Can You Afford to Spend More and Give More? You Might Be Surprised by the Answer!

Can You Afford to Spend More and Give More? You Might Be Surprised by the Answer!

by | Mar 21, 2023 | Advisors, Ask Merriman, Charitable Giving, Family Talk, Geoff Curran, Goal Planning, Retirement Savings, Tech Focus, Wealth Enhancement

 

When I started my career in financial planning over 12 years ago, I discovered a deep passion for helping others navigate important life decisions such as retirement. What I didn’t realize at the time was just how difficult it can be for clients to feel comfortable spending money and giving away their wealth to family or charities they feel good about (and the regret that can come later in life by these decisions). I’ve come to term this as “financial immortality,” which is quite common among clients and was the inspiration for writing a new eBook, Merriman’s Guide to Living Fully in Retirement: How to Feel Comfortable Spending and Giving More.

 

No matter where you are on your financial journey, this new book covers topics and strategies suggested by our advisors to help you Live Fully in retirement. Whether you are currently retired, soon to be retired, or just looking ahead to the future, you can learn about options and make smart decisions that may enable you to spend more and give more. Perhaps you can make that vacation home purchase you have always dreamed of. Maybe starting a home-based business to dabble in during retirement is within reach. Or perhaps you’d like to spread your wealth across the family. Maybe there is a cause you’d like to support in a meaningful way. The giving part can be the act of gifting resources to loved ones or to charitable organizations. The point is, with the right plan of action, you can likely do more with your money!

 

A client of mine passed away in her late 90s with enough resources to survive two to three additional lifetimes relative to her spending needs. While her heirs were grateful for their inheritance, they kept sharing versions of the same story: “Aunt Susan always lived so frugally and was never comfortable with spending money. I wish she had traveled more.” From my conversations with her, I know she wished she had too.

 

Another client of mine reached financial independence in his mid-40s with three children. The problem was that each year he kept moving his own personal goalpost, pushing him to continue to work in a high-pressure role that he didn’t enjoy anymore. It took several planning sessions to build his comfort around the plan, and he was able to step away to spend more time with his family and work on something that he was actually passionate about.

 

If you recognize traits like these in yourself or someone you care about and want to explore ways to positively change attitudes about saving, spending, and giving, we can help! We are happy to share our new eBook, Merriman’s Guide to Living Fully in Retirement: How to Feel Comfortable Spending and Giving More.

 

Learn more about:

  • defining financial immortality and the importance of having a financial plan to help determine if you can afford to spend more and give more
  • spending and giving as it relates to different withdrawal rates and methods and from which account to withdraw
  • actionable strategies to help you save on taxes, donate to charity, and how best to transfer wealth to your family
  • common roadblocks or distractions that clients encounter

 

This book offers great perspective as a collaborative effort from our team of Merriman advisors. To help explain these strategies, each section is filled with real-life examples from over 200 years of our collective experience, including stories from the following advisors: Jeff Barnett, Tyler Bartlett, Aimee Butler, Paige Lee, and Paresh Kamdar. CLICK HERE to get your copy!

 

Do you need help figuring out if you can afford to spend more and give more? Schedule a time with a Merriman advisor to build your own personalized plan and assessment because we truly enjoy helping others LIVE FULLY in retirement.

 

 

 

Disclosure: 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 report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. 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, legal or accounting advice, and nothing contained in these materials should be taken as such.

What Should I Do With My Old 401k?

What Should I Do With My Old 401k?

by | Feb 10, 2023 | 401k, Ask Merriman, Retirement Savings, Tech Focus, Tyler Bartlett, Wealth Enhancement

 

Whether you are part of a recent layoff or are giving your two weeks’ notice, life can be stressful during a job transition. Moving on can be bittersweet as you gather your personal items and turn over keys, ID badges, or a laptop while saying goodbye to co-workers and friends as you head into the next chapter of your life.

