Category: Retirement

Colorado Secure Savings Mandate – What you need to know

Posted on by Brian Colvert

What business owners need to know about Colorado Secure Savings Act

 

In 2020 Colorado passed the Colorado Secure Savings Program. This law mandates that small business owners enroll in a state-run retirement savings plan. The pilot program launched in October 2022 and employers throughout Colorado are now required to comply. 

The purpose of this mandate is to increase access to retirement savings for workers in Colorado. The Colorado Secure Savings Act mandates that qualifying employers provide an employer-sponsored individual plan. The cost of this program will be funded through auto payroll deductions.

In general, this seems like it will have positive benefits for employees. However, it may create additional burdens for employers and may in fact limit employees’ options. Here is what small business owners need to know about the Colorado Mandated Small Business Retirement Plan.

 

Who needs to comply:

 

The Colorado General Assembly states that you, as an employer,  will be required to implement this program if: 

  • You have five or more employees
  • Have been in business for two or more years
  • Don’t have an existing qualifying plan 

Companies already offering 401ks or other qualified savings plans are not required to use the Colorado Secure Savings Program. The law states that employers with less than 5 employees or who have not yet been in business for 2 years will not be required to participate. However, they will have the option to offer the program to their employees.

 

What needs to be done:

 

While there is limited guidance at the moment from the State of Colorado, employers will be required to offer auto-enrollment and facilitate payroll deductions into the program. 

Upon enrollment, employees will opt into the default savings rate for Colorado Secure Savings, which is 5% of their gross pay. Beyond this, deferral rates may vary depending on how much you want to save each year. In addition, age, marital status, and income play a role in the amount that employees can contribute.

However, employees will be able to change their contribution amount or opt-out if desired.

As it is written so far, employers will have 14 days to send employees’ contributions to the program administrator. The program oversight will be done by the board of the Colorado Secure Savings Program. The board is currently chaired by the Colorado State Treasurer. This board will be making a process for withholding employees’ wages and remitting withheld amounts into their Colorado Secure Savings account. It’s not yet clear if the program will offer any integrations with payroll providers to facilitate the timely deposit of contributions.

 

Penalties for noncompliance:

 

Fines can be costly.  For non-compliance, fines will be $100.00 per employee per year and can ratchet up to $5000.00 annually. The compliance period is one year after implementation. 

However, they do state they plan to create a grant program to incentivize compliance. Yet no further details have been released.  The good news is it’s really easy to comply by setting up a 401k plan or another qualified plan in advance. Keep reading on to find out how.

 

General Concerns:

 

There is little to no guarantee of the level of quality or support that will be available to business owners from the state in implementing and managing the Colorado Secure Savings Program. The government has not released any real guidelines. There are some basics, but how is still very undefined. 

Further, if a company offers the state-run plan many of their higher income employees will be excluded. Employees with a Modified Adjusted Gross Income of more than $139,000 or $206,000 married filing jointly cannot participate.

As we wait for more details it’s not a bad idea to consider all the various plan options available to you and your company.

 

State Sponsored vs Employer Sponsored

 

There are a handful of states that currently have state mandated plans in place. California, Oregon, and New York are a few for instance. State sponsored plans have pros and cons, which business owners should carefully weigh. On one hand, government-mandated plans are generally a cheap solution with few fiduciary implications. On the other, these plans tend to be inflexible, one-size-fits-all. Plus they come with potential government penalties.

 

State sponsored retirement plans:

 

  • Roth IRA Investment structure (after-tax)
  • The state board selects investments
  • The plan will “travel with” people if they change jobs or leave the state
  • Excludes higher income employees
  • No employer contributions 
  • No federal tax credits for employers
  • Creates a significant burden for the employer

 

As an alternative, an employer sponsored 401k or other qualified plans may be a better option than having the state do it for you. A common misconception is that employer sponsored plans are expensive. However, that simply isn’t the case. Many plans are now being tailored for smaller companies. Plus, the IRS gives tax credits to firms with fewer than 100 employees for some ordinary and necessary costs of starting an employer sponsored plan. 

 

Employer Sponsored 401K plans:

 

  • Allow an employee to make contributions either before or after-tax, depending on plan options
  • Wide range of investments at various levels of risk chosen by the employer or by an advisor
  • Employee may direct their own investments
  • Higher Annual Salary Deferral Limit 
  • No employee income limits
  • Allows for employer contributions
  • Federal tax credits for the employer for start-up and admin costs and employee education

 

In addition, offering an employer-sponsored plan to your employees may increase your company’s competitiveness in the job market. It could also help you retain valuable staff. Plus, you and other company leaders can participate. 

If you work with a payroll services provider, the software can easily and automatically transfer employees’ funds, making the procedure effortless. Additionally, private plans typically come with the support of financial advisors. Moreover, a financial advisor can help regarding plan types and how best to implement them for your business.

Clearly, adding a 401k or other qualified plans to your company’s benefits package has strategic advantages. Yet, by not providing your employees with a retirement plan, you risk having the state impose one. 

 

Do State-Run Plans Even Work?

 

Time will tell. However, Oregon, the first state to legally mandate a retirement plan, has pretty dismal enrollment numbers. Since its inception in 2018, only 114 thousand workers have enrolled out of a potential of over 1 million total. 

Using Oregon again as an example, there are a lot of restrictions. First, the percentage contribution is fixed. Second, the employee’s first $1,000 gets put into a stabilization fund that since its inception has earned 1.52% per annum, or basically 0%,  Or less after factoring in inflation. Finally,  if and when they have more than $1,000 invested, they must decide between a fund that is a mixture of stocks and bonds and one that is invested entirely with the State Street Equity 500 Index Fund. (03/31/2022) 

By comparison, in the private sector, there are multiple low-cost, exchange-traded funds, most of which averaged an annual return of over 10% during the most recent 10 year period. Some would argue that directing employees away from these superior investment products arguably does a disservice to the employees.

 

Sample Administrative Duties

 

Further, Oregon has demonstrated what a significant burden the plan can be on employees. Here is a short list of employer duties that Colorado will likely have as well.

  • Submit an employee census annually
  • Track eligibility status for all employees
  • Provide enrollment packets to all employees 30 days after date of hire
  • Plus, track whether each employee has opted in or out
  • If an employee doesn’t opt out within 30 days,  set up 5% payroll deduction
  • Manually auto-escalate all employees annually unless they’ve opted out
  • Repeat auto-enroll process annually for all employees who have opted out
  • 6-month look-back for auto-escalation:
    • Track if the employee has been participating for 6 months with no auto-escalation
    • Provide 60-day notice  if they do not opt-out again
  • Hold open enrollment
  • Auto-enroll anybody who hasn’t been participating for at least 1 year

It’s too early to know whether state-run programs work. After all, Saving for retirement is a marathon, not a sprint. As an employer, it is important to weigh all options. 

 

What Are Alternatives to the Colorado Secure Savings Program?

 

If you do not already have an existing plan, and you are skeptical about a government-mandated plan, you can always make your own employer-sponsored plan. Bonfire Financial has many 401k, Simple IRA, and SEP IRA options. We provide affordable, hassle-free solutions that will reduce the administrative burden. 

 

Colorado Secure Savings vs Retirement Plan with Bonfire Financial

State Run Retirement Plan vs 401k

How can my business establish its own retirement plan?

 

Above all, retirement plans don’t have to be expensive or difficult to manage. In light of Colorado’s rollout of the Secure Savings Plan, we are offering small business owners and employers a free, no-obligation call with a CERTIFIED FINANCIAL PLANNER™ to help answer all your questions. We can help you create a better, more efficient retirement plan that is tailored to you and your employee’s specific needs. We are local in Colorado Springs and are here to help with all your retirement plan needs. 

Schedule a Call

10 Mistakes to avoid with your Roth IRA

Posted on by Nick Coleman

Roth IRA Mistakes

 

An individual retirement account (IRA), specifically a Roth IRA, is a great option to save for retirement.  However, there are a handful of common Roth IRA mistakes people make. 

One of the great things about a Roth IRA is that while contributions to a Roth IRA are not tax-deductible when you make them, the distributions can grow tax-free. Unlike a traditional IRA which is tax-deductible, you’ll have to pay taxes on them at your income tax rate.

