There is good news for retirement accounts! The IRS has increased the contribution limits for the upcoming year. As you can see below, there are many notable changes that will allow investors to save more money. One important update for 2024 is that 401(k) elective deferrals increased from $22,500 to $23,000. That’s not all! Please see below for the applicable updates for the coming year:

How do these changes impact your savings in the upcoming year? Are there any changes you should be making? Use this link to schedule a time to meet one-on-one with our team. We look forward to working with you in 2024!

---

---

Related Articles

Corporate retirement plans (401(k), 403(b), 401(a), 457(b), etc.) made up a total of $9.3 Trillion as of December 31, 2022. It goes without saying that these types of accounts make up a significant portion of how Americans save for retirement. In this series we want to help equip and educate investors on how to successfully navigate selecting their investments, sticking to a game plan, and ultimately growing their account in the most efficient way possible.

What matters the most

Asset Allocation

Luckily, studies have been done and papers have been written about the number one determinant of portfolio success. As the pie chart below shows, allocating funds appropriately across asset classes is BY FAR the number one factor that determines portfolio success.

Put differently, ensuring that an investor selects a fund (or funds) that diversifies their investments will outperform the investor who spends time on trying to time the market or ensure that the security they selected is superior to other investments in the same peer group. This can be accomplished using a Target Date Fund, Target Risk Fund, Model Portfolio, or by creating a custom asset allocation.

Expense Ratio (or Fund Cost)

The next variable that we would say matters most is ensuring that the fund or funds you select has a low expense ratio. What’s low? In 2022, the average expense ratio for a index fund was 0.05%. In our opinion, if the index fund you select has an expense ratio of less than 0.15% we think you are checking the box on selecting a low-cost option.

What matters less

Historical Performance

Talking about historical performance is no easy task. The point here is that when you are on your retirement plan website and looking to learn about the investment options, the majority of the information is about the performance of the funds. And while that information might stand out the most, it’s actually not the most helpful. We think about fund performance track records in this framework:

1. Asset class performance is more important than actual fund performance. More specifically, owning the Large Cap asset class is more important than trying to select a specific large cap manager.

2. So much can go into why a specific fund performed well or did not perform well over the last 1 year, 3 year, 5 year, or 10 year performance period. Only looking at these variables has not been a good indicator of if a fund is going to perform well on a go forward basis. A majority of the top-half performing funds fall out of the top half after 5 years.

3. Our recommendation, if you are going to look at funds in a more in depth way look at variables like risk-adjusted return or the specific track record of the management team. Another option is to simply select a low-cost index fund. 

A visual guide on what to look for

We created this table to help provide a road map for selecting investments. This sample fund menu contains; investment options, historical performance, cost, and if the fund should be used on a stand-alone basis (provides ample asset allocation) or should be held alongside other investment options.

What to talk about your company’s retirement plan?

Schedule time to meet with an advisor below or e-mail Andrew at andrew@humaninvesting.com.

---

---

Related Articles

A newly passed bill known as Secure Act 2.0 will change how retirees withdraw from their retirement nest eggs. This fundamental change increases the age at which investors must take money from their retirement accounts, bringing about some impactful financial planning opportunities.

What is an RMD?

Once an investor reaches a specific age, they must withdraw a required minimum distribution (RMD) from their retirement account, such as an IRA or 401(k). The RMD amount is determined by the account holder's age and account balance at the end of the previous year. The Internal Revenue Service (IRS) requires RMDs to ensure account holders pay taxes on their retirement savings. RMDs, therefore, can be taxed on both federal and state taxes.

After reaching their RMD age, account holders must begin taking withdrawals from retirement accounts by April 1. Each subsequent year, RMDs must be taken by December 31st of that same year. The IRS may levy a sizable penalty for failure to take the mandatory distribution.

Good news, RMDs will be delayed by a year

A notable update from Secure Act 2.0 is the delay of RMDs. RMDs will start at age 73 instead of 72 for those born in 1951-1959. For those born in 1960 or later, RMDs will be delayed even further to age 75.

For those who turn 72 in 2023, you will not need to start your RMDs this year. Your first RMD can either be taken by December 31, 2024 or delayed until April 1, 2025.

