked hard. You’ve saved your pennies and watched every cent. Yet now that retirement is just around the corner, you’re second guessing whether you’re truly ready.

We see this often at Merriman. Near-retirees get cold feet not because they’re unprepared for retirement but because they’re unsure how to manage their retirement income. There’s less room for mistakes without a salary coming in. At the same time, retirement is full of financial uncertainties, ranging from personal health to the economy.

The solution isn’t to delay the retirement you’ve worked hard to secure. If you want to feel financially secure heading into retirement, start by learning the ins and outs of your retirement income.

 

How Much Income Do You Need in Retirement?

Outliving your savings is a top fear for retirees. Rather than letting worry consume you, do the math to understand your retirement budget. Account for major budget items like housing, transportation, and healthcare along with variable expenses. Then, take stock of your retirement benefits to see how they stack up.

Is there a big gap? Consider how you can reduce living expenses in retirement. Housing is a major expense, and many older adults are paying for more housing than they need. Downsizing saves money and cashes out home equity to put towards retirement savings. However, this only works if you have enough equity to make selling worthwhile. To estimate home equity, subtract the mortgage balance from the home’s current market value.

After housing, recurring bills and lifestyle expenses have the biggest impact. Rather than assuming small expenses don’t make a dent, use a budget to see how it all adds up and then adjust as needed.

 

Understanding Retirement Income Sources

Now that you understand the expenses side of the equation, let’s examine retirement income.

 

How to calculate Social Security benefits

Social Security retirement income depends on two main factors: lifetime earnings and the age you claim benefits. Filing early reduces benefits whereas delaying past full retirement age increases Social Security payments. Estimate your Social Security benefits online.

 

What about pensions?

Workers with a pension enjoy a second fixed income source in retirement. Pension plans distribute monthly payments according to a vesting schedule. Making the most of a pension requires understanding minimum distributions, age requirements, and other fine print to maximize your payout.

 

Other fixed income sources in retirement

In addition to Social Security and pension plans, retirees rely on fixed-income investments for income generation and capital preservation.

Fixed income investments include:

  • Bonds and bond funds
  • Certificates of deposit
  • Fixed annuities
  • Mortgage-backed securities
  • Preferred stock or securities

 

How to Supplement Fixed Retirement Income

Fixed-income sources provide stability and peace of mind. They don’t, however, keep up with rising costs of living. To maintain their standard of living over time, retirees need diversified income.

 

Building a balanced investment portfolio

It’s standard for near-retirees to shift asset allocation towards low-risk investments. However, stocks are still an essential part of a balanced portfolio due to the return potential. An experienced financial advisor can determine the right asset allocation for your goals. They’ll also develop a withdrawal strategy to maximize retirement savings. Common approaches include the 4% withdrawal rule, fixed-dollar withdrawals, fixed-percentage withdrawals, systematic withdrawal plans, and withdrawal “buckets.”

 

Working in retirement

Many older adults are starting businesses for flexible retirement income. The best businesses for retirees are low-risk and low-cost, such as consulting in a field where you have niche experience. Beyond less financial risk, consulting businesses are easy to start: Simply file a “doing business as,” also known as a DBA, with the Washington Secretary of State to operate as a sole proprietor under your brand.

 

Retirement shouldn’t feel like the great unknown. If you feel like you’re walking into retirement without a plan, contact Merriman to learn how we can help. Merriman’s fee-only services will help you clarify your retirement goals and understand your options for achieving them. Contact us toll-free at 800-423-4893 or email info@merriman.com to learn how you can invest wisely and live fully.

 

 

 

Written exclusively for Merriman.com by Katie Conroy.
Katie Conroy is the creator of Advice Mine. She enjoys writing about lifestyle topics and created the website to share advice she has learned through experience, education and research.

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

Navigating Healthcare Options

Navigating Healthcare Options

 

We strive to deliver peace of mind to our clients, not just about investments and taxes but about everything that touches their financial lives. One subject that continually comes up is healthcare. How will I be able to afford healthcare? Should I work until age 65 so that I qualify for Medicare? To help answer this question, we partner with outside experts to help our clients evaluate different healthcare options. We spoke to Ed Steffens at Propel and asked about health insurance through the Exchange versus COBRA.

