Are you neglecting one of the most precious assets that you have? When it comes to individual retirement accounts or IRAs, many people have a practice of “fund it and forget it”. But there are strategizes you can implement to help maximize the money it generates. The “Dynamic Duo” of financial planning, Joe Anderson, CFP®, and Alan Clopine, CPA, will help you Re-Boot Your IRA!
Important Points:
- 0:00 – Intro
- 2:08 – Re-Boot Your IRA
- 3:37 – Types of Accounts
- 4:27 – Contribution Limits
- 5:41 – Who Qualifies
- 7:53 – Download the Ultimate IRA Guide
- 8:50 – True/False: You can’t contribute to a ROTH IRA if you do not file a tax return to show your income?
- 10:30 – Asset Allocation vs. Asset Location
- 11:58 – Asset Allocation
- 14:48 – Allocation Determiners
- 16:10 – Download the Ultimate IRA Guide
- 17:00 – True/False: For a single tax year, contributions can be made to a Roth IRA over a 15 ½ month period?
- 18:29 – Invest for Success
- 20:16 – Fully Fund Account
- 21:39 – Ask the Experts: I have limited funds to invest. If I fund my Roth IRA first, can I use it as an emergency fund?
- 22:29 – Ask the Experts: If I inherit an IRA, can I take out the money over time to avoid paying the taxes?
- 23:11 – Pure Takeaway
- 23:30 – Download the Ultimate IRA Guide
Transcript:
Joe: Are you taking advantage of all the retirement accounts available to you? If I were to guess, the answer is no. Stick around so you can reboot your overall retirement. Announcer: What does your retirement look like? Are you confident you’re on the right track? Navigating fluctuating markets alone can be confusing. Stocks, bonds, annuities, 401(k)s, and IRAs. Get ready to be informed and empowered by financial experts Joe Anderson and Alan Clopine. Put their decades of experience to work for you. From Social Security to tax planning, they’ll take the stress out of investing in your future and give you the tools and strategies you need to map out the retirement you’re dreaming of on “Your Money Your Wealth.”
Joe: Welcome to the show, everyone. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors, and of course, I’m with the big man, Big Al Clopine. He’s sitting right there. Hi, Big Al.
Al: How you doing, man?
Joe: I’m doing all right. We’re gonna reboot, recharge people’s overall retirement today because one of the most important vehicles that you can use to enhance your retirement is the good old IRA. We’re gonna talk about it, we’re gonna dive in, and we’re gonna see who qualifies and doesn’t qualify, and how to reboot it. That’s today’s Financial Focus. These statistics are crazy to me. Roth IRAs, Big Al–only 21% of the population has a Roth IRA.
Al: It’s not enough.
Joe: It’s probably one of the best vehicles that the IRS has ever given us. Only 21% had it. How about a traditional IRA? 30%. That’s a little bit better, but those are huge, huge gaps in regards to our overall retirement planning. Now, if I could just increase the amount of money that I’m saving to my retirement by 1% per year– $50,000 salary, you save 4%, that’s the green. That’s $200,000 in 30 years. Well, let’s just boost it up to 5%. That’s 250 grand. That’s $50,000 more. What about 6%? It’s almost $100,000. Folks, we can do this. It’s just learning the basics on retirement. Let’s bring in the big man to help us out.
Al: All right, today, we’re gonna talk about rebooting your IRA, so let’s start with the basics. Let’s start with the IRA 101. Kind of review for some of you, maybe new information for some of you, and then we’re gonna get into assessing your asset allocation, location, and then finally, that invest for success, make sure that you’re putting enough in the IRA, make sure you’re investing properly to achieve your goals in retirement. And, Joe, this is a key topic. I mean, a lot of people have 401(k)s, 403(b)s; not everybody, but you can also enhance it with IRAs. A lot of people don’t realize you can have a 401(k) and an IRA.