There is no impact on a retiree if they have already started taking their RMDs or need their IRA to cover their cost of living. For others, who only take RMDs because they are required to, this significant modification to the RMD age provides additional retirement planning opportunities.

Retirement Planning opportunities

There will be more time for growth.

The new RMD regulation will give retirees a simple yet powerful benefit, more time for compounding growth. As the billionaire investor Charlie Munger states, “The first rule of compounding is to never interrupt it unnecessarily.”

This benefit must be highlighted, especially after a year of market losses.

An 8% return on a million-dollar IRA is $80,000. Additional returns undisturbed by an unnecessary RMD can have a snowball effect, providing an exponential lifetime benefit.

A longer window before RMDs can allow for additional planning and time, the essential ingredients in building wealth.  

QCDs can still be maximized.

Amidst the RMD age adjustment, the age at which account holders can use their IRAs to make Qualified Charitable Contributions (QCDs) was untouched. Thus, preserving one of the most powerful tax-saving strategies available to charitably inclined retirees 70.5 and older.

A QCD is a tax-free transfer of funds from an individual's IRA directly to an IRS-recognized charity. This charitable distribution allows taxpayers to avoid paying taxes on the withdrawn funds.

Retiree “Gap Years” are extended.

"Gap Years" are the years that occur between a person's retirement and the beginning of their RMDs. These Gap Years are often the years with the lowest taxable incomes in a person's adult life. As a result, they frequently serve as ideal years for accelerating income that would otherwise be taxable in a subsequent, higher-income year. The Secure Act 2.0's changes will give additional time for Tax Bracket optimization strategies such as Roth Conversions and Capital Gain Realization to reduce an investor's lifetime tax bill.

You may be pushed into a higher tax bracket in your later years.

Like all financial planning strategies, there is no one-size fits. The unanticipated pitfall of postponing RMDs can lead to more significant withdrawals in subsequent years when RMDs do start. An unexpected boost in income from RMDs might push you into a much higher tax bracket, phase you out of a tax credit, or trigger a surtax. Taking the time to understand the applicable tax implications are crucial when building a tax-sensitive retirement income plan.

This is a great time to reevaluate your retirement plan

The retirement system has undergone numerous changes due to Secure Act 2.0's policy reforms, adding to the difficulty of retirement planning. Recognizing the planning opportunities and risks that relate to you and your financial plan is essential.

---

---

Related Articles

We help our clients organize and implement tax bracket optimization. In your early years of retirement, even if you do not have earned income, there are important tax considerations. I will illustrate two recurring tax planning strategies: Roth Conversions and Capital Gain Realization.

Consider a retired married couple (both age 65) living in Oregon this year.

In this example, this couple has $36,700 of taxable income. This places them in the 12% federal tax bracket and provides $52,750 more room inside the 12% bracket before moving into the 22% bracket.

Considering the wiggle room before the increased tax rate, this client could decide between the following options:

OPTION 1: Realize Capital Gains

Realize (sell and reinvest) up to $52,750 of long-term (held longer than 12 months) capital gains to take advantage of the 0% Federal Capital Gains rate within the 12% bracket. This couple living in Oregon would still pay 9% State. Ideally, they pay less taxes today to avoid realizing those gains at 15% Federal and 9% State later, likely during the required distribution timeframe starting at age 73. They would keep 15% more of the growth on their investments.

Option 2: Conduct Roth Conversions

If a client does not have any taxable accounts or unrealized capital gains, they could use the room in the 12% bracket to conduct Roth conversions. This would consist of transferring funds from a traditional IRA, paying the taxes now (12% Federal and 9% State), and putting the net amount into the Roth IRA to grow tax-free overtime. This strategy is helpful to maximize the 12% bracket, since the 12% bracket will revert to the 15% bracket in 2026, when the Tax Cuts and Jobs Act (TCJA) ends. Additionally, when a client turns 73 and is required to take distributions from IRAs, this required distribution amount cannot be converted to a Roth IRA but must be distributed.