 

If you have been recently laid off, life is probably a bit more stressful as you may not have the next job already lined up. You may be fearful and anxious as many major employers, particularly in the tech industry, are currently announcing planned layoffs and/or are in a hiring freeze. However, this may be an opportunity to take a long overdue vacation or a brief sabbatical—or even try your hand at something new.

 

Whether you chose to make this change or it was forced upon you, this is a busy and often confusing time as you transition between jobs. It may be tempting to delay (and even easier to completely overlook) one of the most important decisions about your financial life: what should you do with your old 401(k)?

 

When it comes to changing jobs and what to do with your old 401(k) account, you have many options available to you.

 

One option is to maintain the status quo and leave the account with the old employer (if plan rules allow you to do so). However, you should avoid leaving a trail of “orphaned” 401(k) accounts in the wake of your professional career. Having orphaned accounts can limit your ability to stay present within those investments and make administrative updates.

 

You could also cash out the balance, which typically would not be recommended unless your financial circumstances make it an attractive option. Cashing out a 401(k) plan triggers a taxable event and potentially causes you to have to pay penalties for early withdrawal.

 

Alternatively, you could roll the old 401(k) balance into a traditional IRA, enjoy a greater range of investment options, and potentially save on fees. If you go this route, you will need to make important decisions about what kind of account to open, how hands-on you want to be, and which brokerage firm will handle your account.

 

You might also consider rolling the old 401(k) into your new 401(k) plan if that is allowed per the plan rules.

 

We will now explore each option in more detail and look at additional reasons you might consider one option over another given your specific situation and desired outcome.

 

Option 1: Do nothing

Given all that is going on now, you may not feel like you have a lot of time or energy to do anything with your old 401(k). At a minimum, you will want to look at your plan to compare the investment options available to you, along with the associated fees. You may choose to leave everything in your old plan if you have a good selection of low cost investment options that span all the major asset classes like US Large Cap Stocks, US Value Stocks, US Small Cap Stocks, Real Estate, International Large Cap Stocks, International Value Stocks, International Small Cap Stocks, Emerging Markets, High Quality Short-term Bonds, High Quality Intermediate-term Bonds, and Treasury Inflation Protected Securities.

 

Some plans may even have access to asset classes that are not available in your new 401(k) or a Rollover IRA. For example, Boeing has access to a Stable Value Fund, TIAA has access to a unique private real estate portfolio, and Amazon has access to a lower cost Vanguard Institutional Index fund.

 

If you are between 55 and 59 and are planning to take a sabbatical or retire, you may want to review the details of your former 401(k) plan, as you might be able to access the funds penalty free.

 

Most employer-sponsored retirement plans, such as a 401(k), qualify under the Employee Retirement Income Security Act (ERISA) and are generally protected from creditors, bankruptcy proceedings, and civil lawsuits. Depending on the state in which you live, an IRA or other non-ERISA plan may, or may not, be protected from creditors. If you are at risk of creditors pursuing you, you will want to seek out legal counsel from an attorney who understands the nuances of your state, as the laws can be quite complex.

 

If your former employer was a publicly traded company and you own company stock in your old 401(k) plan, you have another item to consider. The net unrealized appreciation (NUA) of your company stock is the difference between your cost basis (or what you paid for the stock) and its current market value. Under the current NUA rules, employees can roll over the portion of their 401(k) invested in company stock to a brokerage account (not a retirement account) and pay tax at long-term capital gains tax rates rather than ordinary income rates when the shares are sold. It does not always make sense to use this strategy or to keep employer stock in your retirement plan. You will need to carefully weigh the pros and cons.

 

Inertia may seem like the easy choice. However, you might be surprised to find out that doing nothing may still require work on your part.

 

Remembering your old 401(k) account looks easy enough when you have just changed jobs. But if this is your default solution every time you change jobs, then you may be leaving a slew of orphaned 401(k) accounts in several companies over your career. A decade or two later, it may be difficult to remember where those accounts are—or that they even exist.

