Filing Status for Income Taxes & Wealth Building

Learn about the various tax filing options so that you can build wealth more efficiently….

 

Over the years, many have posed questions and concerns about their filing status and who qualifies as a dependent.  In this discussion TheWealthIncreaser.com will attempt to clear up some of the misunderstanding that you and others may have.

 

Even though filing and dependent statuses can get highly technical for some–it is fairly straight-forward for most!

 

As the final day of the “2024 tax season” comes to an end, you as a taxpayer need to know that your filing status in future years will be based on your circumstances.   According to the IRS, there are five filing statuses that include:

 

Single

Head Of Household

Married Filing Jointly

Married Filing Separately

Qualifying Widow(er)

 

Single

If you are single and have no dependents you would file as single.  It is generally one of the simplest returns to file as you are only including your income, adjustments, deductions and credits that apply to you only, however there are exceptions as you might expect as all tax filing situations are unique.

 

If you are single and have a child that you provide majority support for, you can generally claim the child–(assuming the other parent isn’t qualified to do so) and that could put you in position to file as HOH and that could lead to you claiming a higher standard deduction, qualify you for tax credits such as the child tax credit, earned income credit, and possibly other credits.

 

2024 Single filing thresholds:

Under 65    $14,600
65 or older $16,550

If you are also a homeowner, you may qualify for additional tax savings as you may be able to avoid utilizing the standard deduction and claim itemized deductions instead!

 

Head Of Household

Head of household is generally a more advantageous filing status for those who qualify, compared to other filing statuses with the exception of MFJ and possibly QW.

 

If you have qualifying dependents, you are eligible to file as HOH, generally.  If your income thresholds are less than the numbers below, you may not have to file, however if you want a refund of tax withholding and the benefits of credits and deductions that may allow you to get a refund–you want to take advantage of that opportunity.

 

2024 HOH filing thresholds:

under 65 $21,900
65 or older $23,850

If you are also a homeowner, you may qualify for additional tax savings as you may be able to avoid utilizing the standard deduction and claim itemized deductions instead!

 

Married Filing Jointly

Married couples often find it more advantageous to file jointly, and filing is required if the following income thresholds are met:

 

2024 MFJ filing thresholds:

under 65 (both spouses) $29,200
65 or older (one spouse) $30,750
65 or older (both spouses) $32,300

If you are married and also a homeowner, you may qualify for additional tax savings!

 

Married Filing Separately

Married Filing Separately is often used by those who are separated in marriage.  In other cases happily married couples seeking relief from taxes due to innocent spouse or injured spouse claims of one taxpayer can often file MFS and that can often be a wise move, as it can lead to less taxes being paid by one spouse, and in many cases lowers the overall taxes that they would pay if they were to file as MFJ.

 

The IRS considers a couple married for tax filing purposes until they get a final decree of divorce, or a separate maintenance agreement is in effect.

 

The filing threshold is as follows for 2024 MFS filers:

any age $5–yes $5!

 

Qualifying Widow(er)

 

2024 QW filing thresholds:

under 65 $29,200
65 or older $30,750

 

The term qualified widow or widower refers to a tax filing status that allows a surviving spouse to use the married filing jointly tax rates on an individual return.

 

The provision is good for up to two years following the death of one spouse.  The taxpayer must remain unmarried for at least two years following the death of their spouse in order to qualify for this status.

Form 1310 may also need to be filed so that you can stay in good standing with the IRS!

 

MFJ vs MFS

Many married tax filers want to know whether it is more advantageous to file separately.  You can determine which way is more advantageous by running the numbers (or have your tax professional do so).

 

That’s because there are more tax deductions and credits married couples filing jointly are eligible for.  For example, the Earned Income Tax Credit is generally only available to married couples who file jointly.  The EITC enables low-income households to deduct as much as $7,430 off their taxes if they have three or more children.

 

Similarly, the Adoption Credit and Child and Dependent Care Tax Credit are only available for married couples filing jointly.  These and other credits that you may be eligible for can directly lower your tax bill and result in bigger refunds.

 

Also if you don’t owe any money to the IRS but your spouse does, by filing together your tax refund could be applied toward the tab that your spouse racked up with the IRS.

 

The 7.5% medical deduction that you can claim on schedule A may be available to one income, but with two incomes you wouldn’t qualify based on the 7.5% income threshold.

 

It is Important that you realize that filing jointly means you and your spouse are on the hook for the money you and your spouse owe to the IRS prior to your marriage.

 

As far as tax return retention, you want to keep your tax return for at a minimum of 3 years, and if you are a homeowner you want to keep all of your tax returns permanently!

 

1098-E student loan interest deduction for those who have student loans are available whether you itemize or claim the standard deduction.

 

Dependents

Many want to know who qualifies as a dependent and who they can legally claim on their current year tax return.  It is a common question that unsurprisingly deserves a common answer.

 

Who qualifies as a dependent, depends (no pun intended)?

 

Generally if your income is $5,050 or less you may be able to be claimed by another as a dependent on their return.

 

However, there are other situations when filing is required that can get quite technical.  Additionally in some cases if you are claimed as a dependent by another, you can still file your own tax return utilizing the standard deduction only, as your dependency exemption has already been used up.

 

General rules for dependents

 

These rules generally apply to all dependents:

 

  • A dependent must be a U.S. citizen, resident alien or national or a resident of Canada or Mexico

 

  • A person can’t be claimed as a dependent on more than one tax return, with rare exceptions

 

  • A dependent can’t claim a dependent on their own tax return

 

  • You can’t claim your spouse as a dependent if you file jointly

 

  • You can’t claim yourself as a dependent

 

 

Qualifying child

To qualify as a dependent, a child must also pass these tests:

  • Relationship: Be your son, daughter, stepchild, eligible foster child, brother, sister, half-sister or -brother, stepbrother, stepsister, adopted child or the child of one of these
  • Age: Be under age 19 or under 24 if a full-time student, or any age if permanently and totally disabled
  • Residency: Live with you for more than half the year, with some exceptions
  • Support: Get more than half their financial support from you
  • Joint return: Not file as married filing jointly unless only to claim a refund of taxes paid or withheld

See the full rules for a qualifying child

 

Qualifying relative

A qualifying relative must meet general rules for dependents and pass these tests:

See the full rules for a qualifying relative

When can I claim a dependent?

You can currently claim dependents only for certain tax credits and deductions.  Each credit or deduction has its own requirements.

What if I am a dependent on someone else’s return?

You can be claimed as a dependent and still need to file your own tax return.  Your filing requirement depends on your income, marital status and other criteria.  Learn more by visiting more details on filing requirements for dependents at IRS.gov.

 

See if you need to file: answer these questions to find out…

 

As mentioned earlier in this post, you may want to file (federal and state returns) anyway so you can get any federal and state income tax your employer withheld back as a refund or claim certain refundable tax credits.

 

Dependents, Standard Deduction, and Filing Information, Publication 501

 

Your Federal Income Tax, Publication 17, a “must read” for those who sincerely desire to succeed…

 

What Triggers an Audit?

To round out this discussion on filing status, audit triggers will be presented to help you gain a better understanding of filing requirements and how to avoid unnecessary IRS scrutiny so that you can achieve more in the coming tax seasons.  Among other tax concerns, you want to be particularly aware of common audit triggers.

 

Common Audit Triggers include the following:

 

  • Under-reporting taxable income–retirement, side jobs, 401k loan non-repayment, 1099 or other income not being reported can all lead to under-reporting of income, which the IRS frowns upon

 

  • Claiming large or unusual deductions–business expenses, charitable contributions and the like

 

  • Significant changes from year to year–if you have major changes from your previous tax return, that may cause alarm at the IRS

 

  • Independent contractor or self-employment income not reported–venmo, air b-n-b, lyft, UBER, Turo, Grubhub, Doordash, Roadie and other new economy ways of making income are normally taxable, and the IRS normally receives 1099-k or other 1099s from the platforms or app providers

 

  • Claiming credits that they don’t qualify for–i.e. the EIC, Dependent Credit, CTC etcetera

 

Keep in mind the IRS has matching computer system technology that allows them to cross-reference and easily detect many discrepancies in tax reporting.  Therefore, you want to keep good records and stay abreast of reporting requirements.

 

Additionally, you want to file your tax return annually, and if you need additional time you want to file form 4868, as that will give you an additional six months to get your finances and payment options in place.

 

Likewise, you want to timely file your tax return if you are due a refund as there are limitations in place that would disallow your refund if not done within a 3-year window from the filing deadline–including extensions.

 

If you have “security concerns” about your taxes, you want to give an IP PIN real consideration as an Individual Protection Personal Identification Number can provide added security by providing you a PIN (Personal Identification Number) on an annual basis that requires two-factor verification–thus decreasing the likelihood of fraud occurring against you and your family.

 

Conclusion

Your filing status and determining who is a dependent is generally easy to determine, however on occasion, determining the best filing status or who qualifies as a dependent can be difficult and may require analysis, including doing pro-forma projections using varying filing statuses that you may qualify for.

 

Even on occasions when you are not required to file, you may want to do so if you had taxes withheld as you may be able to get some or all of the withholding back along with additional amounts–depending on your circumstances.

 

Additionally, you may qualify for deductions and refundable credits, therefore by not filing you could be leaving money on the table.  You also want to take your state and local taxes into considerations when deciding your filing status, as even if you qualify at the Federal level to not have to file, you may be required to do so at the State or Local level.

 

In general, your filing status should be easy to decipher, however who qualifies as a dependent may need to be given deeper analysis in some situations!  

 

And with filing status and dependents, and many other areas of taxation, you want to be aware of the everchanging nature of taxation.

 

You want to know proactively that credits, deductions, mileage rates and adjustment ceilings or deductible contribution limits such as on IRAs–change from year to year (usually of an upward nature), therefore you want to be highly conscious and aware of this important fact–as you want to see what numbers are in effect for the current tax year or the year in question (the tax year that you are filing) so that you can improve your analysis and decision making and build wealth more efficiently.

 

If you have concerns, you want to do additional research and/or contact a highly competent tax professional to assist you in the process.  Always remember that a marriage, birth, death, divorce, adoption or the claiming of a parent or other qualifying dependent(s) that occurs by December 31st of the tax year in question has the potential to change your filing status for the current tax year or future tax year(s).

 

In the case of death during the tax year by the primary taxpayer, an executor or personal representative may have to file final return of a decedent, as tax obligations are “not” relieved–even in death.  If not done appropriately you as the executor or personal representative can be held personally liable.

 

After the transition of the primary taxpayer (or spouse), MFJ tax rates are still an option when filing and QW can be done in future years.  Therefore, it is important that you look at your circumstances in a wholesome way and determine the best way to file.

 

As the primary taxpayer (or spouse of primary taxpayer), you don’t want to pass on to your surviving spouse debt that you incurred while you were alive if you can avoid it.  With married couples, both parties are singularly or jointly obligated.  Tax obligations of your spouse can be paid through the estate or through you, therefore your filing status election and estate planning could be key to you saving money and building wealth more efficiently.

 

Always realize that once your estate is opened up after your transition, the IRS generally gets paid first!

 

Isn’t it time you get a real GRIP on your taxes and finances so that you can ascend higher and do more of what you sincerely desire.

 

Even with all of the economic disarray–now is the time that you put your filing status concerns at bay!

 

Even though the current economy is in upheaval, you don’t have to pursue your goals in error because of the actions of others who are evil.

 

All the best to your filing status success as you work diligently during these tumultuous times to give it your absolute best…

 

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Understanding Tax Brackets & Wealth Building

Learn how you can achieve more and build wealth more efficiently by gaining a better understanding of tax brackets…

 

Caution: 12-minute read

In the United States, many consumers who are required to file a federal (and state) tax return often find understanding of the system to be difficult and hard to comprehend.  However, the system is not as complicated as many think for most taxpayers and if you file taxes in the United States, you want to put yourself in a more favorable position so that you can achieve at a higher level of excellence throughout your lifetime!

 

In this discussion TheWealthIncreaser.com will end the 2024 tax season by focusing on taxes and how you can gain a better understanding of “tax brackets” so that you can achieve more throughout your lifetime and better prepare for the filing of your 2025 taxes next year, and taxes that you will file in future years.

 

It is the desire of TheWealthIncreaser.com that you will sincerely build wealth more effectively and gain a real understanding of tax brackets as a result of visiting this post.

 

In order for you to better follow this discussion, a few terms will be defined by TheWealthIncreaser.com:

 

Effective tax rate–your effective tax rate would be the rate that you are taxed at from an overall perspective.  If you are in the 10, 12 and 22% tax bracket, your effective rate would be averaged out based on your taxable income and the various tax brackets.

Marginal tax rate-your marginal tax rates are based on your income according to IRS guidelines and they range from 0, 10, 12, 22, 24, 32, 35, and 37%.

Alternative Minimum Tax–if you had very high income and would be able to avoid taxation altogether or at a very low level under the current tax code, the AMT would come in to ensure that you paid taxes at a minimal level.

Net Investment Income Tax--if you have high income, generally $200,000 and up, you will pay an additional tax of 3.8% on your capital gains after the sale of your assets on your tax return.

Ordinary income–your income that is taxed at ordinary income rates based on your marginal tax rates mentioned above.

Income–income is earnings that come into your household on a daily, weakly, bi-weekly, monthly or annual basis and can take on many forms.

Capital gain–sale of an asset at a gain, usually taxed at the more favorable rate of 0, 15, or 20% which is normally lower than the ordinary income tax rate of many who sell assets.

Dividend–a payment made by corporations to shareholders of record, not all companies pay dividends.

Qualified dividend–a dividend that is taxed at the capital gains rates of 0, 15, or 20%, and is generally more favorable to taxpayers.

Qualified Business Income–taxation on a portion of your pass-through income can possibly be avoided if you qualify for the QBI (pun intended) deduction.

Modified Adjusted Gross Income–income on your tax return after certain adjustments are made, those adjustments will generally lower your taxable income and could put you in a more favorable position for credits, deductions and a lower amount of taxation.

Taxable income–income that is subject to taxation after all of your adjustments, deductions and credits have been entered generally.

Mileage rate–a rate that is paid for business, medical, charitable travel etcetera that is adjusted annually.  The rates differ with the highest going to business mileage.

Standard deduction–the deduction outlined by the IRS that is of a set amount and is usually adjusted upward annually due to inflation.  If the amount is higher than if you itemize, you will generally choose the standard deduction, however there are exceptions when itemized may be a better option even when lower than the standard deduction, so be sure you have a highly competent tax professional to guide you along.

Itemized deduction–deductions that you can take on your tax return that have the potential to increase your tax refund or reduce the amount that you owe if the amount is higher than the standard deduction mentioned above.  The deductions available among others include–medical, taxes, mortgage interest, and charitable contributions.

Exemption–personal exemptions are no longer allowed on tax returns or form W-4 as a result of the TCJA of 2017.

Form W-4–you can complete a W-4 form and claim qualifying children and dependents and enter amounts that you want to withhold so that you can avoid underpayment of taxes or get a larger refund.  The tax system in the United States is pay as you go, and if you fail to do so, you will be penalized–and that will force you to be in the know.

Estimated taxestaxes paid over the course of the tax season, usually on, April 15, June 15, September 15, and January 15 of the new year.  By paying the right amount or at least being in the ballpark area, you can avoid the penalty for failure to pay your taxes and stay in good standing with the IRS.

Credits–an advantage to you when you qualify that has the effect of reducing your taxes dollar for dollar, thereby providing a bigger refund or the paying of less in taxes.  Credits are better than deductions.

Deductions–an advantage for you on your taxes that are not dollar for dollar but based on a percentage of your taxable income.  They can also provide a bigger refund or the paying of less in taxes for you at tax time.

Dependent

A dependent is generally a qualifying child or relative who relies on you for financial support. To claim a dependent for tax credits or deductions, the dependent must meet specific requirements outlined by the IRS.  You cannot claim yourself as a dependent.

 

The above definitions are the creator of TheWealthIncreaser.com’s take, for a more technical definition of the tax terms click on the links above!

 

Most who file income taxes in the United States will pay taxes at a rate that is based on their income.  Their “marginal tax rate” would be where their income tops off at and is based on tax rates and schedules that come out annually.

 

Your “effective tax rate” effectively combines all of the rates based on your income and averages out the rates to give you your effective tax rate, which is the actual amount of taxes percentage wise, that you would be paying based on your taxable income.

 

On the following chart you will see the tax rates in effect for the 2024 tax year.  Keep in mind that the numbers adjust annually due to inflation and market activity.

 

For tax year 2024, the top marginal tax rates are:

 

37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly).

 

The other rates are:

 

    • 35% for incomes over $250,525 ($501,050 for married couples filing jointly).

 

    • 32% for incomes over $197,300 ($394,600 for married couples filing jointly).

 

  • 24% for incomes over $103,350 ($206,700 for married couples filing jointly).

 

  • 22% for incomes over $48,475 ($96,950 for married couples filing jointly).

 

  • 12% for incomes over $11,925 ($23,850 for married couples filing jointly).

 

  • 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).

 

Note:  Income for taxation at the above rates are based on taxable income for the year, not your gross income for the year!

 

Tax Penalties

April 15th is normally the filing deadline for individuals.  In years when April 15 falls on a weekend or holiday, the deadline gets pushed up to the next business day.

 

Failure to file–25% 

Failure to pay–5% monthly on any balance that is due and maxes out at 25%

.5% if filed on April 16th

 

Interest also accrues, at a rate of 3 percent, compounding daily.

 

Some taxpayers affected by recent natural disasters get extra time to file if it is in a federally declared area.

 

If you are due a refund, you have a 3-year window from the filing deadline to file and claim your refund, otherwise you lose the ability to claim the refund on your federal tax return for the year(s) in question.

 

The filing of form 4868 before the April 15th deadline gives you a 6-month extension–and you can file the form yourself or have your tax professional file.   You can also make a provisional tax payment if you expect to owe.

 

You risk not only a possible “reduction in taxes owed” or a “tax audit” by rushing and not taking advantage of all of your adjustments, credits, and deductions and reporting all of your taxable income, therefore if you need extra time, it may be wise to extend and pay before the 6-month extension expires.

 

Form 1098 Mortgage Interest Statement that is provided to homeowners at tax time will reveal at a minimum your principal and interest payments for the year–points and partial interest may be on your 1098 closing disclosure or settlement statement (be sure store these documents and home improvement documents in a permanent file as they cost time and money to replace) and not included and/or also on form 1098.

 

Therefore, your first year after purchase you may want to provide form 1098 along with your closing documents to your tax professional and also sign up for homestead and other exemptions that you may qualify for at the state and local level.  Whether you should Itemize or take the Standard Deduction should be analyzed annually to see which option serves you and your family better.

 

The amount of your adjustments, credits and deductions claimed may allow you to fall into a lower tax bracket which could lead to the lower payment of taxes, or you receiving a higher refund!

 

Always realize that tax penalties can be substantial and lead to your building of wealth being stagnated, therefore do your best to avoid failure-to-file, late penalties, and any other tax penalties.

 

TariffsWTO or World Trade Organization is in existence to help regulate world markets to help establish predictability on the world stage.   In early April 2025, world markets were impacted in an unprecedented way as the United States moved away from world trade cooperation to a world trade paradigm shift of isolation.

 

Even though tariffs are paid by others, when a country implements tariffs, ultimately you as a consumer will pay in the end.  Consumer driven economies will be hurt the most–generally.  Your increased spending as a result of tariffs is in essence a tax, as those increased payments for goods did not exist before the tariffs.  In addition, expect countries whom tariffs were levied against to implement tariffs (retaliatory) in an effort to protect against substantial trade imbalances and also seek other markets to unload their goods.