Required distributions could also push income from IRAs into the 22% bracket. Another benefit of Roth conversion is that Roth IRAs are not subject to required distribution rules and therefore can continue to grow tax-free for the life of the married couple.

Option 3: Combination of realizing Capital Gains and Roth Conversions

This requires year-by-year income and deductions tracking from all sources to ensure the right amount of money is being realized or converted.

Tax bracket optimization is not an after-thought, but a pivotal component of holistic financial planning offered at Human Investing. If this kind of planning would be helpful to you, please schedule a time to review your situation.

---

---

Are you fearful a recession might be around the corner?

There’s been a lot of chatter about the state of the economy and whether we’re in a recession, or if one’s already passed. Whatever the situation, we wanted to help put things into perspective and remind you of the things you can (and cannot) control if uncertainty is on the horizon.

The widespread definition of a recession is two consecutive quarters of a decline in real GDP (Gross Domestic Product). However, the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months." No matter which yardstick we use to measure a recession, here is what you need to know:

• Recessions are a natural part of the business cycle. There have been 34 recessions since 1857, ranging from more than five years to the pandemic-driven contraction of 2020 that lasted two months.

• Recessions do not necessarily coincide with a decrease in the stock markets.

• No two recessions are alike in cause, length, or intensity.

• Recessions are marked as a time of heavy uncertainty and an increase in job insecurity.

Planning for a recession is difficult.

Using the general definition, we won't know we are in a recession until six months after it starts. Rather than worrying about a recession (which is out of our control), investors should focus on things that they can control. When future economic uncertainties arise, here is a list of things that you can do to prepare yourself better:

1. Re-evaluate the size of your emergency fund.

The amount someone should keep on hand should correspond with their living expenses, income instability, stage of life, risk tolerance, etc. This amount is typically 3 to 12 months of living expenses. An unforeseen medical bill or a temporary lapse in employment can happen anytime. Arming yourself with a cash safety net is your first defense against debt or selling your investments during a market downturn. For more information, read our blog about understanding the role of cash in a financial plan.

2. Analyze your spending.

Watching how much you spend builds awareness of your current spending habits. Understanding essential vs. nonessential expenses will make it easier to navigate your budget if your income disappears. Bonus: a better understanding of your spending can help you spend less and thus help you save more.

3. Bolster your professional network and skills.

Prioritize efforts to develop strong long-term relationships with essential connections. You may also invest in yourself with job-related skills and by polishing your résumé to ensure you are prepared for an unanticipated lapse in your employment.

4. Assess your investment portfolio.

Recessions don't always coincide with a stock market selloff. However, ensuring your investments are aligned with your goals is essential. Before a downturn in the market is the best time to position your portfolio based on your risk tolerance, time horizon, and financial goals. If you are unsure of your investment strategy, get in touch with a financial advisor to ensure you have the formula for successful investing.

5. Review your insurance coverage.

Start with the basics. Review what you have vs. what you need.

• What kind do you have? Is your protection tied to your job?

• Do you have enough dollar-amount coverage?

• Do you need to adjust, more or less?

Remember the things you can and cannot control. Take your time to examine what you want to prioritize. While we can't predict precisely when a recession will occur, we can plan, prepare, and adjust appropriately to survive any economic storm. If you want to talk with one of our advisors, please call Jill at 503-905-3100.

---

---

Related Articles

Many small businesses are behind.

There are several retirement solutions that can help you secure your future and that of your employees, but the decision-making process can be challenging.

A survey of nearly 2,000 small business owners in 2017 found that over a third (34%) don't have a retirement plan. The main reason for this cited (by 37% of those respondents) was that they could not generate enough revenue to save. Another 18% of the business owners without retirement savings are looking at selling the businesses as a retirement plan.

Many small business owners avoid or are unaware of the crucial elements of planning for their futures. Here are a few questions to ask yourself before deciding on a retirement plan:

Do you have employees or expect to in the future?

Is it important that employees can contribute to a retirement plan?

Is your priority higher contributions or ease of administration?

Would you like plan contributions to be deductible as a business expense?

What retirement plan options do you have?