 

You will also need to monitor any changes to the investment lineup and cost structure within the old plan. It is important to note that employer-sponsored retirement plans like a 401(k) are not governed by your will or trust, and you will need to update your beneficiaries in the event of a marriage, divorce, or other major life events to ensure your 401(k) is inherited by the individual(s) you desire.

 

Finally, you will want to take a deeper dive beyond the basic fees for the investments within your 401(k) to consider how much it will cost you to keep your funds where they are. Most 401(k) plans have three basic types of fees: administrative, individual, and investment fees. The investment fee is how much it costs to invest in a fund. If your old plan doesn’t offer index funds, you’ll almost certainly pay higher investment fees. The administrative fee covers various costs of running the plan. These include costs like statement processing fees, web hosting fees, and customer service fees. In some cases, there may be “hidden” fees, such as wrap fees or revenue sharing arrangements. The individual fees, such as withdrawal fees or loan processing fees, apply to special plan features that a participant may opt to use.

 

Most investment accounts have fees associated with them. Your task is to make sure that you are getting a fair level of investment management service in exchange for the fees that you pay. Some 401(k) plans are more competitively priced than others, so you will need to review the details of your situation and a few alternatives before you can make a smart choice.

 

Possible Advantages:

  • Doesn’t require any effort or time at the moment
  • Retirement savings continue to grow tax-deferred
  • Might have unique or lower cost investment options
  • Potential for penalty-free withdrawals after age 55
  • Enhanced protection from creditors
  • Might have special tax treatment for company stock

 

Possible Disadvantages:

  • Must stay engaged with any changes within the plan
  • Lack of full transparency for all fees
  • Limited investment options
  • Remember to update beneficiaries
  • Multiple sites to log into and statements to organize
Option 2: Cash out

Let’s start with a small bit of good news. The most obvious (and possibly the only) benefit of taking a full distribution from your old 401(k) plan is getting your money immediately. If you are in dire financial straits with no other options, this may be something to consider. However, that distribution will come with a price tag.

 

If your account holds pre-tax money, the IRS is going to treat the distribution as taxable income to you. You will potentially owe federal and state income tax on your distribution. Keep in mind that depending on your taxable income in relationship to tax income brackets, a cash-out distribution may push you into a higher tax bracket, which means that a portion of your income for the year will be taxed at a higher rate.

 

If paying income taxes on your distribution isn’t punishment enough, in most cases you may also have to pay a 10% early withdrawal penalty if you are under age 59 ½. Unless you have specific plans for how you will use this money, remember that you will receive less than the total account balance after accounting for income taxes and penalties. There are a few exceptions that may allow you to avoid the 10% early withdrawal penalty.

 

If you change your mind about the cash out, you have 60 days to deposit the distribution into another qualified plan or a traditional IRA. This is called an “indirect rollover.” Within 60 days, you will need to deposit the cash you received plus any taxes that were withheld into a qualified retirement account. You are only allowed to do an indirect rollover once every rolling 12 months.

 

Possible Advantages:

  • Might need the cash if you’re facing extraordinary financial needs
  • Potential for penalty-free withdrawals after age 55

 

Possible Disadvantages:

  • Subject to federal tax and a 10% early withdrawal penalty
  • Your money is no longer growing tax-deferred
  • Might severely impact your ability to retire
Option 3: Direct rollover to an IRA

If you don’t want to cash out and potentially face a tax bill, but you also don’t like the thought of being tethered to your former company, one option is to do a direct rollover from your old 401(k) to a traditional IRA.

 

IRAs generally offer far more investment options than a typical 401(k) plan. With an IRA, you may get access to many more mutual funds than you would have in a 401(k) plan. You may also invest in individual stocks and bonds, exchange-traded funds (ETFs), and certificates of deposit (CDs). Depending on your investment preferences and goals, that degree of flexibility can potentially make a difference.