Currently (as of 2024), a Roth IRA contribution allows investors to save up to $7,000 an additional $1,000 if over 50 years into an account that will forever be tax-free. That means if you started a Roth IRA when you were 18 years old, and you’re now 55, every single dollar including the gains are tax-free. Peter Thiel, a hedge fund manager, turned his Roth IRA into a 6 Billion Dollar tax-free account. Maybe you won’t end up with that much in a Roth IRA, but any amount that is not taxed by Uncle Sam, the better. 

Many pre-retirees want to find more ways to save for retirement. They also want to make sure they are setting themselves up for a better tax situation when they start taking money out of their accounts. A Roth IRA allows married couples over 50, to add an additional $16,000 ($7,000 each) per year, helping them build a tax-free nest egg. 

However, there are several common mistakes we see that cause people major tax issues or nullify their contributions. Below are the most common mistakes we find and how to avoid them

 

Mistake #1 – Contributing When You Don’t Qualify

 

The government wants people to save, however, they don’t want them to be able to save too much. As such, you can earn too much to contribute to a Roth IRA. Whether you’re eligible is determined by your modified adjusted gross income. Plus the income limits for Roth IRAs are adjusted periodically by the IRS. As such Roth IRA mistakes can be made. 

Find the current Roth IRA Contribution Limits can be found here. 

If you make contributions when you don’t qualify, it’s considered an excess contribution. The IRS will charge a tax penalty on the excess amount for each year it stays in your account.

 

How to avoid it:

 

If you’re close to the income limits, one way to avoid the extra tax penalty is to wait until you’re about to file your taxes. Then you can see how much if anything you can contribute. You have until the day your taxes are due to fund a Roth IRA. This way, you avoid making the mistake of contributing more than the allowable maximum. Plus, helps to avoid paying unexpected penalties. 

 

Mistake #2 – Funding more than one Roth IRA

 

Let’s say you fund a Roth IRA with Bonfire Financial, and also open another Roth IRA at Vanguard, for example, you cannot contribute $7,000 to each Roth IRA.  If you contribute more than you’re allowed to your Roth IRA, you’ll face the same excise tax penalties on those extra funds.

 

How to avoid it:

 

To avoid this problem, be sure to watch and manage the total amount of contributions in all of your Roth IRA accounts. If you do accidentally put in too much, you can make a withdrawal without penalty as long as it is before the tax filing deadline. You also have to withdraw any interest earned.

 

Mistake #3 – Not Funding your spouse’s Roth IRA

 

While your contributions to a Roth IRA are limited by the amount of money you’ve earned in a given year, there is an exception. Your spouse!  Even if your spouse has no earned income, they can still contribute to their own Roth IRA via the Spousal Roth IRA. You must be legally married and file a joint return to make this work.

 

How to avoid it:

 

By using a Spousal IRA, you can double up on your Roth IRA contributions. You can save an extra $8,000 per year in tax-free dollars if over 50 years old. 

Keep in mind that IRAs are individual accounts. As such, a Spousal Roth IRA is not a joint account. Rather, you each have your own IRA—but just one spouse funds them both.

 

Mistake #4 – Too large of a Roth Conversion 

 

Roth conversions are a good tool to use to make your future earnings tax-free and avoid RMDs in the future.  How these conversions work is by moving pre-existing funds in your traditional IRA or traditional 401K into a Roth or Roth 401k. The amount of money that is converted or moved from one account to the other will be taxable at whatever your current income tax bracket is.

One problem that can happen is that if you are close to the next income bracket and you convert funds over to a Roth, some of the conversion could be taxed at a higher rate. It pushes you into the next income bracket.   These conversions cannot be reversed. So, if you are not working with an advisor and your tax professional you can inadvertently pay more taxes than you need to.  

 

How to avoid it:

 

If you have large IRAs or 401k and would like to convert into a Roth, it is best to watch your income brackets and convert an amount of money that would fill your current income tax bracket but not spill over into the next.  It is best to use this strategy over multiple years.

 

Mistake #5 – Not doing a Backdoor Roth

 

Many of our clients have incomes that are above or well above the Roth IRA income phaseout.  Yet they and their spouses are funding their Roth IRA’s fully each year. How? 

By using a strategy called the Backdoor Roth Conversion. A Backdoor Roth Conversion is done by funding an empty IRA then immediately converting the IRA dollars into the Roth IRA. In this way, you are funding a traditional IRA and not-deducting from your income, also known as a nondeductible IRA contribution, and then converting into the Roth IRA, which is allowed regardless of income. In this strategy, you indirectly fund the Roth IRA and can continue to do this every year going forward.

 

How to avoid it:

 

If you make too much money to contribute directly to a Roth IRA, consider doing a Backdoor Roth. There are some drawbacks to converting a traditional IRA to a Roth IRA. Since the money you put into your traditional IRA was pre-tax, you’ll need to pay income tax on it when you do the conversion. It’s possible that this additional income could even bump you up into a higher tax bracket. We highly recommend talking to a CERTIFIED FINANCIAL PLANNER™ about implementing this strategy. 

 

Mistake #6 – Doing a Backdoor Roth with Money in an IRA

 

One mistake we often see is someone funding a backdoor Roth IRA while concurrently having pre-tax dollars in other IRA accounts. The reason this is a problem is that the IRS looks at all accounts. And due to the “Pro-rata Rule” treats them as one. You cannot simply just choose to move after-tax dollars into a Roth IRA.

You have to calculate the amount of money that can be moved into a Roth without paying taxes by dividing the amount of after-tax dollars by the total amount of money in all your  IRA accounts. 

 

How to avoid it:

 

A way to avoid this common pitfall is to account for all IRAs. (SEP IRAs, Simple IRAs, and or traditional IRAs)This will help know whether you can contribute without triggering the Pro-rata rule. You could also convert all pre-tax dollars at once. Or, another option would be to roll your IRA money into a 401k so that you no longer have any money in an IRA.  

 

Mistake #7 -Not properly investing the money

 

One common mistake we see investors make is that they believe the Roth IRA is an investment when it is simply an account. Just because you contribute to a Roth IRA doesn’t mean it is invested automatically.

It is not enough just to open an account. You have to go into the account and select investments and manage them. If you just contribute to a Roth IRA without selecting an investment in the account, it could be just sitting in cash! 

 

How to avoid it:

 

Invest the money in your Roth IRA. If you are unsure of a good investment strategy, schedule a meeting with one of our CERTIFIED FINANCIAL PLANNER™ professionals. We can help make sure your Roth IRA is invested correctly for you based on your goals,  time horizon, and risk tolerance. 

 

Mistake #8 -Not optimizing your Roth Dollars 

 

Oftentimes, we see Roth IRA investors using allocations that are very conservative. Or they match other allocations in their 401(k). This is a massive oversight and not planning for a proper tax allocation strategy. A Roth IRA should be managed more aggressively than your other accounts so that you can take full advantage of the tax-free benefit. 

 

How to avoid it:

 

Leave the conservative allocation to the after-tax and tax-deferred accounts.  A Roth IRA should be as aggressive as you are willing and capable of doing. One advantage of  IRAs over 401k plans is that, while most 401k plans have limited investment options, IRAs offer the opportunity to put your money in many types of stocks and other investments.

 

Mistake #9 – Forgetting to name Beneficiaries

 

It’s important to name a primary and contingent beneficiary for your IRA accounts. Otherwise, if something happens to you, your estate will have to go through probate. And that can take more time, cost more money, and cause a lot of inconveniences.

 

How to avoid it:

 

Name your beneficiaries and be sure to review them periodically and make any changes or updates. This is especially important in the case of divorce. We see a lot of issues arise because a divorce decree won’t prevent a former spouse from getting your assets if he or she is still listed as a beneficiary on those assets. 

 

Mistake #10 -Not having a CFP® Manage your investment and tax strategy

 

There are many nuances to opening and maintaining a Roth IRA. The investments, the tax strategies, and the timing of contributions can all make or break your account’s tax-free status. This potentially could cost you additional taxes and penalties. 

 

How to avoid it

 

Work with a CERTIFIED FINANCIAL PLANNER™ to help you set up, and maintain your Roth IRA.  They can help plan for an effective retirement and tax strategy. Having a professional help you with your retirement accounts and other complicated retirement plan strategies can potentially help you avoid expensive Roth IRA mistakes.