With help from Vanguard, we put together a one-sheeter that gives details and considerations on several small business retirement plans, including Small Plan 401(k), Individual 401(k), SEP IRA, Simple IRA, Traditional IRA, and Roth IRA.

---

Source: Vanguard

---

Keep in mind that the state requires all employers in Oregon to facilitate OregonSaves if they don't offer a retirement plan for their employees. The deadline for employers with four or fewer employees is March 1st, 2023. The rules are identical to a Roth IRA, where employees contribute post-tax dollars to the plan and distribute savings tax-free.

If your business already sponsors or wants to sponsor a 401(k) or another qualified retirement plan, you are not required to participate in OregonSaves but must certify the exemption online. Exemption certificates are valid for three years from the filing date.

Employers who don’t sponsor a retirement plan or participate in OregonSaves by the appointed deadline may be penalized $100 per affected employee. The maximum fine per year is $5,000. More details can be found here: OregonSaves

Which plan is best for you?

401(k): Best retirement plan for large and established small businesses.

Safe Harbor 401(k): Best retirement plan for small businesses with less than 100 workers to avoid expensive annual compliance testing.

Solo 401(k): Best retirement plan for maximizing contributions.

SEP IRA: Best retirement plan for a sole proprietor who wants easy administration.

Simple IRA: Best retirement plan for employee participation in funding the retirement account.

Profit Sharing Plan: Best retirement plan for business owners who want more 401(k) contributions and tax benefits.

The responsibilities of owning and operating a small business can be overwhelming, but having the right retirement plan and advocates on your side can make all the difference. If you would like assistance making the best decision for your business, we invite you to schedule an appointment on the calendar below.

Source: Best Retirement Plans for Small Business

---

Related Articles

Taking a distribution from a tax-qualified retirement plan, like a 401(k) before age 59.5, is generally subject to a 10% penalty for early withdrawal. The exceptions to paying this 10% penalty are:

• Hardship distributions

• Rule of 55

Are you familiar with how the Rule of 55 works? If you want to retire early, this blog post is significant for you.

What is the Rule of 55?

The Rule of 55 is an IRS provision that allows employees who leave their job on or after age 55 to take penalty-free distributions from their retirement accounts. It’s a life hack! Typically, individuals would face a 10% early-withdrawal penalty if they access their retirement account before age 59.5. The 10% penalty and account accessibility are two of the reasons why people plan to work until at least age 59.5. 

If you are someone who is thinking about retiring early, the following Rule of 55 requirements are necessary:

1. You leave your job (voluntarily or involuntarily) in or after the year you turn 55 years old.

2. Your plan must allow for withdrawals before age 59.5.

3. Your dollars must be kept in your employer’s retirement plan. If you roll them over to an IRA, you lose the Rule of 55 protection.

4. You will likely want your plan to allow partial distributions when you are terminated.

Access to your retirement account at age 55 is available for all employees with an employer-sponsored retirement account. However, if you are considering retiring after age 55 and using funds from this retirement account, you must check whether your plan allows partial distributions. This feature is an opt-in feature for employers to select. We recommend that you work closely with your recordkeeper to ensure you can take advantage of the Rule of 55 in a way that benefits you.

3 Examples of the Rule of 55

Look at a few examples of employees with partial distributions compared to employees without partial distributions allowed in their plan.

Example 1: Partial Distributions Allowed

Danielle can take any amount from her PDX 401(k) account. For example, in October 2022, she can request $30,000. She doesn’t have to take anything out in 2023. She could take another $65,000 out in January 2024.

EXAMPLE 2: Partial Distributions Disallowed

Martin’s employer-sponsored retirement plan does not permit partial distributions. If he wants to access his retirement account at age 57 without incurring a 10% early-withdrawal penalty, he would have to withdraw the entire $450,000. This would result in reporting $450,000 of taxable income for the year of his distribution. Given the tax bracket optimization strategies that exist during retirement years, this may not be Martin’s best solution for accessing dollars before age 59.5.