 

As you look at IRA fees, keep in mind that some custodians have asset-based fees (meaning you pay a percentage of the amount of money in your IRA), while other custodians have transaction-based fees, which you incur each time you buy or sell investments. Some investment options may have no additional trading or transaction fees. Be sure to read the fine print and estimate what a typical annual fee on an account with your size and activity would look like.

 

In general, assets in your IRA have some protection if you file for bankruptcy, but they are not necessarily protected from creditors. Whether or not your IRA offers creditor protection depends on your state of residence. Research your residency state for more details and seek out legal counsel from an attorney who understands the nuances of your state, as the laws can be quite complex.

 

Possible Advantages:

  • Retirement savings continue to grow tax-deferred
  • Wider range of investment options available
  • Consolidation of retirement plans
  • Greater control and visibility of the fees you are paying
  • Possibly lower expenses than your 401(k)

 

Possible Disadvantages:

  • Possibly higher expenses than your 401(k)
  • May lose special tax benefits on company stock
Option 4: Direct rollover to your new 401(k)

If your new employer offers a 401(k) plan that accepts direct rollovers from other 401(k) plans, you may opt to take this route. But be sure to ask the question first, as not all plans accept rollovers.

 

The main benefit of choosing this option is less administrative hassle for you. All your employer-sponsored retirement plan assets will be in a single account. That means less paperwork, fewer statements, fewer passwords, and fewer investment options to align. It will also make it easier to maintain proper beneficiaries.

 

The option to roll your old 401(k) into your new 401(k) gives you the benefit of simplicity. Instead of updating investments or risk preferences in multiple accounts, you can do it in one account.

 

However, that only works if you are satisfied with your investment choices. Research whether your new 401(k) offers investment options that you find attractive. Many employers offer excellent choices inside their 401(k) plans while others do not. Perhaps you want the ease and low cost of investing in index funds but your new plan only offers mutual funds that are run by a portfolio manager. Or maybe you find the plan rules to be too restrictive for your liking.

 

Possible Advantages:

  • Retirement savings continue to grow tax-deferred
  • Consolidation of retirement plans
  • Might have unique or lower cost investment options
  • Potential for penalty-free withdrawals after age 55
  • Enhanced protection from creditors
  • Might be able to borrow against the new plan

 

Possible Disadvantages:

  • Must stay engaged with any changes within the plan
  • Lack of full transparency for all fees
  • Limited investment options

 

There is no one-size-fits-all path for what to do with your old 401(k). Choose what best fits your financial goals and resources. Your decision should also account for how hands-on (or hands-off) you wish to be in your investing, how much time you are willing to dedicate to reviewing your accounts and making course-correcting decisions, along with researching the investment vehicles that are available in each plan or account.

 

At the end of the day, any of these options may be right for you. What’s most important is that you make a strategic choice about what to do—and that you complete the rollover correctly to avoid unnecessary taxes.

 

If you have additional questions or if you would like help with keeping your retirement savings on track through your job and life changes, reach out and schedule some time with one of our advisors today!

 

 

 

 

Disclosure: 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 report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. 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, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

Take Advantage of New Tax Adjustments in Planning for 2023!

Take Advantage of New Tax Adjustments in Planning for 2023!

by | Jan 12, 2023 | 401k, Advisors, Chris Waclawik, Investing 101, News, Retirement Savings, Tech Focus, Wealth Preservation

 

 

Tax adjustments happen every year, but this provides an excellent opportunity to review and plan for a better personal tax situation for 2023. Let’s take a look at the changes! Legislation has given even more planning opportunities for employees and retirees than usual. The planning opportunities for 2023 fall into three broad categories: tips for current workers, tips for retirees, and ongoing strategies.