 

To Sum it Up- Don’t make these Common Roth IRA Mistakes

 

Roth IRAs can provide a lot of great retirement benefits, but they can also be complicated. There are a lot of common mistakes with a Roth IRA. It is important to pay attention to all the regulations and rules to help you avoid these common mistakes.

Have questions about your Roth IRA? Give us a call! We are local in Colorado Springs but help clients all over the nation. We are happy to help. 

6 important things to do when turning 65 – A Retirement Checklist 

Posted on by Brian Colvert

Turning 65 – A Retirement Checklist

 

Are your turning 65 soon? Turning 65 is a major milestone and pivotal age for your retirement planning. Not only is this an important age for government programs like Medicare and Social Security, but it’s also a perfect time to check other parts of your financial plan, particularly if you’re about to retire. Here are 6 important things to do as you get closer to your 65th birthday to make sure this year and the many years that follow are amazing!

 

  1. Prepare for Medicare
  2. Consider Long Term Care Insurance
  3. Review your Social Security Benefits
  4. Review Retirement Accounts
  5. Update Estate Planning Documents
  6. Get Tax Breaks

 

1. Prepare for Medicare

 

Medicare is the most common form of health care coverage for older Americans. The program has been in existence since 1965 and provides a way for seniors to have their health needs taken care of after they retire from the workforce.

 

What is Medicare?

 

Medicare is basically the federal government’s health insurance program for people 65 or older (or younger with disabilities). Medicare is primarily funded by payroll taxes paid by most employees, employers, and people who are self-employed. Funds are paid through the Hospital Insurance Trust Fund held by the U.S. Treasury.

 

When can I enroll in Medicare?

 

Starting 3 months before the month you turn 65, you are eligible to enroll in Medicare, you can also sign up during your birthday month and the three months following your 65th birthday. Essentially, you have a seven-month window to sign up for Medicare. Be mindful of your timing and enrollment because Medicare charges several late-enrollment penalties.

 

What does Medicare cover?

 

Medicare benefits vary depending on the enrollment plan you choose. Medicare is made up of four enrollment plans:  Medicare Part A, Part B, Part C, and Part D.

 

Here is a quick breakdown of the four parts of Medicare:

 

Medicare Part A: Know as the Original Medicare, Part A covers inpatient hospital care, home health, nursing, and hospice care. Part A is typically paired with Medicare Part B.

Medicare Part B: Still considered part of the Original Medicare, Part B helps cover doctor’s visits, lab work, diagnostic and preventative care, and mental health. It does not include dental and vision benefits.

Medicare Part C: This option offers traditional Medicare coverage but includes more coverage for routine healthcare that you use every day, routine dental care, vision care, and hearing. Plus, it covers wellness programs and fitness memberships. Medicare Part C is also known as Medicare Advantage and is a form of private insurance. Note that you will not be automatically enrolled in these benefits.

Medicare Part D: Medicare Part D is a stand-alone plan provided through private insurers that covers the costs of prescription drugs.  Most people will need Medicare Part D prescription drug coverage. Even if you’re fortunate enough to be in good health now, you may need significant prescription drugs in the future.

Age 65 Medicare

 

While Medicare is great it’s not going to cover all your medical expenses. You’ll still be responsible for co-payments and deductibles just like on your employer’s health plan, and they can add up quickly.

To offset these expenses, a Medicare Supplement (Medigap) insurance policy could be a good option as well. Medigap is offered by private insurance companies and covers such as co-payments, deductibles, and health care if you travel outside the U.S.

 

How can I enroll in Medicare?

 

For most people, applying for Medicare is a straightforward process. If you already receive retirement benefits from Social Security or the Railroad Retirement Board, you’ll be signed up automatically for Part A and Part B.

If you aren’t receiving retirement benefits, and you don’t have health coverage through an employer or spouse’s employer, you will need to apply for Medicare during your 7-month enrollment window.

You can sign up for Medicare online, by phone, or in-person at a Social Security office.

Please note that if you have a Health Savings Account (HSA) or health insurance based on current employment, you may want to ask your HR office or insurance company how signing up for Medicare will affect you.

 

2. Consider Long Term Care Insurance

 

Another prudent thing to do when you are turning 65 is to consider your long-term care insurance options before retirement.

 

What is long-term care insurance?

 

The goal of long-term care is to help you maintain your daily life as you age. It helps to provide care if you are unable to perform daily activities on your own. It can include care in your home, nursing home, or assisted living facility.  The need for long-term care may result from unforeseen illnesses, accidents, and other chronic conditions associated with aging.

Medicare often does not provide long-term care coverage, so it is a good idea to factor this additional coverage in.

 

Why do I need long-term care insurance?

 

While it may be hard to imagine needing long-term care now, the U.S. Department of Health and Human Services estimates that someone turning age 65 today has almost a 70% chance of needing some type of long-term care service in their lifetime.

Unfortunately, long-term care coverage is often hindsight, only thinking about it once it is needed. Planning for it now can help you access better quality care quickly when you need it and help you and your family avoid costly claims.

 

How do I get long-term care insurance?

 

First, talk with a CERTIFIED FINANCIAL PLANNER™ about whether long-term care insurance makes sense for you. Coverage can be complex and expensive. A good Financial Advisor can help guide you to a plan that is right for you.

Most people buy their long-term care insurance through a financial advisor, however, some states offer State Partnership Programs and more employers are offering long-term care as a voluntary benefit.

It is important to start shopping before you would need coverage. While you can’t predict the future, if you wait until you are well into retirement and already having medical issues, you may be turned down or the premiums may be too high to make it a feasible option.

 

3. Review your Social Security Benefits

 

If you haven’t yet started to collect Social Security, your 65th birthday is a great time to review your social security strategy to help you maximize your benefits.

 

Age 65 Social Security

 

When can I take Social Security?

 

The Social Security Administration (SSA) considers the full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960 until it reaches 67. For anyone born in 1960 or later, full retirement benefits are payable at age 67.

In deciding when to start receiving Social Security retirement benefits, you need to consider your personal situation.

 

How can I maximize my Social Security Benefit?

 

Turning 65 might raise questions about how to maximize your Social Security befits in retirement. Rightfully so. Receiving benefits early can reduce your payments, however, the flip side is also true. If you’re still working or have savings that will allow you to wait a while on receiving benefits, your eventual payments will be higher. Your benefits can stand to grow 8% a year if you delay until age 70. Plus, cost of living adjustments (COLA) will also be included in that increase.

In addition to delaying receiving your benefits, it is important to make sure all your years of work have been counted. SSA calculates your benefits based on the 35 years in which you earn the most. If you haven’t clocked in 35 years, or the SSA doesn’t have those years recorded, it could hurt you.

Be sure to create a “My Social Security” account and check to make sure your work history is accurately depicted. It is wise to download and check your social security statement annually and update personal information as needed.

Another potential boost in your benefit can come from claiming spousal payments.  If you were married for at least 10 years, you can claim Social Security benefits based on an ex-spouse’s work record.

Everyone’s financial situation is different, but it can be helpful to have a plan for how you’re going to approach Social Security before you turn 65.

 

4. Review Retirement Accounts

 

Even if you are not planning to retire soon, now (and every quarter for that matter) is a good time to check in on your retirement accounts. Is your portfolio allocated in a way that lines up with your target retirement date? When is the last time you met with your financial advisor? Do you need to catch up a little?  Do you have a plan for your Required Minimum Distributions?

Meeting with a CERTIFIED FINANCIAL PLANNER™ can help you evaluate your risk tolerance in comparison to your retirement goals, make sure your investments are aligned to help you retire when you want, and make a plan for you to maintain the lifestyle you want in retirement.

A financial advisor can also help with planning for 401(k) catch-up contributions, RMDs, early withdrawals, or completing a Mega Backdoor Roth IRA.

A big hurdle as retirement approaches is often all the homework you have to do. Penalties, enrollments, coverage gaps, deadlines, etc. A great financial advisor can help guide you through this process.

If you are wondering how to find a great financial advisor, we have put a simple guide here. Or, we would love for you to schedule an appointment now to meet with one of our CERTIFIED FINANCIAL PLANNERs™.

 

5. Update Estate Planning Documents

 

The next item on the retirement checklist of important things to do when Turning 65 is to get your estate planning documents and legal ducks in a row. If you do not yet have an estate plan, will, medical directive, or financial power of attorney, it is time to get those in order. It is not too late! If you do have them, take some time to update them.