A couple of alternative solutions for Martin are:

1. Ideally, Martin would have a cash-flow plan to support his expenses until he reaches age 59.5.

2. Initiate a direct rollover of his $450,000 retirement account into a IRA account. Then take distributions as needed but expect to pay a 10% penalty on these dollars. Before paying a 10% penalty on an early-distribution from a IRA, we would recommend that Martin review other cashflow options he may have.

Example 3: Partial Distributions Disallowed

Rebecca, age 56, has $67,000 saved in her most recent 401(k) account with ABC Company. She also has $700,000 saved in her previous 401(k) account with XYZ Company. Neither of these retirement plans allow for partial distributions.

Rebecca retired at age 56 from ABC Company, so she can take the entire $67,000 balance out in one lump sum distribution. She will not owe a 10% penalty on these dollars due to the Rule of 55.

If she were to access any of her $700,000 saved in her previous 401(k) account with XYZ Company before age 59.5, then she would incur a 10% penalty. Not to mention the $700,000 is sitting in a plan that disallows partial distributions so that would be significant taxable income to report in the same tax year. Similar to the example above, Rebecca may consider initiating a direct rollover of her $700,000 into a IRA account for more flexible distribution choices.

What About Other 401(k) Accounts from Previous Jobs?

To qualify for the Rule of 55, you must be terminated as an employee on or after age 55. Therefore, if you have multiple retirement accounts, the only ones that will qualify for a penalty-free distribution between ages 55 and 59.5 are accounts with your termination date reflecting that age range.

One consideration is to roll over a previous retirement account into your current account before you retire. We recommend speaking with your recordkeeper to confirm that your retirement plan features are designed so rollover sources can be accessible by partial distributions.

For example, if Danielle from above had another 401(k) account, she could have rolled that into her PDX 401(k) account before retiring. All the dollars in the account would be eligible for Rule of 55 distributions.

What if I Decide to go Back to Work but have Taken Distributions Already?

Going back to work after you have taken a Rule of 55 distribution should not result in a 10% penalty. If you go back to work for the same company, then you may lose the ability to access funds as an active employee. However, your distributions will not be impacted if you go back to work at another organization.

How are Rule of 55 Distributions Tracked for Tax Reasons?

Custodians and recordkeepers are responsible for providing a Form 1099-R. This tax form reports any distributions from a retirement account. If you take a distribution under the Rule of 55, you would expect to see code 2 in box 7 of your 1099-R form. Code 2 specifies the following:

2 - Early distribution, exception applies (under age 59.5)

If your 1099-R form includes Code 2 in box 7, you will not owe a 10% penalty. Before you initiate a withdrawal between ages 55-59.5, we recommend confirming your record keeper will issue the 1099 in this format.

What Other Resources do you Have?

Retirement is a transition that only happens once in life. You probably haven’t retired before, and you likely won’t retire again. Retirement transitions involve several financial planning considerations and we wanted to conclude this article with additional resources that may be helpful to you:

Your Pre-Retirement Checklist

The 3 Questions to Ask to Build a Solid Retirement Income Plan

Why an IRA Makes More Sense in Retirement than your 401(k)

While the articles are supplemental information, we believe the best way to prepare for your upcoming retirement is to collaborate with our team at Human Investing. Please use this scheduling link to meet with our team to review your unique financial landscape before you start planning your retirement celebration(s): Schedule here.

---

Related Articles

Medicare is an important part of your retirement plan. We hope this overview is a helpful resource to know when to apply and how much it may cost.

Before you turn 65…

Most people turning age 65 should sign up for Medicare during their Initial Enrollment Period (IEP). During your IEP, which starts 3 months prior to the month you turn 65 and lasts until 3 months after, you can enroll in Medicare Part A (Hospital coverage), and Medicare Part B (Doctor visits). Medicare Part B pays 80% of most medically necessary healthcare services and the beneficiary pays the remaining 20%. You may also join a Medicare Part D plan (Prescription Drugs) within 3 months of when Medicare coverage begins to avoid any late enrollment penalties.

What if I’m still working past age 65?

If you are still working and have employer-based health insurance at a company with 20 employees or more, you can delay enrollment in Medicare until retirement. If, however, you work for a company with less than 20 employees, you will likely need to sign up for Medicare at age 65.