 

Progressive tax rates in the United States range from 10% to 37% and the goal is for those who make more to pay more–because they have a higher ability to pay.  A tariff causes increases in prices that are often passed on to consumers and is in effect regressive as all pay regardless of income level and is similar to a sales tax that is also regressive.

 

Many economists in the United States predict an average increase of $5,000 or more per household (some predict $3,500 to $7,000) in spending annually as a result of tariffs, and those at the lower end of income will be hurt the most as no progression is in play here (those who earn less have a lower ability to pay)!

 

In simple terms, a tariff is a tax paid by you if you were an importer (for example, you import vases from India) you would pass that tax (or a lower amount) on to your consumers depending on the financial strength of your company.  If you pay a tariff or any other tax as a result of obtaining the vases, you would generally pass the costs on to the consumer (unless you were benevolent) as you are in business to make a profit.

 

The other country whom the tariff is imposed against does not pay the tariff!

 

When it comes to tariffs, the higher your income or net worth, the less you would be affected by tariffs.  If you earn $50,000 you will be hit harder than someone making $500,000, as those who are at the higher end of the “earnings” spectrum are in position to take the expected $5,000 in additional payments on an annual basis in stride, while those who make less will have a much shakier ride.

 

Tariffs can change the way you live economically and you want to prepare yourself as best you can by implementing steps that you can take immediately! 

 

If you are new to this site, you want to familiarize yourself with steps that you can take now–or for repeat visitors, continue to follow the steps that you have been following for years–as your goal is to continue to live your life in balance, regardless of what is occurring in the political, regulatory, economic, societal, technological or legal realm.

 

In light of the 6 trillion lost in stock market activity earlier this month that is causing concern for many, TheWealthIncreaser.com will offer ways that you can possibly reduce the stress that tariffs and other negative market activity is causing, so that you can achieve more during what appears to be difficult and volatile market activity for an indefinite or unknowable period.

 

Whether you are just entering the workforce, or you have been working for years, you want to know your retirement number for at least a 30 year period after you retire, or up to age 95 at a minimum.  In spite of all that is happening in the markets, you may want to stay the course or make adjustments–depending on where you are at as far as reaching your retirement number, your risk-tolerance level, and other goals that you have at this time.

 

The markets are currently shaking (as of April 4th, 2025) but they are not yet destroyed, and by continuing to dollar cost averagere-balance and utilizing diversification of your assets at this time and doing so with more consistency over time, you may be able to achieve more.

 

You can use asset allocation, diversification and re-assessment of your holdings now, to put your mind more at ease about your future.  Money market accounts, bonds and bond funds, high yield savings, CDs etcetera may need to be looked at and an increased percentage devoted to those accounts, as you may want to reduce your equity position depending on your goals and timeline needed to reach your goals.

 

In this and any economy, you can always decide to spend less, use intelligence in shopping, and take advantage of other money savings strategies that are available.  You may want to wisely make auto and big-ticket purchases and not be led astray by marketing and other distractions.  Many purchases can be put off or purchased later when and where applicable.  Your planned home improvement may have to be re-analyzed and possibly done at a later date or scaled back some.  Additionally, a side gig or second job may be needed or at least given real consideration by you, so that you can continue on your path of making your dreams come true.

 

Conclusion

Always remember that tax brackets adjust annually, and you want to have an idea of how your income is taxed and at what marginal and effective tax rate, so that you can compare from year to year and use analysis to not only plan better, but also implement those plans more effectively and efficiently to help you achieve the goals that you desire in a more time certain manner.

 

Your tax professional should be able to provide you comparison data (and explain the data) from year to year on your “marginal” and “effective” tax rates that you paid so that you can use the data to your advantage in future years.

 

If your marginal tax rate is 22% and your effective tax rate is 13.4%, you want to know that–as by knowing you can gauge what you are paying tax wise as compared to others in your society and use the numbers to plan for your tax payment and earnings in future years based on realistic data!

 

Effective tax management plays an important role in your overall wealth building success, and it is important that you at a minimum learn the basics about taxation as taxation in various forms are here to stay.

 

Always remember, if you don’t contribute to the solution by managing your taxes and finances more effectively, your lack of engagement is normally the main problem that is preventing you from achieving more and building wealth more efficiently during your lifetime.

 

Isn’t it time that you have sway and say about your finances, so that you can make happenings go your way and achieve more from day-to-day?

 

Isn’t it time you use your mental makeup in a better way, so that you can live to fight another day?

 

The time for effective action is now, and by landing on this blog you can “really” learn how!

 

Your ability to comprehend and understand tax brackets can put you in position for a lifetime of success for those who live in the U.S., and for those who are willing to give it their absolute best.

 

By understanding and applying at a minimum what you will learn from tax basics, tax brackets and how tax withholding occur, you will put yourself well ahead of the average taxpayer, however you want to be more than just ahead–your goal is to give it your absolute best so that you will achieve ultimate success as you put procrastination to rest.

 

All the best as you reach higher to achieve the goals that you truly desire, and at the same time put yourself in position to avoid a financial and tax filing quagmire….

 

Disclaimer – TheWealthIncreaser.com does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only.  This article is the author’s opinion based on experience, research and publicly available information.  The inclusion of links to third-party content is not an endorsement by TheWealthIncreaser.com of such content or services but is included to save you valuable time.  Please do your due diligence, independent research and use your own discretion.

 

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Employee Withholding & the Building of Wealth

Learn more at this time about W-4 withholdings and how you can maximize your tax position…

 

Caution:  15 minute read

As the new year and tax season advances, many have questions or concerns about their federal (and state) tax withholdings, and they want to know how they can more effectively manage those withholdings.

 

And with TheWealthIncreaser.com blog being down for 5 days (March 12th to March 17th) for the first time since creation (01/2014) due to domain hosting and server issues (sincere apologies to all), this discussion takes on more meaning than most, and it is the desire of TheWealthIncreaser.com that you will sincerely build wealth more effectively as a result of visiting this post.

 

In this discussion TheWealthIncreaser.com will address how withholdings on income earned in the United States occur, so that you–or those whom you know can utilize the system to achieve more.

 

W-4 Employee’s Withholding Certificate

Your employer provides you the opportunity to elect withholding for income tax purposes upon hire, or upon request by you if you are a current employee.  That opportunity could allow you the chance to adjust withholding amounts by changing certain elections and/or having additional amounts withheld.

 

By adjusting your withholding amounts, you can get to a point where you have a designated amount withheld so that you can get a refund or owe–or increase the amount of the refund or amount that you will owe the IRS.  Your withholding for the year would be displayed on your form W-2  that you get at tax time from your employer (usually in January or February).

 

Before 2020, you had to claim a certain number of withholding allowances on form W-4 (you could also pick zero).  The amount of federal income tax withheld from your paycheck was then based on how many allowances you claimed.  The more allowances that you claimed, the less the IRS would withhold.  Prior to the change you could claim fewer allowances than what you were entitled to if you wanted to increase your withholding, but you couldn’t claim more allowances.

 

Allowances are no longer allowed on the new form that went into effect in 2020!

 

Generally, upon hire you would complete Form W-4 so that your employer could withhold the correct federal income tax from your pay based on what you desire.  If changes are needed, you can complete a new Form W-4 each year and particularly when your personal or financial situation changes.  Depending on the size of your employer, the process would be done through your Human Resources or Payroll department–or if a small operation through your manager or other designated individual(s).

 

Key factors since the arrival of the new form now include:

 

Step 1:  personal information (name, address, SSN) and Single, MFJ, or HOH election

 

Step 2: multiple jobs or spouse works election

Step 3: the number of qualifying children under age 17 multiplied by $2,000 and the number of dependents multiplied by $500 can be entered based on the amount calculated–and if you plan on being eligible for other credits, the estimated amount can also be entered

Step 4:  other income, deductions and extra withholdings (key step for adjustment from your current withholding), and additionally if you expect to have other income such as interest, dividends, retirement income and/or you expect to itemize–you can include extra withholdings based on your own situation

 

Step 5: you would sign and date

 

The IRS now offers a tax estimator that many find helpful when deciding on their withholding amounts.

 

Estimated Taxes

If you are self employed or have W-2 income you can elect to pay estimated taxes and if you choose this option, payments are expected to be paid to the IRS based on your income at intervals of April 15, June 15, September 15 and January 15 of the new year through the EFTPS (you set up online and in a week or so you will receive correspondence in the mail that allows you to finalize setup and start making payments) system or other arrangement that you can set up with the IRS that would allow you to make timely payments.

 

Once your account is set up securely through the EFTPS system you can make payment for the current interval and also schedule payments for up to 3 additional intervals based on the payment date(s) that you select (be sure your account is adequately funded on the dates that you elect to pay), thereby ensuring that you avoid underpayment penalties if your estimate of taxes you owe is accurate or fairly accurate.

 

Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

 

Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

 

You may have to pay estimated tax for the current year if your tax was more than zero in the prior year.  See the worksheet in Form 1040-ES, Estimated Tax for Individuals for more details on who must pay estimated tax.

 

You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.

 

  • You had no tax liability for the prior year

 

  • You were a U.S. citizen or resident alien for the whole year

 

  • Your prior tax year covered a 12-month period

 

You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return!

 

For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

 

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

 

Estimated tax payments are generally due:

 

  • April 15 for income earned January 1 to March 31 (months 1, 2 and 3 of year)

 

  • June 15 for income earned April 1 to May 31 (months 4 and 5 of year)

 

  • September 15 for income earned June 1 to August 31 (months 6, 7, and 8 of year)

 

  • January 15 of the following year for income earned September 1 to December 31 (months 9 through 12 of year)

 

https://www.irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-and-ways-to-avoid-the-estimated-tax-penalty.

 

Interest categories 4th quarter(Oct-Dec) 3rd quarter(Jul-Sep) 2nd quarter(Apr-Jun) 1st quarter(Jan–Mar)
Non-corporate overpayment (for example, individual) 8% 8% 8% 8%
Corporate overpayment 7% 7% 7% 7%
Underpayment (corporate and non-corporate) 8% 8% 8% 8%

 

It is also important to distinguish whether you are an employee (employer can withhold taxes) or and independent contractor (you are responsible for paying taxes) so that you can stay in good standing with the IRS.

 

W-9 and Business Transactions

If you are a business owner, you may want those who you do business with to submit a W-9 form so that you can withhold taxes or report withholding or payments made to them based on their business identification number or social security number if a sole proprietor.

 

You too can use Form W-9 to provide your correct Taxpayer Identification Number (TIN) to the person or business who is required to file an information return with the IRS to report, for example:

 

  • Income is paid to you.
  • Real estate transactions.
  • Mortgage interest you paid.
  • Acquisition or abandonment of secured property.
  • Cancellation of debt.
  • Contributions you made to an IRA.
  • Gambling winnings.

 

Learn more by going to the IRS website…

 

FICA

The Federal Insurance Contributions Act of 1935 was signed into law to allow money to be withheld to help establish and keep the social security system solvent and ensure that current recipients receive their payments.  On your paycheck you will see Social Security withholdings (6.2%) up to a a wage limit which “adjusts annually” and Medicare withholding (1.45%) “which is unlimited” under current law.

 

The current total tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, or 12.4% total.

 

The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.

 

The combined rate for Social Security and Medicare employer and employee rate is 15.3% total.

 

There’s a maximum wage base for Social Security taxes on earnings, above which no tax is levied.  The wage base is set at $168,600 for 2024, and for earnings in 2025, the base or “taxable maximum” is $176,100.  Again, keep in mind there is no wage base limit for Medicare taxes.

 

Other

HSA/FSA and retirement accounts are often withheld by employees who elect the withholding and it is usually a wise choice, as that allows for the” lowering of your taxes” since it is done on a pre-tax basis, therefore it does not go into your taxable income calculation and can lead to a substantial financial windfall for you and your family if utilized effectively.

 

Social Security income does not require withholdings; however you have the option of having taxes withheld if you desire.  Medicare payments can also be withheld from your monthly social security payments if you find it convenient to do so and you elect Medicare for health coverage at age 65.

 

If you received Social Security income you would receive a 1099-SSA form during the tax season and you would include that income along with your other income to determine how much would be taxable up to a maximum of 85%.  If you had taxes or Medicare premiums withheld, they would be displayed on form 1099-SSA.

 

Pension income you can generally elect to have withholdings from pension provider by making the election and completing form W-4p which is very similar to the W-4 process mentioned earlier in this discussion.

 

Self-employment income does not require withholding, but estimated taxes are expected to be paid to the IRS based on your income at intervals of April 15, June 15, September 15 and January 15 of the new year, so if you are self-employed (or an independent contractor) be aware of your responsibilities

 

Failure to pay in a timely manner could lead to a “tax penalty” for underpayment of your federal taxes.

 

You can deduct ordinary and necessary expenses from your self-employment earnings to help reduce the amount that will be taxable.  Among others, the deductions include advertising, commissions, postage, phone, utilities, supplies, medical coverage, office expenses, automobile, equipment, furniture and any other expenses related to your business that qualify according to IRS guidelines, and those expenses can be deducted from your income to help reduce the taxes that you will owe at tax time, thereby “lowering your estimated tax payments” that are due on the dates mentioned above.

 

You can also use retirement plans, including SEP-IRAs (up to 25% of earnings can be contributed) to further reduce the amount that would be subject to taxation.  Self employment earnings of $400 or more would also be subject to SE taxation and you would also be able to deduct 1/2 of your SE tax payment on your personal 1040 return.  Your earnings and deductions from self employment as a sole proprietor would go on schedule C and be carried over to schedule 1 and then 1040 page 1.

 

Your earnings that you pay taxes on through self-employment would be used in the 35-year average that is used to calculate your social security benefits when you retire (generally age 62 to age 70), so be aware of that factor.

 

Qualified Business Income may offer you the opportunity to pay less in taxes if you qualify and you timely file your tax return.

 

Gaming/gambling winnings may have tax withholdings up to 24% at the federal level.  Be sure to keep good records as winnings can be offset against losses to help reduce your taxes.  With certain gambling winnings you would receive a form W-2G during the tax season for winnings you had in the previous year.

 

Unemployment Compensation you could choose to have taxes withheld or you can choose not to.  Unemployment compensation requires the payment of taxes, so be sure to plan for the payment at the federal and possibly state level.  If you receive unemployment compensation you would receive a 1099-G during the tax season the year after you received the compensation.

 

IRAs and retirement accounts may be subject to withholding unless an exception applies.  Early withdrawals could also result in an additional penalty.  If contributions are done through payroll they could possibly avoid taxation and penalty until withdrawal at retirement time if you did not tap into the account(s) early.  Your retirement income would generally be reported to you on form 1099R which is similar in content to that of a form W-2 mentioned earlier, your withholdings would be done through a form W-4p which is similar in scope to that of a W-4 that was mentioned earlier.

 

Form 1098 although “no withholding” is done on form 1098 Mortgage Interest Statement, it is included in this post due to the importance that it plays in the building of wealth.  You would receive form 1098 at tax time and if you are a homeowner, it provides in documented form a statement that includes your outstanding mortgage loan balance (usually balance at beginning of tax year) mortgage points paid if any, principal, and interest paid for the year–along with private mortgage insurance or MIP for those who put less than 20% down at the time of their home purchase.

 

Escrow payments made for property taxes may also be included.  The mortgage interest along with property taxes paid can be deducted on schedule A for those who itemize, and mortgage interest, property taxes along with other deductions, can play an important role in reducing taxes or increasing the refund amount that you would receive.  By strategically planning in advance, you can plan from year to year and that planning can play an important role in helping you build wealth more efficiently.

 

1099-K income is income that is often earned in the new gig economy, and TheWealthIncreaser.com would be remiss not to include this income in this post, as 1099k income is subject to taxation and no withholding for tax purposes are done, therefore it is the responsibility of the recipient of 1099-K income to report the income and pay taxes on that income.  Keep in mind the IRS receives a copy of this and virtually all other forms of income that has been discussed in this blog post.  Whether you resell clothing, household items or other goods or services and an electronic record is kept–you may have to report that income depending on the amount.

 

This includes uber, lift, grubhub and a vast array of delivery services and rideshare income that are derived over electronic platforms.

 

Although there was a back and forth on reporting 1099-K income for several years, the form is now active and online marketplace or third-party apps must report when certain thresholds are met (generally when goods and/or services total over $5,000 for tax year 2024 but scheduled to begin at $600 in the future), therefore if you are part of the gig economy you want to plan now for the payment of taxes.

 

Other sources of income depending on type, may also be subject to withholding.  Also be aware of taxation at the local and state levels as it is important to look at your taxes in a comprehensive or wholesome way and analyze from ALL sources–even when what are really taxes, go by other names.

 

In addition, liens, child support and garnishment of your pay can occur (involuntary withholdings) and that is the type of withholding you want to avoid as best you can.

 

Conclusion

 

It is important that you realize that taxation of income at this time in the United States appears here to stay, and if you have income you want to come up with a way to pay your taxes “as you earn” whether by w-4 withholdings through your payroll withholdings as you earn or through the payment of estimated taxes based on what you earn throughout the year and pay at designated intervals in April, June, September and January.

 

By timely managing your finances and paying your taxes you can avoid large tax payments and penalties at tax time that could severely hamper your wealth building efforts.  Although you are the ultimate decision maker, a refund of $1,000 or owing $1,000 is a reasonable target to aim for, assuming your finances are in order from a comprehensive perspective, and you have a strong money management personality.

 

By “planning in advance” you can manage your finances and taxes in a manner where you owe a little–or get a little back, thereby minimizing the financial stress in your life, preventing large losses due to fraud, investing what you would otherwise allow the IRS to hold and otherwise manage your finances more optimally.  Also, don’t forget about the taxation of your assets upon sale, as in many cases you will be taxed at your ordinary income or the generally more favorable capital gains rate.

 

Your withholdings along with your standard deduction or itemized deduction amount, and other adjustments deductions and credits will play a large role in determining if you will owe or if you will get a refund in this and the coming tax seasons.

 

Always realize that “even if you don’t have any income tax withheld” from your wages, you may get a refund if you are eligible for tax credits such as the Earned Income Credit, the Additional Child Tax Credit, American Opportunity Credit and other potential credits that you may qualify for.  Therefore, you would want to ensure that you file your taxes in a timely manner (you have a 3-year window to file, otherwise you lose the refund) as that can put you in better position to manage your money at the various stages of your life.

 

Also, you can elect to file for an extension to pay your taxes (up to October 15th) if you find yourself in the unfortunate position of not planning or planning inappropriately due to lack of knowledge, fatigue, or not knowing about the payment of taxes to the degree that you now know!

 

You and your tax practitioner can extend the deadline for months (by filing form 4868) to give you additional time to come up with the funds needed to pay your taxes.  However, payment is required or at least suggested based on what you expect to owe in taxes–even when extending your time to file.

 

All the best to your withholding and wealth building success as you deserve nothing less…

 

Disclaimer – TheWealthIncreaser.com does not provide and does not intend to provide financial, investment, tax, or legal advice.  Information contained in this article is for informational and educational purposes only.  The inclusion of links to third-party content is not an endorsement by TheWealthIncreaser.com of such content or services but is designed to save you time.  Please do your due diligence and use your discretion and additional independent research so that you can come to your own conclusion as to the best approach to take for your particular situation.

 

Tax ArchiveTheWealthIncreaser.com

 

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Copyright®2014–2025–TheWealthIncreaser.com–All Rights Reserved

 

Employee Withholding & Wealth Building

Learn more about W-4 withholdings and how you can maximize your tax position…

 

As the new year and tax season advances, many have questions or concerns about their federal (and state) tax withholdings, and they want to know how they can more effectively manage those withholdings.

 

In this discussion TheWealthIncreaser.com will address how withholdings on income earned in the United States occur, so that you–or those whom you know can utilize the system to achieve more.