Have you had recent changes in personal circumstances? Do you need to update beneficiaries? Reviewing your plan at regular intervals, in addition to major life events, will help ensure that your assets and legacy are passed on in accordance with your wishes and that your beneficiaries receive their benefits as smoothly as possible.

Further, it is also a good idea to take inventory and organize all your financial documents. Keep a list of all your accounts (banking and investment), insurance, and estate documents as well as key contact information in a safe place. Make note of any safety deposit boxes you have. Keeping all this info organized and in one place will be a big help to your loved ones during a difficult time.

You’ll feel great knowing that you and your family are prepared

 

6. Get Tax Breaks

 

Finally, don’t let Medicare be the only gift to you when you turn 65. Starting in the year you turn 65, you qualify for a larger standard deduction when you file your federal income tax return. You may also qualify for extra state or local tax breaks at age 65.

Many states also offer senior property tax exemptions as well. For example, in Colorado for those who qualify, 50 percent of the first $200,000 of the actual value of the applicant’s primary residence is exempted. Check with your local tax assessor to see what property tax breaks may be available to you.

 

Turning 65 Birthday Advice

 

Relax and enjoy it. As much as turning 65 is a time to plan for retirement, it is also a time to celebrate.

If you plan to indulge in a much-deserved tropical getaway or a quick trip to visit your grandchildren, you may be able to take advantage of new travel discounts. Delta, American, and United Airlines all offer senior discounts on selected flights. Additionally, many hotels, car rental companies, and cruise lines all also offer senior discounts. So treat yourself!

Happy 65th! Cheers to many more!

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Cheat Sheet 

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Have more questions? We’d love to talk. You can reach us at 719-394-3900 or you can schedule a call here!

Retirement vs. Inflation

Posted on by Brian Colvert

How to protect your retirement from inflation 

 

It’s the ultimate battle of good vs evil. Retirement vs. Inflation. Inflation is the arch-enemy of your retirement savings and if you’re near retirement – or even thinking about it – now is a good time to pay particularly close attention to your money.  According to the Bureau of Labor Statistics Press Release on January 12, 2022, it is clear that prices are rising and inflation is here. Overall, prices have climbed 7% year over year which is the greatest increase in over 40 years. Truly there is no other topic that seems to be getting more attention right now than inflation. 

On top of that, the pandemic has most certainly shaken the sense of security that Americans felt when it comes to their finances and a lot of people feel more vulnerable than they did two or three years ago. Even if you have been diligent about saving for retirement inflation can eat into your nest egg quickly.

 

Why Inflation Happens

 

Inflation is, oddly, both incredibly simple to understand and absurdly complicated. It is worth taking a pause and understanding why inflation is happening in the first place. 

In the simplest terms, inflation happens when prices broadly go up. In other words, the average price of everything is increasing (housing, food, gas, cars, etc.). Generally, it is not a bad thing, as wages also rise. Ideal inflation according to the U.S. Federal Reserve targets an annual inflation rate of 2%. Most policymakers believe it leads to a healthy economy. However, we are currently sitting at 7%. A bit off the mark is an understatement. Here is a visual to give you an idea of where we are in relation to just 10 years ago. 

Inflations Impact on Your Retirement

Source: US Inflation Calculator

 

Why is inflation so high right now?

 

Again, simply put…blame the pandemic. In response to the pandemic, the Fed started adding an unprecedented amount of money into the economy via emergency stimulus funds to quickly get the country out of the recession, plus they slashed interest rates. People started spending more and demand was up. Good, right?

Yet, months and months of this fueled inflation because supply wasn’t able to recover as fast. Take for example the automobile industry. Many auto-manufacturers shut down during the pandemic and were slow to get things moving again, some still are, mostly due to supply chain issues. It is a classic formula of high demand plus limited supply equals higher prices. 

Further, inflation is hard to predict because it depends on what people expect of inflation in the future. For example, if businesses expect higher prices and wages next year, they’ll raise prices now. If workers expect higher prices and wages next year, they’ll ask for higher wages now. So Fed Chairman Jerome Powell has long been calling the recent inflation “transitory”, meaning in other words, only a temporary correction of the pandemic. 

However, both Powell and Treasury Sectary Janet Yellen admitted last month (December 2021) that it is time to retire the term. So, prices will continue to go up and the government is finally admitting it. Now what? 

 

How to protect your retirement from inflation 

 

Maximize Social Security Benefits

 

With rising costs it may be hard to offset inflation with your traditional retirement benefits, such as social security. However, you can work to maximize your social security benefits by delaying them. Delayed Retirement Credits help you to increase your benefit by a certain percentage each month that you delay starting your benefits. If you can wait to start getting your social security checks until age 70 your monthly payments will be higher and will adjust to the annual cost of living when you do begin to take them. 

It is important for everyone to maximize their social security benefits. This is a small step that could potentially hedge off some inflation and help your retirement savings go a little further. 

 

Get aggressive with any Consumer Debt

 

The Feds have signaled it will aim to make some aggressive policy moves in response to the current situation. It is likely we may see as many as three rate hikes this year, two more next year, and another two in 2024. If you have any outstanding credit card debt now is the time to pay it down before interest rates go up. Any variable rate debt will get very pricey. If you cannot pay it off all at once, but you have good credit try and take advantage of some zero to low-interest balance transfers. Doing this will help insulate you from the coming higher interest rates. 

 

Take advantage of lower mortgage interest rates now

 

While mortgage rates move based on long-term bond yields, a spike in consumer prices will certainly make a rise in mortgage rates more likely.  Right now mortgage rates are still low. If you have considered refinancing to a lower rate (or buying a new home) this is your sign to look into it further depending on the term left on your mortgage. If rates do go up, you may wish you would have done it sooner. Also, as mentioned above, if you have an adjustable home equity line it could be at risk for an increase. Call a mortgage broker today to see what options you have. 

 

Look at your portfolio and make adjustments as needed

 

As financial advisors, this is something we are watching closely. Here are some of the general recommendations we have, however, everyone’s financial situation is different so we recommend contacting us (or talking to CERTIFIED FINANCIAL PLANNER™) before making any changes. Also, keep in mind if rates don’t go up like crazy these recommendations may not be the best and may underperform your hopes. 

First, at the very least, review your investment allocations. If you have bonds in your portfolio, we recommend short-term bond funds until interest rates go up. Ultimately these are going to be less risky with rising interest rates. While they may not have as much earning potential they can weather the inflation storm better. 

Also, with rising prices, finding stocks with dividends can add value to a portfolio. Think consumer-based large-cap stocks. Likewise, financial stocks also commonly benefit from higher prices and inflation. These types of investments may help keep pace during an inflationary environment.  

Finally, consider diversifying with Digital Assets, such as Bitcoin. Essentially, owning Bitcoin means you are betting against the world’s fiat currencies. Most major digital assets have a fixed number of coins or have capped the potential circulation growth. Interestingly, the infamous billionaire investor, Paul Tudor Jones, has even claimed that crypto protects better against inflation than gold. While there still may be limited evidence that crypto can hedge inflation and will cure all as it itself is often susceptible to market jitters, it certainly is worth looking into if it fits your risk tolerance and time horizons. 

Again, we emphasize not making any dramatic changes to your investments until you’ve consulted with a professional. Our experience has taught us that unforeseen events can happen and do happen, so it is best to stay diversified, rebalance as needed, and always come back to your long-term goals. We are happy to talk with you about your specific situation anytime. Schedule a call here.

 

In conclusion

 

Inflation can impact your retirement in a variety of ways. If you’re not on the right path to protect yourself against inflation it will be increasingly difficult for you to live comfortably when you can are no longer working. Adjusting your investment strategy, spending habits, and expectations to account for inflation is extremely important for retirees and those close to retirement.

Small Changes, Big Differences in your Retirement plan

Posted on by Nick Coleman

The Power of 1% 

  How Small Changes Can Make Big Differences in your Retirement Plan

We have all heard that something – something 1% more, or something-something 1% better every day will have a massive effect on your life over the long run. How small changes can make big differences. It makes sense, if you could mathematically make yourself 1% better or more each day, you will be significantly better than you were at the beginning of the month or beginning of the year. It is a worthy pursuit. But it is very hard to calculate unless you are talking about running miles or lifting weights.