When your employment health plan coverage ends, you will need to add Part B within eight months of either a) the end of your employment or b) then end of your group health coverage. COBRA can help bridge the gap between employment coverage and Medicare. COBRA will end once Medicare begins.

If you are still working past age 65 and want to continue contributing to a Health Savings Account (HSA) with a high deductible plan, you will need to delay your Medicare Part A coverage.

What does Medicare cost?

Most beneficiaries will only pay the standard premium amount for Part B ($158.50 in 2022). They may be required to pay a premium based on their income represented in the chart below. Medicare uses the modified adjusted income from the beneficiary’s IRS tax return two years prior.

Typical cost for Part B is shown below with income ranges that increase Medicare premiums:

If you do not enroll in Medicare Part B when you are first eligible:

• Your Part B monthly premium will increase 10% for each 12-month period that you are not enrolled.

• You will pay a higher premium for the remainder of your life.

What if I need additional coverage?

Your IEP is also when you can buy Medicare Supplemental Insurance (also known as Medigap) from insurance companies. This is an additional policy that Medicare beneficiaries can purchase to cover the gaps in their Part A and Part B Medicare coverage. You are guaranteed the right to purchase this insurance without going through medical underwriting (i. e. you can’t be denied). This is critical if you have one or more chronic health conditions. Cost for Supplemental Insurance can typically range from $200 to $300 per month.

How do I sign up?

• Online (at Social Security) — It’s the easiest and fastest way to sign up and get any financial help you may need. (You’ll need to create your secure my Social Security account to sign up for Medicare or apply for benefits).

• Call Social Security at 1-800-772-1213. TTY users can call 1-800-325-0778.

• Contact your local Social Security Office.

Sources: medicare.gov

Medicare can be a complicated concept, but the help of a professional can make all the difference. Please reach out to our team if you could use some guidance as you approach retirement.

---

---

Related Articles

Given the combination of low interest rates, soaring housing prices, and saving habits during the global pandemic, we have noticed more people are needing a strategy for their excess savings. Contributing to a Roth IRA account is strategic for individuals who have already funded their emergency account and have some extra savings. We are helping people plan for scenarios like these three examples below:

Michaela, age 29: “I have $15,000 of extra cash savings. I started to build this savings account with the intention of buying a home sometime in the next five years.”

Martin & Angela, age 40: “We are a dual-income house with two young children. We manage to pay our monthly bills, live within our means, and we need a plan for our extra money. We looked at high-yield savings accounts but are underwhelmed with the current return. Our main concern is wanting access to the dollars in case we need it in the coming years.”

Samuel, age 35: “I am currently leasing my car. The lease is up in 3 years, and I might be interested in buying the car at the end of the lease.”

All three of these examples include an element of uncertainty or unpredictability. Michaela hasn’t engaged with a realtor and isn’t certain if/when she will buy a home, Martin & Angela don’t have an immediate need for their excess savings, and Samuel may change his mind about buying his car in a few years. These three situations share these things in common:

• There is no specific timeline for the savings to be spent.

• These people are all seeking a way to grow their dollars.

• These people want distribution flexibility in the future.

Roth IRA Eligibility

In the year 2022, the maximum annual Roth IRA contribution is $6,000 per person. The annual contribution increases to $7,000 for people ages 50 and older. This $6,000 contribution amount is different than making Roth contributions inside a 401(k) account. All employees with a Roth contribution type available inside their 401(k) account are eligible to save Roth that way regardless of their income. Due to the tax-advantages of Roth IRA accounts the IRS has set the following income limits for Roth IRA eligibility:

View fullsize

If your income is above these limits, then you are not eligible to make a Roth IRA contribution this year.

Roth Distribution

If you’re eligible, let’s review why this account has both tax advantages and distribution flexibility. Because Roth IRA’s are funded with after tax dollars, you are allowed to take out your contributions without taxes and penalties. Here is an example:

View fullsize

In this scenario you can take up to $6,000 out of your account without penalties and taxes because you are withdrawing what you originally deposited into the account. If you take out the $800 of growth, then it will be taxed and subject to a 10% penalty for non-qualified distributions.