Joe: Right, or–but a lot of people don’t have a 401(k), but they’re still not taking advantage of an IRA. Let’s just kind of break it down. There’s a lot of different accounts, Big Al. No wonder why, right? They just try to make this as confusing as ever. So when we look at IRAs or defined- contribution plans, the 401(k)– everyone’s heard of that before. That’s through your employer, right? It comes from your paycheck. You pop money in, grows tax-deferred, boom. When you retire, you have a little bit of a nest egg, right? That’s great, but then there’s the 403(b). What the heck is that? Well, that could be someone that works for a nonprofit, maybe a school district, maybe you’re a nurse or doctor. But here’s the grand pooh-bah–the IRA, the individual retirement account. So even though you might have a 401(k) or a 403(b), you still qualify for the IRA.
Al: Yeah, well that’s right, and then it’s not only the IRA. You could do a Roth IRA, right? And so you can kind of mix and match. There’s limitations, but you can split it up, you can do one, you can do the other. There’s a self-directed IRA. Have you heard of that? So that’s where you direct your assets into things that aren’t necessarily stocks and bonds– maybe real estate–and then finally, a simple IRA for businesses. It tends to be a little simpler than a 401(k) plan.
Joe: But there’s nothing simple around it.
Al: It’s not very simple, but it is simpler than a 401(k).
Joe: All right. Why don’t you break this down, Al? What can I save into these different plans?
Al: All right, so let’s start with a 401(k), 403(b), and the like, so that’s $20,500. This is for 2022. Now, if you’re 50 and older, you can do a catch-up, and the catch-up is $6,500, so you could do $27,000. A defined-contribution plan is including 401(k)s and all these plans I mentioned here. You can get in as much as $61,000, which would include your employer match or your employer profit share, or maybe some 401(k) plans allow you to put after-tax money in, but you can’t do more than that $61,000. SIMPLE IRAs, $14,000; and SIMPLE catch-up, 50 and older, Joe, is $3,000.
Joe: You know, this is for 2022, and there’s a lot of legislation that is coming out, a lot of different proposals of kind of shaking this up a little bit by helping people save a little bit more money, including the matches–or not the match, but the catch-ups and Roth-ifying, you know, some of these overall retirement plans, which would be fantastic. But stick around because a lot of you are still not maxing these plans out. Absolutely want to make sure that you know how much that you can put in and then just try to get to these maximum levels as much as you can. But then who qualifies?
Al: Let’s switch over to IRAs and Roth IRAs, Joe. So, first of all, you have to have earned income, which means salary or could be profit from a self-employed business, so that would qualify for earned income, or your spouse has to have earned income. You can use your spouse’s earned income if you’re not working or retired or whatever it may be, so that works. There are no age limitations on IRAs and Roth IRAs as long as you or your spouse have earned income. That changed because it used to be you could do Roth IRAs after RMD–required minimum distribution–age. Now they’ve made it available, Joe, for everybody.
Joe: Yeah, that was kind of a weird, stupid rule, is that once you reach 70 and a half, you can no longer contribute to an IRA, but you could put money into a Roth IRA. But then they realized, “Hey, wait a minute. You know, there’s a lot of people that are still working in their 70s,” so they got rid of that rule just recently with the SECURE act. So, no matter what your age, as long as you have this earned income requirement, you could make a contribution to an IRA, all right? If you have a 401(k), if you have a 403(b), it doesn’t matter. If you have earned income, you could put money into an IRA. The only debate is, is it gonna be deductible or not, OK? That’s the question because then it’s like, “All right, do I want to get a tax savings here, or do I want to do an after-tax contribution?” It doesn’t necessarily matter. As long as you have earned income, you can put money in, but I think the questions that people will have is, “Well, do I want to do the after-tax or pre-tax?”
