Webinar in Review: A Beginners Guide for Those Just Starting Out

Contributed by: Emily Lucido

With a little bit of wit and a whole lot of information, Kali Hassinger, CFP® and Josh Bitel, Client Service Associate, recently presented a webinar that provided young folks with a broad guide for how to start their financial lives off on the right foot. As we found out during the presentation, making smart choices early can make life easier in the long run.

Although Millennials have an average debt of 50% in just student loans, they are doing better than most people might think. About 80% have a budget and 72% are saving for retirement. (Source: http://bit.ly/2bBC3vG). If you are a Millennial and are reading and thinking, “I’m not saving for retirement and I don’t have a budget,” that’s okay! Even by taking small steps now, you can make a huge difference rather than waiting. There are a lot of different factors to think about when tackling financials in the “real world.” The first step is to get organized.

Spending vs. Saving

You can spend smarter by following these tips below:

• Stay Organized - which can include setting up account notifications & alerts

  • These notifications can be set up for when you complete a transaction, or if your balance falls below a specific amount (you can set the minimum balance amount yourself)

  • The notifications can also be good for detecting fraud

• Applications & Technology

  • There are a ton of free apps out there that can help with any situation, just google your need and you can find something suitable for you

• Figuring out your Credit Score

  • Credit Karma gives you free access to your credit score and is highly secure

  • What determines your credit score?
    ~ Check out our blog that breaks down your credit score composition!

  • When building credit and using credit cards, you want to make sure to use only around or below 30% of your available credit

  • Watch for annual fees on credit cards; see if opening the card is worth the annual fee you will end up paying

  • Set up auto pay on all your bills with your credit card to benefit with cash back and rewards

  • To avoid ATM fees, go to the store and buy something small (like a pack of gum) and then get cash back on that purchase

• Student Loans

  • Student loans are something you want to start paying down right away – and if you can make more than just the minimum payment, try to do that

  • Make sure your payments are being allocated toward your highest interest loan

  • A good resource to show you every student loan you have, whether federal or private is, Annualcreditreport.com

Saving is so important, and to start sooner can make such a big difference in the long run. These tip s help with how to smartly save money:

• Cash Savings

  • In case of emergency it’s good to have six months of living expenses in a savings account

• Investing Early

  • The graph below demonstrations how investing your savings early can really benefit you in the long run

  • In the example below Chloe started investing from age 25 and almost reaches $2 million dollars by the age of 65, while we see Noah saves from age 25 (the same amount of money) and just let it sit in cash and only obtained about $653,000 by the age of 65.

• Retirement Savings

  • Although retirement might seem far away, it is important to be forward thinking and plan ahead

  • Employer plans are a great opportunity to save money if your company offers one - always remember to contribute at least the match if you can

• If your employer doesn’t offer a retirement plan you can still invest through a Roth IRA or Traditional IRA. Depending on your situation a Roth or an IRA could work for you.

• Taxes – some quick tips

  • The more money you make, the more you pay in taxes!

  • You can write off student loan interest of up to $2,500 per year

  • TurboTax® is a great online resource for doing your taxes with a 100% accurate calculation guarantee

• Insurance

  • Insurance is something that is so important – but something that can be overlooked when we are young

  • Staying on your parents health coverage until age of 26 is great – but don’t just assume it’s the best option because you aren’t paying anything

  • Remember to get renters insurance when living in an apartment – you never know when you might need it!

The last thing to remember is the 28/36 Rule. Your housing expenses should not exceed 28% of your gross monthly income while your total debt payments should not exceed 36%. Remember, the earlier you start saving the better – and any place you start at is good.

Take 30 minutes to view the webinar below and get the full details of Kali and Josh’s discussion. If you have any questions, please reach out to us -- we’re here to help!

Emily Lucido is a Client Service Associate at Center for Financial Planning, Inc.®

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Emily Lucido and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Preparing for Retirement: How Much Fixed Income Should I Have?

Contributed by: Nick Defenthaler, CFP®

How much guaranteed income (i.e., Social Security, pension and annuity income) should I have in retirement? This is a question I hear quite often from clients who are nearing, or entering, retirement and are seeking our guidance on how to create a tax-efficient and well-diversified retirement paycheck. 