The concept is that a small change over a long period of time will have a massive impact on you and your life if done for a long time. This can be applied to so many things. Even an aircraft that is 1 degree off will land in a very different location than what was scheduled. But today I want to apply it to your financial life. Specifically, your 401k or retirement plan.

The “Power of 1%” is a motivational abstraction, why would I want this idea applied to a boring, old 401k plan? Because just 1% could make a massive difference in your life. These small changes can make big differences in your retirement plan. This one concept could make your retirement and life unimaginably better, and totally change the way you grow your wealth. Just 1% can be the difference between barely scraping by, to being a comfortable millionaire.

 

Power of 1%

 

The true key is to simply increase your 401k contribution by 1% at the beginning of the year, each year.

 

Let’s talk about how.

 

You have a 401k retirement plan and let’s say you are saving a decent amount of your money at 5% of your income, and your employer is either matching your contribution or putting in a percentage of your salary, depending on where you work.

Let’s take three pilots for this example, each in different stages in their career. 1. Rookie 2. Senior FO 3. Fully Tenured Captain that was flying bi-planes back in the day (joking). Pay will remain the same for easy math.

The Rookie makes $100,000 per year and is deferring 3% of his salary each year. In 5 years he would have put away $15,000 into his 401k. 3% seems like a lot, but over 5 years, that is only $15,000 for his retirement. Now let us see what would happen if he increases his deferral by just 1% each year. If he starts at 3% and increases each year by 1%, he will be at 7% (Year 1 was 3%) and over that time he would have contributed a total of $25,000! That is an extra $10,000 or 67% more than what he was normally doing.

Small Changes Big Differences in your Retirement plan

The Senior FO makes $250,000 per year and is deferring 5% into his 401k each year. When he retires in 10 years, he would have contributed $125,000 into his 401k. Not bad! But if he plans to retire, he should definitely do more. If he increased his contribution just 1% each year for 10 years, He would add $216,500 over his time, almost twice as much if he stuck with the 5% rate. Remember, you can only max out your side of the 401k contributions up to $19,500 each year, plus another $6,500 if you’re 50 or more, which is the case here. But you can always take that money and put it somewhere else. (Hint, hint Backdoor Roth Conversions) Here is the example:

Small Changes Big Differences in your Retirement plan

The last person is a Captain that will be retiring in 3 years. He has 3 years to put away as much money as possible. His salary is $350,000. He will need to put away 8% of his salary in order to meet his max of $26,000. Since he doesn’t have a lot of time to scale up every percent, he should just try to contribute as much as possible before he retires. If he maxes out, he will have $78,000 over 3 years! The more you can contribute to your 401k the better life will be.

 

The Tale of Two Pilots

 

Now let’s look at another example of how small changes can mean big differences in your retirement plan.

David and Susan both went to Metro State University to be pilots. They both were very good students, graduated from school, both worked for a regional liner and they just started flying for the same major airline. David loves to snowboard, vacation around the world, and party. He says  “As long as I’m covering my financial bases, I can do the things I enjoy.”

Susan loves to ski, read books, and spend time with her family. Living a comfortable life is important for her and she wants to make sure she can do the things she enjoys in the future. 

On their first day, they sit down with HR, and they are asked how much they want to start deferring in their retirement plan. David, whose friend told him to defer as much as he can, announces he will start with 5% of his $150,000 salary going to his 401k. When Susan sits down with HR, she says she can’t defer any dollars into her 401k because she wants to finish paying her student loans first. But she promises next year she will start with 1% of her $150,000. And the next year, 2% and so on. 

At Year 10, they both start getting paid $250,000. And at Year 20, they are making $300,000.

25 years later, after they both have amazing and fulfilling careers, they bump into each other at the DIA breakroom! “Wow!” They say for they haven’t seen each other for a long time. After a while of catching up, they talk about their retirement accounts. 

David smiles and boasts “I’ve been saving 5% of my salary since the first day I got here, and now I have saved $282,500 of my salary” as he calculates in his Excel spreadsheet:

“Very impressive!” Says Susan, as she tabulates how much she has saved. She started saving with nothing, but she promised she would increase her contribution by just 1% each year. After she does some math, she shows David how much she has saved. Smug David leans forward and stares, mouth open, at the numbers from Susan’s tablet…

“You saved $439,500?! Wow! I thought you said you were doing none, how did you beat me? That’s almost twice as much as I’ve saved, and I’ve been doing 5% my entire career!”

“Slow and steady wins the race” Susan smiled. 

Just a small change can make a huge difference in your retirement plan. And just because you start off slow doesn’t mean you’re out. Don’t get discouraged, just try to be 1% better. Like Susan!

 

What’s Next?

 

If you are just starting out or in your mid-career, increasing your retirement plan contributions by just 1% this year will have a huge impact on your retirement accounts and life. This doesn’t even factor in the potential increased growth that your account could receive. Lastly, your salary regularly increases with inflation, usually around 2% to 3% each year. If you just took 1% from that, you would hardly notice the change in your cash flow. 

This strategy is something relatively new but is gaining more traction among plan sponsors and large companies. Many of them are automatically enrolling employees into automatically increasing their deferral, or at least strongly encouraging that their employees increase their 401k contribution each year. Hopefully, these examples have made it clear the importance of growth for your retirement. 

Do you have a financial plan? Please reach out for a complimentary discovery meeting with our CERTIFIED FINANCIAL PLANNERS™ to help give you a clear path to a successful story. Susan would 🙂

United Airline Layoffs. What to do if you are laid off.

Posted on by Nick Coleman

United Airline Layoffs

 

Economic downturns often hit the airline industry harder than most. Once again, the airline industry has been grounded by the pandemic and the corresponding economic conditions. As such, layoffs are looming.  United Airlines announced it will be laying off thousands of employees, estimated to be 36,000 by October 1, 2020. Additionally, United Airlines said the jobs of more than 14,000 employees are at risk when federal aid expires in the spring of 2021. These layoffs could affect everyone from customer service employees, flight attendants, to pilots. Many other airliners may follow suit.

The fallout from 9/11 and the impact of the 2008 Financial Crisis took the airline industry roughly 2-3 years to recover. It is hard to say how long the coronavirus impact will last or how it will all turn out.

If you are worried you might be one of the airline employees to be laid off or already have been, there are many concerns you may have.  From how to pay bills, to how long will this last, to how to keep medical insurance and benefits… the list goes on.

 

What should I do if I am laid off?

 

We have put together some tips, ideas, and strategies to help you get through this tough situation. 

 

Covering your living expenses

 

Being able to cover your living is by far the most important question and concern.  There are a number of strategies to help navigate this and there are also some new provisions from the CARES ACT that can help if you are a United Airline employee who has had to face the layoffs. 

 

Your emergency fund

 

An emergency fund is a savings account or separate account that is set aside for when the unexpected happens, like being laid off.  We recommend that our clients have 3-6 months of their monthly expenses saved in this kind of account. The goal is to use this money to pay for your mortgage, food, etc.  It is designed to help you bridge the gap of unemployment to your next job or getting rehired when things recover.  

One often-overlooked task is once you are employed again to refill your emergency fund. This account can help you in a tough situation but be sure to replenish it to ensure it is there for the next time something unexpected comes up. 

If you do not have an emergency fund in place, read on for some other ideas that can help. 

 

Claiming unemployment

 

If you received a WARN, it is important to start planning ahead now. You can now qualify for weekly unemployment payments from the state in which you worked.  Many people fly out of a hub that is different from the state that they live in. When applying for unemployment, use the state that you work out of. Selecting reason for unemployment: “Coronavirus” can streamline the paperwork process. A quick Google search of your state and unemployment will land you on the right page. Look for “.gov” in the address. The CARES Act is adding $600 per week into unemployment checks but is set to end on July 31st. This may be extended as the impact of the virus continues. 

 

Mortgage Forbearance

 

Mortgage Forbearance means you can postpone your mortgage payment temporarily. For 180 days you can request a forbearance from your mortgage lender. If granted it means you will not have to pay your mortgage for about 6 months.  However, this is not mortgage forgiveness. You still owe the full amount and interest still accrues on the months you do not pay.  You will need to work out the details and repayment plan with your lender as each situation is different.  Per the CARES Act, no additional fees or penalties will be applied if you require forbearance.