Al: Yeah, yeah, exactly, and those limits are pretty low. I think it’s around $68,000 single. I think it’s $109,000 where it starts phasing out, but then the other question is should you do a traditional IRA or a Roth IRA? We’re big believers in having money in tax-free in retirement, so who can do a Roth IRA? It’s the same rules as regular IRA, but there’s other income limitations. So if you’re single and your adjusted gross income is below $129,000, it’s perfect. You could do a full one that it phases out. By the time you get to $144,000, no more Roth IRA. When you’re married, those numbers are $204,000 to $214,000, but, Joe, there’s backdoor Roth, there’s workarounds, but this–if you want to do a direct contribution to a Roth IRA, these are the income limitations you need to be aware of.
Joe: Yeah, and I think a lot of individuals that are higher than this that still want to get money into the Roth–like I said, you could still put money into an IRA. It’s a non-deductible IRA ’cause you do not get the tax deduction, and then potentially, you could convert that into a Roth IRA, so it’s a double step. It’s called the “backdoor” Roth, but there’s aggregation, pro-rata rules. It gets a little bit of complication there, but we have your back. We got “The Ultimate IRA Guide,” so if you want to talk about backdoor, front door, garage door, whatever type of IRA contributions and how to look at investing these just to reboot your overall retirement, go to our website, yourmoneyyourwealth.com, click on that special offer, and that’s our gift for you this week. You’re watching “Your Money Your Wealth.” We’ll be back in just a second.
Joe: Welcome back to the show, folks. Show’s called “Your money Your Wealth.” Joe Anderson, Big Al. We’re talking IRAs, Roth IRAs, SIMPLE, SEPs. You name it, we got it. [Computer beeping] Go to our website, yourmoneyyourwealth.com, click on our special offer. It’s “The Ultimate Guide to IRAs.” So if you have questions on who can contribute, what you can invest in, what you qualify for or don’t, go to our website, yourmoneyyourwealth.com, click on the special offer this week. It’s our “Ultimate Guide to IRAs.” Let’s see how you did on the true/false question.
Al: “You can’t contribute to a Roth IRA if you do not file a tax return to show your income.” True or false? Well, I’m gonna say that’s generally false because if you don’t have to file a tax return, you could still do the Roth IRA as long as you have earned income. IRS knows your earned income from your W-2. One exception, though, I guess, is if you’re self-employed, you probably still have to file to show that earned income, and plus you’ll have to pay self-employment tax.
Joe: So if you get a little cash under the table?
Al: Doesn’t work.
Joe: Heh heh!
Al: Don’t do it. Heh!
Joe: You know, another thing, too, though, is that you can make contributions for your children as long as they have earned income, right? So it doesn’t necessarily–the contribution for IRAs or Roth IRAs doesn’t necessarily have to come from that individual. Let’s say I have my son. He’s made $6,000 a year, right, but he wants to spend that $6,000 a year on Tonka trucks, whatever. I have $6,000 that I can open up a Roth IRA for my son and deposit that for him. As long as the child has earned income, you can still make contributions as a parent or grandparent, friend, family member, whatever. So I think that’s a pretty cool way to kind of help your kids get jump-started a little bit as well.
Al: Oh, I think so, too, and absolutely, if they have earned income, you want to do it because if you get it in at age 18 or 20, 22, whatever, that– and it compounds all that time–
Joe: Or two.
Al: Two if you’re, like, a child prodigy, doing commercials.
Joe: That’s my kid right there.
Al: Heh heh!
Joe: All right. Asset allocation versus location. What the heck are we talking about here? This is really key in regards to attack strategy, as you look long-term. Asset allocation. I think we’ve all heard of that: stocks, bonds, real estate, cash, OK? So this is the asset allocation, right? So this is an asset class. A stock is an asset class, bonds and so on, right? But I think, more importantly, from a tax perspective is that if you have money, let’s say, in a tax-free, a Roth IRA account or a taxable account or your tax-deferred or IRA accounts, you might want to hold different types of assets in different location from a tax.