 

How do you help your clients?

I help clients navigate their options with individual healthcare, Medicare, life insurance, and long-term care insurance.

 

COBRA vs Affordable Care Act (ACA)

Since the rate increases in the individual market back in 2017, COBRA is usually the better option, depending on the tax credits (subsidies) available to you. If you have to pay full price on the ACA exchanges, COBRA plans tend to be better. The network of doctors with the COBRA plan option has fewer limitations and is generally available throughout the US. These networks offer coverage in and of network, with higher costs using an out of network doctor.

ACA plans, on the other hand, use more restrictive networks of doctors. Generally, your available network is your home area and surrounding areas. There is no coverage out of network, with exception to true emergencies. In this case, ER and ambulance are covered anywhere in the country.

Before you choose a COBRA or ACA plan, spend time with a professional and/or on the healthcare website: https://www.healthcare.gov/glossary/exchange/ and www.wahealthplanfinder.org.  Subsidies are estimated based on the current year of total estimated MAGI. When determining MAGI, your income includes unemployment benefits and your spouse’s income. If the tax credits are deep enough, ACA may end up being a better option than COBRA.

 

When should people reach out to you?

The sooner the better. Separation from service, marriage, death, permanent move, and the birth of a child are all qualifying events. It might just be a 10-minute call. If tax credits are an option, however, a longer conversation will be necessary. For Medicare, please reach out three months before your 65th birthday.

 

How are you compensated?

I am compensated by salary and not by enrollments. This allows me to work in the best interest of my clients.

 

What kind of clients do you most enjoy working with?

I enjoy helping everyone. People who are in their fifties and sixties are the most common clients I work with, as they are more likely to experience the above-mentioned qualifying events—including those who are contemplating retirement. I am unable to help people with Medicaid though Such cases are redirected back to the state.

 

What would you tell someone who does not think they should retire because of the cost of healthcare?

People should analyze their situation and explore the options. They are often pleasantly surprised. It should really be explored on a case-by-case basis, regarding both the coverage available and the cost of coverage. This analysis should be taken into account along with the individual’s entire financial picture in order to make this life transition.

 

What are common misconceptions about healthcare on the open market?

It goes both ways. Some people think they should get tax credits but don’t. Other people think they won’t get credits and do. The amount of tax credits you may receive is unrelated to the level of health coverage (labeled as Gold, Silver, or Bronze, depending on what coverage you purchase). In general, the three tiers of health coverage look like this:

Bronze level plans: Lowest cost, highest deductibles, highest cost sharing after deductible.

Silver level plans: “Reasonable” cost, deductibles and cost sharing.

Gold level plans: Highest cost, highest level of coverage, lowest deductibles and cost sharing.

 

Tell me about the recent changes in the stimulus package. 

The new administration opened new enrollments through May 15, and then extended it to August 15t. They raised income limits on tax credits. Everyone has an opportunity to make changes now through August 15th. The government is trying to make insurance as accessible as possible. You can use a subsidy calculator for an estimate.

 

How should clients contact you?

I can be reached at 541.494.7714 or via email at ed.steffens@propelinsurance.com to schedule an appointment.

 

Written by: Michael Van Sant, CFP®. CSRIC™

Disclosure: Edward Steffens is a licensed insurance agent/broker for Propel Insurance. All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the article. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any particular individual. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax or legal or accounting advice, and nothing contained in these materials should be taken as such.

Downsizing? Tips for Getting the Best Property Size

Downsizing? Tips for Getting the Best Property Size

 

Downsizing has been a rising trend among retired and almost retired Americans. But the drama last year due to the pandemic has caused younger Americans to rethink their priorities.

Decade-high unemployment figures, soaring healthcare and health insurance costs, and loneliness have forced a fifth of adults to move homes. Many have made significant decisions about their careers, lifestyles, and relationships.

Americans are rethinking what they value and how they want to spend their precious moments.

Is your monthly mortgage tab far too high? Do you think your family could be just as comfortable in a smaller place (no matter your age)?

You are not alone. Millennials prefer better lifestyles to humongous homes. If you are about to retire and want to make the most of your golden years (paying fewer bills and being around people, not empty hallways or dusty furniture), read on. These tips will help you make the most from downsizing.