“The 50% Rule”

Although every situation is unique, in most cases, we want to see roughly 50% or more of a retiree’s spending needs satisfied by fixed income. For example, if your goal is to spend $140,000 before-tax (gross) in retirement, ideally, we’d want to see roughly $70,000 or more come from a combination of Social Security, pension, or an annuity income stream. 

Below is an illustration we frequently use with clients to help show where their retirement paycheck will be coming from. The chart also displays the portfolio withdrawal rate to give clients an idea if their desired spending level is realistic or not over the long-term.

Cash Targets

Once we have an idea of what is required to come from your actual portfolio to supplement your spending goal, we’ll typically leave 6 – 12 months (or more depending of course on someone’s risk tolerance) of cash on the “sidelines” to help shield these funds from volatility and ensure money available for your short term cash needs. Believe it or not, since 1980, the average intra-year market decline for the S&P 500 has been 14.1%. Over the course of those 37 years, however, 28 of them have ended the year in positive territory (source:  JP Morgan).  We believe market declines are imminent, and we want to plan ahead to help mitigate their potential impact. By having cash available at all times for your spending needs, it allows you to still receive income from your portfolio while giving it time to “heal” and recover – something that typically occurs within a 12 month time frame. 

As you enter the home stretch of your working career, it’s very important to begin dialing in on what you’re actually spending now compared to what you’d like to spend in retirement. Sometimes the numbers are very close but often times, they are quite different.  As clients approach retirement, we work together to help determine this magic number and provide analysis on whether or not the spending goal is sustainable over the long-term. From there, it’s our job to help re-create a retirement paycheck for you that meets your own unique goals. Don’t hesitate to reach out if we can ever offer a first or second opinion on the best way to create your own retirement paycheck.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

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Opinions expressed are those of Nick Defenthaler, CFP®, and are not necessarily those of Raymond James. There is no assurance the forecasts provided herein will prove to be correct. This information has been obtained from sources deemed to be reliable but we do not guarantee that it is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Please note direct investment in any index is not possible. Annuity guarantees are subject to the issuing company's ability to pay for them.

Ford Buyout: Knowing your Options

Contributed by: Nick Defenthaler, CFP®

Over the past month, Ford has extended buyout offers to nearly 15,000 of its salaried employees. The offer, in most cases, contains two main components – a severance package or an enhancement of your retirement benefit from Ford.  Below is a high-level breakdown of some of the key points of the offer:

Special Incentive Program (SIP) and Select Retirement Program (SRP)

• Up to 18 months’ severance

• Retirement benefit enhancement

  • Credit for three additional years of age and three years of service for calculating benefits under the General Retirement Plan (GRP), Benefit Equalization Plan (BEP), and Supplemental Executive Retirement Plan (SERP)

  • This can translate into a nearly 15% increase over your normal benefit

• Must retire no later than September 30, 2017

  • This means up to 27 months of income received in 2017 which more than likely means higher tax brackets for those accepting the offer

• Access to reemployment assistance from Ford for six months

• Health insurance – type of coverage will depend on if you were hired before or after 6/1/2001

• Life insurance – eligible to maintain if you were hired on or after 1/1/2004, are age 55 or older with at least ten years of service, or are age 65 with at least five years of service upon termination

• Vacation

  • Regular – accrued through your last day on pay roll, unused accrued vacation is paid out if the last day on pay roll is prior to year-end

  • Purchased – unused days are forfeited

Buyouts from Ford or any of the “Big Three” are nothing new. As always, however, a thoughtful analysis should be completed when ultimately making a decision on whether to stay employed with Ford or to retire early. Many of the offers extended will be virtually the same, but everyone’s situation is different. If you’ve received an offer from Ford and would like our take on how that offer could impact your own long-term financial game plan, don’t hesitate to reach out to us for guidance. 

P.S. I did a webinar on this topic where I dug deep into the nuances of the offer and discussed some planning opportunities you might consider if you decide to retire early. Check out the replay below!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

The Potential Impacts of Student Loans on your Credit Score

Contributed by: Josh Bitel

For those of us lucky enough to have entered the work force in the past few years, student loan repayment can cause a significant impact, either positive or negative, on your credit score.