In this example, the account value increased overtime. Like any investment account, there is no guarantee that the account value will have appreciated at the time of the withdrawal. Be mindful that a Roth IRA account value could decrease below its initial contribution amount. 

better savings Compared to What?

In order to give Roth IRA’s credibility, let’s compare them to other accounts for excess savings. Here are some examples of common comparisons:

Roth IRA vs. 401(k) Accounts: Most 401(k) accounts have stricter rules on accessing your money before retirement age. The quick and easy distribution of principal contribution is not guaranteed in Roth 401(k) accounts.

Roth IRA vs. Traditional IRA: Unless the distribution is for one of these reasons, early distributions from IRA accounts result in a 10% penalty and income tax payable on the amount distributed. For example, if Samuel from above (age 35), wanted to take out $5,000 from his Traditional IRA account he would owe a 10% penalty and income taxes on the $5,000 in the year of distribution. Not ideal!

Roth IRA vs. High-Yield Savings Accounts: High-yield savings accounts do offer principal production, but not an inflation-protected return. As an example, most high-yield savings are currently paying .5% APY and the average inflation rate is approximately 2.84%. This is not an ideal investment strategy if you are saving up for future purchases. The current interest rate environment means that high-yield savings accounts are not optimal for growing your savings. As an example, the current high-yield savings account is paying .5% APY meaning someone would only earn $30 a year on an account with $6,000.

Roth IRA vs. Brokerage Account: Brokerage accounts are Roth IRA’s fiercest competitor. To start, brokerage accounts are accessible by all savers because there are no income eligibility limitations for brokerage accounts. Brokerage accounts aren’t tax-sheltered. Let’s compare the same $5,000 distribution as above, but this time in a brokerage account instead of a Roth IRA.

View fullsize

Ideally, Roth IRA’s are setup with long-term investment strategies and the dollars stay invested for a long period of time to serve you later on. However, the distribution flexibility outlined above is why Roth IRA’s can be a reasonable savings account for extra money that does not have predetermined utility in the coming years.

We hope that this article provides some clarity if you need a place to invest your excess savings. If you have any questions, please get in touch with our team at Human Investing.

---

Related Articles

Full transparency: I am a Roth enthusiast.  

If you are reading this article, it’s likely that we have already spent some time reviewing the benefits of Roth together and you have sensed some of my fervor. While the excitement is real, the concept of saving dollars in tax-sheltered accounts like an IRA, 401(k), HSA, or 529 account is complicated to grasp. With that said, I am offering some written advice about Roth accounts for my fellow visual learners.

Before you read on, here is an outline of the two different ways to save Roth.

Roth IRA

• Contribution limit: $6,000 per year ($7,000 if you are ages 50 and older)

• Eligibility: Single tax filer with 2022 income less than $144,000 or Married filed jointly with 2021 household income less than $214,000

Roth 401k

• Contribution limit: $20,500 per year ($27,000 if you are ages 50 and older)

• Eligibility: All employees can contribute up to $20,500 regardless of your income and salary.

• Employer match: Employer contributions are always pre-tax. If you contribute Roth inside your 401(k) plan you will still receive your pre-tax employer contributions. This is important! People are commonly surprised to learn that 401(k) accounts have Roth inside them.

401(k) Account – two savings types under the same umbrella

In summation, if your annual income is less than $125,000 (single filer) or $198,000 (married filed jointly) then you could save up to $26,500 in Roth accounts for the year 2022. The math is here:

Hierarchy of Roth

What should you do if you have access to save Roth inside your 401(k) account but are also eligible to make Roth IRA contributions? Which account should you actively contribute to this year?

First, we recommend that you contribute enough to your Roth 401(k) account to receive your employer match (if applicable). For example, if your employer match is designed so that if you save 5% your employer will contribute 4%, then we recommend you meet the 5% savings rate to take advantage of the free money.

If you can still save additional dollars, use the Venn Diagram and these two examples to help formulate your decision.