Al: Yeah, well, I think that’s right. So if you think about it like stocks, so those kind of have a–they have a capital gain treatment if you hold them for at least a year and a day and sell them, you get a lower tax rate, right? So–and they’ve got qualified dividends. You know, ideally, you’d rather have that in your non-qualified account, non-retirement, or your Roth; Roth because they grow more than bonds. Your bonds–you might want to kind of favor the tax-deferred account because you don’t necessarily want your largest growth there because you’re just gonna have to pay more tax later. Now, of course, many of you are gonna have the majority of your assets in a deferred account, an IRA, you know, 401(k), so, yeah, you’re gonna have a mixture of each, but let’s just say, in a perfect world, where you got kind of even amounts, you want to kind of favor the stocks in the Roth and the non-retirement and everything else in the retirement account.
Joe: Here’s another key component. You can invest in a standard IRA or Roth IRA and basically anything you want besides life insurance and collectibles. So if you want to buy a bond, a CD, cash, if you want to buy a mutual fund, an exchange-traded fund, an individual stock, you could purchase all of those assets inside the shell of the IRA or the Roth IRA, OK? So, first off, there’s this custodian, such as, like Vanguard, Charles Schwab, TD Ameritrade, all right? Then you open up your account–IRA, Roth IRA–then the third step is to select the investment that you want that account to hold. So is it a mutual fund, is it an ETF, is it a stock, or is it a diversified portfolio? So key thing here is that you could design this any way that you want, OK? So it’s not like you’re buying a product. A Roth IRA is not a product. It’s basically a shell that you could purchase securities through, and the only difference between the two of these is the tax implications on withdrawal. So if you have a stock that grows, you pull it out of a Roth tax-free, you put it into an IRA. It grows, you pay tax, but you could have got a tax deduction on that contribution.
Al: Well, you could, and then, Joe, you could also do, like, a self-directed IRA, so that’s if you want to hold other assets besides what we might call non-traditional, you know, like crypto or precious metals or real estate. Have you ever thought about owning real estate in your IRA, your Roth IRA? You can do that in a self-directed IRA. Now, we don’t necessarily– I don’t necessarily recommend real estate in regular IRAs because you’re taking a very tax-favored investment and putting it in something that’s gonna create ordinary income later. Roth IRA may be a different story; maybe it would be nice to hold some of those things in there.
Joe: Yeah, a lot of real estate investors love real estate, and they don’t want anything else. They’re like, “I don’t want to deal with anything here. I just want to buy real estate.” So if you have a large enough IRA, you can buy real estate, but as Al said, you know, you got to be careful there because as you sell real estate, you’re gonna be taxed at a capital gain. If you put real estate inside the shell of an IRA, yeah, you could buy and sell and flip and do all those great things that you could potentially lose your assets with, but when you pull the money out, it’s going to be all ordinary income, so you want to make sure that you understand the tax implications as you start designing your overall strategy. Things that you got to consider. When you want to retire? What rate of return do I need to generate? So is real estate the right asset, or is crypto, or is it a stock? Is it a bond? Is it a combination of all that’s gonna be on your risk tolerance? If the markets are a little bit volatile, does that keep you up at night? Are you looking at your accounts daily, you know? So then that will also help here to design the appropriate strategy.
Al: Right, and I think a lot of people kind of don’t look at their goals. Like, what rate of return do you really need to make this work, right? And then some of these considerations. If you’re very close to retirement, you might want to take your foot off the gas a little bit, not have as many stocks because you’re gonna need those assets for your cash flow, right? Or if you’re younger, you might favor more stocks.