Getting Started

Beginning to repay these loans after the precious six to nine month grace period has expired can affect your ability to obtain other credit if not handled properly. One way to find out how you’re being affected is to pull a copy of your credit report. There are three major credit reporting agencies (Experian, Equifax, and Trans Union) and you should get a copy of your credit report from each one (click here to read our blog on how to get your free annual credit report. Student loan institutions aren’t required to report information to all three bureaus, although many do, which is important to keep in mind. If you're repaying your student loans on time, these disciplined repayments will actually help your credit score. Conversely, if you are delinquent on payments or worse, default on your loans, your credit report can take a beating, potentially crippling your chances of obtaining other credit.

Credit Score Factors

Many different factors are used to determine your credit score. Some of these factors are more crucial than others. Among these critical factors are:

• Your payment history. Meaning the consistency and punctuality of payments and how long your payment history is.

• Your outstanding debt and amounts you owe on these accounts. How close your account balances are to your defined limits is also taken into consideration.

• How long you've had credit. How long specific accounts have been open, and how long it has been since you've used each account

• New credit and new inquiries. This means outstanding applications for new credit as well as additional inquiries for your credit reports, whether by institutions or yourself, can impact your credit score.

• For a deeper look at your credit score composition, check out our blog from last year.

How Student Loans Can Affect your Credit Score

If you consistently make your student loan payments on time, your credit score should not be negatively affected. A nice tip to ensure consistency is to set up an auto-pay from a bank account. Most loan institutions will allow you to set up an automatic withdraw from your bank account, eliminating the need to remember to pay each month. As an added bonus, some institutions may even offer an interest rate discount for setting this up!

Prospective creditors may look at other factors when analyzing your debt, and student loans can make this tricky. One example of this may be if you are in a lower-paying job, this makes your debt-to-income ratio unfavorable for some creditors. Another example may be your principal balances being largely unchanged in the early stages of repayment, which is common with long term repayment schedules, and some lenders may view this as a lack of paying down debt.

It is important to monitor your credit history from all three bureaus regularly. If you find that your repayment history is not being reported correctly, contact your lender to make this correction.

Suggestions to Help Reduce the Burden

Being overburdened with debt can feel suffocating, here are some suggestions to take some weight off your shoulders:

• Pay off your student loan debt as fast as possible. Doing so will help reduce your debt-to-income ratio, even if your income doesn't increase, which can make your credit score more favorable to lenders.

• If you're struggling to repay your student loans and are considering asking for forbearance, ask your lender about any other options you may have. Interest-only payments are a cheaper alternative, although they may not reduce principal.

• Ask your lender about a graduated repayment option. This means making smaller payments in the early years of the loan, with larger payments coming in the later years.

• If you're really strapped, you can explore longer term options. Much like a home, when a longer repayment term is selected, you will likely be paying more in interest over the life of the loan, but the monthly payment can be significantly reduced.

• If all else fails, don’t ignore your student loans. Generally these loans won’t be discharged even in a bankruptcy situation. Talk to your lender about the options available for you, this can be crucial to maintaining a favorable credit history.

If you have any questions about refinancing your student loans or improving your credit score, please contact your Financial Planner here at The Center, we’re always happy to help!

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

Dealing with the Loss of a Spouse

Contributed by: Sandra Adams, CFP®, CeFT™

Whether you have time to prepare for it or it is sudden, the loss of a spouse is one of life’s most traumatic events. For most, it means the loss of one’s soul mate and life partner, one with whom so many past memories and future goals and dreams are woven.  If you have recently lost a spouse or know someone who has, it is an understatement to say that there is an initial feeling of being overwhelmed – there is so much to do at a time when you feel the least capable (and the one with whom you’ve always shared the decision making duties in the past is no longer there to help you). There seem to be lots of people around but you are feeling numb, lost, and alone. 

To make things a little easier to handle at this time, you can break things down into things you really need to do now, things that need to be done soon, and things that can be done later. 

There are very few things that need to be done immediately/now (see my previous blog: Dealing with Death: A Financial Guide). We often encourage clients at this time to do only what is absolutely necessary and leave any bigger decisions for much later when you find yourself in a better place where you can think more clearly and confidently. This space we provide is called the Decision Free Zone – it gives you permission for yourself (and others) to not make any big decisions until you are comfortable moving forward in this time of transition.