 

Retirement Account Withdrawals

 

Taking a distribution or withdrawal from your 401(k) should be a last resort. The money in your 401(k) is meant for your retirement. However, with the intensity and impact of the United Airline layoffs caused by COVID-19, the CARES Act has set up many relief options.

Traditionally, you could not access your retirement account before the age of 59 1/2 without having to pay a 10% penalty and income tax.  The CARES Act has waived this 10% penalty.  Since all retirement accounts (Roths excluded) are funded with pre-tax dollars and the income tax is normally due in the year of a distribution. 

The CARES act has allowed distribution in 2020 up to $100,000 be taken out and the taxes are due over the next 3 years. For example, if you take out $90,000 from your retirement account, you will have to pay tax on $30,000 in 2020, $30,000 in 2021, and $30,000 in 2022. That is much better than having to pay all $90,000 in 2020. The money will come out of your account’s investments pro-rata, so if you have half your money in large-cap stocks and half in small-cap stocks, the money will be sold in them equally to fund the distribution.

Reach out to your 401(k) provider Charles Schwab or Fidelity for details.

 

401(k) Loan

 

Taking a loan from your 401(k) is not a good idea because you will be taxed on the distribution, and you will have to repay the loan. There could potentially be many more downsides to taking a loan rather than just distributing the money.  If you are furloughed or leave the plan, you will be subjected to a faster repayment schedule.

If you take out a loan, you will be taxed on the loan amount, plus you will have to use after-tax dollars to pay back the loan. In the grand scheme of things, once you repay the 401(k) loan, you will still be subjected to income tax when you take the money out when you retire. So you will be taxed TWICE on the money, instead of just at the distribution.

 

Miscellaneous Items

 

Many car manufacturers are offering payment deferrals during this time. If you are unable to make payments comfortably on your car, be sure to reach out to your car’s manufacturer finance department to discuss payment options. Many newer cars (2018 or newer) will have more generous payment options than older vehicles.

Also, a voluntary separation could be a good idea if you are close to retirement. The benefits of the United Airlines Retirement Health Account (RHA) can help you pay for medical insurance. 

 

What about my  Benefits if I am laid off??

 

United Airline layoffs are hard enough, luckily you can retain certain benefits. For instance, health insurance, RHA, and you’re retirement accounts can still provide you benefits.

 

Health Insurance

 

COBRA is a government bill that lets you keep your medical insurance with your company for up to 3 years. You will have the same coverage and plan, except you will have to pay 100% of the premium (plus a 2% premium for administration costs for a total of 102%) Look at your most recent pay stub to see how much you and your employer were paying for medical insurance.

 

Retirement Health Account

 

Your Retirement Health Account (RHA) is a unique account granted directly to United from a private letter ruling with the IRS. The RHA is used to pay for out-of-pocket medical expenses and health insurance premiums when retired, furloughed, or separated from service. The RHA can also be used to pay for your COBRA premiums. Click here for more details on how to use your RHA.

 

401(k) and Retirement Investments

 

There are some options you can choose to do with your 401(k) when you have faced a layoff.

  1. You can keep it with the company.  Nothing will change as you will have the same investment options and access.
  2. You can withdraw the money, as we mentioned above.  However, this is not the best action to take if it can be avoided.
  3. You can roll your money into an IRA.  There are no taxes on this move, and it can give you more investment options and control of your money.

Our preference is to roll your 401(k) over into an IRA so that you have better access to your account while avoiding the administration and investment fees from United, Fidelity, or Charles Schwab. We can build you a custom portfolio based on your needs and our custom investment research for a fee typically lower than your Fidelity and Charles Schwab 401(k) options.

Our expertise is working with pilots and aircrew in providing them the best investments through our relationship with Charles Schwab. Leveraging our partnership with Charles Schwab we can build you a custom portfolio in your PCRA.

 

What’s Next?

 

We can help you navigate one of the most difficult times the airline industry has ever faced, and that is really saying a lot! We work with many pilots, crew members, and their families and help them prepare for a successful retirement and reach their financial and life goals.

Bonfire Financial is a fiduciary, fee-only,  financial advisor.  We have a staff of Certified Financial Planners™ that specialize in helping United Airline Employees and Pilots.

As a United Airline or major airline employee, we would like to offer you a free consultation to help answer any questions you may have and help you get a game plan in place. Scheduled your call now. 

Schedule a Call

United Employee Benefits: How to Leverage Your RHA for Tax-Free Growth

Posted on by Nick Coleman

United Airlines Employee Benefits: Retirement Health Account

 

Working as a United Airline Employee has more benefits than just a 401(k) plan or free flights. United provides a Retirement Health Account that gives you another resource to fund medical expenses in retirement.  When doing financial plans for our clients many of which are pilots, one important issue that often comes up is how to fund health care.  The United RHA is a great tool for that.

 

What is an RHA?  

 

The United Retirement Health Account is a health expense reimbursement account like a Health Saving Account (HSA) but one you use in retirement. United Airlines ALPA Retirement Health Account (RHA) allows retired United and legacy Continental pilots to reimburse themselves tax-free for qualified health expenses for them, their spouse, and dependents in retirement. For that reason, it truly is one of the great United Employee benefits.

 

Eligible expenses include:

  • Doctor visits
  • Co-pays
  • Dental premiums
  • Insurance premiums
  • Medicare
  • Long Term Care insurance premiums

 

The RHA is a fringe benefit provided by United and is a unique savings account that most companies do not have. United basically got the blessing of the IRS through a private letter ruling to have this plan.  Because it is more of a one-off plan the rules are more opaque and restrictive.

 

How does the RHA work?

 

Unlike other United Airlines employee benefits, the RHA is funded by United only. No employee money is ever contributed to the account. Every working hour, United contributes $1.00 to your account. More importantly, when your 401(k) limit is reached, all employer contributions will continue, but spill into the RHA. United contributes 16% of your salary into your 401(k), and once the 401(k)  limit is reached at $57,000 in 2020 (not including the employee age 50 catch-up of $6,500 in 2020), further contributions will spill into the RHA. Forfeited vacation can be contributed to either the PRAP or RHA at the employees’ discretion.

 

What can I use the RHA for?

 

The RHA is meant for medical expense reimbursement in retirement or separation of service only. The account itself is held in a pooled account with other employees and pilots at United, and cannot be moved into an individual account. As such, the benefit of the RHA is to allow you and your spouse and dependents to reimburse any health expenses and premiums tax-free.

According to a study done by Fidelity, the average 65-year old couple retiring in 2019 can expect to spend $285,000 in healthcare and medical expenses. Medical expenses increase at nearly twice the rate of inflation, and will likely continue to grow in the future. The RHA allows retired employees and pilots to maximize their retirement benefits by providing a tax-free vehicle to pay for medical expenses, without having to access taxable or tax-deferred accounts like your 401(k).

 

An example

 

Take for example, Sarah. Sarah is a retired pilot and can use her 401(k) to pay for regular retirement expenses. The issue that she runs into is that distributing from her 401(k) will recognize that income. If she is currently in the 22% tax bracket and takes out $50,000 per year to pay for expenses, she will need to pay $11,000 in tax for that year. Sarah needs surgery and will need to pay $10,000 out of pocket. She will pay that money from her checking account, and reimburse herself from the RHA for $10,000. Because she used the RHA for a qualified health expense, she will not have to pay any taxes. If Sarah made the mistake of using her 401(k) for the expense, she would need to pay an extra $2,200 to the government!

The RHA can be used to pay for Medicare premiums, co-pays, insurance premiums, dental insurance premiums and expenses, and even long-term care insurance premiums. The RHA can grow rather quickly and it can be very useful for your family. For example, if you have a balance of $0 in your RHA, and United contributes $5,000 each year for 20 years, and you expect an annual return of 6%, your ending RHA value will be $183,928 of tax-free dollars at 65! If you have contributed $10,000 per year, you would have $367,856!

 

Eligible Expenses

 

All of the following in red are covered by the RHA. The blue are non-eligible medical expenses that must be paid out-of-pocket. 

United Airline Employee Retirement RHA

(Image: Further/SelectAccount Family of Products)

 

When can I excess the money in my RHA?