 

Updates for Current Workers

Here are some items that people who are currently working will want to review for the new year:

  • New Tax Brackets and Standard Deduction: Tax brackets and the standard deduction are all indexed to inflation. The large numbers in 2022 created bigger changes than usual in 2023, making it worth reviewing tax withholding.
  • Higher 401k (and 403b and 457) Employer Plan Contribution Limits: 2023 will see an increase from $20,500 ($27,000 if age 50+) to $22,500 ($30,000 if age 50+) that can be added to your employer retirement plan.
  • Higher IRA and Roth IRA Contribution Limits and Phase Outs: The contribution limits to IRA and Roth IRA accounts will also increase, potentially in addition to employer plan contributions. There will also be an increase to the income limits regarding when your ability to take advantage of these plans starts to phase out.
  • Health Savings Account Increases: For employees with a health savings account (HSA), the amount that can be contributed to the plan will also increase in 2023.
  • NEW Employer Matching 401k Contributions as Roth: Starting in 2023, employers may start allowing employees to take matching contributions as Roth contributions rather than pre-tax contributions. This is brand new and opens up significant planning opportunities.

 

Updates for Retirees

Retired individuals will also see several changes in 2023 to plan around:

  • NEW RMD Age Increased from 72 to 73: The biggest change for retirees in 2023 is the delay of the first required minimum distribution (RMD) from age 72 to 73. Individuals turning 72 in 2023 now have an additional year of flexibility for things like Roth conversions or other strategies to minimize taxes over their lifetimes.
  • Social Security Benefits and Medicare Premiums: Social Security will get an 8.7% increase in 2023. The base monthly premium for Medicare will decrease from $170 to $165.For higher earning retirees, the thresholds for Medicare’s IRMAA surcharge will be increasing.

 

Ongoing Planning Opportunities

There are several ongoing planning opportunities as individuals start looking ahead at 2023:

  • Qualified Charitable Contributions (QCD): For individuals who are at least 70½ years old, qualified charitable distributions (QCDs) from an IRA may be one of the most tax-effective ways to give to charity.
  • Roth Conversions and “Backdoor” Roth IRA Contributions: Depending on your current income and current retirement accounts, Roth conversions or “backdoor” Roth IRA contributions may allow more savings into accounts that will grow tax-free in the future.
  • Tax Loss Harvesting: With the decline in both stock and bond markets in 2022, there may be more opportunities than usual to sell investments at a loss and offset taxable income realized in other areas.

 

The Bottom Line

The new tax changes have created significant planning opportunities to review. It’s worth exploring how your personal tax situation may benefit from making adjustments in 2023. At Merriman, we live and breathe this stuff so you don’t have to. We are happy to answer your questions and partner with you to develop and/or refine the best approach for your taxes for 2023. Schedule some time with us today!

 

 

 

Disclosure: 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 report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. 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, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

 

 

 

Minimizing Lifetime Taxes with Roth Conversions in Early Retirement

Minimizing Lifetime Taxes with Roth Conversions in Early Retirement

by | Oct 4, 2022 | After you retire, Chris Waclawik, Goal Planning, Preparing for Retirement, Retirement Savings, Tech Focus, Wealth Enhancement, Wealth Protection

 

Minimizing Lifetime Taxes with Roth Conversions in Early Retirement

Moving into retirement is an exciting opportunity to live fully. It can be a time to travel, explore new hobbies, or spend time with grandchildren.

For many, this period at the start of retirement can also be an opportunity to provide additional financial security—and minimize lifetime taxes—by making partial Roth conversions.

 

The Retirement “Tax Valley”

Many retirees will be in a lower tax bracket early in retirement than they were just before retirement while they’re still working—or than they will be in later in retirement. To understand why, consider Jim and Susan (both age 61) who recently retired.