 

W-4 Employee’s Withholding Certificate

Your employer provides you the opportunity to elect withholding for income tax purposes upon hire, or upon request by you if you are a current employee.  That opportunity could allow you the chance to adjust withholding amounts by changing certain elections and/or having additional amounts withheld.

 

By adjusting with your withholding amounts, you can get to a point where you have a designated amount withheld so that you can get a refund or owe–or increase the amount of the refund or amount that you will owe the IRS.  Your withholding for the year would be displayed on your form W-2  that you get at tax time from your employer (usually in January or February).

 

Before 2020, you had to claim a certain number of withholding allowances on form W-4 (you could also pick zero).  The amount of federal income tax withheld from your paycheck was then based on how many allowances you claimed.  The more allowances that you claimed the less the IRS would withhold.  Prior to the change you could claim fewer allowances than what you were entitled to if you wanted to increase your withholding, but you couldn’t claim more allowances.

 

Allowances are no longer allowed on the new form that went into effect in 2020!

 

Generally, upon hire you would complete Form W-4 so that your employer could withhold the correct federal income tax from your pay based on what you desire.  If changes are needed, you can complete a new Form W-4 each year and particularly when your personal or financial situation changes.  Depending on the size of your employer, the process would be done through your Human Resources or Payroll department–or if a small operation through your manager or other designated individual(s).

 

Key factors since the arrival of the new form now include:

 

Step 1:  personal information (name, address, SSN) and Single, MFJ, or HOH election

 

Step 2: multiple jobs or spouse works election

Step 3: the number of qualifying children under age 17 multiplied by $2,000 and the number of dependents multiplied by $500 can be entered based on the amount calculated and if you plan on being eligible for other credits, the estimated amount can also be entered

Step 4:  other income, deductions and extra withholdings (key step for adjustment from your current withholding), and additionally if you expect to have other income such as interest, dividends, retirement income and/or you expect to itemize you can include extra withholdings based on your own situation

 

Step 5: you would sign and date

 

The IRS now offers a tax estimator that many find helpful when deciding on their withholding amounts.

 

Estimated Taxes

If you are self employed or have W-2 income you can elect to pay estimated taxes and if you choose this option, payments are expected to be paid to the IRS based on your income at intervals of April 15, June 15, September 15 and January 15 of the new year through the EFTPS (you set up online and in a week or so you will receive correspondence in the mail that allows you to finalize setup and start making payments) system or other arrangement that you can set up with the IRS that would allow you to make timely payments.

 

Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

 

Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

 

You may have to pay estimated tax for the current year if your tax was more than zero in the prior year.  See the worksheet in Form 1040-ES, Estimated Tax for Individuals for more details on who must pay estimated tax.

 

You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.

 

  • You had no tax liability for the prior year

 

  • You were a U.S. citizen or resident alien for the whole year

 

  • Your prior tax year covered a 12-month period

 

You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return!

 

For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

 

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

 

Estimated tax payments are generally due:

 

  • April 15 for income earned January 1 to March 31

 

  • June 15 for income earned April 1 to May 31

 

  • September 15 for income earned June 1 to August 31

 

  • January 15 of the following year for income earned September 1 to December

 

https://www.irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-and-ways-to-avoid-the-estimated-tax-penalty.

 

W-9 and Business Transactions

If you are a business owner you may want those who you do business with to submit a W-9 form so that you can withhold taxes or report withholding or payments made to them based on their business identification number or social security number if a sole proprietor.

 

You too can use Form W-9 to provide your correct Taxpayer Identification Number (TIN) to the person or business who is required to file an information return with the IRS to report, for example:

 

  • Income is paid to you.
  • Real estate transactions.
  • Mortgage interest you paid.
  • Acquisition or abandonment of secured property.
  • Cancellation of debt.
  • Contributions you made to an IRA.

 

Learn more by going to the IRS website…

 

FICA

The Federal Insurance Contributions Act of 1935 was signed into law to allow money to be withheld to help establish and keep the social security system solvent and ensure that current recipients receive their payments.  On your paycheck you will see Social Security withholdings (6.2%) up to a a wage limit which adjusts annually and Medicare withholding (1.45%) which is unlimited.

 

The current total tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, or 12.4% total.

 

The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.

 

The combined rate for Social Security and Medicare employer and employee rate is 15.3% total.

 

There’s a maximum wage base for Social Security taxes on earnings, above which no tax is levied. The wage base is set at $160,200 for 2023 and $168,600 for 2024.  Again, keep in mind there is no wage base limit for Medicare taxes.

 

Other sources of income depending on type, may also be subject to withholding.  Also be aware of taxation at the local and state levels as it is important to look at your taxes in a comprehensive or wholesome way and analyze from ALL sources–even when what are really taxes, go by other names.

 

Conclusion

 

It is important that you realize that taxation of income at this time in the United States appears here to stay, and if you have income you want to come up with a way to pay your taxes “as you earn”  whether by w-4 withholdings through the payment of taxes through your payroll withholdings as you earn or through the payment of estimated taxes based on as what you earn throughout the year and pay at designated intervals in April, June, September and January.

 

By timely managing your finances and paying your taxes you can avoid large tax payments and penalties at tax time that could severely hamper your wealth building efforts.

 

By “planning in advance” you can manage your finances and taxes in a manner where you owe a little–or get a little back, thereby minimizing the financial stress in your life, preventing large losses due to fraud, investing what you would otherwise allow the IRS to hold and otherwise manage your finances more optimally.  Also, don’t forget about the taxation of your assets upon sale, as many will be taxed at your ordinary income or the generally more favorable capital gains rate.

 

Your withholdings along with your standard deduction or itemized deduction amount, and other adjustments deductions and credits will play a large role in determining if you will owe or get a refund in this and the coming tax seasons.

 

Always realize that “even if you don’t have any income tax withheld” from your wages, you may get a refund if you are eligible for tax credits such as the Earned Income Credit, the Additional Child Tax Credit,  American Opportunity Credit and other potential credits that you may qualify for.  Therefore you would want to ensure that you file your taxes in a timely manner (you have a 3 year window to file, otherwise you lose the refund) as that can put you in better position to manage your money at the various stages of your life.

 

All the best to your withholding and wealth building success as you deserve nothing less…

 

Disclaimer – TheWealthIncreaser.com does not provide and does not intend to provide financial, investment, tax, or legal advice.  Information contained in this article is for informational and educational purposes only.  The inclusion of links to third-party content is not an endorsement by TheWealthIncreaser.com of such content or services but is designed to save you time.  Please do your due diligence and use your discretion and additional independent research.

 

Return from Withholdings & Wealth Building to Reducing Your Taxes & Wealth Building

Return from Withholdings & Wealth Building to What is the 3 Step Structured Approach

Return from Withholdings & Wealth Building to Tax Basics

Return from Withholdings & Wealth Building to Business Expenses

Return from Withholdings & Wealth Building to Tax Preparation Tips

Return from Withholdings & Wealth Building to Taxes & Personal Finance

Return from Withholdings & Wealth Building to Who is the creator of TheWealthIncreaser.com

 

Copyright®2014–2025–TheWealthIncreaser.com–All Rights Reserved

 

 

Individual Retirement Accounts Unmasked & Wealth Building

Learn all that you need to know about IRA’s so that you can maximize the use of them and Build Wealth more efficiently so that you can do more of what you desire during your retirement years…

 

CAUTION: 30-minute read

 

Nasdaq Historical Returns

The Nasdaq stock market comprises two separate markets, namely the Nasdaq National Market, which trades large, active securities and the Nasdaq Smallcap Market that trades emerging growth companies.

Russell 2000 Historical Returns

The Russell 2000 Index is a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index. The Russell 2000 is managed by London’s FTSE Russell Group, widely regarded as a bellwether of the U.S. economy because of its focus on smaller companies in the U.S. market.

S & P 500 Historical Returns

The S&P 500 Index is a basket of 500 of the largest companies of both the New York Stock Exchange (NYSE) and the NASDAQ.  The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.

Dow Jones Historical Returns

The Dow Jones Industrial Average (DJIA) is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq. The Dow Jones is named after Charles Dow, who created the index in 1896 along with his business partner, Edward Jones. Also referred to as the Dow 30, the index is considered to be a gauge of the broader U.S. economy.

New York Stock Exchange

The New York Stock Exchange (NYSE) is a New York City-based public marketplace for trading stock. It is the largest stock exchange in the world based on market capitalization of its listed securities and dates back to 1792.

 

MarketWatch–Learn what is happening in the markets today…

 

IRAs are an important tool for building wealth for those who are employed and particularly those who lack an employer sponsored plan where they work.  Just what are the rules and guidelines as it relates to IRA’s, and how can you use them to maximize your retirement accounts if you now qualify for the utilization of them as you build your retirement nest egg?

 

It is important that you unmask and learn all that you can about IRAs and how you can use them for creating wealth for you and your loved ones in all ways possible, proactively when possible.  Improving your wealth in ways that could be of significant benefit to you and your family can be made easier if you unmask or learn all that you can about IRAs proactively as opposed to after the fact (after your earned income years come to an end).

 

You want to ensure that you look at IRAs and determine if they can be of value to you as you build wealth and not allow blind spots to cause you to miss out on important facets of IRA utilization that you could possibly miss out on and make your retirement years less enjoyable!

 

Over the years TheWealthIncreaser.com has discussed many financial matters with consumers. No topic seems to be as misunderstood or improperly grasped by consumers on a consistent basis than that of the topic of IRAs.

 

It is important that you simplify your understanding of IRA’s—and particularly as it relates to taxation—so that you can make an informed and well thought out decision—if you are considering IRAs in your financial portfolio for retirement or other purposes.

 

IRA Basics

With a traditional IRA—you get a tax benefit up front in the form of a tax deduction on your personal tax return.

 

You would pay taxes on your distributions at “ordinary income” tax rates upon withdrawal and if done before age 59.5 and no exception applied–a 10% early withdrawal penalty would also apply.  With a ROTH IRA you get no tax deduction up front, however “all contributions” and “qualified” distributions are tax free.

 

Qualified distributions are distributions after age 59.5 or those that are made due to an exception or other guidelines that are outlined in the tax code.

 

If you own—or anticipate owning a Traditional IRA or a ROTH IRA, and you make a “non-qualified” distribution, you may have to pay federal income taxes on withdrawals—and in some cases be socked with a 10% penalty on top of the income tax bill.

 

In this discussion TheWealthIncreaser.com will look at a number of ways that you can utilize a ROTH IRA or a Traditional IRA to build wealth more effectively.

 

The goal of this discussion is to keep conciseness–and to the point actions at the center, however conciseness and to the point on IRAs can be difficult.  Key points will be reiterated (repeated) in an attempt to enhance your understanding.

 

Broad Stock Market History Charts

 

Nasdaq

Dow Jones Industrial

S & P 500

Russell 2000

 

Key Points that you need to know about IRA’s 

 

Important questions that you need to ask yourself include:

 

*Do I even qualify

 

You qualify if you have “earned income” and that income doesn’t exceed certain thresholds that are established by law.  The amount of the contribution limit and the thresholds are adjusted upward annually, generally speaking.

 

You can fund an IRA if you have a 401 (k) plan or other retirement plan through your employer. Having a workplace retirement account could make you “ineligible to deduct traditional IRA contributions” on your taxes annually.  Funding a 401 (k) could help you reduce your taxable income so that you can directly fund a Roth IRA.  Many employers also offer an employee match with 401k plans so you want to give the match option considerable attention.

 

Single Limits

 

The IRA contribution limits are the combined maximum you can contribute annually across all personal IRAs. This means if you have a Traditional IRA and/or a Roth IRA, you “cannot” contribute more than this limit across both accounts in a year.

 

You also cannot contribute more to your IRAs than the income you earn each year! 

 

If your income is lower than the contribution limit, your annual IRA contribution may be limited to your earned income.  For example, if your earned income is $5,500, your maximum contribution limit is $5,500 total–whether you contribute to a traditional, ROTH or both.

 

If you are the only breadwinner in your household and you meet the income limits, you may be eligible for a spousal IRA which are separate IRAs for you and your spouse or for the non-working spouse if they are the only one who qualifies.

Traditional Spousal IRA

A Traditional Spousal IRA allows the working spouse to make tax-deductible contributions on behalf of the non-working spouse, and the contributions grow tax-deferred, which means taxes are paid only upon withdrawal.

 

A spousal IRA is a strategy that allows a working spouse to contribute to an individual retirement account (IRA) in the name of a non-working spouse with no income or very little income. This is an exception to the provision that an individual must have earned income to contribute to an IRA.

 

Note: Your contributions may be limited to what your spouse makes if you have no income and are contributing to a spousal IRA.

 

  • Tax-Deductible Contributions: Contributions to a Traditional Spousal IRA may be tax-deductible, depending on the couple’s modified adjusted gross income (MAGI) and whether the working spouse participates in an employer-sponsored retirement plan.

 

  • Tax-Deferred GrowthInvestments in a Traditional Spousal IRA grow tax-deferred, meaning taxes are not due until withdrawals are made.

 

  • Withdrawal Rules and Taxes: Withdrawals from a Traditional Spousal IRA are generally subject to income tax. Additionally, a 10% early withdrawal penalty may apply if withdrawals are made before age 59½, with some exceptions.

 

ROTH Spousal IRA

A Roth Spousal IRA allows for non-deductible contributions, which grow tax-free and can be withdrawn tax-free under certain conditions.

  • Non-deductible Contributions: Contributions to a Roth Spousal IRA are not tax-deductible.

 

  • Tax-free growth and withdrawals: Investments in a Roth Spousal IRA grow tax-free, and qualified withdrawals are also tax-free.

 

  • Withdrawal Rules and Taxes: Qualified withdrawals from a Roth Spousal IRA are tax-free, provided that the account has been open for at least five years, and the account holder is at least 59½ years old or meets other qualifying criteria.

 

If you want to save more for retirement than your IRA contribution limit allows this year, consider contributing more to your workplace retirement plan, like a 401(k) or 403(b).

 

If you don’t have access to a workplace plan, check to see if you’re eligible to open and contribute to a self-employed 401(k) or SEP IRA, each of which may allow you, as the employer, to save up to $66,000 in 2023 and $69,000 in 2024.

 

An additional $7,500 can be saved in either years 2023 and 2024 if you have a 401(k) or 403(b) plan and are age 50 or older.  However, catch-up contributions are not permitted  in SEP plans whether a 401k or IRA.

 

Traditional IRA income limits for 2023 and 2024

Unlike with a Roth IRA, there’s no income limit for those who can contribute to a traditional IRA!  However, your deduction may be limited or disallowed if you contribute to a retirement plan on your job.

 

Your income (as well as your spouse’s) affects “whether you can deduct your traditional IRA contributions” from your taxable income for the year!

 

If you and your spouse do not have access to a workplace retirement savings plan, then you can deduct the full amount of your IRA contributions, up to the contribution limit!

 

If you and/or your spouse are covered by a workplace plan, your eligible deduction limit may be decreased based on your tax-filing status and modified adjusted gross income (MAGI).

 

Your Modified Adjusted Gross Income is how much you earn each year considering certain adjustments.  It’s a smart idea to consult a tax professional if you have any questions about how much of your IRA contributions you can deduct if you still have questions after reading this article.

 

And remember, even if you cannot deduct any of your traditional IRA contributions, the money you invest in a traditional IRA may benefit from compounding and “can grow tax-deferred” until you withdraw it.

 

And you won’t have to pay income taxes on any contributions you previously did not deduct from your taxes!

 

The tables below can help you figure out how much of your traditional IRA contribution you may be able to deduct based on your income, tax-filing status, and your and your spouse’s access to a workplace retirement plan.

 

The key point is that even if you have a plan at work you and/or your spouse may still be able to contribute to a Traditional IRA and deduct the contribution (up to a limit) annually even if you are covered by a plan at work if you meet the annual IRA income limits based on your MAGI.

 

If you are not covered by a plan you (and possibly your spouse) can contribute up to the contribution limit for that year.  If you are married and you or your spouse have a plan at work, your contribution deduction would be limited if your income was greater than $220,000 to $240,000 for tax year 2024 and would phase out all together at income over $240,000.

 

Keep in mind you can still contribute up to the annual limit, however you could not deduct the contribution on your tax return.  Additionally, when you are taxed, the “contributions that were not deductible would not be taxable” however, the earnings would be taxed at your ordinary income rate.

 

If you or your spouse were covered by a plan at work, your annual earning limits would be lower as far as deducting your contributions ($123,000 to 143,000) then phaseout for tax year 2024.

 

Keep in mind that IRA deduction limit numbers normally change on an annual basis.

 

Traditional IRA deduction limits

2023 IRA deduction limit — You are covered by a retirement plan at work
Filing status Modified adjusted gross income (MAGI) Deduction limit
Single individuals ≤ $73,000 Full deduction up to the amount of your contribution limit
> $73,000 but < $83,000 Partial deduction (calculate)
≥ $83,000 No deduction
Married (filing joint returns) ≤ $116,000 Full deduction up to the amount of your contribution limit
> $116,000 but < $136,000 Partial deduction (calculate)
≥ $136,000 No deduction
Married (filing separately)1 < $10,000 Partial deduction
≥ $10,000 No deduction

Source: “IRA deduction limits,” Internal Revenue Service, August 29, 2023.

2023 IRA deduction limits — You are NOT covered by a retirement plan at work
Filing Status Modified adjusted gross income (MAGI) Deduction limit
Single, head of household, or qualifying widow(er) Any amount A full deduction up to the amount of your contribution limit
Married filing jointly with a spouse who is not covered by a plan at work Any amount A full deduction up to the amount of your contribution limit
Married filing jointly with a spouse who is covered by a plan at work $218,000 or less Full deduction up to the amount of your contribution limit
> $218,000 but < $228,000 A partial deduction (calculate)
≥ $228,000 or more No deduction
Married filing separately with a spouse who is covered by a plan at work < $10,000 Partial deduction
≥ $10,000 No deduction

Source: “IRA deduction limits,” Internal Revenue Service, August 29, 2023.

2024 IRA deduction limit — You are covered by a retirement plan at work
Filing status Modified adjusted gross income (MAGI) Deduction limit
Single individuals ≤ $77,000 Full deduction up to the amount of your contribution limit
> $77,000 but < $87,000 Partial deduction
≥ $87,000 No deduction
Married (filing joint returns) ≤ $123,000 Full deduction up to the amount of your contribution limit
> $123,000 but < $143,000 Partial deduction
≥ $143,000 No deduction
Married (filing separately)1 < $10,000 Partial deduction
≥ $10,000 No deduction

Source: “401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000,” Internal Revenue Service, November 1, 2023.

2024 IRA deduction limits — You are NOT covered by a retirement plan at work
Filing Status Modified adjusted gross income (MAGI) Deduction limit
Single, head of household, or qualifying widow(er) Any amount A full deduction up to the amount of your contribution limit
Married filing jointly with a spouse who is not covered by a plan at work Any amount A full deduction up to the amount of your contribution limit
Married filing jointly with a spouse who is covered by a plan at work $230,000 or less Full deduction up to the amount of your contribution limit
> $230,000 but < $240,000 A partial deduction
≥ $240,000 or more No deduction
Married filing separately with a spouse who is covered by a plan at work < $10,000 Partial deduction
≥ $10,000 No deduction

Source: “401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000,” Internal Revenue Service, November 1, 2023.

 

What happens if you contribute too much to your IRA?

If you contributed too much (more than the annual contribution limit) to your IRA, you have up until when your taxes are due to remove any excess contributions as well as any investment gains those contributions may have made.

 

Those investment gains will have to be reported on your taxes!

 

If you don’t catch your excess contributions by your tax deadline, you may have to pay a 6% tax penalty on the excess amount each year until you remove those funds from the account.