 

What is downsizing anyway?

When you move to a smaller home to cut down on the upkeep and mortgage costs, you are downsizing. This change is often associated with retirees or those who are approaching retirement age. But a growing number of younger professionals are opting for a more fulfilled life—as opposed to more square feet.

Candidates for downsizing often do not have a large retirement nest egg and have smaller families.

Although downsizing should help you cut down your costs, that’s not always the case. Soaring demand for homes due to dwindling mortgage rates has triggered a 9.5% increase in prices. Downsizing the square footage of your home may not always result in lower bills. Therefore, you should think and research before executing such a plan. These tips will help you make a more fulfilling choice.

 

Be smart when downsizing

Smart downsizing means ensuring the move results in maximum rewards for your goals. Accordingly, you need to figure out your goals first. Consider how downsizing will affect your cost of living and healthcare. After you take in the considerations and make the calculations, consult the experts and make your move.

 

Figuring out your goals

Oftentimes the goals for downsizing focus on improving your financial state and maintaining or enhancing your lifestyle.

Transamerica did a survey and found that more than 50% of retirees consider cost of living and proximity to family and friends as the most critical factors when choosing where to live. Nearly 40% considered healthcare as the most important.

Concerning financial goals, the objective is to access as much equity as possible or maximize savings on monthly mortgage payments.

As for lifestyle goals, the objective is to minimize any adverse impacts on family and ensure access to services, amenities, and quality healthcare.

What impact will downsizing have on your finances and your lifestyle?

 

Think about how downsizing will affect your expenditure

Reach out to a financial advisor for an objective review of how the move will affect your financial status. Darren Robertson, a real estate agent at Northern Virginia Homes, explains, “A cost reduction of $500 per month in a 15-year, $200,000 mortgage at 4.5% could slash four years from the term and save you $25,000 in payments.”

Downsizing can also help you cut down on living expenses. How much do you spend on groceries, travel, and other services? If changing towns is not out of the question, use this calculator by CNN to estimate how your cost of living would shift.

 

What about healthcare?

If you are about to retire or are retired, consider health costs separately.

Although most Americans 65 years and above are enrolled in Medicare, you should brace yourself for a “health cost gut punch.” Retirees in America incur healthcare costs averaging $122,000 between the age of 70 and death.

Worse still, the inequalities of healthcare services in the US are no longer a myth—the pandemic just made them more apparent.

Look for ways to boost your Health Savings Account and make the most of it. Also, consider where you can access high-quality, affordable healthcare.

 

Consult the experts

Perhaps you are not so proud of some of the moves you made when acquiring your current home. This could be your chance at redemption.

Remember, this is for the long haul. You want to clinch a great deal that is not too far away from family, friends, and opportunities.

Scope the real estate market and reach out to a couple of agents. Find out what they think about the market and about selling your home and downsizing. Also, enquire about smaller homes in the market. If you find some that you like, ask the right questions about them, keeping in mind how much you want to save.

Experienced professionals will help you identify the best options for low-priced homes in your preferred locations. They can even recommend excellent new spots based on real estate projections and trends. They will help you to:

  • Evaluate your financing options.
  • Negotiate great deals amidst stiff competition.
  • Save on taxes and offer practical ways you can cut down your costs.

 

Commit to substantial downsizing

Don’t wait until after the move to start downsizing your belongings. Start to declutter as soon as you make the decision, beginning with smaller items.

Take photos of those kindergarten crafts by the kids (who are all grown up now) and keep the memories in the Cloud. Donate or have a garage sale for old furniture and any other antiques you’ve not touched in ages.

The more you visualize yourself in a smaller space, the more likely you will make it happen.

 

In conclusion, when downsizing, the best property sizes are not always the least in square feet. They are the properties that offer an opportunity to maximize your financial and lifestyle goals. These tips will help you to make smart decisions in this area.

 

 

 Written Exclusively for Merriman.com by Madison Smith

Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial stride in their lives by providing expert insight on anything from credit card debt to home-buying tips.

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

 

 

 

 

 

Should I Set Up a Traditional 401k for My Business?