While working, Jim and Susan had a combined household income of $250,000. This put them right in the middle of the 24% tax bracket for a married couple. At retirement, Jim and Susan have the following assets:

  • $1 million (Jim’s IRA)
  • $1 million (Susan’s IRA)
  • $100,000 (Jim’s Roth IRA)
  • $500,000 (Taxable account – with a $300,000 cost basis)
  • $300,000 (Cash savings in bank accounts and CDs)
  • $800,000 (House – No Mortgage)

Jim and Susan will also have the following income in retirement:

  • $50,000 (Jim’s annual pension – starting at age 65)
  • $30,000 (Susan’s annual pension – starting at age 65)
  • $40,000 (Jim’s annual Social Security – Starting at age 70)
  • $35,000 (Susan’s annual Social Security – Starting at age 70)

 

In addition to that income, Jim and Susan will each have to start taking required minimum distributions (RMDs) out of their IRAs starting at age 72. Assuming they don’t make withdrawals from the IRA between now and age 72, and that the accounts grow at 7% annually over the next 11 years, they would each be worth about $2.1 million by age 72. They would each have an RMD of about $76,650 the year they turn 72 ($2,100,000 / 27.4).

This would potentially give them a taxable income at age 72 of about $308,300 from pensions, Social Security, and their RMDs. This puts them back at the top of the 24% tax bracket, and they could easily move up to the 32% tax bracket or higher.

However, in their first years of retirement, they could basically have no taxable income if they are using cash savings and the taxable investment account to fund their goals if they choose to do so. Is it a smart idea to minimize taxes this much during these early retirement years?

 

Strategic Roth Conversions Early in Retirement

Let’s say that Jim and Susan would have $0 taxable income in early retirement. Their modest interest, dividend, and realized capital gain income is offset by their $25,900 standard deduction.

If they each convert $65,000 annually from their IRA to their Roth accounts ($130,000 total), they will initially pay tax on that conversion primarily at the 10% and 12% rates, with just a little being taxed in the 22% bracket each year.

If they do this each year until age 72 when their RMD begins, they would have about $1,079,000 in each IRA, assuming 7% annual returns. This would reduce their initial RMD at age 72 by about half. Their taxable income at age 72 would be reduced by about $74,500 and their tax liability by about $17,880 since they were in the 24% tax bracket.

Much of the earlier conversions each year would have been taxed at 10% or 12% rates, resulting in less overall tax being paid during their lifetimes.

 

Protection Against Rising Tax Rates

The example above shows the benefits of Jim’s and Susan’s Roth conversions, assuming tax rates stay the same. If 10 years from now, tax rates on higher earners increase, they will have less income being taxed at those higher levels due to the smaller IRA balances and smaller RMDs.

They would also have about $1,000,000 in each Roth IRA by age 72, assuming a 7% rate of growth. This can be withdrawn tax-free if additional money is needed. This is always a benefit but especially so in a world where overall tax rates are higher.

 

Roth Conversions to Take Advantage of a Market Decline

In addition to the benefit of taking Roth conversions when in lower tax brackets, Jim and Susan can take advantage of market declines to make strategic Roth conversions.

Say a market decline in the first six months of the year produces the following negative returns:

-2% (Bonds)

-10% (Large US stocks)

-15% (Large international stocks)

-20% (Small US stocks, small international stocks, emerging market stocks)

This becomes a great opportunity for Jim and Susan to strategically move some of the small US, small international, and emerging market stocks from the IRA to the Roth accounts. Assuming the investments recover as expected, Jim and Susan can pay tax on the conversion when the prices are down and enjoy a significant tax-free recovery after the investments are in the Roth account.

 

Additional Factors to Consider

There are several other factors for Jim and Susan to consider when making Roth conversions early in retirement.

When purchasing individual health insurance in retirement before Medicare begins, retirees may qualify for subsidies to reduce the cost of their premiums based on their taxable income. In Jim and Susan’s case, they have retiree healthcare from their employer that doesn’t qualify for tax subsidies, so this is not a factor.

Once Medicare Part B benefits start at age 65, there is an additional IRMAA premium cost when taxable income increases beyond a certain level. In 2022, this additional premium begins when income is above $182,000 for a married couple.

For retirees who expect to have money at the end to leave to an heir, Roth conversions can be an important part of an estate plan, as leaving Roth assets to heirs are significantly more valuable than leaving traditional IRA money to heirs.