Meet Michaela, age 29, single tax filer

Michaela, like many 29 year-olds, just started a job at her fourth employer in 8 years. Let’s imagine that she just enrolled in her current 401(k) plan which has a save 4%, get 4% employer match structure. She has also noticed her total savings and checking account balances have grown over the past year. As a result, she wants to set aside additional dollars to invest for the future, but also has some concerns about possibly needing access to the dollars in the coming years. Michaela could easily increase her 401(k) contributions to above 4%, but she decides to open a Roth IRA instead because of the flexible distributions. For Michaela, the hierarchy of her Roth savings is as follows:

Meet Martin, age 40, married, joint tax filer

Martin is busy juggling their full-time job, building a deck in their backyard, and spending time with their energetic family. They are currently saving 8% Roth into their 401(k) plan which equates to $7,500 annually. Martin is a great candidate for increasing their Roth 401(k) contributions since they still have $12,000 of potential savings into this account to reach the $20,500 maximum this year. Given their busy lifestyle, Martin will benefit by leaning into the automation of a 401(k) account.

Increasing your contribution rate is easier than opening a Roth IRA, making contributions throughout the year, and creating an investment strategy for that account. For Martin, the hierarchy of their Roth savings is as follows:

Since Michaela and Martin’s examples don’t speak to all situations, here is a Venn Diagram with additional considerations for you:

---

Related Articles

There is good news for retirement accounts! The IRS has increased the contribution limits for the upcoming year. As you can see below, an important change for 2022 is that 401(k) elective deferrals increased from $19,500 to $20,500. That’s not all! Please see below for the applicable updates for the coming year:

How do these changes impact your savings in the upcoming year? Are there any changes you should be making? Use this link to schedule a time to meet one-on-one with our team. We look forward to working with you in 2022!

---

---

Related Articles

Transitioning into retirement can be an exciting time. For many it can also be a daunting reality. We hope the following Pre-Retirement Checklist is a helpful tool as you intentionally prepare for your retirement years.

5-10 years out 

• Create a plan to pay down debt.   

• Maintain Emergency Fund – Emergencies still happen in retirement.  

• Familiarize yourself with Social Security, Pension, and/or Defined Benefit options.  

• Consider Long Term Care (LTC) options – LTC Insurance vs Self-insuring using other assets.  

• Maximize all tax-advantaged savings accounts – 2021 Contribution Limits.  

• Review your investment strategy to make sure your retirement accounts are in line with your risk tolerance and timeline.   

• Strategize how to divest from company stock.  

2-4 years out 

• Devise a retirement spending plan:   

  • Identify your retirement spending goals – basic needs, travel, one-time needs, etc.  

  • Take inventory of assets and consolidate as needed.

  • Retrieve Social Security estimates and create a strategy for taking your social security.

  • Determine and clarify your retirement paycheck replacement strategy.  

  • If you are retiring early, figure out how you will bridge spending needs prior to Social Security income, Medicare coverage, and accessing retirement accounts at age 59.5. 

  • Review deferred compensation distribution strategies.  

• Begin developing a plan for a fulfilling retirement (goals, purpose, health).  

• Practice being retired – take a long vacation in the location you plan to retire and live within your retirement budget. 

• Retirement Living Plan:  

  • Evaluate downsizing a home or relocation and the associated tax implications.  

  • If a mortgage is required, relocate while you still have the income to qualify for the mortgage preapproval process. 

• Formulate a plan to exercise your stock options. 

• Review insurance needs – potentially to cancel or lower life/disability insurance.  

< 1 Year out 

• Formulate a health care plan:   

  • Investigate Medicare, Medigap, and Medicare Advantage plans.  

  • Compare Individual Insurance policy or COBRA if you are younger than age 65.  

  • Enroll in Medicare 3 months before age 65.  

• Apply for Social Security benefits 3-4 months before you want benefits to start.  

• Determine how much monthly income you need from your portfolio to cover your expenses.   

• Analyze your retirement income plan.

• Consider a HELOC while you still have the income to qualify.  

• Update estate plan documents with retirement changes.  

• Take advantage of employer medical plans.   

Download this as a printable one-sheeter.

Planning for retirement should be exciting. Please reach out if our team of credentialed experts can help you navigate the road to retirement.

---

---

Related Articles