Starting soon, it’s important to make sure you are taking care of yourself; eating well, trying to get enough rest, exercising, and trying to stay social. Support groups and counselors can be extremely helpful during this time. You will also need to meet with your professional advisors to make sure needed details and changes are taken care of on financial accounts, legal documents, etc. You will work with your financial planner to determine your income and budget needs for yourself going forward during this transition period, determine how cash will flow, etc. Decisions during this time can take months to years to refine and complete.

Later (and depending on the person this can be a few months or a few years since your spouse’s death), you will be able to look forward and visualize your new life and future. You will be able to work with your advisor to create a Bliss List that will include new goals and a plan for your “new normal.” You will determine: how you want to live your life going forward; what makes you feel joyful and fulfilled; and what is on your bucket list that is left undone? 

The devastation that you feel with a loss of a spouse seems insurmountable. With time, self-care, and the help of your financial planner who can hold your hand through the painful transition, for as long as it takes, you will be able to get through this! If you or someone you know has suffered the loss of a spouse and could use our guidance, please contact us at Sandy.Adams@centerfinplan.com.

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Opinions expressed are those of Sandra Adams and are not necessarily those of Raymond James. Raymond James Financial Services and its advisors do not provide advice on tax or legal issues, these matters should be discussed with the appropriate professional.

Maximizing your 401k Contributions: Nuances to Save you Money

Contributed by: Nick Defenthaler, CFP®

When we’re first starting our careers, we’re always told to at contribute at least the minimum needed to get the full company match in our 401k plans (typically between 4% and 8%, depending on how your plan is structured).  “Never throw away free money!” is a phrase we use quite often with children of clients who are starting their first job out of college. What about, however, those who are well established in their careers, and are fully maximizing 401k contributions ($18,000 for 2017, $24,000 if you’re over the age of 50)? They shouldn’t have to worry about not receiving their full employer match, right? Well, surprisingly, depending on how your 401k plan is structured at work, the answer could actually be yes!  

Let me provide an example to explain what I’m referring to:

Let’s say Heather (age 54) earns a salary of $400,000 and elects to contribute 10% of her salary to her 401k.  Because Heather has elected to contribute a percentage of her salary to her 401k instead of a set dollar figure, she will actually max out her contributions ($24,000) before the end of August each year.  Let’s also assume that Heather receives a 5% employer match on her 401k – this translates into $20,000/yr. ($400,000 x 5%). If Heather does not have what’s known as a “true up” feature within her plan, her employer would stop making matching contributions on her behalf in August – the point at which she maxed out for the year and contributions stopped. In this hypothetical example, not having the “true up” feature would cost Heather nearly $7,500 in matching dollars for the year!

So how can you ensure that you’re receiving the matching dollars you’re fully entitled to within your 401k? 

The first thing I would recommend is reaching out to your benefits director or 401k plan provider and asking them if your plan offers the “true up” feature.  If it does, you’re in the clear – regardless of when you max out for the year with your contributions, you’ll be receiving the full company match you’re entitled to. 

If your plan does not offer the “true up” feature, and you plan on maximizing your 401k contributions for the year, I’d strongly suggest electing to defer a dollar amount instead of a percentage of your salary. For example, if you’re over 50, and you plan on contributing $24,000 to your 401k this year and you’re paid bi-weekly, it might make sense to elect to defer $923.07 every pay period ($923.07 x 26 pay periods = $24,000). By doing so, you’ll ensure you maximize your benefit by the end of December and not end up like Heather, who maxes out before August and potentially loses out on significant employer matching dollars.  

Subtle nuances such as the “true up” 401k feature exist all around us in financial planning and they can potentially have a large impact on the long-term success of your overall financial game plan. If you have questions on how to best utilize your employer’s 401k or retirement savings vehicle, please don’t hesitate to reach out to us for guidance.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.

Examples are hypothetical and are not representative of every employer's retirement plan. Not all employers offer matching 401(k) contributions. Please contact your employer's benefits department or retirement plan provider for terms on potential matching contributions.

Mobile Check Deposit Coming to an Investor Access App near You!

Contributed by: Clare Lilek

The Raymond James Investor Access mobile app continues to get more convenient for its users. As long as you have the most up-to-date version of the Apple or Android application, you can now use it to deposit checks into your Raymond James accounts. You can deposit a check into almost any retirement and brokerage account that is linked to your Investor Access—only SIMPLE IRAs, pledged, and minor accounts are not included in this feature. You simply choose the destination of the account, enter in the check amount, and then snap a picture of the front and back of the check and the check will be deposited to your account!