Joe: Yeah, and so, when you kind of look at this diagram here, you’re first looking at how much that you have in each of these, right? So here’s your IRA. That’s the big daddy, right, or 401(k)? Most of us have a lot of money sitting in these accounts, but just know, when you pull the money out, it’s gonna be taxed at that ordinary income rate. So diversification, from a tax perspective, is having money in each of these different accounts, right? So how much money do you have in a Roth IRA? Well, a lot of you don’t even have an account where all of you probably qualify as long as you have money here or earned income, right? So tax-free is pretty cool because when you pull the money out, zero tax. And if you have assets over here, when you pull the money out, it’s gonna be taxed at a favorable rate, a capital gain rate. So when you’re thinking about rebooting your overall retirement, you might be thinking about “Where’s my money held?” from a tax perspective. If all of my money is sitting here, just know I’m probably gonna get hammered in taxes if you have a pretty good- sized balance here. I like here. Takes the uncertainty of taxes off the table because 100% of that growth will forever grow tax-free. Learn the strategies. Come up with your own solutions to your overall retirement. Start rebooting this thing, right? Go to our website, get “The Ultimate Guide to IRAs”– yourmoneyyourwealth.com, click on the special offer. It’s our “Ultimate Guide to IRAs.” That’s our gift. Click it, download it, learn, implement. We’ll be right back.
Joe: Welcome back to the show. Show’s called “Your Money Your Wealth.” Joe Anderson, Alan Clopine talking about IRAs today. Go to yourmoneyyourwealth.com, click on “The Ultimate Guide to IRAs.” It will help you immensely in your overall retirement strategy– yourmoneyyourwealth.com, click on that special offer. It’s “The Ultimate Guide”–not the best, the ultimate guide to IRAs. Let’s see how you did on the true/false question.
Al: “For a single tax year, contributions can be made to a Roth IRA over a 15 1/2-month period.” Seems kind of weird, but that’s true because think about it. So 2022, you could start doing your Roth contribution for 2022 on January 1st, then you could do it all the way till tax filing date the following year–April 15, 2023– so you do have 15 1/2 months to make the contribution for any particular tax year.
Joe: Best time to make a contribution, in my humble opinion, is January, right? ‘Cause 70% of the time, the markets go up, 30% that go down, so if I could get my money in as soon as I can, most of the time, I’m gonna get that ride all the way through. If you don’t know what your income’s gonna be for that year, especially for Roth IRA contributions, then you probably need to wait a little bit more towards the end of the year or until you file your tax return or when you get your taxes close to being filed. Then you know where your income falls, then you can make either an IRA or a Roth IRA contribution.
Al: Yeah, yeah, Joe, and you– if you do a contribution anyway and you do too much, you can recharacterize it into the following year up until the extended due date of the returns, which is October 15th.
Joe: So here’s a couple things to reboot our overall retirement. Let’s recharge this thing. Here’s what’s missed so many times: the spousal IRA. What the heck is the spousal IRA? Well, let’s say I no longer am working, my wife is working. I could still make an IRA contribution, even though I did not have earned income. As long as the spouse has earned income, both spouses can make an IRA contribution; Roth or traditional. It doesn’t necessarily matter. So the spousal IRA, that’s missed often.
Al: Yes, I would say all the time, you know, and another thing is your employer match, right? Make sure you’re taking advantage of that. Your 401(k), 403(b) may have an employer match, and so make sure you at least contribute enough money into that plan to get the full match, right? Then you may want to do that first and then go to the Roth IRA to get money in a Roth, or maybe your 401(k) has a Roth option. Maybe you want to take advantage of that, but at least make sure you get the match.
Joe: Absolutely. This is free money. Make sure that you take care of that. Automate your contributions, OK? Out of sight, out of mind. Pay yourself first, right? So I’m paying myself in my IRA, in my 401(k), then I’m gonna take care of all my bills, right? People do the opposite. They budget. They’re like, “OK, well here’s my mortgage payment, here’s electricity, and then, oh, guess what–we’re gonna go out to eat and we’re gonna do vacations and we’re gonna do that,” and then, at the end, you got a couple of pennies to put for your retirement. If you start here, automate ’em, pay yourself first, life is a lot better.