 

Key points about Traditional IRAs:

  • You can contribute up to the annual limit to a traditional IRA

 

  • Only a certain amount can be deducted annually on your taxes and that amount is based on your filing status and income range

 

  • If you have a retirement plan at work your deduction will be limited

 

  • If you don’t have a retirement plan a work you can get a full deduction up to the limit

 

  • If you are married and your spouse is covered, you are entitled to a partial deduction that phases out, and if your income is too high ($240,000 or more from year 2024 and forward) you are not eligible for a deduction (your deduction phases out)

 

  • You have up until April 15th of the tax filing season to contribute to your IRA for the previous year (i.e., 2024 contributions can be made up until April 15th of 2025–if the 15th falls on a weekend or holiday, you may have additional day(s) to contribute)

 

  • If you over-contribute to your IRA, you may have to pay additional taxes on the gains that are a result of your over contribution

 

  • An exception for withdrawal may allow you to avoid the 10% early retirement penalty.  Tuition, 1st time home buyer qualification (no personal residence ownership in past 2 years) and other exceptions are available that will possibly allow you to avoid the penalty.  Limits and technicalities may apply

 

  • You may be able to “double dip” and get the benefit of a retirement savers credit as well as the deduction on your federal tax return if you meet the income criteria and other guidelines

Unlike Roth IRAs, you can contribute up to the maximum contribution limit to a traditional IRA “regardless of your income” if your earned income is higher than that year’s contribution limit (currently $7,000) that is normally adjusted from year to year.

 

Your ability to “deduct traditional IRA contributions from your tax bills” are dependent on your income and your workplace retirement plan, and/or your spouse’s!

 

If you want to save even more for retirement than the IRA contribution limit, you can consider contributing to your workplace retirement plan (if you have one), such as a 401(k) or 403(b) at a level that allows you to live comfortably, yet reach your retirement goals.  If you don’t have access to a workplace plan, you can look into whether you’re eligible to contribute to a self-employed 401(k) or SEP IRA, if you are self-employed or you have a sideline gig that is showing a profit.

 

Roth IRA income and contribution limits for 2023 and 2024

How much can you contribute to a Roth IRA—or if you can contribute at all—is dictated by your income, specifically your household’s modified adjusted gross income (MAGI)!

 

This is your adjusted gross income (gross income minus tax credits, adjustments, and deductions), with some of those credits, adjustments, and deductions added back in.

 

Depending on your MAGI and your tax filing status, you are either eligible to contribute to your Roth IRA up to the full IRA maximum, contribute only a partial amount, or contribute nothing at all.

 

Note: If you’re ineligible to contribute to a Roth IRA, you can still contribute to a traditional IRA up to 100% of your income, or the annual contribution limit!

 

Calculating your MAGI and balancing contributions to multiple IRAs can be complicated, so consult a financial professional if you have any questions around your eligibility to contribute and you have an uneasy feeling, even after this discussion.

 

If you are married and make $150,000 a year in MAGI and you have a retirement plan on your job, you can contribute $7,000 to a spousal Traditional IRA (you would be eligible for full deduction) or $7,000 to a spousal ROTH IRA (you would be eligible for the full “contribution”) because you meet the income and tax filing guidelines for a ROTH IRA.

 

You could choose to contribute $3,500 annually to a spousal Traditional IRA and deduct the $3,500 on your taxes yearly if you qualified and upon withdrawal after age 59.5 you would pay taxes at your ordinary income tax rate–and also contribute $3,500 to a spousal ROTH IRA that would be non-deductible but would grow tax free and you would owe no taxes upon withdrawal within parameters.

 

Roth IRA income requirements for 2023
Filing status Modified adjusted gross income (MAGI) Contribution limit
Single individuals < $138,000 $6,500
≥ $138,000 but < $153,000 Partial contribution
≥ $153,000 Not eligible
Married (filing joint returns) < $218,000 $6,500
≥ $218,000 but < $228,000 Partial contribution
≥ $228,000 Not eligible
Married (filing separately)1
< $10,000 Partial contribution
≥ $10,000 Not eligible

“Amount of Roth IRA Contributions That You Can Make for 2023,” Internal Revenue Service, August 29, 2023.

Roth IRA income requirements for 2024
Filing status Modified adjusted gross income (MAGI) Contribution limit
Single individuals < $146,000 $7,000
≥ $146,000 but < $161,000 Partial contribution
≥ $161,000 Not eligible
Married (filing joint returns) < $230,000 $7,000
≥ $230,000 but < $240,000 Partial contribution
≥ $240,000 Not eligible
Married (filing separately)2
< $10,000 Partial contribution
≥ $10,000 Not eligible

Source: “401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000,” Internal Revenue Service, November 2023.

 

The IRS’s annual IRA contribution limit covers contributions to all personal IRAs, including both traditional IRAs and Roth IRAs.

 

But as we touched on above, your income may limit whether you can contribute to a Roth. You want to determine at the earliest time possible whether a Roth IRA, traditional IRA—or both—are right for you.

 

Learn about Fidelity IRAs and more about other types of IRAs…

 

What happens if you contribute too much to your Roth IRA?

If you contributed too much to your Roth IRA, you have until the tax filing deadline to fix the mistake. You must remove all excess contributions as well as any investment earnings. Those earnings will have to be reported as investment income. If you remove any excess contributions after you file your taxes, you may need to file an amended tax return.

 

If you over contributed to your Roth IRA due to your income limit, you can re-characterize your Roth IRA contributions to a traditional IRA.  Just make sure you do not contribute more than the combined IRA maximum.

 

If you re-characterized, you’ll definitely want to check and see if you’re now eligible for any income tax deductions.

 

You could also apply your excess contributions to tax year 2023.  But first verify what you roll over will be eligible within 2023’s limits.

 

If you don’t catch your excess contributions when you file your taxes, you may have to pay a 6% penalty on those contributions each year until they are removed from the account.  Visit the IRS.gov to learn more about contribution limits and for more information on tax penalties for IRAs.

 

  • Your contribution limit is based on your income and filing status

 

  • You may be eligible to contribute a partial amount or nothing at all

 

  • If you are married and your spouse is covered, you are entitled to a partial deduction that phases out, and if your income is too high ($240,000 or more from year 2024 onward)–you are not eligible for a deduction

 

  • If your income is too high, you may not be able to contribute to a ROTH

 

  • You can possibly roll over traditional IRA contributions and earnings to a ROTH–be sure you plan for the payment of taxes well in advance so that you have no surprises

 

  • An exception for withdrawal may allow you to avoid taxation on the earnings, therefore both contributions and earnings could be withdrawn where an exception applied.  Tuition, 1st time home buyer qualification (no personal residence ownership in past 2 years) and other exceptions are available that will possibly allow you to withdraw tax free.  Limits and technicalities may apply.

 

How much should you contribute to your IRAs?

 

To give you some historical context, IRA contribution limits in 2011 and 2024 will be contrasted:

 

Income Limitation

 

Single Limits

In 2011 the income cutoffs for a traditional IRA where you can get the full deduction was $56,000 and partial deduction is $65,999 if you are single.

 

In 2011 the income cutoffs for a ROTH IRA where you can get the full contribution was $107,000 and partial contribution was $122,000 if you are single.

 

Married Limits

In 2011 the income cutoffs for a traditional IRA where you can get the full deduction was $90,000 and partial deduction was $109,999 if you are married.

 

In 2011 the income cutoffs for a ROTH IRA where you can get the full contribution was $169,000 and partial contribution was $179,000 if you are married.

 

Keep in mind that the above figures represent the “income cutoff” that is based on your AGI or Adjusted Gross Income—not Total Income!

 

Having a plan in place for your retirement can help you reach your financial goals and give you peace of mind that you are on the right track. To help create a retirement plan, consider consulting with a financial professional to map out your financial future or if you are comfortable, you can create your own path to retirement success.

 

It can be a challenge to determine how much to save in your IRA, as you need to know your retirement number in advance of saving or investing.  As a general guideline, you want to save at a minimum 10% of your pre-tax income each year (including any employer contributions) for retirement.  The higher you go after that is even better as the actual percentage will depend on your unique personal and family profile and your retirement or other goals that you may have in mind.

$1,000 Monthly Withdrawal Rule for Retirement…

$1,000 Tax-Free Retirement Account Withdrawal Allowance under SECURE ACT 2.0

That 10% or more includes savings in any other retirement accounts or savings plans, like 401(k)s, Thrift Plans or 403(b)s–as well as pension and other income that you may receive in the future.  In short, your “retirement number” that is unique to you and what you desire most in your life, will help guide you on the right amount that you need to save and invest to reach your goals.

 

Consulting with a financial professional can help you figure out a strategy that works best for your goals and what you want to see occur in your future.

 

In 2011 the income cutoffs for a traditional IRA where you can get the full deduction was $56,000 and partial deduction was $65,999 if you were single.

 

In 2024 the income cutoffs for a traditional IRA where you can get the full deduction is $146,000 and partial deduction is $161,000 if you are single.

 

As you can see, over that 13 year period the amount adjusted upward by $90,000!

 

In 2011 the income cutoffs for a ROTH IRA where you can get the full contribution was $107,000 and partial contribution was $122,000 if you were single.

 

In 2024 the income cutoffs for a ROTH IRA where you can get the full contribution is $230,000 and partial contribution is $240,000 if you are single.

 

As you can see, over that 13-year period the amount adjusted upward by $123,000!

 

Married Limits

In 2011 the income cutoffs for a traditional IRA where you can get the full deduction was $90,000 and partial deduction was $109,999 if you are married.

 

In 2024 the income cutoffs for a traditional IRA where you can get the full deduction is $230,000 and partial deduction is $240,000 if you are married.

 

As you can see, over that 13-year period the amount adjusted upward by $140,000 for the Traditional IRA.

 

In 2011 the income cutoffs for a ROTH IRA where you can get the full contribution was $169,000 and partial contribution was $179,000 if you are married.

 

In 2011 the income cutoffs for a ROTH IRA where you can get the full contribution was $230,000 and partial contribution was $240,000 if you are married.

 

As you can see, over that 13-year period the amount adjusted upward by $61,000 for the ROTH!

 

Keep in mind that the above figures represent the “income cutoff” that is based on your AGI or Adjusted Gross Income—not Total Income!

 

Contribution Limits

Single:

 

The annual contribution limit for 2011 was $5,000 if you were single and had earned income ($6,000 if you were over age 50).

 

By contrast:

 

The annual contribution limit for 2024 is $7,000 if you were single and have earned income of at least the contribution limit ($8,000 if you are over age 50).

 

Married:

The annual contribution limit for 2011 was $10,000 if you are married and have earned income ($12,000 if you are both over age 50).

 

The annual contribution limit for 2024 was $14,000 if you are married and have earned income of at least the contribution limit ($16,000 if you are both over age 50).

 

Always remember that if your earned income is “less than” the contribution limit—your contribution is limited—to your earned income!

 

Deadline to Contribute

Also keep in mind that you have until the tax deadline (April 15, 2025) to fund your IRA for 2024 and be sure that you understand that with a traditional IRA—your contributions are in pre-tax dollars (deducted on your tax return if you qualify) and your withdrawals are taxable at your ordinary income tax rate at the time of withdrawal.

 

You want to always know that you can make 2024 contributions up until the April 15th deadline in 2025, and you can make 2025 contributions up until the 2025 tax filing deadline of April 15, 2026. 

 

In future years the tax deadline of April 15th is normally the deadline unless the date falls on a weekend or federal holiday.

 

If you file for an extension, the cutoff date for contributions remains April 15th of the tax year or the next business day if the 15th is on a weekend or holiday!

 

With a ROTH IRA you pay your taxes upfront, however you or those who inherit your IRA—will owe no taxes on withdrawals but would be required to make RMDs.  Depending on your tax bracket—the ROTH is often the best choice in the long run—for many.

 

*Again the 2024 Contribution limits are $7,000, or if you are age 50, $8,000

 

*Know that Income Limits Apply when investing using IRAs as there is a minimum that you must earn to qualify–and a maximum that will eventually phase you out.  With a traditional, you can continue to contribute after the phaseout, however you would not be able to deduct the contribution.

 

Can I convert from a Traditional to a ROTH IRA

You can convert from a Traditional to a ROTH regardless of your income.  Be aware that you might have a large tax bite!

 

You want to plan and strategize the conversion to help minimize your taxes in a very serious way as there can be serious tax consequences if you fail to do so!

 

If you do not yet have an IRA—you can set up one at any time, if you qualify and the process is fairly simple.

 

You can also convert to a ROTH IRA at any time—just be aware of your taxes that you will have to pay—prior to doing the conversion–not AFTER!

 

Converting is particularly important if you anticipate being in a higher tax bracket in your retirement years.  With 2024 tax rates from the TCJA scheduled to end at the end of 2024—you would face a maximum tax rate of 35%.

 

Depending on your age and income streams—it can often be difficult to determine whether you will be in a higher or lower tax bracket during your retirement years, but you want to make the best educated guess possible to assist in your planning at this time.

 

IRAs & College Planning

  • Regardless of whether you have a Traditional or Roth IRA, there is a penalty-free way to use your retirement savings to pay for your education, your children’s, or your grandchildren’s education.  IRA withdrawals used for qualified education expenses at an eligible institution are “exempt” from the penalty.

 

  • Higher education is expensive, and if loans are taken out to pay for school, it may take 10 to 30 years to repay a student loan when you borrow, depending on the amount and your repayment schedule. While direct higher education expenses qualify for penalty-free withdrawals from a traditional individual retirement account (IRA), the payment of student loans and interest don’t.

    Be aware that early withdrawals from a Traditional IRA—if you’re not yet age 59½—used to pay for student loans are subject to a 10% penalty, plus any deferred income taxes owed.

 

  • Early withdrawals from a ROTH IRA, however, may be free from penalties as long contributions—and not gains—are touched before age 59½.

 

  • It’s important to determine whether using IRA funds to pay off student loans is viable for your situation as everyone’s financial profile is unique, therefore you want to proactively run the numbers to see if it makes good sense financially as well as you psychologically being comfortable about your decision.

 

ROTH accounts could also work for you in college planning—and as an added bonus if your child has enough to go to college with other means—such as your current income, financial aid, scholarships etcetera—you could avoid using the ROTH (or traditional for that matter) for your child’s education—and continue building up the account for (your and your spouse’s) retirement years.

 

Withdrawals of your “contributions” would be tax free.  There would be no 10% early-withdrawal penalty on “earnings” if you use the money for “educational” expenses.

 

Even with a ROTH, if you were under age 59.5 and you held the account for less than five years. you would owe tax on the “earnings” at your ordinary income tax rate plus a 10% penalty for early withdrawal unless an exception was applicable.

 

Regardless of how you use your contributions, they would be tax free if withdrawn from your ROTH account for any reason!

 

Traditional IRA & Home Purchase

You can take funds out penalty free to purchase your home whether you have a ROTH and/or Traditional IRA.

 

You can also invest in Self-Directed IRAs and Invest in Real Estate.

 

ROTH IRA & Home Purchase

You can take funds out penalty free to purchase your home whether you have a ROTH and/or Traditional IRA.

 

You can also invest in Self-Directed IRAs and Invest in Real Estate.

 

If you plan on using a traditional or ROTH for your home purchase–or investing for retirement using real estate investing, make sure you have a well thought out strategy.

 

Be sure you have your retirement goals in place and a strategy to get to the “number” that you need to reach—dollar wise—to live at your pre-retirement levels at a minimum–where possible.

 

For example, if your “number” was $500,000 and you were age 65, you would be able to withdraw $20,000 per year for approximately 30 years assuming a modest rate of return.

 

You would also need to factor in your Social Security and any other income that you would receive monthly.

 

If tapping into your ROTH for your child’s educational expenses would prevent you from getting to your “number”—you would have to increase the ROTH contributions—or other Retirement Account contributions—or pursue another educational and/or retirement funding strategy for you or your loved one.

 

If you plan on using a Traditional or ROTH account for educational funding be sure to start well in advance.  ROTH accounts have a dollar contribution per year limit—and a little higher if you are over age 50.

 

Traditional IRAs allow you to contribute regardless of your income, and what you can “deduct annually” is limited!

 

If you are married your spouse can also contribute up to the annual amount limits, or a little higher per year if age 50 or older if qualifications are met.

 

Always Remember—in order to Contribute to “Any” IRA You Must Have “Earned” Income!

 

Keep in mind that in order to contribute to a ROTH you must have earned income (employer or self-employed) and there are income limits of Modified Adjusted Gross Income for Single and for Married Filing Jointly that are adjusted annually.

 

An example of what you can achieve using IRA contributions:

 

If you contribute just $5,000 annually from the time your child is born, you would have $90,000 in “contributions” alone.  Assuming you had a modest annual return, your total account value could be over $200,000 by the time your child attended college.

 

If your spouse also contributed the total “contributions” would be over $180,000 and the account value could be over $400,000 by the time your child attended college.

 

IRA Investment Choices

Stocks, Bonds, Mutual Funds, CDs, real estate, precious metals, blockchains and many other financial accounts can be a part of your IRA if set up and structured properly.

 

IRA’s & Alternative Investments

If you open a self-directed IRA with a custodian willing to deal with alternative assets—you could invest in real estate, gold bullion, tax liens, racehorses and other more speculative and/or exotic investments.

 

However, you cannot invest in art or life insurance with your IRA account(s)!

 

It is not always wise to invest in more speculative IRA holdings—even though you are legally allowed to do so.  When dealing with IRA’s that offer more exotic types of investments—you can often run into those who are con-artists and very smooth in their articulation of what they are offering—and the returns you could possibly get may be unrealistic.  You want to have a real understanding of what you invest in and choose your account custodians in a wise and prudent manner.

 

Due to the large number of baby-boomers converting their 401k’s and other retirement accounts to an IRA—con artists and other unscrupulous players feel they have a ripe and lucrative market that they can tap into for years.

 

You must be very careful if you are even considering any out-of-the-ordinary type of investments.

 

Also, realize that there are even more inherent risks when investing in non-traditional ways.

 

You will have market risk if you invest in gold or real estate.  You must also use funds that are inside of the IRA—for renovations and upgrades that you want to do to real estate you own inside of an IRA!  You will have the risk of horses getting sick or dying—if you invest in racehorses…and so on.

 

If you are determined to invest in alternative—out-of-the-ordinary type of investments—a better option may be to consider doing so (inside of an IRA) with a mutual fund that invests in a broad range of investments and has a five-to-10-year track record of success.

 

If your goal is to invest in real estate—consider a mutual fund (REITs) that invests in a broad range of properties!

 

By doing so you will reduce your risk from being conned by fraudsters—and reduce other risks that were mentioned above.

 

Understanding the IRA rules and guidelines before and after you transition

Traditional IRAs will face taxation upon transfer to beneficiaries and will be taxed at transfer–based on life expectancy of beneficiary.  A ROTH can be transferred tax free with no minimum withdrawals required annually to your spouse, other beneficiaries will face mandatory withdrawals.

 

Traditional IRA

With a traditional IRA, you would set it up with an IRA custodian and contribute to it in the manner that you chose to do so—for example weekly, monthly or yearly.  You have up until the tax deadline of the current year to make contributions for the previous year.

 

Let’s say you contribute $5,000 by the April 15th, 2025, filing deadline.  If you filed your return on April 17th, 2025, you could deduct it on your 2024 tax return on form 1040.  If you were in the 35% tax bracket you could save roughly $1,750 on your taxes if you were able to utilize the full deduction.

 

If you had already filed your return before April 15th, 2025, you could amend your 2024 return—or you could decide to make the $5,000 contribution after April 15th, 2025–and deduct the 2025 contribution on your 2025 income tax return.

 

The correct choice for you would depend on your expected contributions or goals.  To maximize your contributions—you would choose the first option.

 

Taxation at Withdrawal

 

Traditional IRA

If you were to withdraw funds prior to age 59 ½ you would have a 10% early withdrawal penalty and the withdrawal would be taxed at your ordinary income tax rate.