 

Conclusion

While they won’t be a perfect solution for everyone, for the right families, Roth conversions early in retirement can be a powerful tool to minimize taxes over your lifetime and maximize overall expected wealth.

This can be one more tool to ensure the ability to make the most of retirement and really live fully!

 

 

 

Disclosure: 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 report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. 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, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

 

 

Boeing Pension and Lump Sum Comparison – Should I Retire Early?

Boeing Pension and Lump Sum Comparison – Should I Retire Early?

by | Aug 19, 2022 | 401k, Advisors, After you retire, Chris Waclawik, Goal Planning, Preparing for Retirement, Retirement Savings, Tech Focus, Wealth Enhancement

 

Boeing Employee – Should I Retire Early?

Boeing employees nearing retirement age are facing a financial decision that will need to be made by November 30—one that could have a significant impact on their lifestyle in retirement.

 

Higher Interest Rates and the Lump Sum Pension Benefit

Boeing offers many employees the option at retirement to either receive a pension, providing monthly income for life, or to have a single lump sum deposited into a retirement account that can be invested and withdrawn as desired.

The amount of the pension benefit is based on several factors, including years of service with Boeing and average salary while employed.

When determining the lump sum benefit, the underlying interest rates are an additional factor to take into consideration. Higher interest rates will create a lower lump sum benefit, and lower interest rates will create a higher lump sum benefit. Boeing resets the interest rate used in the calculation once per year in November.

With the significantly higher interest rates we’ve seen in 2022, an engineer who may currently qualify to choose either a $5,000 monthly pension or a $1 million lump sum benefit may be looking at only $800,000 in lump sum benefit if they retire after November 30, 2022. The exact numbers will vary for each employee.

That $200,000 reduced benefit can be a significant incentive for employees who are planning to retire in the next few years to adjust their plans and retire early.

 

To Whom Does This Apply?

Not all Boeing employees have a pension as part of their benefits. Also, some employees are covered by unions that only offer the monthly pension and do not have a lump sum option.

Boeing engineers who are members of the SPEEA (Society of Professional Engineering Employees in Aerospace) union usually have a generous lump sum benefit compared with the monthly pension and may benefit significantly from comparing their options.

 

Financial Planning to Compare Options

The decision to take either the lump sum in retirement or the monthly pension is a significant one, and both contain risks.

With the lump sum, the employee is accepting the risk of the market and managing the money.

With the monthly pension, the guaranteed income provided to the employee will not increase with inflation. This year has been a good reminder that inflation can significantly reduce the purchasing power of that income.

Also, does it make sense for an employee who originally planned to retire in two years to give up on the years of additional earnings and savings? Can the employee afford to do so?

We help employees compare how a monthly pension or lump sum benefit will interact with other resources (Social Security, retirement accounts, real estate) to determine the ability to meet goals in retirement. We can also compare retiring in 2022 with delaying retirement and possibly receiving a reduced benefit in the future.

 

Deadline and Next Steps

Boeing employees wanting to claim the lump sum before rising interest rates potentially reduce benefits will have to retire and submit the request for a lump sum benefit by November 30, 2022.

If you’re feeling overwhelmed by assessing the pros and cons of this decision, reach out to us for your complementary personalized analysis. We can help you determine whether retiring now would provide you with a sustainable retirement that meets your lifestyle needs.

 

 

 

Disclosure: 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 report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. 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, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

 

 

 

 

The Roth Rulebook

The Roth Rulebook

by | Feb 15, 2022 | Advisors, Frank McLaughlin, Goal Planning, Investing 101, Retirement Savings, Tech Focus, Wealth Enhancement

 

When preparing for retirement, it can be important to save money in different types of accounts to give you flexibility when it comes time to spend those funds. One of the most powerful and misunderstood types of accounts is the Roth. A Roth account is an after-tax retirement account that can be in the form of an IRA or an employer-sponsored plan such as a 401(k). The after-tax component means you pay tax on the front end when receiving the income, and in exchange, you can receive tax-free growth and tax-free withdrawals if you follow the rules of the Roth. There are three components to consider: contributions, conversions, and earnings. Contributions and conversions refer to the principal amount that you contribute or convert, while earnings refer to the investment growth in the account. There are contribution and eligibility limits set by the IRS each year, but today we will focus on withdrawing funds from a Roth IRA to maximize the after-tax benefit.