Deposit limits correspond to the monetary size of your Raymond James relationship. See this handy chart below to know your daily deposit limit:

Helpful Tips and Exceptions

• Checks you can NOT deposit include:

  • Fee payments

  • Foreign Checks

  • Rollover Checks

  • Account Starter Checks

  • Please send any of these above types of checks to us, and we can deposit them for you.

• IRA Contributions

  • You can deposit these checks using the mobile check deposit

  • During January up until tax day, you will be able to choose your contribution year (current or prior year)

  • The app will not let you contribute over the allowed amount

• 3rd party checks are available for deposit

If you have any questions on using this new feature, check out the FAQ page from Raymond James.

The mobile check deposit feature on the Investor Access App is for your convenience. If you don’t have Investor Access, you can enroll here. When in doubt, however, feel free to send your checks our way and we will deposit them in the correct account on the day we receive them. We are always happy to help you with our friendly and traditional in-person service – let us know how we can help you!

Clare Lilek is a Challenge Detroit Fellow / Client Service Associate at Center for Financial Planning, Inc.®

Money Sense for Young Kids

Contributed by: Matt Trujillo, CFP®

As a dad of two young boys, I read and think a lot on how to teach my sons about how to handle money.

Even before my boys could count, they already knew something about money: it's what they had to give the ice cream man to get a cone, or put in the slot to ride the rocket ship at the grocery store. So, as soon as your children begin to handle money, start teaching them how to handle it wisely.

Making Allowances

Giving children an allowance is a good way to begin teaching them how to save money and budget for the things they want. How much you give them depends in part on what you expect them to buy with it and how much you want them to save.

Some parents expect children to earn their allowance by doing household chores, while others attach no strings to the purse and expect children to pitch in simply because they live in the household. A compromise might be to give children small allowances coupled with opportunities to earn extra money by doing chores that fall outside their normal household responsibilities.

When it comes to giving children allowances:

• Set parameters. Discuss with your children what they may use the money for and how much should be saved.

• Make allowance day a routine, like payday. Give the same amount on the same day each week.

• Consider "raises" for children who manage money well.

Take it to the Bank

Piggy banks are a great way to start teaching children to save money, but opening a savings account in a "real" bank introduces them to the concepts of earning interest and the power of compounding.

While children might want to spend all their allowance now, encourage them (especially older children) to divide it up, allowing them to spend some immediately, while insisting they save some towards larger ticket items they really want but can't afford right away. Writing down each goal and the amount that must be saved each week toward it will help children learn the difference between short-term and long-term goals. As an incentive, you might want to offer to match whatever children save toward their long-term goals.

Shopping Sense

Television commercials and peer pressure constantly tempt children to spend money. Therefore, children need guidance when it comes to making good buying decisions. Teach children how to compare items by price and quality. When you're at the grocery store, for example, explain why you might buy a generic cereal instead of a name brand.

When it comes to shopping with children who want you to buy them every little thing they see, take a moment to explain your “yes” and “no” decisions. By explaining that you won't buy them something every time you go to a store, you can lead children into thinking carefully about the purchases they do want to make. Then, consider setting aside one day a month when you will take children shopping for them. This encourages them to save for something they really want rather than buying on impulse. For those big-ticket items, suggest that they might put those items on a birthday or holiday list.

Finally, don't be afraid to let children make mistakes. If a toy breaks soon after it's purchased or doesn't turn out to be as much fun as seen on TV, eventually children will learn to make good choices even when you're not there to give them advice. For more tips on how to raise Money Smart Kids, check out our webinar on the topic!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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The views expressed herein are those of Matthew Trujillo and are not necessarily those of Raymond James.

5 Steps for When You're in the Retirement Home Stretch

Contributed by: Laurie Renchik, CFP®, MBA

It’s the home stretch! Important retirement decisions during the five to ten years before you leave the workforce can easily create more questions than answers. Dropping to the bottom line, one way to describe retirement readiness is getting in step with financial and lifestyle matters before you stop working. 