 

If you were to withdraw funds after age 59 ½ you would “not” have a 10% early withdrawal penalty and the withdrawal would be taxed at your ordinary income tax rate.

 

Keep in mind that withdrawals were once mandatory at age 70 ½ now the age is 73 with a Traditional IRA.

 

Roth IRA

With a ROTH IRA “you would pay your taxes on your contributions up front” and then contribute to your IRA.

 

Your earnings would grow tax free and your “contributions” that you later decide to withdraw would be tax free—because you have already paid taxes on them!

 

You cannot deduct your contributions on your personal income tax return!

 

Once you reach age 59 ½ and have contributed for at least five years, you can receive your earnings—or investment gains tax free.

 

Withdrawals are not mandatory at age 70 ½, 73 or any age–BUT WITHDRAWALS WOULD BE MANDATORY TO BENEFICIARIES AFTER YOUR TRANSITION.  IF YOUR WIFE WAS THE BENEFICIARY–WITHDRAWALS WOULD NOT BE MANDATORY.

 

Deadline to Contribute to Traditional & ROTH IRAs

Also keep in mind that you have until the tax deadline (April 15 generally) to fund your IRA annually—and be sure that you understand that with a traditional IRA, your contributions are in pre-tax dollars (deducted on your tax return if you qualify)—and your withdrawals are taxable (normally after you retire).

 

With a ROTH IRA, you pay your taxes upfront, however you or those who inherit your IRA—will owe no taxes on withdrawals.  Depending on your tax bracket a ROTH IRA is often the best choice in the long run for many.

 

If you’re 59.5 or older and have had at least one Roth IRA that has been open for more than five years, withdrawals from any of your Roth IRAs are called “qualified” withdrawals.

 

Your qualified withdrawals would be free of any federal income tax or penalty.  The “five-year period” for qualified withdrawals starts on January 1 of the first tax year for which you make a Roth contribution.

 

If you established your first Roth IRA on April 15, 2021—and the contribution was for the 2021 tax year, your five-year period would start on Jan. 1, 2020.

 

You could begin taking qualified withdrawals at any time after Jan. 1, 2025.  You could also take tax-free qualified withdrawals from any and all Roth IRAs that you own by then—as long as you’re 59 ½ or older.

 

Let’s say you opened a second Roth IRA account in 2021 by converting a Traditional IRA, you could take tax-free qualified withdrawals from that account too—after Jan. 1, 2025—as long as you’re at least age 59 1/2.

 

What Happens if You Take Withdrawals Before Age 59 ½?

If you take a ROTH distribution before age 59 ½, it would be considered a “non-qualified” withdrawal—unless an exception applies.

 

A non-qualified withdrawal or distribution may be subject to federal income tax and a 10% penalty tax!

 

As far as the IRS is concerned, non-qualified withdrawals come first from your annual Roth “contributions”—not your “investment gains or earnings.”

 

If you take out contributions only–you “would not pay taxes on the contributions” as you have already paid taxes on that portion of your ROTH IRA!

 

Always remember that withdrawals from your “contributions” are always tax-free and penalty-free with a ROTH IRA.

 

To figure out how much of your account is “qualified” you would add up your annual contributions to all Roth IRAs set up in your name (do not use any accounts in your spouse’s name).

 

To prove you don’t owe any income tax or penalty, you’ll have to fill out Part III of IRS Form 8606 (Nondeductible IRAs) and file it with your Form 1040 during the tax filing season.

 

If you converted from a Traditional IRA to a ROTH IRA—non-qualified withdrawals are deemed to come from ROTH conversion contributions “after” you determine what your contributions are.

 

To figure out how much is non-qualified due to conversion—you would add up all conversion contributions from converting a traditional IRA or a retirement plan payout to all Roth IRAs set up in your name (again—do not use any accounts in your spouse’s name).

 

Withdrawals from the conversion are federal-income-tax-free, but you could still get hit with a 10% penalty—unless an exception applies.

 

Keep in mind that age 59.5 is generally the required age for starting to receive IRA distributions without getting hit with the federal 10% premature withdrawal penalty tax.  With a Traditional IRA (whether you continue to work or not), there are some circumstances under which you can receive your IRA funds even earlier without the penalty.

 

The 10% penalty applies unless you qualify for an exception:

Exceptions for Early Distributions from an IRA or a Traditional & ROTH IRA include:

• You had a “direct rollover” to your new retirement account

• You received a lump-sum payment but rolled over the money to a qualified retirement account within 60 days

• You were permanently or totally disabled

• You were unemployed and paid for health insurance premiums

• You paid for college expenses for yourself or a dependent

• You bought a house (can be for children or grandchildren—dollar limits apply)

• You paid for medical expenses exceeding 7.5% of your adjusted gross income

• The IRS levied your retirement account to pay off tax debts.

• It has been more than five years since the conversion contribution (the five-year period starts on Jan. 1 of the year when the conversion contribution occurred)

 

Lesser-Known Exceptions:

Annuitize Your IRA—one way to take money from your traditional IRA without incurring the 10% penalty is to “annuitize” your account.  The way this works is that for five years, or until you turn age 59 1/2 (whichever is longer), you take annual cash withdrawals based on your life expectancy, as predicted by the IRS.

Withdraw Roth Contributions—the Roth IRA allows penalty and tax-free withdrawals of “contributions” for any reason.  However, once you’ve taken out that money, you don’t have the option of replacing it.

Take a 60-Day Loan—you can withdraw funds from your IRA for up to 60 days tax-and penalty-free as long as you return the funds to an IRA by the end of the 60-day period.  The IRS looks at this as a non-taxable rollover.

Just make sure that the funds are back in an IRA within the 60 days, otherwise it will be treated as a withdrawal that is subject to taxes and penalties if you are under age 59 1/2!

Also, if you follow this strategy, you can only do it once within a 12-month period for the account in question.

 

Special Penalty-Free Withdrawal Situations:

First-time home purchase—up to $10,000 for you, your spouse, your children or even your grandchildren.

Qualified education expenses—for you, your spouse, your children or even your grandchildren. Approved expenses include post-secondary education, tuition, books, supplies and, if the student is enrolled at least half-time, room and board.

Disability—to qualify for a disability exemption, you must prove that you are incapable of working.

Un-reimbursed medical expenses—expenses must exceed 7.5% of your adjusted gross income.

Health insurance for the unemployed—only after 12 consecutive weeks of collecting unemployment benefits.

 

Use caution before you dip into an IRA or any Retirement Account:

Before you start dipping into your retirement stash, you may want to explore other options including a standard bank loan.

 

If you must withdraw funds from an IRA, avoid paying taxes by withdrawing “contributions” from your Roth IRA first.

 

Be sure to tap a tax-deductible IRA last.  Above all, you generally want to use these tax-sheltered accounts as a last resort–unless you have planned upfront to use them–possibly where an exception applies.  And before you raid your retirement savings, make sure you are leaving enough to support your actual retirement–as you want to know your “retirement number” upfront.

 

Key Points to Remember:

  • ROTH IRAs have a five-year rule that applies in three situations:

 

  • 1) if you withdraw account earnings,

 

  • 2) if you convert a traditional IRA to a Roth,

 

  • 3) or if a beneficiary inherits a Roth IRA.

 

• Traditional IRA withdrawals used for higher education are 10% penalty free but taxable at your ordinary income rate

• Funds in a ROTH that are withdrawn for higher education would be taxed on earnings only—not original contributions

• Funds in a ROTH that have been there for five or more years would be taxed on earnings only—not original contributions

• Funds in a ROTH that have been there for less than five years would be taxed on earnings only—not original contributions

At this time there is a $10,000 maximum withdrawal of IRA funds for a home purchase—whether Traditional or Roth!

• Traditional IRA withdrawals used for disability or death are 10% penalty free but taxable at your ordinary income rate

• A Roth IRA used for death or disability held in account for less than five years would have no penalty but would be taxed on earnings—not original contributions

• A Roth IRA used for death or disability held in account for more than five years would have no penalty –and would have no taxes

  • If you meet the income guidelines and otherwise qualify–you could receive a savers credit (line 4 schedule 3) on top of your traditional IRA deduction

There are no required distributions for a Roth IRA while the original account holder is alive. However, after the account owner dies, their beneficiaries must empty the account according to the rules at the time of death: five years if the account owner died before 2020, and 10 years if he or she died after 2020. An inheriting spouse also has the option of taking RMDs based on their own life expectancy.

 

However, death of a ROTH account owner doesn’t totally get you (the beneficiary) off the hook with regard to the five-year rule.  If you, as a beneficiary, take a distribution from an inherited Roth IRA that wasn’t held for five tax years, then the earnings will be subject to tax.

 

Withdrawals when an exception does not apply:

Traditional IRA withdrawals would have a 10% penalty UNLESS YOU ARE AGE 59.5 OR OLDER—and would be taxable at your ordinary income rate

• Funds in a Roth IRA for less than 5 years would have a 10% penalty on earnings—not contributions—and would be taxed on earnings at ordinary income rates—original contributions would be non-taxable

• Funds in a Roth IRA for more than 5 years would have a 10% penalty on earnings—unless you are age 59 ½ or older—and would be taxed on earnings at ordinary income rates—unless you are age 59 ½ or older—original contributions would be non-taxable regardless of age

• Finally, any further non-qualified withdrawals from Roth accounts set up in your name (after you’ve tapped all your contributions) are deemed to come from earnings or investment gains.

• Non-qualified withdrawals from earnings are 100% taxable prior to age 59.5 and meeting the the 5 year rule.  You or your tax professional would fill out Part III of Form 8606 to calculate the taxable amount from this layer, and enter that on Form 1040.

• In addition, the 10% penalty applies, unless you’re eligible for an “exception.” If you owe the penalty tax, fill out Form 5329 and enter the penalty on line 8 of Form 1040.

 

What if I am age 59 ½ but I fail to meet the five-year test:

Any Roth IRA withdrawal taken before passing the five-year mark would be considered a non-qualified withdrawal.  As such, it may be subject to income tax and a 10% penalty tax.

 

In this case, non-qualified withdrawals are generally handled in the same order as above:

1)—first from annual contributions

2)—then from conversion contributions

3)—and lastly from investment gains or earnings.

 

Most importantly you want to know that, non-qualified withdrawals from investment gains are subject to income tax, and, if you’re under 59.5, the 10% penalty (unless you’re eligible for an exception) would apply.

 

You or your tax professional would fill out Part III of Form 8606 to calculate the taxable amount from investment gains and enter that figure on Form 1040.  If you owe the penalty tax, fill out Form 5329 and enter the penalty on line 8 of Form 1040.

 

If you qualify for the home purchase exception: If you’ve passed the five-year test but you’re under 59.5, a special exception allows tax-free and penalty-free Roth withdrawals in order to buy a principal residence.

 

However, there’s a lifetime $10,000 limit on this deal, and you must use the money within 120 days of the withdrawal.  The home buyer can be you or certain relatives (including children and grandchildren).  However, the buyer must not have owned a principal residence within the two-year period ending on the purchase date.

 

Final Thoughts on Taxation & IRA’s

While the tax rules for “Traditional” and “ROTH” contributions and withdrawals may seem complicated, your custodian (or your tax professional) will clear up much of your confusion by completing Part III of Form 8606 after you receive tax documents from your custodian.

 

In addition, you will receive a form 1099-R from your IRA custodian or trustee shortly after the end of any year in which you take withdrawals.

 

By providing this form to your tax professional—or utilizing the form yourself if you do your own taxes–you can complete your taxes in an efficient manner.

 

As for contributions—you mainly have to keep the income cutoffs in mind if you have income that is in the income cutoff limitation ranges.  Your contribution limit is easy to remember—as it will be $7,000—or $8,000 as of 2024 if you are age 50 or older, and the number could change slightly from year to year.

 

The 1099-R would show the total amount of withdrawals for the preceding year and your tax with-holdings (and the IRS gets a copy) so if you took any “non-qualified withdrawals”—the IRS will expect to see a Form 8606 included with your return.

 

With a traditional IRA—you get a deduction up front on your tax return if you qualify, and you pay taxes on your distributions at “ordinary income” tax rates in later years after you retire (or before if you took a early distribution and there would be an additional 10% early withdrawal penalty)—whereas, with a ROTH you get no deduction up front, however all “qualified” distributions are tax free if you meet the 5 year rule and age 59.5.

 

Be sure to go to our individual retirement account page where you can find other helpful ways in which you can use IRA’s to reach your and your family’s retirement and other goals.

 

For income tax preparation you can utilize the tax professional of your choice—or if your tax situation is not very complicated you can choose to do your taxes yourself!

 

Many retirees who reach age 70 ½ were required to begin to make withdrawals from their retirement accounts in accordance with the IRS guidelines.  In 2023 the age was moved up to 73–giving you more time for your traditional IRA account to grow, if you have no need for the funds prior to age 73.

 

As for your annual taxes once you start receiving your traditional IRA distributions, those who are not working would normally pay their taxes (estimated taxes) in AprilJuneSeptember and the following January on a continuous cycle until their transition or the funds in the account ran out.   For those who continue to work after age 73, they may be able to avoid paying estimated taxes by withholding their taxes at the appropriate level on their W-2.  Still others who are not working could comply with their withholding requirement by having taxes withheld on their social security income or W2P.

 

To avoid the IRS penalty for “underpayment of taxes” you have the option of paying 100% of your previous year taxes through estimated payments (previous year tax divided by 4) in April—June—September and the following January or you can pay 90% of your current year taxes. 

 

You can also choose to have your taxes “voluntarily” withheld by adjusting your W-4P for your pension income that goes on your 1099R that you would get during the tax season.

 

Even your social security benefits can be “voluntarily” withheld by you electing to have taxes withheld (use form W-4V) at varying percentages such as 7%, 10%, 15% or 25% of your monthly benefits.

 

If you receive income from your Traditional IRA, you have more flexibility.  You can choose to have no withholding, otherwise 10% will be withheld by law.  At the other end of the spectrum, you could tell your IRA custodian to withhold 100%.

 

IRA distributions are considered made evenly, regardless of when you receive them during the year.

 

You could choose to receive your IRA distributions yearly if you are able to live off of your other income sources—say November or December and have an amount withheld that could cover the taxes that you owe from all of your other taxable income (must be over age 70 ½–now age 73).

 

To effectively use this strategy (avoid the underpayment of taxes penalty) your RMD or required minimum distribution must be large enough to cover your taxes that would be owed.

 

You would avoid having with-holdings on your other income, avoid writing a check for estimated taxes every 3 months or so–and make your life less stressful by doing so.

 

Conclusion

The strategy that you use with your IRA account(s) will affect not only you, but potentially your heirs as well.

 

It is important that you give serious attention to how you will receive your retirement income after you turn age 70 ½–now age 73 as of 2023, and you have the opportunity to structure your income in a way that can minimize your tax bite or make the payment of your taxes more convenient.

 

 Non-spouse Beneficiaries

Also give serious consideration of what will happen to your retirement income after you transition. 

 

If you are married the process is simpler, however if you have non-spouse heirs in the picture you don’t want to trigger a large tax bill for them by not knowing what may occur after you transition.

 

Non-spouse beneficiaries of “any age” who want to stretch the IRA over their own “life expectancy” must start the RMDs the year following the year the owner of the IRA transitioned.

 

Non-spouse heirs will have to pay tax on distributions of deductible contributions and earnings from a traditional IRA!

 

Even though non-spouse ROTH IRA owners will not feel a tax bite, they still must begin taking RMDs.  If they fail to do so a 50% penalty could apply on the amount that should have been withheld for the year.

 

If you miss the RMD for the year in question, you can still possibly avoid the penalty by emptying the account within 5 years of the owner’s death.

 

However, death doesn’t totally get you off the hook with regard to the five-year rule.  If you, as a beneficiary, take a distribution from an inherited Roth IRA that wasn’t held for five tax years, then the earnings will be subject to tax.

 

The size of your ROTH IRA and the age of your intended beneficiary will come into play and you must plan accordingly at this time to help minimize or eliminate the penalty for your intended beneficiary(s).

 

Also realize that non-spouse beneficiaries cannot roll an inherited IRA over into their own IRA!

 

If you are a spouse, and you inherit an IRA you must take RMDs based on your life expectancy.

 

A separate account must be set up with a title that includes the deceased name and the fact that the account is for a beneficiary(s).   Also have the non-spouse heir name successor beneficiaries on the newly titled account(s).

 

If a number of non-spouse heirs are involved, it is important that they “split the IRA” so that the money can continue to grow tax deferred, otherwise the age of the oldest beneficiary will be used to calculate RMDs which would shorten the growth period of the IRA.

 

To be valid the split must occur by December 31st of the year following the IRA owner’s transition!

 

If you decide to leave your IRA with a charity or multiple non-spouse beneficiaries including a charity or other non-person entity that entity must receive their share by September 30th following the year of the owner’s transition.

 

If that share isn’t paid out, you will create a problem if a non-spouse beneficiary(s) is involved.

 

The entity must be paid out and the account must be split (mentioned above) otherwise your beneficiaries have to empty the account within 5 years if the owner transitioned before his or her required beginning date for taking distributions.

 

If the owner died after their RMD date the beneficiary(s) must take annual RMDs based on the deceased life expectancy, as noted in IRS tables.

 

If a trust is involved the process works a little differently as the IRA custodian must receive a copy of the trust by October 31st of the year following the year the owner transitioned.

 

If the IRA custodian does not receive a copy of the trust in a timely manner the trust will be considered a non-designated beneficiary and the payout rules mentioned above would apply to the trust.

 

Although a lot about RMDs has been discussed, it is important that you process and apply what may be relevant or potentially relevant to you and your family at this time.

 

Be sure to discuss required minimum distributions and tax strategy and plan with your family and other professionals in ways that you can have favorable outcomes.

 

By doing so you can lessen your taxes, make your heirs life less stressful, build your wealth more efficiently and transfer your wealth after you transition in a manner that is best for all parties involved.

 

 

 

IRA’s play a critical role in the United States for workers who lack a retirement account that is sponsored by their employer and is a major tool for those who are in the know and are willing to use the power of compounding and investing consistently over time for their benefit.

 

Whether a Traditional or a ROTH, IRA’s can play an important role for those who qualify and help them live out their retirement years with more dignity.  By starting early and combining the returns with retirement accounts, other investments and social security income, it could provide the needed edge that allows better living for you and your spouse in your retirement years.

 

The bottom line is that IRAs—both ROTH and Traditional are an important tool to help you reach your retirement and other goals and should be given strong consideration by you if your goal is to improve your living conditions for yourself and your family to a high level in possibly a more “tax efficient” manner.

 

With a traditional IRA—you get a deduction up front on your tax return, and you pay taxes on your distributions at “ordinary income” tax rates—whereas, with a ROTH you get no deduction up front, however all “qualified” distributions are tax free.

 

A Properly Funded IRA Can Enhance Your Future Living Conditions

 

If you have addressed your finances in a comprehensive manner and are in financial position to do so—IRAs should be a part of your financial strategy to help you and your family attain the future goals that you desire.

 

Be sure you use realistic projections and you invest consistently using a portfolio that fits your investment style. You can also consider target-date funds inside of an IRA.

 

By starting early in your “life stage” you can set yourself and your family up for real success—in a relatively painless manner.

 

You must not only be good or excellent in the management and understanding of your IRA, but you must also be able to tell someone else about IRAs.  It is your connection and your presentation to others that is at stake and is critical for your successful spreading of how to use IRAs and other wealth building techniques to not only reach your highest heights, but help others reach theirs as well.

 

Isn’t it time to get your IRA and other Retirement Planning under way–today?

 

All the best to your IRA success…

 

Note: This discussion is not intended to be financial or legal advice and the accuracy of all information cannot be guaranteed.  Even though all reasonable action was taken to ensure accuracy, accuracy cannot be guaranteed.