Al: And then also make sure that you fund the catch-up. If you’re 50 and older, you’ve got those additional amounts that you can fund in your 401(k)–$6,500, right? IRA, Roth IRA–it’s an extra thousand dollars. Make sure you do that.
Joe: Let’s reboot. Let’s take a look at fully funding, let’s say, an IRA. You can have a max contribution of $6,000; if you’re over 50, it’s $1,000; 7 grand. 401(k)–$20,500. That’s the max. You’re over 50, catch-up, 27, and then let’s say you have a 4% match, $4,000– that’s 31; you combine these two, that’s $38,000. If you can do this, right, that money grows exponentially long-term. Over 5 years, it’s $271,000, 5 years. If you get a little bit more time, 10 years, now you’re talking about a half a mil; 20 years, almost two mil, so this is the power of compounding. This is the power of discipline, right? This is also thinking of your future self, right? Think about yourself 10, 20, 30 years from now. You don’t want to be broke. You probably want to have a fat paycheck coming in every month. If you start thinking about yourself in future tense, you will save more money.
Al: Yeah, well, no question, and this is the question we get asked a lot is–or the statement–“I’m 50 and I haven’t done anything, I haven’t saved.” Well, there’s ways to get significant money if you just kind of buckle down, get a bunch of–get some money into your IRAs and 401(k)s. If you max ’em out, you can see, over 20 years, gosh, you can end up with almost $2 million at a 7% rate of return.
Joe: All right, let’s switch gears. Let’s go to Ask the Experts.
Al: All right, this is from Bella: “I have limited funds to invest. If I fund my Roth IRA first, can I use it as an emergency fund?” Joe, she can, but we don’t necessarily recommend it.
Joe: Yeah, um, Roth IRAs have fivefold tax treatment–first in, first out–so you put $6,000 in, you always have access to that $6,000, no matter what your age is. So if you’re 45, 55, 65, you put in the $5,000, $6,000 and let’s say something happens and you need a couple of bucks. Yes, you can always pull money from the Roth IRA–no taxes, no penalties, no nothing. You could pull your contributions out first; the earnings, on the other hand, need to season inside that Roth IRA for 5 years or 59 1/2, whichever’s longer. So there are some rules on the earnings from a tax redistribution point, but your contributions are available.
Al: They are available. I just like to think of two different buckets, if you will. There’s emergency funds, there’s Roth IRA. Don’t touch your Roth IRA ’cause that’s gonna grow tax-free. The longer you have, the longer it’s gonna compound. So let’s do number two, and this is Ben: “If I inherit an IRA, can I take the money out over time to avoid paying taxes?” Ben, that would be awesome if you could–heh!–not pay taxes on your inherited IRA, but no. You pay taxes. In fact, now you have to take the money out over 10 years.
Joe: Yeah. I mean, you can avoid a big tax hit, right? So let’s say you inherit a million-dollar IRA. You don’t have to pay that million dollars in tax year one, but you do have to pull the account out over 10 years, so there are some new laws and nuances there, but in general speaking, yeah, you’ll have to pull the money out. It’s mandatory. If you don’t pull the money out, you’re gonna get penalized to all get-out, but you are taxed. There’s no way around the tax on retirement accounts.
Al: Yeah, no question. So, Joe, why don’t we talk about what we learned? [Whoosh] So we learned about IRAs. We learned all kinds of things about IRAs, kind of the basics. We learned how to consolidate, diversify, rebalance. We learned to limit your tax exposure, make sure you’re taking advantage of everything possible, from catch-up contributions to employer matches and the like.
Joe: Hey, don’t stop there, folks. Go to our website, yourmoneyyourwealth.com, click on that special offer. It’s our “Ultimate Guide to IRAs.” You got this. Don’t procrastinate any longer. This is a perfect time to start rebooting your overall retirement– yourmoneyyourwealth.com, click on that special offer. That’s it for us today. For Big Al Clopine, I’m Joe Anderson. We’ll see you next time, folks.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