 

Roth Contributions

After you contribute to a Roth IRA, you can withdraw that contribution amount (principal) at any time without paying taxes or the 10% penalty. That is an often-overlooked fact that can come in handy.

Example: Ted is 38 years old and decides to open his first Roth IRA. He contributes $5,000 to the account immediately after opening it. Two years later, Ted finds himself in a financial bind and needs $5,000 for a car repair. One of the possible solutions for Ted is that he could pull up to $5,000 from his Roth IRA without paying any tax or penalty.

 

Roth Conversions

A Roth conversion is when you move funds from a pre-tax account such as a traditional IRA. You will owe income tax on the amount that you convert. This can be a powerful strategy to take control of when and how much you pay in taxes. There is no limit to how much you can convert.

When it comes to withdrawing money used in a Roth conversion, five years need to have passed or you need to be at least 59.5 years old to withdraw the conversion penalty-free. It is important to remember that each conversion has a separate 5-year clock.

Example: Beth is 50 when she executes a $40,000 conversion from her IRA to her Roth IRA in January 2020. In March 2025, Beth finds herself needing $40,000 for a home renovation. One of the possible solutions is that Beth could pull up to $40,000 from the conversion that she did over five years ago even though she is under 59.5.

 

Earnings

When it comes to withdrawing earnings from growth that has occurred after contributing or completing a conversion, you must wait until age 59.5 and five years need to have passed since you first contributed or completed a conversion. If you don’t follow both of those rules, then you could have to potentially pay income tax on the growth and a 10% penalty.

Example: With our previous examples above with Ted and Beth, even though they can withdraw their contribution and conversion respectively, neither of them can touch the earnings in their Roth accounts until they are 59.5 and have satisfied the 5-year rule.

 

Other Important Details

There are a few other exceptions that allow a person to avoid the penalty and/or income tax, such as a death, disability, or first-time home purchase.

For ordering rules, when a withdrawal is made from a Roth IRA, the IRS considers that money to be taken from contributions first, then conversions when contributions are exhausted, and then finally earnings.

 

Strategies 

  • Have a thorough understanding of the rules before withdrawing any funds from a Roth account.
  • Speed up the 5-year clock.
    • You can technically satisfy the 5-year clock in less than five years. You can make contributions for a previous year until the tax filing date (typically April 15th, but as of this writing, it may be April 18th in 2022). This means that a contribution on April 1st, 2022, could be designated to count toward 2021, and the clock will count as starting on January 1st, 2021. This shaves 15 months off the 5-year clock! Note: Conversions must be complete by the calendar year’s end (12/31), but you can still shave 11 months off the 5-year clock.
  • Start the 5-year clock now!
    • Even a $1 contribution or conversion starts the clock for you to be able to harness tax-free gains, so start as soon as possible.
  • After the passing of the SECURE ACT in 2019, most non-spousal IRA beneficiaries must now fully distribute inherited IRAs within ten years. This means that an inherited Roth IRA owner could potentially allow the inherited Roth to grow tax-free for up to ten more years and then withdraw those funds tax-free. If it fits into an individual’s financial plan, this can be a tremendous tax strategy to take advantage of.

 

Roth accounts can be incredible but also very confusing. As advisors, we figure out the best way to use these accounts to your advantage in terms of maximizing growth and minimizing taxes. If you have any questions about how you can best utilize a Roth account, please don’t hesitate to reach out to us. We are always happy to help you and those you care about!

 

 

 

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. Nothing in these materials is intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Merriman does not provide tax, legal, or accounting advice, and nothing contained in these materials should be relied upon as such.