 

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Social Security Simplification & Wealth Building

Learn the importance of knowing all about social security prior to you actually deciding to get your benefits…                 

 

FAQs of Visitors to the sites created by Thomas (TJ) Underwood…

 

Purchase Wealth Building Now–Now…

 

Read a Sample Chapter in Wealth Building Now

See what is inside Wealth Building Now

 

Caution: 50-minute read, but well worth it in the opinion of TheWealthIncreaser.com for those who desire to take control of their understanding of Social Security

 

Create your social security account today…

 

In the current economy the threat of Social Security and Medicare tampering happens on a regular basis.  But what exactly is Social Security and Medicare–and how can you make the Social Security and Medicare that you have contributed to work for your best advantage during your retirement years?

 

Deciding on the best approach to take to receive your Social Security benefits can be a confounding and confusing process for many, and this discussion is designed to clear up competing arguments on when and what is the best approach to receive retirement benefits and more specifically your Social Security benefits so that the average person can understand and possibly provide guidance so that they are better informed.

 

And just as your investments and how you approach them are determined by your unique goals that you have, your risk-tolerance level, your income and your personal situation–so too does your analysis of your Social Security that you will receive, to a lesser or greater degree, depend on those same factors.

 

In this timely discussion, TheWealthIncreaser.com will attempt to simplify the topic of Social Security so that you can make better use of Social Security during your retirement years–and possibly be of more benefit to your heirs after you transition.

 

Social Security & Your Finances

 

Learn how to determine the best time to receive the social security and other benefits that you are entitled to…

 

As you age and edge closer to retirement, Social Security and your other retirement income becomes a real concern.

 

In this discussion, TheWealthIncreaser.com will discuss the ins and outs of Social Security so that you can better time “the time” (pun intended) that you will elect to receive your benefits, and furthermore show you other things that you can do as you approach retirement that can enhance your Social Security and other benefits that you may be entitled to.

 

You can apply for Social Security disability income at any time if you are suffering from a disability that allows you to receive benefits.

 

Full Retirement Age, or FRA, is the age when you are entitled to 100 percent of your Social Security benefits, which are determined by your lifetime earnings.  It is gradually increasing, from 66 and 6 months for those born in 1957 to 66 and 8 months for those born in 1958 and, ultimately, 67 for people born in 1960 or later.  Be sure to “distinguish” that FRA when you are entitled to 100% of your Social Security benefit, is not the same as your Maximum Benefit Amount which could be 25% or more higher than the amount you receive at your FRA.

 

Those FRA dates apply to the retirement benefits you earned from working and to spousal benefits, which your husband or wife can collect on your work record.  They differ slightly for survivor benefits, which you can claim if your spouse dies.

 

Full retirement age for survivors is 66 and 4 months for people born in 1958 and gradually increases to age 67 for people born in 1960 or later.

 

  • Claiming benefits “before” full retirement age will lower your monthly payments that you receieve from the SSA; the earlier you file — you can start at age 62 — the greater the reduction in benefits.  Spousal and survivor benefits are also reduced if you claim them before reaching full retirement age.

 

  • You can increase your retirement benefits by waiting past your FRA to retire.  Each month you put off filing up to age 70 earns you delayed retirement credits that boost your eventual benefit.

 

How early should I decide to get my benefits?

 

Your window to elect to receive Social Security benefits begin at age 62 and end at age 70 (note: you can elect to receive Social Security after age 70, however there is no financial benefit of doing so).

 

That’s a difficult question and will depend on your goals, risk-tolerance level, income, tax position, personal situation and other factors that may be unique to your current and anticipated financial position.  You can claim Social Security as early as age 62, but it may be to your benefit to put off filing for benefits as long as possible (pun intended).

 

By delaying you can maximize your monthly payments.  But you may want to do further analysis.

 

Here are some key factors that you may want to consider:

 

  • Q: How’s your and your family’s health history?  A: If you have a reasonable expectation of living decades past retirement, postponing benefits to get a bigger payment could prove important to your long-term financial stability.  But if you turn 62 and you are in poor or debilitating health, or you have a genetic predisposition to certain illnesses, or otherwise have a pessimistic view of your future, you may decide it makes more sense for you and your family to get what you can, while you can.

 

  • Q: How long do you expect to be gainfully employed? A: Many older workers are being nudged into early retirement as companies downsize, and they wind up spending their last working years in the gig economy or other odd jobs.  If you are one who did not plan appropriately for you golden years and you find yourself struggling to pay your monthly expenses, filing for Social Security at age 62 or before your FRA and taking lower benefits may be what you need to make ends meet.  Just be sure to take into consideration inflation, rising property taxes, rising insurance rates and other factors that may be unique to you and the environment in which you live, into serious consideration.

 

Still, there are strong arguments for waiting as long as you can, and you want to use caution and do careful analysis of the choices available:

 

  • Filing earlier locks you into a lower benefit on a “permanent” basis.  You are not entitled to 100 percent of the benefit calculated from your earnings history unless you apply at full retirement age (66 and 6 months for people born in 1957, 66 and 8 months for people born in 1958 and rising two months annually to age 67 over the next few years).

 

 

  • From full retirement age until age 70, you can earn delayed retirement credits that can boost your eventual benefit by two-thirds of 1 percent for each month of delay — and increase survivor benefits for your spouse, if you die first.

 

Survivor, Spousal & Dependent Support

 

  • after you transition your spouse and/or dependents could receive–survivor benefits

 

  • after 10 years of marriage and you divorce–your “former spouse” could be entitled to benefits–divorced spouse benefits

 

  • dependents may be entitled to receive social security benefits based off of your work record–dependent benefits

 

Other family members may be entitled to benefits that you have earned through the Social Security program during your working years.

 

Social Security “survivor’s benefits” are paid to widows, widowers, and dependents of eligible workers and this benefit is particularly important for “young families with children” and the benefit amount would be based on your earnings, if you were to transition after accumulating a work history.

 

If you are divorced, your ex-spouse can receive benefits based on your record (even if you have remarried) if certain conditions are met.

 

Generally, you must be married for one year before you can get spouse’s benefits.  However, if you are the parent of your spouse’s child, the one-year rule does not apply.

 

The same is true if you were entitled (or potentially entitled) to certain benefits under Social Security or the Railroad Retirement Act in the month before the month you got married.  A divorced spouse must have been married 10 years to get spouse’s benefits.

 

You can apply for benefits by going online and completing the application for benefits.

 

Regardless of when you claim Social Security benefits, the sign-up age for Medicare is still 65. You can’t enroll earlier, except under very narrow circumstances, and you may incur hefty fees for signing up later.  There is a “time-period window” (roughly a 6-month period near the time of your 65th birthday) that must be met in order to sign up and receive Medicare!

 

How does a Reduction in Benefits work?

 

It depends on the year you were born and how long until you reach full retirement age, abbreviated as FRA.  That’s the age at which you would collect 100 percent of the monthly benefit payment that the Social Security agency calculates from your lifetime earnings history.

 

Retirement benefits are designed so that you get the full benefit if you wait until full retirement age, which is 66 and 6 months for those born in 1957, 66 and 8 months for those born in 1958 and gradually rising to 67 for those born in 1960 and afterward.  If you file early, Social Security reduces the monthly payment by 5/9 of 1 percent for each month before full retirement age, up to 36 months, and 5/12 of 1 percent for each additional month.

 

Suppose you were born in 1962 and will turn 62, the earliest age to claim retirement benefits, in 2023.

 

Filing at 62, 60 months early, permanently reduces your monthly benefit by 30 percent and if you would have been entitled to $2,000 a month at full retirement age, you will get $1,400 if you start benefits when you turn 62.

 

Here’s what the reduction would be in subsequent years.

 

  • Age 63: 25 percent

 

  • Age 64: 20 percent

 

  • Age 65: 13.3 percent

 

  • Age 66: 6.7 percent

 

In essence, by starting early you would forfeit roughly 5% to 7% or more in guaranteed returns a year, depending on the year you decided to start receiving your benefits.

 

  • The figures above represent the reduction if you start benefits as soon as possible upon reaching the designated age.  The benefit decrease is calculated based on months, not years, and each month that you wait beyond your 62nd birthday lessens the reduction.

 

 

  • All care in the accuracy in the data above was pursued, however the above data cannot be guaranteed as changes occur over time and the data obtained cannot be guaranteed.

 

What is the Maximum Benefit that I could receive?

 

 

You receive the highest benefit payable on your own record if you start collecting Social Security at age 70.

 

Once you reach your full retirement age, or FRA, you can claim 100 percent of the benefit calculated from your lifetime earnings.  Again, the full retirement age is 66 and 6 months for people born in 1957, 66 and 8 months for those born in 1958 and for those born in 1959, 66 and 10 months.

 

It will incrementally increase to 67 over the next few years, however if you were to hold off a few years, you could earn delayed retirement credits that increase your eventual benefit — by two-thirds of 1 percent for each month you wait.

 

For example, if you were born in 1958, your reach full retirement age between September 2024 and August 2025.  If you put off filing for Social Security until you turn 70, you’ll get 40 months of delayed requirement credits, good for a bump of nearly 27 percent over your full retirement benefit.

 

If the benefit you’re entitled to at FRA is $1,800 a month, at 70 your benefit would bump up to about $2,280 a month.

 

Here’s how that $1,800 full benefit could grow for you if you decided to wait:

 

  Year of birth     Full retirement age    Benefit at 70   

 

1954 66 $2,376 (132% of full retirement benefit)
1955 66 and 2 months $2,352 (130.67%)
1956 66 and 4 months $2,328 (129.33%)
1957 66 and 6 months $2,304 (128%)
1958 66 and 8 months $2,280 (126.67%)
1959 66 and 10 months $2,256 (125.33%)
1960 or later 67 $2,232 (124%)

At age 66 and 8 months you would receive a benefit of $1,800 a month, however if you waited to age 70, you could pocket $2,280 monthly–a difference of $480 a month, which could go a long way if you were in financial position and health condition to hold off a few years.

 

Keep Points

 

  • You can claim benefits later than 70, but there’s no financial reason to do so as delayed retirement credits stop, and your payment tops out once you attain age 70.

 

  • From age 67 to age 70 you can earn “delayed retirement credits” which can increase the benefit amount that you would receive.

 

What is the maximum amount that I can receive if I contribute a substantial amount to the system?

 

The most an individual who files a claim for Social Security retirement benefits in 2024 can receive per month is:

 

  • $2,710 for someone who files at 62

 

  • $3,822 for someone who files at full retirement age (66 and 6 months for people born in 1957, 66 and 8 months for people born in 1958).

 

  • $4,873 for someone who files at age 70 (Maximum Monthly Benefit Possible for anyone in 2024)

 

To add more clarity, the average Social Security retirement benefit in October 2023 was $1,796 a month, while the average disability benefit for 2023 was $1,489 a month.

 

You would be eligible for the maximum benefit if your earnings equaled or exceeded Social Security’s maximum taxable income — the amount of your earnings on which you pay Social Security taxes — for at least 35 years of your working life.

 

The maximum taxable income in 2024 is $168,600 and the figure is adjusted annually based on changes in national wage levels (wage adjustments), and thus the maximum benefit changes each year.

 

Also be aware that the maximum benefit is not the same as the maximum family benefit.  The most a family can collectively receive from Social Security (including retirement, spousal, children’s, disability or survivor benefits) on one family member’s earnings record differs from the maximum benefit amount for an individual mentioned above.  That amount is generally, about 150 to 180 percent of your full retirement benefit.

 

Can I stop and later restart receiving my Social Security benefits?

 

Yes, within limitations.  If you are in your first year of collecting retirement benefits, you could apply to Social Security for a “withdrawal of benefits” if you started early, say age 62.

 

If you later got an unexpected windfall such as an inheritance, lottery winnings, or a pay raise or higher-paying job, you could theoretically be in a position to wait until you are older and you can collect a larger benefit if you do so within 12 months of the date you first claimed your benefits.

 

You start the process by filling out Social Security form SSA-521. and sending the completed form to your local Social Security office, preferably by certified mail.

 

If you opt for a stop (withdrawal), Social Security will treat it as if you never applied for benefits in the first place, and you will have to repay every dollar you’ve received including the following:

 

  • Your monthly retirement payments.

 

  • Any family benefits collected by your spouse or children, who must consent in writing to the withdrawal.

 

 

If you’ve been getting retirement benefits for more than a year, the “window for withdrawal” has closed for you!

 

However, once you reach full retirement age (66 and 6 months for those born in 1957, 66 and 8 months for those born in 1958 and rising two months per year to 67 for those born in 1960 and later), there’s a second option:

 

You can request a suspension of benefits!

 

During a suspension, you accrue delayed retirement credits that were mentioned earlier, which will increase your monthly retirement benefit when you start collecting again.

 

You can ask Social Security to reinstate your benefits at any time prior to turning age 70, and if you don’t ask for reinstatement by age 70, the agency will do it for you!

 

Be aware that:

 

  • If you change your mind about a withdrawal of benefits, you have 60 days from the date Social Security approves your withdrawal to cancel the request.

 

  • The SSA-521 includes a question asking if you want to keep “Medicare” benefits.  You can if you want to, however if you don’t, there are numerous implications both for any health care benefits you’ve already received and for re-enrollment in Medicare at a later date.  You can review these implications in the Social Security publication “If You Change Your Mind.”

 

  • You don’t have to hand in your notice when you start getting retirement benefits, as there is “no requirement” that you stop working.

 

  • But continuing to draw income from work might reduce the amount of your benefit if you claim Social Security before you reach full retirement age (FRA), the age when you qualify to collect 100 percent of the maximum benefit allowed from your earnings history.

 

To reiterate, Full Retirement Age is 66 years and 6 months for people born in 1957 and will rise two months for each subsequent birth year, until it settles at 67 for those born in 1960 and later.  Prior to FRA, Social Security doesn’t consider you fully “retired” if you make more than a certain amount from work, and it will deduct a portion of your benefits if your earnings exceed that limit.

 

The earnings caps are adjusted annually for cost-of-living adjustments (COLA), and they differ depending on how close you are to full retirement age.

 

If you are receiving benefits and working in 2024 but not due to attain FRA until a later year, the earnings limit is $22,320.  You lose $1 in benefits for every $2 earned over the cap.  So, if you have a part-time job that pays $30,000 a year — $7,680 over the limit — Social Security will deduct $3,840 in benefits or roughly $125 a month, from your social security check.

 

Suppose you will reach full retirement age in 2024.  In that case, the earnings limit is $59,520, with $1 in benefits withheld for every $3 earned over the limit that applies until the date you hit FRA!  Once you attain age 70 and onward, there is no benefit reduction, no matter how much you earn–once you hit age 70, the sky is the limit as far as your earnings are concerned as it relates to your Social Security benefits.

 

In fact, Social Security increases your monthly benefit at that point so that over time you recoup benefits you lost to the prior withholding.

 

If you receive wages, earnings-limit calculations are based on your gross pay; if you’re self-employed, Social Security counts your “net income” only.  The Social Security pamphlet “How Work Affects Your Benefits” and its Retirement Earnings Test Calculator can provide you with more details.

 

Key points

 

  • The earnings cap applies only to income from work.  The cap does not count investments, pensions, annuities or capital gains.

 

  • If your Social Security payments are reduced because you earned income above the limit, spouses and children receiving benefits on your work record will have their payments reduced as well.

 

  • The earnings cap and rules also apply to the work income of people receiving spousal, children’s and survivor benefits.

 

 

  • It may be wise to consult your tax advisor prior to electing to receive your benefits, if possible, as all tax situations are unique and experienced tax professionals can see through blind spots and areas of taxation that are nuanced and you may not be aware of.

 

Will my benefits increase if I continue to work?

 

It very well could.  It will all depend on how much you’re making now and how much you’ve made working in years past.

 

Social Security uses your “lifetime average” for monthly income, as calculated from your 35 highest-earning years and adjusted to reflect historical wage trends, as the basis for your benefit calculation.

 

Even if you’ve already claimed your benefits, Social Security annually recalculates this average, factoring in any new income from work.

 

If your current earnings fall into your top 35 earning years, your monthly average will rise, and so could your benefit!

 

What is the recalculation time period?

 

The Social Security Administration recalculates your retirement benefit each year after getting your income information from tax documents.  If you have a job, employers submit your W-2s to Social Security; if you are self-employed, the earnings data comes from your personal tax return that you would file during the tax season.

 

Social Security will take any work income from that tax year and figure it into your benefit calculation.

 

That calculation is based on the average monthly income from the 35 best-paid years of your working life (as indexed for historical United States wage trends, a process similar to adjusting for inflation).  If your recent earnings make the top 35, it will increase the monthly average and your benefit payment will increase!

 

You can call Social Security at 800-772-1213 to ask about how your anticipated earnings might change your benefit.

 

What is the payment schedule?

 

Apart from any earnings-based calculations, Social Security makes an annual cost-of-living adjustment (COLA) to your benefit based on inflation, if any.  The COLA for 2024 will be 3.2 percent, boosting the average retirement benefit by $59 a month starting in January.  COLA review and adjustments are done annually by the Social Security Administration.

 

Social Security pays benefits in the month following the month for which they are due.  For example, the January benefit that you are entitled to would be paid in February.

 

For most beneficiaries, the payment date depends on your birth date since changes that were made in 1997 went into place.  If you are receiving payments on the record of a retired, disabled or deceased worker (for example, spousal or survivor benefits), that person’s birthday sets the schedule for the payments that you would receive.

 

Here’s how it works in a nutshell:

 

  • If the birthday is on the 1st through the 10th, you are paid on the second Wednesday of each month.

 

  • If the birthday is on the 11th through the 20th, you are paid on the third Wednesday of the month.

 

  • If the birthday is on the 21st through the 31st, you are paid on the fourth Wednesday of the month.

 

The Social Security Administration adopted this staggered schedule in June 1997.  Prior to that, all benefit payments went out on the third day of the month, but that became untenable as the number of beneficiaries grew to a level that made it impractical to pay out on a single day.

 

Most people who started receiving benefits before May 1, 1997, are still paid on the third of the month.

 

The third is also the monthly pay date for these groups of Social Security beneficiaries:

 

 

  • Those enrolled in Medicare Savings Programs, which provide state financial help for paying Medicare premiums continue to receive their payments on the 3rd day of the month.

 

  • Those who collect both Social Security and Supplemental Security Income (SSI) benefits.  If you were in this group, you would get your SSI on the first of the month and your Social Security on the third day of the month.

 

Social Security has an online calendar showing all the payment dates for 2024 and is updated annually.

 

Key points

 

  • Social Security no longer pays benefits by check. You can receive benefits by direct deposit or via a Direct Express debit card.

 

  • Those who receive Social Security Benefits receive payment based on the birth date of the retired, disabled or deceased person, or a set date determined by the Social Security administration which is generally the 3rd day of the month.

 

  • If a scheduled payment date falls on a weekend or federal holiday, payments are made on the first preceding day that isn’t a Saturday, Sunday or holiday.

 

Medicare payments

Medicare consists of:

 

Part A   Hospital

Part B   Utilizing Outpatient Coverage

Part C   Medicare Advantage

Part D   Prescription Drugs

 

An easy way to remember what each part of Medicare covers (which can be difficult for some) is to use the following system:

 

When you think of part A think of coverage that allows you to go to “A” Hospital

When you think of part B think that you will “Be” getting health coverage or utilizing outpatient coverage

When you think of part C think that you are buying “Coverage” for Medicare Advantage

When you think of part D think that you are going to get prescription “Drug” coverage

 

Medigap Insurance coverage fills in the gaps where you would possibly have out of pocket expenses and deductibles, and it can be purchase by you if you select Medicare–and decide not to buy into Medicare Advantage coverage.