 

There are a few times in which you will be able to access your RHA. The most straightforward one is in retirement. Also, if you are laid off or fired you will be able to access it. Additionally,  if you are furloughed, you can use the RHA to pay for COBRA premiums until you get back to work. Just another one of the United Employee Benefits.

 

How do I maximize my RHA?

 

If you are nearing retirement, you may be seeing that you have a very large 401(k), which can also mean a very large tax problem when you go to withdraw from it in retirement, especially with Required Minimum Distributions (RMD) beginning at 72 years old with the new SECURE retirement act. To maximize RHA funding, you can contribute more to your 401(k), up to $19,500 in 2020. Moreover, if you maximize your contribution, you will have only $37,500 ($57,000-$19,500) left for the employer to contribute. Say if you make $280,000 in 2020, United will contribute $44,800. Because there is only $37,500 left for United to fund the 401(k), the rest, $7,300, will spill into the RHA. Therefore, if you wish to save more in your RHA, you can maximize your contribution early in the year to fund the 401(k) using your employee contribution.

Further, you can also elect to move all forfeited vacation days into the RHA. You can maximize or minimize what is in your RHA by either over- or under-funding your PRAP using your employee contribution or forfeited vacation. The United Retirement & Insurance committee has an RHA spill calculator available to you, to estimate your projected RHA funding.

Here is an example of two pilots, they both make $280,000. Both pilots are 47 years old. Tom (Pilot A) maxes his 401(k) contribution up to $19,500. Bill (Pilot B) contributes $10,000 to his 401(k). Remember, the total amount allowed in the 401(k) per year is $57,000. Any amount over will spill into the RHA:

Salary United’s 16% Contribution Pilot’s Personal Contribution Total Contribution (limit of $57,000) Spill into RHA (above $57,000)
Tom (A) $280,000       $44,800     $19,500     $64,300 $7,300
Bill (B) $280,000       $44,800     $10,000 $54,800 $0

How do I limit contributions to my RHA?

 

Because United funds your RHA based on your salary, there is no way to avoid contributing to the RHA if United has maximized your 401(k) contribution. Based on the 401(k) rules, the 401(k) spill will begin once a pilot has reached a total of $57,000 contributed in his 401(K) in 2020 (not including $6,500 in catch-up at 50). All employer contributions will go to the RHA  after that. By underweighting what you contribute into the 401(k), you can limit the amount of spill into the RHA. If you have a salary of $250,000 and United contributes 16%, you will have $40,000 in your 401(k). You still have $17,000 without having any spill into the RHA ($57,000 – $40,000 = $14,000 left to fund). Regardless, you are not losing money when United contributes to the plan. It is essentially a free benefit to you.

 

What happens to my RHA if I die?

 

The RHA can be used by you, your spouse, and qualified dependents. If you are 65, and your children now support themselves, they are not considered to be your dependent. When you die, your spouse will be able to use and access the RHA. Once your spouse dies, and you have no dependents, any remaining amount in the RHA will be reverted back into the pooled investment account at the record keeper. The RHA is not able to be inherited like other accounts. Therefore, it is important to take advantage of your RHA when you are able to use it so you don’t leave any money on the table. 

 

The RHA and Tricare for Life

 

Many pilots are retired military and will use Tricare to supplement part of their medical coverage. For example, a family on Tricare for Life in retirement will still be using Medicare Part A & B, and Tricare is used in conjunction to pay for coverage outside of hospital stays (A) and doctor’s visits (B).  Similarly, Tricare is used for other coverage such as prescription drugs, and the remaining premiums from Medicare Part B. Tricare and Medicare Part A & B cover most health-related expenses, but the RHA can be used tax-free to cover other parts such as dental insurance premiums, long term care insurance premiums, vision plans, therapy, and other eligible medical expenses outside of Medicare and Tricare coverage.

 

RHA to fund long term care insurance premiums

 

According to Genworth Insurance, $51,480 in 2019 was the national annual median cost of In-Home Care. Long-term care can quickly drain older Americans’ retirement and savings. According to AARP, 52% of people turning 65 in 2017 will need long-term care at some point. The estimated cost for end-of-life care in 2016 ranged from $215,820 and $341,651 according to Alzheimer’s Association. Ultimately, the last thing you want is to drain your worth in your final years and not be able to leave anything to your estate, children, heirs, and charities.

Long-term care insurance is one way to pay for long-term care and nursing care. LTC insurance can cost up to $3,000 per year for one person and can be even more if you have a family history of dementia. Luckily, you can pay for LTC insurance premiums tax-free with the RHA. Therefore, you can have LTC insurance and leverage your RHA’s tax-free characteristics. 

The Retirement Health Account might just be one of the best United employee benefits out there. It’s employer-funded, more money without more taxes, extra money for health care expenses during retirement benefit.

 

Questions?

 

We are here to help. Bonfire Financial acts as a fiduciary financial advisor for our clients. We have a staff of Certified Financial Planners™ that specialize in helping United Airline Employees and Pilots with their retirement and benefits. Schedule a free consultation with us today. We’d love to talk to you. 

Schedule a Call

Roth 401k or Traditional 401k?

Posted on by Nick Coleman

Roth 401k or Traditional 401k? 

 

The 401k plan is the cornerstone to retirement. Gone are the days of big company and school district annual pensions and generous social security benefits. It’s now up to you to plan and save for retirement. In addition to all the expenses that go with it. Luckily, a Roth 401k or Traditional 401k is a fantastic tool. One of the best that you can use to save for your retirement and goals. However, there is a lot to understand about how they work and how to use the 401k for your best outcome.

 

A little background

 

The purpose of the 401k plan is to save for retirement. Currently (as of 2024), an employee can contribute $23,000 of their own money to their account and an additional $7,500 if they are over 50 years old per year. Some plans also allow for you to contribute to a Roth 401k. Many people wonder if this may be a better option for them. We’ll explore the key differences between a Roth 401k or a Traditional 401k so you can make a confident decision.

 

The Roth 401k

 

The Roth 401k is a relatively new concept. It was introduced in 2001 for the purpose of allowing employees to take taxes now and forever shield the gains from tax. Many people see the benefits of contributing to the Roth 401k. However, some are hesitant as to whether the traditional tax-deferred 401k will still be better for them because of its favorable tax deferral.

The money you add to the Roth is still considered income. You will be taxed on that amount. Once your savings in the account have been taxed at your regular income level, it will grow tax-free. Then, when you take money out of it, that will also be tax-free.

This is a great option if you do not want to pay extra tax in your retirement. Also, good if you are in a lower tax bracket than you expect to be in the future.

 

Example

 

As an example, if you contribute $25,000 to your Roth 401k at the 22% tax bracket, you will still pay $5,500 as a part of your tax bill. Let’s say if you contribute $25,000 annually for 10 years at a rate of 8%, you would be the owner of an account that has $362,164 completely tax-free! The benefit of having a Roth IRA is that you will never pay taxes on the gains that you make in the account. If your account is still around for your heirs, they will not have to pay any tax either!

Having this option will allow you to grow your money . Addtionally, you will not have to worry about paying extra taxes. It is important to note that your employer does NOT match your contribution on a Roth basis if you do. They will continue to match your contribution, but it will only be in traditional tax-deferred dollars.

Let’s say your company matches you 3% of your salary. If you are in the plan and make $100,000, you will be contributing $3,000 each year into your Roth 401k. Plus, your company will contribute $3,000 to the traditional 401k. They will be in the same account but will be accounted for separately by the administrator of the company 401k plan. When you are deciding, if you can afford to do the Roth 401k, you absolutely should.

 

The Traditional 401k

 

The traditional 401k allows an employee to defer their income of what they contribute. That means if you made $100,000 and decided to contribute $25,000 to your 401k, you will only have to report $75,000 to the IRS. This is because you “deferred” your income into the account. Once you retire and withdraw that money, you will have to pay the income that you “realized” at the tax rate you are at when you withdraw.

The advantage of the traditional 401k is that you get to defer your income and save it while it grows in your account. When you retire, you may move your traditional 401k to an IRA. As an example, you made $170,000 as a married couple. At $170,000, you are pushed into the 24% tax bracket (over $168,450 Married Filing Jointly). But because you understand the 401k can defer your income, you decide to defer $15,000 into the account, dropping you out of the 24% bracket and into the 22% bracket, which saves you money!