Should I Set Up a Traditional 401k for My Business?

 

Whether you recently transitioned to being self-employed or have been a business owner for years, you may have wondered what the best way is to save for retirement. While it is commonplace for established companies to offer a retirement plan to their employees, many self-employed individuals may not realize the potential for significant retirement savings by establishing their own plan.

However, the decision as to which type of plan to choose is far from simple. There are a multitude of questions a business owner must ask themselves before they can identify the best fit for their goals and preferences. To assist in this decision, the following flowchart poses the most pertinent of these questions.

 

 

Whether you are considering a SIMPLE IRA or are curious how a defined benefit plan can help you achieve your savings goals, Merriman’s team of knowledgeable advisors are here to help you make the most optimal selection. Please don’t hesitate to contact us if you have questions about your unique situation.

 

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

1 In 5 Americans Are Delaying Retirement, and Here’s Why

1 In 5 Americans Are Delaying Retirement, and Here’s Why

 

The devastating effects of COVID-19 are still making themselves known, as cities all over the world face longer lockdowns and restrictions in a bid to stop the spread of the virus. Life has certainly changed, with working from home now the new normal and public transport dwindling to a few people on each bus or train.

You may find that your life has been uprooted severely, and adjustments have had to be made in order to cope. With unemployment at an all-time high, there is a global concern for all of our futures. Many older workers were also looking to retire this year, but with the uncertainty surrounding when exactly life will return back to something resembling normal, seniors have been putting their plans on hold—and it might be time you followed suit.

Assessing retirement options

Currently, one in five American workers of retiree age have put their twilight-year plans on hold specifically due to COVID-19. With so many families’ finances taking a turn for the worse during this incredibly difficult time, delaying retirement could be a very smart idea.

The benefits of delaying retirement

Older workers may find employment more difficult to navigate due to the high level of young workers also vying for a small number of positions. With 13 applications for every 1 job available, recruiters and employers may find that the younger generation have more qualifications and are physically more fit than their senior counterparts. Older workers are often looked over despite their decades of experience; also, knowing retirement is on its way, it’s more cost effective for the business to hire someone who is guaranteed to be there for the long term.

Delaying retirement eliminates this issue. The employer you already work for and have been employed with for some time has been happy with your work; perhaps you’ve been in the same role for 15+ years. It’s a lot smarter to stay there and put your retirement on hold for now. Remember—it won’t be forever. Think of it more like a “putting in the last extra mile” situation.

Putting the brakes on your retirement plans for now also gives you further opportunity to add more funds into your superannuation account. Some super funds even have a clause that means you’ll receive more money by delaying withdrawing for a few years, with potentially up to 24% more benefits coming your way.

The differences between what a 65-year-old may receive once retiring in comparison to what a 70-year-old could receive may be as high as an 8% difference in funds per year. It’s a good idea to have a look at your super fund at this time, just in case you weren’t aware of such retirement clauses.

The cons of delaying retirement

By making the decision to delay retirement, there are a few cons to be on the lookout for. Firstly, your physical health is very important, and any issues that arise in the future could find you out of a job. Even if you look after yourself well, accidents and falls are statistically at a much higher level amongst older people. Regardless, many may find that they also need to leave work earlier to care for a partner or family member who has become too unwell to continue working.

It also might be tempting to get yourself further into debt throughout the pandemic as well. Taking out credit cards and personal loans might help in the short term to help you get back on your feet, but paying these off in the long term can result in even further debt. It’s important to have Plan Bs for all scenarios, just in case those retirement plans don’t pan out the way you expected them to.

Holding out on retirement a little longer

There is absolutely nothing wrong with planning for your retirement at this stage, but as 2020 has proven to all of us, it’s a good idea to ensure you stay flexible or have adaptable plans that can easily be changed. The future is so unexpected that it’s hard to stay one step ahead, but being as organized as you can will assist with navigating these uncertain times.

However, it’s also important to note that delaying retirement at this time might just not be possible, and you’ll need to look at every angle to see what an unexpected retirement might look like for you and your family.

 

Written Exclusively for Merriman.com by Madison Smith

Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial strides in their lives by providing expert insight on anything from credit card debt to home-buying tips.