 

Another way of looking at it is part A is Hospital Coverage and possibly free, Medicare is part B, Medicare Advantage is part C, and part D is coverage for Prescription Drugs, whether you have Medicare or Medicare Advantage!

 

Or yet another way to look at it is you must get over the HUMP with your Medicare–and you do so by realizing that part A is Hospital coverage, part B is Utilizing outpatient coverage, part C is Coverage for Medicare Advantage, and part D is Prescription Drug coverage.

 

Now that you have a system that you can use to distinguish all parts of Medicare and MA, let’s discuss Medicare in greater detail.

 

If you elect traditional Medicare, you will pay for parts B, D and Medigap, and you could be surprised by the premiums.  You have just learned and fully understand that part B covers outpatient care and has a monthly deductible ($174.70 in 2023), and there is also a deductible for every hospital visit on part A ($1,632 in 2023).

 

Part A: generally, you will qualify for hospital coverage if you have worked in the United States and have paid Medicare taxes (provides hospital coverage up to 60 days and a high deductible could be involved).

 

Part B: outpatient care is similar in scope to health insurance and in 2024 had a payment of $174.70 per month and the coverage will subject you to the benefits test if your modified adjusted gross income is over $103,000 single or $206,000 married filing joint.

 

Part D prescription drug coverage premiums averaged $50.50 in 2023, however drug and other coverage varies.  Often purchased through a private insurer.

 

Medigap coverage kicks in when there is a “gap in coverage” when you use part B and D, for example you could use the coverage to pay the part A and D deductibles mentioned above!

 

With Medicare, physicians and hospitals would have to submit claims to parts A, B, D and Medigap, where applicable individually, whereas with Medicare Advantage the claim would normally go to just one provider.

 

Medicare recipients could also possibly get financial assistance from Medicaid or other assistance programs if they qualified.

 

Medicare Advantage (part C) —the “competitor to Medicare” offers coverage for parts A, B and D, and coverage and costs varies by provider.  The coverage provided is similar to that of an HMO or PPO and provider costs and coverages that vary from provider to provider, so it is best to shop around.

 

In either plan, Medicare Advantage (MA) or Medicare “pre-existing conditions” will be covered!

 

Star Ratings by AARP could also be helpful when considering plans!

 

If you are signed up for both Social Security and Medicare Part B — the portion of Medicare that provides standard health insurance or outpatient care — the Social Security Administration will “automatically deduct” the premium from your monthly benefit.

 

The standard Part B premium for 2024 is $174.70 a month, an increase of $9.80 from the 2023 rate. Medicare Part A, which covers hospitalization, is free for anyone who is eligible for Social Security, “even if” they have not claimed Social Security benefits yet.

 

If you are getting Medicare Part C (additional health coverage through a private insurer, also known as Medicare Advantage) or Part D (prescription drugs), “you have the option” to have the premium deducted from your Social Security benefit or to pay the plan provider directly yourself.

 

Part D is also subject to a means test, similar to part B!

 

If you want the deduction from your Social Security income, you will have to contact your part C or D provider to arrange it!

 

Keep points 

 

 

  • People with low incomes and limited financial assets may qualify for Medicare Savings Programs that can help with Part B premiums.  These are federally funded but run by the states.  In 2023, income limits to qualify for the programs in most states ranged from $1,235 to $1,660 a month for individuals and $1,663 to $2,239 a month for married couples (the thresholds are higher in Alaska and Hawaii).  The 2024 limits will be posted on the Medicare website once they are announced.

 

  • If you are receiving benefits” from SSA, the Social Security Administration will “automatically sign you up at age 65” for parts A hospitalization and B outpatient care of Medicare.

 

  • Medicare is operated by the federal Centers for Medicare & Medicaid Services, but Social Security handles enrollment.  Social Security will send you sign-up instructions at the beginning of your initial enrollment period, three months before the month of your 65th birthday, however mistakes and delays can occur, therefore you want to act within the 6-month window of your 65th birthday if you have a need for Medicare as you are now aware of the enrollment process.

 

  • Medicare Part A covers basic hospital visits and services and some home health care, hospice and skilled-nursing services.  If you are receiving or are eligible to receive Social Security retirement benefits, you do not pay “premiums” for Part A.

 

  • Medicare Part B is similar to standard health insurance and carries a premium.  The base rate in 2024 is $174.70 a month.  Higher-income individuals pay more depending on the amount of their modified adjusted gross income.

 

  • You can “opt out” of Part B — for example, if you already have what Medicare calls “primary coverage” through an employer, spouse or veterans’ benefits and you want to keep the primary care that you already have.

 

  • Check with your current insurance provider to make sure your coverage meets the standard. Opting out will not affect your Social Security status, but you might pay a penalty in the form of permanently higher premiums if you decide to enroll in Part B later.

 

  • If you want to enroll in Medicare Part C (also known as Medicare Advantage, an “alternative to Part B” that is provided by private insurers, you must sign up on your own. The same goes for Medicare Part D, prescription drug coverage.  You can find more information in Social Security’s “Medicare” publication and AARP’s Medicare Made Easy guide, or you can call Medicare at 800-633-4227.

 

Key points

 

  • If you are living abroad or are outside the United States when you become eligible for Medicare, contact the nearest U.S. embassy or consulate to request an enrollment form.

 

You can only enroll in Medicare at age 62 if you meet one of these criteria:

 

 

  • You are on SSDI because you suffer from amyotrophic lateral sclerosis, also known as ALS or Lou Gehrig’s disease (The two-year requirement is waived in this case).

 

  • You suffer from end-stage renal disease.

 

Otherwise, your initial enrollment period for Medicare begins three months before the month of your 65th birthday.  For example, if you turn 65 on July 14th, 2024, the enrollment window opens on April 1st and closes on November 1st, 2024.

 

If you “are receiving” Social Security benefits, the Social Security Administration, which handles Medicare enrollment, will send you an information package and your Medicare card at the start of the sign-up period.  You’ll be automatically enrolled in Medicare Part A (hospitalization) and Part B (standard health insurance) in the month you turn 65.

 

In the meantime, consider looking into other options for health insurance to bridge the gap until you are Medicare-eligible if you lack insurance and have not reached the age to receive Medicare.  Depending on your financial and marital situation, these might include Medicaid, private insurance through the Affordable Care Act marketplace or coverage through your spouse’s workplace plan or your own employer’s work plan.

 

Key point

 

 

How to enroll

 

You can enroll online, by phone at 800-772-1213, or by visiting your local Social Security office.  Local offices fully reopened in 2022 after being closed to walk-in traffic for more than two years due to the COVID-19 pandemic, but Social Security recommends calling in advance and scheduling an appointment to avoid long waits.

 

You should proactively be aware of the enrollment deadlines, as Social Security will not sign you up automatically at 65 for “traditional Medicare” — Part A (hospitalization) and Part B (health insurance) — as it typically does for people already collecting Social Security benefits!

 

In this situation, you’ll have to enroll yourself, either online or by contacting Social Security.

 

Always remember that Medicare and Social Security are “two separate programs” however the Social Security Administration runs enrollment for traditional Medicare!

 

You can enroll in Medicare parts A, B and D (prescription-drug coverage) as early as three months before the month you turn 65 or as late as three months after your birthday month which is called your initial enrollment period.  For example, if your 65th birthday is May 15th, 2024, the initial enrollment window is open from February 1st until August 31st, 2024.

 

Here’s why you need to be on top of your deadline:

 

If you don’t sign up during those seven months, you may be subject to a permanent surcharge once you do enroll.  You’ll find more information on sign-up periods in Medicare publications about enrolling in Part B and Part D.

 

Part A is free if you qualify for Social Security, even if you have not claimed benefits yet, however Part B carries a premium and in 2024, the standard Part B premium is $174.70 a month; it goes up for beneficiaries with MAGI (income) above $103,000 for those who file an individual tax return, and MAGI of $206,000 for a married couple filing jointly.

 

If you are not yet receiving Social Security benefits, you will have to pay Medicare directly for Part B coverage.  Once you are collecting Social Security, the premiums will be deducted from your monthly benefit payment.

 

If you “decide to purchase” a Part D prescription-drug plan, it’s best to do so during your initial enrollment period; and as mentioned previously, you may pay a higher premium, permanently if you fail to sign up in a timely manner.

 

Your Part D provider cannot deny coverage even if you are in poor health or have a preexisting condition.  You can choose between paying Medicare directly or having Part D costs deducted from your Social Security payment.

 

Key points

 

  • The Medicare eligibility age of 65 no longer coincides with Social Security’s full retirement age (FRA) — the age when you qualify for 100 percent of the Social Security benefit calculated from your lifetime earnings.  FRA was long set at 65 but it is gradually going up: It’s 66 years and 6 months for people born in 1957, 66 and 8 months for those born in 1958, 66 and 10 months for those born in 1959 and will settle at 67 for those born in 1960 or later.

 

  • Always remember that even if you don’t elect for Social Security at the earliest time possible, you can still sign up for Medicare at 65 as long you are a U.S. citizen or lawful permanent resident.  You will have to pay Medicare directly for all coverage, including Part A (unless you or your spouse are among the small number of state and local government employees who paid Medicare taxes but not Social Security taxes; in this case, you may be able to get Part A for free).

 

Managing Medicare enrollment

 

For most people, Medicare eligibility starts at age 65 and “if you’re receiving Social Security retirement benefits” at that time, SSA will send you a Medicare enrollment package at the start of your initial enrollment period, which begins three months before the month you turn 65.   This point cannot be over-emphasized and is repeated here yet again due to the importance of you understanding this deadline.  If you are not on Social Security, you want to still know that you must sign up by age 65 if you desire the coverage!

 

For example, if your 65th birthday is July 15, 2024, this period begins April 1.

 

On your 65th birthday, you’ll automatically be enrolled in parts A and B.  You have the right to opt out of Part B, but you might incur a penalty, in the form of permanently higher premiums, if you sign up for it later.

 

If you have not yet filed for Social Security benefits, you will need to apply for Medicare yourself!

 

You can do so any time during the initial enrollment period, which lasts seven months (so, for that July 15 birthday, the sign-up window runs from April 1 through Oct. 31). If you do not enroll during that period, you could face late fees if you do so later.

 

You’ll find comprehensive enrollment information in SSA’s “Medicare” publication and links to application forms on the Social Security website.

 

Paying Medicare premiums

 

If you are drawing Social Security benefits, your Medicare Part B premiums are deducted from your monthly payments.  If you’re not getting benefits, you’ll receive bills from CMS (almost all Medicare beneficiaries pay no premiums for Part A because they worked, and paid Medicare taxes, long enough to qualify for the program).

 

The standard Part B premium paid by most Medicare enrollees is $174.70 a month in 2024. The rate rises with the beneficiary’s income, going up in steps for individuals with incomes greater than $103,000 in 2024 and married couples who file taxes jointly and have a combined income of more than $206,000 in 2024.

 

Social Security determines whether you will pay a higher premium based on income information it receives from the IRS!

 

If your income is high enough, Social Security will impose what is called an Income Related Monthly Adjustment Amount (IRMAA) or means test on Part B outpatient care and Part D prescription drugs.

 

Although this surcharge is unknown to many prior to signing up for Medicare, it can add up and can be hundreds of dollars on a monthly basis for some recipients.  If your income tier (MAGI) is from $103,000 to $129,000 in 2024, everyone in that tier would pay the same annual surcharge.  For MFJ the tiers start at MAGI of $206,000.

 

Therefore, if you are a high-income household and your spouse were to transition, you could fall into the single tax bracket (and the tier of $103,000 to $129,000) and a monthly surcharge could be added to your monthly payment, even though your household actually had a reduction in income.

 

The determination as to whether you will face this surcharge is based on your AGI (line 11 amount on form 1040 that does not go into the calculation of your MAGI or modified adjusted gross income) so charitable contributions or donations, mortgage deduction, taxes and medical deductions would not be of benefit with the exception of a QCD (Qualified Charitable Deduction) in which you can donate up to $100,000 annually and count it toward your RMD (distributions that must begin at age 73 according to the SECURE  Act 2.0.

 

Unlike cash, a QCD will keep the donation out of your gross income (it is an above the line deduction in tax jargon–goes on schedule 1 adjustments) and thus “lower your MAGI” so you could possibly avoid (the IRMAA adjustment) the surcharge.

 

Strategies that you can use to avoid or minimize the surcharge imposed by the Income Related Monthly Income Adjustment Amount:

 

*Consider a ROTH conversion

News flash–withdrawals from a ROTH IRA don’t count toward IRMAA

 

*Contribute more to your Retirement plans

You can lower your above the line income (IRS form 1040 line 11 and above) by contributing the maximum amount or at the very least an increased amount to your retirement plan or IRA account(s) and thus fall below the $103,000 threshold for singles, or $206,000 threshold, if you file as married filing jointly.

 

*Use tax-gain harvesting

By harvesting you sell your stock, mutual fund, etf etcetera, that is outside of your retirement account and buy it back immediately to “reset” your basis.  You would pay taxes on the gain in the year you harvested.   And by doing so the higher cost basis will reduce your taxes once you sign up for Medicare.

 

*Set up a Qualified Charitable Donation

As mentioned above, by setting up a QCD you can take an above the line deduction and reduce the amount of you MAGI, so your income won’t reach the threshold set by IRMAA (Income Related Monthly Adjustment Amount).

 

*Defer taking Social Security

You have up to age 70 until Social Security benefits make the most sense to take for many, and by delaying Social Security won’t count toward IRMAA.

 

*Compare your premiums between Medicare and Medicare Advantage

Medicare Advantage may give you the coverage that you need and might be cheaper than Medicare.  With Medicare you must pay separately for Parts A, B, D and Medigap and that along with the coverage that you desire could tilt the scales as to which one to choose.

 

*Appeal the surcharge

You can appeal if your income is significantly lower than it was 2 years ago.  SSA uses a 2-year lookback to determine current year surcharges.  If you were to start receiving Medicare in 2024, they would look at your 2022 MAGI to determine if IRMAA was applicable for 2024.  Other grounds to appeal include life changing events such as retirement, death of a spouse, divorce, loss of pension and other life changing events that the agency could possibly accept if it appeared reasonable in their eyes.

 

*Use your imagination to find other ways to avoid the surcharge

The surcharge is not necessarily permanent and if you can find ways to reduce your income some in future years, you may be able to avoid this surcharge altogether.  You may want to take the surcharge early because you know you can avoid it later.  Likewise, you may want to find ways to avoid the surcharge early and pay it later.  The surcharge is a year-to- year charge and you want to use the creativity that you have to find ways to eliminate this charge–when possible.

 

Key points

 

  • People with disabilities may qualify for Medicare before age 65 in many instances.  If you are receiving Social Security Disability Insurance (SSDI), Social Security will enroll you automatically in Parts A and B after you have been drawing benefits for two years.

 

  • If you have Medicare Part D (prescription drug plan) or a Medicare Advantage plan, also known as Medicare Part C, you can elect to have the premiums deducted from your monthly Social Security payment.

 

 

Conclusion

Social Security, Railroad Retirement Benefits and Pension income and other retirement income are areas that you want to give proactive analysis to, as the decisions and choices that you make will be critical for a successful retirement where you can do what “you” desire during your retirement years and not be restrained due to inadequate income or poor planning.

 

Although pension income for many is a thing of the past, those who now or will soon receive it can use the proceeds in conjunction with their social security income and sound investment and retirement planning to live out their life with more joy and enthusiasm.

 

Railroad Retirement Benefits are similar in scope to the benefits that the Social Security Administration provides, however those benefits are designed to assist railroad workers and their family in retirement and in the unfortunate transition of the income earner.  It is a system that is generally more generous than that of the SSA (pun intended) toward recipients and beneficiaries.  If you receive, or anticipate receiving those benefits, you too want to plan appropriately and build your retirement nest egg in the best way possible, based on your ability to do so.

 

Now is the time that you contemplate your Social Security payment amount that you will receive and combine the monthly benefit with your other retirement benefits to determine if the number that you are now at or will soon be at, is sufficient or whether you will need to earn more income, work a few more years until ultimately retiring or taking your benefits at the earliest time possible due to financial and health concerns.

 

Your total monthly income must be determined upfront, that means you must combine your 401k or other pre-tax retirement income, pension income, IRA income and income that is outside of your retirement accounts to determine if you have the monthly cash flow that allows you to pay your monthly expenses, do what you desire and have funds that can last for your remaining life expectancy and beyond.

 

The basic questions of choosing whether Medicare or Medicare Advantage is your best choice, whether you should you start your SSB, RRB or other retirement distributions earlier, at a reduced amount, or start later at a higher level may all coincide at this time or at the time you plan to retire!

 

If you delay, your eventual Social Security and/or RRB payment that you could receive will keep rising, until you hit age 70.

 

If you elect to start your benefits today or before reaching your FRA, you can enjoy the benefits earlier, because you are concerned about whether life and the future will go your way!  If you decide to wait, you may find an additional amount monthly, and for you that could be great.  Your unique financial and health condition will play a large role in the approach toward your retirement funds that you choose.

 

The choice as to whether to choose Medicare or Medicare Advantage can be a difficult one and should be given careful analysis, possibly with the assistance of family members and other professionals.

 

But many other factors come into play when determining the best age for you to claim benefits, including your physical well-being, marital status, financial needs, tax position and job satisfaction, other sources of income and your life savings.

 

The election of when and how you will elect SSB, RRB or choosing between Medicare and Medicare Advantage must all be analyzed in a thoughtful manner from all angles.

 

When you combine your SSB, RRB, investment income inside and outside of retirement, retirement income whether from your 401k’s, IRA’s, 403b’s, Thrift and other retirement plans, you want to be in position where you can put yourself, your loved ones and causes that you value most that bring you the most joy at the center.  And if you planned appropriately and obtained the necessary knowledge in a timely manner all of your retirement goals can come into clear focus and be attained in real time.

 

By simplifying the process and the way that you approach investments and retirement, you can make what you desire to happen most during your retirement years become a reality.

 

Other Key Points:

 

You receive the highest “maximum benefit payable” on your own record if you start collecting Social Security at age 70.  Full retirement age is 66 years and 6 months for people born in 1957 and will rise two months for each subsequent birth year until it settles at 67 for those born in 1960 and later.

 

You receive the “highest benefit payable” on your own record at FRA if you start collecting SSB or RRB at age 67.  Full Retirement Age extends from age 65 for beneficiaries born before 1938, to age 67 for those born in 1960 and later.  You can receive your full railroad retirement benefit starting at age 60 if you have 30 years of qualifying service.  Normal full retirement age for railroad benefits is 65 or 67, depending on the year you were born.

 

Medicare and Medicare Advantage are often in a “state of flux” and you can expect changes (hopefully for your benefit) to occur in the future.

 

All the best to your SSB, RRB, Other Retirement Income & Medicare success, as it is our hope that this discussion has allowed you to valiantly perch from your retirement nest…

 

Create your social security account today…

 

 

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Retirement Simplification & Wealth Building

Learn how you can manage your retirement in a more stress-free manner as you build your wealth…

 

Caution:  20-minute read, however it is “well worth your time” in The Wealth Increaser.com’s opinion

 

In the most recent post investment simplification was discussed and investment approaches were presented in a way that allows you to build wealth almost effortlessly.  Based on that post, if you determined that you had the needed discretionary income and you were to apply the principles learned in that discussion on a consistent basis, you would now be on a real path toward investment and possibly retirement success.

 

You must know what you need to do after you have accumulated a large nest egg and this discussion is designed to show you a number of ways that you can receive your retirement income and minimize your taxes so that you can stretch your income over your life expectancy so that you can do more and live more abundantly!