The traditional 401k is best if your cash flow is tight. It is extremely important to save for your retirement. You should always save 10% or more of your salary as a rule of thumb. When you save on taxes, you will be saving yourself money.

 

Example

 

Here is an example that will illustrate how your contributions of $20,000 affect your cash flow.

 

Roth 401(k) or Traditional 401(k)

 

Here we can see with a salary of $100,000 we cannot defer any money from taxes if we contribute $20,000 into the Roth 401k. Our total taxes at 24% will be $24,000 for the year. If we contribute $20,000 to the traditional 401k, we will defer that money from taxes, so only $80,000 will be taxed at 24%. At the end of the year, using the traditional will save us $4,400, which is $367 per month. If that money is needed for your cash flow, do the traditional. If you can take the hit now on taxes, you should do the Roth 401k.

 

Which one is best for me?

 

You are weighing now versus later. If you are just starting out in your career and are in the lower tax brackets you should contribute to the Roth 401k. At the end of the year, you will have a bigger tax bill from Uncle Sam because you recognized all of your Roth contributions. Have no fear! Your Roth retirement account will grow tax-free all the way up until you retire. Plus, all the gains that you have made throughout those years will be tax-free as well!

If you have a good handle on your cash flow, you should contribute to the Roth 401k. If cash flow is an issue you can use the traditional 401k to lower your tax bill. You get to defer that income and save it in a tax-deferred account that will grow. Once you take money out of the account, you will have to pay income tax on it. This can be quite advantageous if you are at the top of your career and at the higher tax brackets. If you believe that you will be in a lower bracket when you retire, the traditional is your best bet.

 

The Backdoor Roth IRA

 

People want to enjoy deferring their income to save on taxes but also want the ability to have a Roth account that they can draw from tax-free in retirement. Many people close to retirement are looking at all the taxes they have saved in their accounts and now see a huge dollar sign going to the government every time they take money out for their retirement expenses.

The Backdoor Roth IRA allows a person to continue to defer their income through their 401k, but also contribute $6,000 (plus $1,000 if over 50) per spouse into a Roth IRA. A married couple can contribute up to $14,000 each year to Roth IRAs. If this planning technique is done for 5 – 10 years before retiring, this would give a retiring couple a substantial tax-free account.

 

Example

 

As an example, if a married couple were to contribute the max amount of $14,000 for 10 years. Assuming a yearly return of 8%, they would have $202,811.87 of assets that would never be taxed again! The benefit of a Roth is also that there are no Required Minimum Distributions as there are with a traditional account. If a married couple paired the backdoor Roth IRA with the 401k plan, they would have an effective diversification of their tax accounts, which would be very helpful in retirement.

This is a complex planning strategy. It is important to work with a financial advisor who understands your objectives and will help you leverage your current situation to help you meet your expectations.

 

The Bottom Line

 

If you can stomach the tighter cash flow and you suspect that you may be in a higher tax bracket, the 401k Roth is best for you. If you are tight on cash flow and could use the extra money while also saving for your retirement, the traditional 401k is for you. Also, if you suspect to be in a lower tax bracket in the future when you take out money, the traditional 401k is what you should choose.

The Backdoor Roth IRA is great for people who wish to save in a traditional 401k to take advantage of the tax deduction, but also want to grow a Roth IRA that will never be taxed. Using this mechanism, a single person could add $62,000 into a traditional 401k and $7,000 into a Roth IRA.

 

What’s next?

 

Interested in learning about the differences between an IRA and a 401k? Read up on that here.  Still have questions? Please feel free to contact us!  719-394-3900- We offer free 30-minute consultations that can help answer many of your questions.

Differences Between an IRA and 401k

Posted on by Brian Colvert

IRA vs 401k: What’s the Difference:

 

There are some common misconceptions about the difference between an IRA (Individual retirement account) and a 401k plan. While these two are very similar there are some distinct differences that make each unique.

Before we tackle the difference between an IRA and a 401k it’s important to note that these are not investments.  They are simply accounts.  Just because you have an account open does not mean you have an investment that will grow and help fund your retirement.  Much the same way that just because you own a refrigerator doesn’t mean you actually have any food in it. You have to add to it.

To continue with this analogy…  in your fridge, you can have a variety of different types of food (juice, pickles, eggs, beer, and anchovies- if you’re into that sort of a thing). In an IRA and 401k you can have different investments too.  Such as stocks, bonds, mutual funds, ETFs, commodities, real estate, and more. You can also change or “throw out” the investments in your IRA or 401k if you’ve left them in the back of the fridge for too long. You know like that 3lb. jar of mayo you bought for that party that one time.

Now that you are hungry, let’s get to the dive-in.

 

Overview of an IRA vs. 401K:

 

You probably know fundamentally that saving for retirement is one of the single best things you can do financially. You don’t want to rely on social security, you don’t want to run out of money, you don’t want to be a financial burden to your children, and you want to enjoy your golden years. All great reasons to have a retirement plan! So which retirement plan is best for you?

Both IRAs and 401Ks have tax benefits and are among the most common defined contribution plans. The good news is that you don’t have to choose one over the other. To maximize your retirement savings, you can and should, if possible, contribute to both an IRA and 401k.

The key to note is that a 401k, named for the section of the tax code that discusses it, is an employer-based plan and an IRA is an individual retirement plan. Got it?

First up let’s look at how a 401K and IRA are alike.

 

The Similarities:

 

  • Both allow you to put money in on a tax-deferred basis. Meaning that taxes are not due at the time when you add money. For example, if you make $50,000 and decide to invest $2,000 of it into your IRA or 401k, the $2,000 is not going to be part of your taxable income.
  • Your money within an IRA or 401k can be invested in a variety of ways.
  • The money that is invested is allowed to grow tax-deferred. You do not have to pay taxes on the gains from your investments until you take the money out.  If you make $1,000 off of your $2,000 investment, you now have $3,000 in your account and you will not have to pay taxes on that gain until you withdrawal the money.
  • When you do withdrawal the money for whatever amount it will be considered part of your taxable income. You will own taxes on the withdrawal amount. Let’s say you withdrawal the $2,000 and your current annual income is $50,000 after the withdrawal your taxable income will be $52,000.
  • Since an IRA and 401k are designed for retirement the money that you invest is not supposed to withdraw until after the age of 59 ½. You read that correctly -the government added in a half, well, because your inner 6-year-old knows it’s that important. If you withdraw the money prior to 59 ½ you will pay a 10% penalty on the money plus the amount withdrawn is now part of your taxable income.
  • Also, the government mandates that at age 71 ½ (again the half) you have to take out a Required Minimum Distribution (RMD).  Basically, they tell you the amount that you must pay taxes on.  Quick note, if you are still employed at age 71 ½ and not the owner you can delay your RMDs.

 

The Differences:

 

While an IRA and a 401k have many similarities, they do differ is a few very key areas.  The main one being that an IRA is Individual Retirement Account, so it is yours and yours alone. Anyone can have one. A 401k is company-sponsored, so you can only participate in it if your employer offers one.   Some other key differences are:

  • Since a 401k is employer sponsored typically the employer will match a percentage of their employees’ contributions up to a certain limit or percentage. There is no option for  this in an IRA.
  • Consequentiallybecause a 401K is employer-sponsored your investment options are limited to what the employer offers. Whereas an IRA will allow you to have more variety in terms of stocks, bonds, real estate, etc.
  • Loan or hardship withdrawals are available for 401ks. However, IRAs generally do not permit loans or early
  • withdrawals.
  • An IRA has certain income limts and a 401k does not.
  • Finally, the contribution limits are different and change from year to year. Check with your financial advisor or go here to learn about the current years’ limits.

 

Difference Between an IRA and 401k- A Venn Diagram

Differences between an IRA and a 401k

Which is Right For You?

 

It depends really. If you have the option of putting your money into an employer-sponsored 401k or an IRA you should do both. Max them out if possible. We recommend prioritizing the 401k first especially if your employer offers a match and then adding to an IRA if you are within the income limits.

This hopefully gives you a good overview of the differences between an IRA and a 401k. While there are many factors to consider, the most important thing to remember is that both are great tools to use to help achieve your retirement goals.

Are you interested in learning about a Roth?  We’ve got a great article here for you.

Have other questions? Setup a call with us HERE!

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