What to do? Start with the big picture and think about what the ideal retirement looks like for you. Maybe you have already dropped to the bottom line and have a preferred timeframe in your sights. Either way, below are five steps to help.

Five Fundamental Steps to Help Guide Decisions Leading Up to Your Retirement Day:

1. See When You Can Realistically Retire
   It’s not a simple decision. Start with getting a general idea about out how much money you’re likely to spend each year. Some expenses drop off like payroll taxes, retirement savings, and potentially mortgage debt. Additional expenses may surface like extended travel, bucket list items, or higher than average health care costs.

2. Make a Plan to Pay Off Your Debt
   While you are still working, review all outstanding debt. Personal loans, student loans, and credit cards tend to have higher interest rates. Make a plan to pay these off before you retire. Now is also the time to find the balance between putting “extra” on the mortgage and funding retirement accounts. Your financial planner and CPA can help with these decisions.

3. Run the Numbers to Understand Where You Stand Today
   This is your opportunity to see how close you are to your potential retirement goal and what changes you might need to make. An annual review with your financial planner will help chart progress, identify gaps, and create solutions.

4. See How Retirement Age Affects Social Security Benefits
   Some people are inclined to begin receiving Social Security as soon as possible, even if it means reduced payouts. For planning purposes the best decision depends on many variables including health, wealth, tax situation, and life expectancy. Understanding the impact to your retirement plan is a big part of making the decision when to draw those benefits.

5. Keep Your Plan on Track
   Now that you are hitting the final stretch it is time to give your retirement savings all that you can.  Ramping up for the next ten years will make a big difference. 

You are almost there! Candidly thinking through your options and taking your plan to the next level is sure to help you hit your retirement mark in good stride. But if you need help along the way, please reach out to us or your Financial Planner for guidance.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered.

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Opinions expressed are those of Laurie Renchik and are not necessarily those of RJFS or Raymond James. Every individual's situation is unique; please consult with a financial professional before making any investment decision.

The Flexibility of a Roth IRA

Contributed by: Kali Hassinger, CFP®

Whether it’s a 401(k) or 403(b), many employers provide employees with the option to defer their income and help save toward retirement. Although these are essential savings tools, it’s important to be aware of and understand other retirement savings options as well.  With a Roth IRA, your money is given the same opportunity to be invested and grow over time without taxation, with the additional benefit of being tax free at withdrawal! With a Roth IRA, however, the funds invested are already taxed, so there is no immediate tax benefit. Roth IRAs do provide additional advantages and flexibility, which can make them very attractive additions to your retirement savings.

Use of Contributions

Because you’ve already paid tax on the funds invested, Roth IRAs can allow you to take out 100% of your contributions at any point, with no taxes or penalties. Generally, contributions are assumed to be withdrawn first. Earnings, on the other hand, are subject to penalty if withdrawn prior to age 59 1/2.

First Time Homebuyers

Roth IRAs can be beneficial to young investors thanks to an exception which allows the account holder to withdraw funds prior to age 59 ½ without paying the 10% penalty tax.  After the Roth IRA has been established for 5 years, the account holder is able to withdrawal up to $10,000 if the funds are used toward his or her first home purchase. This means that a couple, if they both have established Roth IRAs, could use up to $20,000 toward their first home purchase.

Required Minimum Distributions

Roth IRAs do not have required minimum distributions (RMDs) during the lifetime of the owner, unlike other tax-deferred savings (like traditional IRAs, 401(k)s, 403(b)s) which require the owner to begin taking distributions at age 70 ½.  An inherited Roth IRA will, however, require the beneficiary to take annual distributions, but these withdrawals are still tax fee.

Conversions

Since Roth IRAs can be beneficial for long term tax planning, the IRA has placed income limits on who can make contributions. If your income is above this threshold, however, you may be able to work around those limitations by completing a back-door Roth conversion. This process is essentially opening and funding a traditional IRA with a non-deductible contribution, but then immediately converting the funds from that account into a Roth IRA. 

Whether you’re just starting out or getting close to retirement, a Roth IRA could be a beneficial addition to your retirement savings. By simply understanding all of your options, you can be more equipped to help achieve your long term financial goals. Please contact us if you have questions about this type of retirement account and how it could benefit your financial plan, we’re here to help!

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investments mentioned may not be suitable for all investors. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.