 

Your retirement plan may need to last you decades and you want to know how you can stretch your nest egg at the earliest time possible so that you can live a more comfortable retirement.  Even if your retirement is decades away, you want to proactively familiarize yourself with the information in this timely discussion, so that you can achieve more throughout your lifetime.

 

Once you approach your retirement years you can choose to roll over your 401k, 403b, Thrift or other retirement plan, you can decide to leave your retirement funds in the 401k or other retirement account, or you also have other options, and they will all be discussed below:

 

Do the rollover yourself

Once you retire you can choose to roll over your funds from your retirement plan into an IRA, and you have 60 days to do so if you want to avoid the pain of being taxed on the entire amount.  Even if you roll over your funds within the 60-day window your employer (or former employer) or plan administrator will withhold 20% of the rollover amount for income taxes.

 

If you don’t have the 20% amount laying around in your emergency fund or other accounts, you will only be able to roll over 80%.

 

By coming up with the 20% you can “recoup” the 20% that was withheld at tax time when you file your tax return!

 

If you are unable to come up with the 20%, be sure that you realize that the 20% will be considered taxable income, and if you are under age 55 you will be penalized another 10%!

 

Say you receive $200,000 to rollover, $40,000 would be withheld and sent to the IRS and $160,000 would be rolled over into your IRA that you designated.  You would receive a 1099R at tax time showing $40,000 as taxable income.  By rolling over 100% it would not be considered taxable income and you could file your taxes and get the 20% withholding back.

 

Arrange for a trustee-to-trustee rollover

A trustee to trustee, also known as a direct rollover could be more beneficial than a rollover that you do yourself as it will be done by your retirement plan administrator, and is generally the best course of action as there would not be a 20% withholding.

 

Once the money is in the IRA, you are not “required” to take anything out until April 1st of the year after you turn 73.  If your contribution includes “after-tax” contributions, you can only roll over for the full amount if the IRA sponsor will account for the after-tax money separately.

 

If you have after-tax contributions, a “portion” of every IRA withdrawal will be tax free.  Or you can receive all of the “after-tax money” before the rollover and pocket it tax free!

 

Leave the money in the account

If you like your plan administration and the returns that you are getting, you can choose to leave the money in the account and cash out or roll it over later if you desire.  If the retirement plan is providing good returns and you are comfortable with the investments, why shake up the pot?

 

You would normally need at least $5,000 or more in the account to make this option worthwhile and distributions would be required by age 73, even if you did not need the money.  If your account was invested in a ROTH, you could leave the money in the account until you transitioned.

 

Roll over to a ROTH IRA

You can roll your assets from your company plans to a ROTH IRA, and because your contributions to your company plan was done on a “pre-tax” basis and have never been taxed, the rollover would now be taxable, however no 20% withholding would be required.  You do not have to take Required Minimum Distributions (RMDs) at age 73 with a ROTH.  The assets in your ROTH IRA could then grow tax-free indefinitely.

 

If you use this strategy, you want to be able to find the money “outside of your retirement account” to pay the taxes, otherwise you will limit the tax-free growth of the ROTH account.  Also, if you transition, the funds in the ROTH IRA could go to your beneficiaries and RMD’s and taxes would come into play.

 

Take out company stock

If you work for a fortune 500 company or a company that has publicly traded stock and your company put those stocks within your retirement plan, you could have yet another option that could help you save on your taxes.

 

You can use a tax concept called NET UNREALIZED APPRECIATION” (NUA) and pull the company stock out and put only the non-company stock balance in the IRA!

 

Rolling highly appreciated stock into an IRA, locks in a high tax rate for that appreciation.  You will owe taxes on the full value of the stock at ordinary income tax rates (up to 37%) “as you sell it” and take distributions from the IRA.

 

However, there is a better way to transfer the stock!

 

Lets say you have $2.2 million (the part not held in company stock) and roll it into an IRA, and you transfer the stock to a separate taxable account.

 

You will owe income taxes on the company stock, but the tax is based on its “cost-basis” — the value of the stock when your employer put them into your account.  In this case, let’s say it was $20,000 and is now valued at $200,000.

 

When you sell the stock from your taxable account, you will report a long-term capital gain, and if the sales price is $300,000, the gain ($300,000 minus $20,000) of $280,000 would be taxed at the more favorable capital gains rate of 0%, 15% or 20 percent–which would for most be lower than the “ordinary income tax rate” mentioned above that could be as high as 37%.

 

Assuming a retirement “long-term capital gains” tax rate of 15%, ($280,000 * .15) your taxes would be $42,000.

 

Had you rolled the entire $2.2 million into the IRA and “then” withdrawn the $300,000, you would owe income tax on the entire distribution in your highest tax bracket–and if it was the 37% tax bracket you would owe $111,000–a difference of $69,000, an amount that can go a long way during your retirement years.

 

Another way of looking at it is if you were able to use the above strategy you would pay $69,000 less in taxes or you would have an additional $69,000 that you could be utilizing for the continued growth of your retirement fund.

 

It is important that you realize that there are things in life that you don’t know–that you don’t know, and you want to know this important “lifelong fact of life” at this time or the earliest time possible in your life (no pun intended)!  This tidbit of knowledge that you have just learned as it relates to company stock can go a long way in protecting your nest egg during your retirement years, if it is a strategy that you can use with your retirement portfolio.

 

If you own the stock when you transition, not having it in an IRA creates a windfall for your heirs as the stock will receive “favorable stepped up basis” (stock will be stepped up to the stock price at your transition date and that means lower taxation for your heirs) treatment and once your beneficiaries sold the stock the tax would be at the capital gains rate and would be based on the price of your company stock at the time of your transition–not when your employer put them in your account.

 

Or another way of looking at it is if the stock is “outside the IRA, appreciation after the distribution becomes tax free” and the gain not taxed at the time of the distribution would be taxed at the 0%, 15% or 20% long-term capital gains rate, depending on where your beneficiaries would fall based on taxable income and filing status.

 

If the stock was in the IRA, the full value would be taxed as income in your beneficiary’s top tax bracket (as high as 37% as of 2024) as it is withdrawn.

 

Taxes & Retirement

Once you retire and start taking distributions from your retirement accounts, pensions, social security or railroad retirement benefits, you want to plan for the payment of your taxes in a proactive manner where possible.  You social security income could be taxable depending on the amount of your retirement income and whether you work part or full time after retirement.  Also keep in mind that taxation at the state level must be taken into consideration as many states exempt some or all income of retirees–and some states have no income tax at all.

 

In addition, consider the estate tax system in your state proactively, as even though you may not have estate taxes at the federal level–you may very well be required to pay them at the state level.

 

During your retirement years you will receive 1099Rs, Social Security Benefit statements, W-2s or 1099NEC if you decide to work, other 1099 statements for interest, dividends, capital gains etcetera, and you want to proactively plan with your tax professional so that you won’t have large surprises at tax time.

 

The IRS also receives copies of all of these documents so you want to do a “double take” to ensure that you have all of your documents at tax time.  Failure to do so and your inability to provide them to your tax pro for any reason could result in your return being audited.

 

Also realize that if you file your personal or business taxes by paper, the return will receive extra scrutiny from the IRS.  Even though many think paper is more secure, filing electronically has proven to be more secure and accurate.  You can also enroll in the IP PIN program (Identity Protection Personal Identification Number program) to further secure your filing, as even if they (scammers) have your social security number or ITIN (Individual Taxpayer Identification Number) they would still need your PIN to pretend they were you.

 

Your payment of taxes (ordinary income rates) will be based on your taxable income and filing status (10%, 12%, 22%, 24%, 32%, 35% or 37%) and you will pay taxes on your investment income at a rate of 0%, 15%, or 20% and that rate would be based on your taxable income and family situation (filing status).  If you are single with adjustable gross income over $200,000, ($250,000 married filing joint), you will have an additional 3.8% net investment income tax on your investment returns that were not offset by losses.

 

You also want to commit age 59.5 (age that you can begin withdrawals), age 73 (age at which you must take RMDs) and the age in which you will eventually transition (your assets will or will not receive “stepped up basis” treatment) to memory as those ages are important to know for planning purposes and particularly for tax and estate planning.  In addition, you want to know that short-term (less than 12 months) gains will be taxed at your ordinary income rates.

 

The above figures are based on the 2023 tax year and the numbers are adjusted annually.

 

Required Minimum Distributions & Retirement

Required Minimum Distributions or RMDs are the least amount of money you “must” withdraw from your traditional IRAs or pretax 401k and other pre-tax retirement accounts based on United States tax law.

 

Always remember that whatever your retirement (or pre-retirement) age, it is never too early to strategize your RMDs for 2024 and beyond.

 

The year that you turn 73 is the year that RMDs will be required to be taken by you.  If you are not turning 73 this year, you may still want to take withdrawals to reduce the amount of your future RMDs.  It will all depend on your goals, risk-tolerance level, income, personal situation–and tax bracket, the impact on the raising of your Medicare premiums and the impact of increasing the taxes on your Social Security income.

 

If you are now 70.5 or older, you can make a QCD (Qualified Charitable Distribution) directly from your IRA to a charity.  If you are 73 or older the QCD will count toward your RMD.  Though you can’t generally claim the deduction for the donation, you won’t be taxed either.

 

If you fail to take your RMDs in a timely manner, you want to notify the IRS of this “before they notify you” when possible (use form 5329) and explain with a letter why you didn’t take the RMDs by the December 31st deadline.

 

By doing so you can possibly avoid a 25% penalty on the amount you were required to withdraw–however you may still be subject to a 10% penalty!

 

Bond Management

Unless you have time to monitor and respond to the bond market, you may want to hire a pro as the pricing of bonds are normally out of the public view when compared to stocks.

 

Bonds have what is called a “bid price” and an “ask price” and shopping around for bonds can save you hundreds on commissions and markups.  If you are a buy and hold investor, you normally want to have at least $50,000 to spend and you want to assemble a portfolio of high quality corporate, treasury and possibly municipal bonds.  Mutual funds offer one stop bond diversification, but a portfolio of them typically costs “more to maintain” than a portfolio of individual bonds.

 

You want to have “at least two brokers” and check with each before placing your order.  You can also search online to compare prices and yields by going to:

 

 

 

 

 

 

All of the above sites would be a good starting point.  Treasurydirect.gov allows you the opportunity to purchase directly without fees and you can manage savings bonds, T-bills, notes, bonds and TIPs (Treasury Inflation Protected securities) in a free online account.

 

You also want to ask the right questions whether online or with your broker.  You would want to know the following:

 

*What is the spread between the bid and ask price?

The closer you buy to the bid price the smaller the markup!

 

*Is the bond callable?

Bonds may be redeemed by the issuer, and if so you want to request the yield-to-worse call (which is the lowest potential yield)!

 

*Which yield are you quoting me?

The coupon, yield to call (YTC) or yield to maturity (YTM)!  Be ready to haggle as brokers expect it.  If you don’t like to haggle, consider treasuries.

 

Since you are retired or are now anxiously anticipating the day that you will be, you now or will one day have the time to learn about bonds and other investments that can possibly help grow your nest-egg with relatively low risk.  You want to put yourself in position to learn what you need to learn in a relaxed and as stress-free a manner as possible while you are improving your finances.

 

You may also want to set up a bond ladder system during your retirement years to “smooth out the ups and downs” of interest rates.  Treasuries are as close to a risk-free investment that you can buy and when purchased in a 5-year laddering system, it can provide you income that guards against inflation during your retirement years.

 

If you need more income, consider CDs, municipal and corporate bonds in a laddering system or even dividend paying stocks such as those offered by utility stocks and REITs (companies that own and manage office buildings, shopping centers, apartments and other large developments).

 

On occasion, annually at least–you may need to re-balance your asset allocation, as over time based on gains and losses–your asset allocation will go out of balance from what you initially selected.

 

If your stocks or bonds exceed your previously set allocations by more than 5% you may want to re-balance once that occurs.

 

You generally want to re-balance first inside of tax deferred IRAs or tax-free ROTH accounts to get their allocation back on track as no taxes would be due and you want your risk level to return to what you selected initially.

 

You can also invest RMDs that you receive from your retirement accounts that are out of balance back into those tax-deferred accounts–so they go back into the market (they will be taxed) and increase your returns further.

 

Conclusion

You will have to allocate your assets based on your goals, risk-tolerance, income and personal situation.

 

You want to buy and sell bonds appropriately and know how to set up a bond ladder if that is of appeal to you and something that you feel can be of benefit during your retirement years.  It is important that you choose the best option possible based on what you desire to achieve during your retirement years and after you transition.

 

As you can see from this discussion the “choices that you make” can lead to lasting, cost-effective or cost-ineffective results during your retirement and pre-retirement years–and even after you transition!

 

The factors that should influence your decision should include your age, income tax bracket, insurance needs, income needs, estate plans, and whether you own individual stocks and/or mutual funds.  If you have adequate pension and social security income, you can supplement resources by spending income “generated in taxable accounts” and letting the “investments in your IRA grow tax deferred” until withdrawals are required.

 

Some people re-invest even after RMDs start, rather than spending their money.  You want to ensure that your allocation of stocks, bonds and cash are at the right mix to balance your need for both income and continued growth.  If you have Treasuries and Money Market accounts, corporate bonds and REITs that generate taxes, you may want to put them in your IRA.

 

You can put municipal bonds, index funds and stocks held for the long-term into a taxable account(s).

 

With the cap rate on most stock dividends capped at 20%, your IRA may not be the best place for dividend paying stocks.  And even though your stocks in a taxable account may generate capital gains taxes when you sell, the top long-term rate is 20% in 2024.  Keep in mind non-qualified dividends could be taxed at your ordinary income rate.

 

It is critical that you create a portfolio (or have your advisor do it) that is diversified among asset classes–from small company domestic companies to international equities, from bonds to commodities to help lessen the effects of an economic downturn during your retirement years as the funds in your accounts along with your social security (and possibly pension income) at a minimum must last through your remaining life expectancy.

 

Keep in mind that an all-stock portfolio will normally “fall more” during a downturn and also “rebound more” during an upturn in the economy.  As you get older during retirement, you may want to shift your allocation to a more conservative position such as 35% to 40% in the market, 10 to 15%% in cash and 45% to 50% in bonds.

 

By taking to heart and giving real consideration to how you will build up and  divvy up your retirement fund(s) during your lifetime, you can make your retirement stage or phase one that you can truly enjoy with your loved ones.  You can also “position your life” where volunteering your time and resources toward causes that are important to you while you are yet alive here on planet earth–can happen for you in a more realistic way–as you awake each and every day!

 

All the best as you make the best choices that will lead to continuous retirement success…

 

 

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Retirement Success & Wealth Building

Learn the importance of successfully planning for your retirement years…

 

In the current market many soon-to-be retirees are feeling short-changed to a degree, as 2022 was not a good year for many in the financial markets.  As a person who anticipates retiring and enjoying life abundantly in the future, it is imperative that you plan in advance to make a successful retirement a reality.

 

It is important that you realize that investment returns will go up and down from year to year but has historically averaged from 6% to 9%–which is more than you can get in most other places–relatively speaking.

 

In this discussion TheWealthIncreaser.com will focus on the importance of you choosing a portfolio that can lead you toward the goals that you desire–as you put a plan in place that will take you higher and higher–and lead to you reaching the retirement number that will not leave you in a quagmire.

 

Do the basics early so that you know where you stand

You must put yourself in position for a successful retirement by doing the basics or what you need to do on the front end.  That includes creating a budget or cash flow statement, an income statement, a balance sheet and a net worth statement at the earliest time possible during your working years.

 

By doing so, you give yourself a helpful guide that can provide more direction as you formulate goals that are more precise and forward moving toward the lasting wealth building success that you need to achieve–and particularly your retirement planning success.

 

You want to at the earliest time possible contemplate the amount that it would take for you to feel confident about retiring and doing what brings you joy and happiness–consistently.  There are a number of factors that you must consider (such as what your expenses will be) and unknowns (such as how long you’ll live) along with what you desire to do most during your retirement years.

 

You want to know the minimum number or baseline that you need to reach to pay your monthly expenses and live out the remainder of your life based on the life expectancy that you (or your financial planner) anticipate–based on sound analysis.

 

By using the 25x rule or other highly effective retirement planning formulas or techniques, you can get to your retirement funding in a manner that you can feel more comfortable as you approach your retirement.

 

The 25x rule, simply means that to stop earning new income (retire), you will want to have saved 25 times the amount you expect to need every year in retirement–as that should sufficiently fund your retirement for 25 years after you retire–and is generally a well planned life span for those who plan on retiring after age 60.

 

You can figure out what you’ll need for retirement using the 25x guideline by doing the following:

 

Your retirement calculation:

 

1. Start with your 25x number (25 times the amount you expect to need every year in retirement).

2. Subtract the savings you have today to get the savings you’ll need.

3. Estimate what your current savings may grow to by the time you reach, say, 62, by plugging that number into a compound interest calculator assuming a conservative 6%, 7%, 8% or 9% rate of growth.

4. Subtract that amount from your 25x number.

5. Divide the result by the amount you think you can save each year and you will have calculated the number of years you’ll need to get there.

 

Example:

 

1.  Say your 25x number is $2,000,000. ($80,000 a year times 25)

2.  Assume you’ve already saved $200,000.  $2,000,000 – $200,000 = $1,800,000 (your target!)

3.  If you’re 32 years old, by age 62 your $200,000 will be worth $1,522,451. (assuming 7% return compounded annually over 30 years)

4.  $2,000,000 – $1,522,451 = $477,549 (subtract the amount from line 3 from your 25x number)

5.  Say you can save $1,000 per month or $12,000 per year.   (divide result from number 4 above by what you think you can save each year) $477,549 / $12,000 = 39.8 years

 

If you’re 32 now and have already saved $200,000, you could retire at 71 with 2 million in your account by saving $1,000 per month for roughly 40 years.

 

If you’re 32 now and have already saved $200,000 and you desire to retire at age 62 with 2 million, you would have to bump your monthly savings up to $1,333 per month or $16,000 annually ($477,549 / $16,000 = 29.8 years) for roughly 30 years.

 

Always remember that this is just an estimate, and there are more caveats (in addition to the ones above) as you must consider inflation and other factors that could eat into your savings–but your savings and investments may help offset that along the way if you attain the right return over time.

 

Always remember that investing always involves risk!

 

Although the stock market has traditionally averaged from 6% to 9% return on investments over a number of intervals–that does not mean your portfolio will meet that average as it could be higher or lower over your retirement savings interval.

 

Therefore, your assumed rate of return is not what may occur in actuality, and your rate of return over the years will depend on how you invest, save and allocate your money, including the level of risk in your portfolio and other political, regulatory, economic, societal, technological and legal happenings in your country!

 

The 6% to 9% return is a reasonable expectation based on the history of the S&P 500 Index–but their are periods where that average has been lower–and higher.  You may want to consult a competent financial advisor if you want to be more precise in your calculations–and remember that financial markets don’t always act as they did in the past.

 

How Much Savings Will I Have When I Retire?

 

What will your portfolio numbers look like when you retire?

 

Here’s another way to figure it out!

 

The retirement calculation:

1. Think about how many years you plan to work.

2. Using an interest calculator, figure out what your current investments will be worth when you retire, assuming 6%, 7%, 8% or 9% annual growth.

3. Estimate your yearly savings.

4. Over ________ years, that regular contribution will get you to $________. (For comparison, if you just saved that money without investing it, you’d only have $__________).

5. Current Investment when you retire = $_________ +  your yearly savings estimate over x number of years $___________ = $____________ or the amount you would have when you retired!

Note: You can also use a financial calculator if you are proficient in the use of one

 

Make adjustments as needed

You must not only have the commitment to do what you need to do–you must also continuously review, if you are sincere in making your dreams come true.  That includes having a flexible mindset to make adjustments as adversity and life happenings that you did not or could not plan for–will occur.

 

Know what your retirement budget or monthly cash flow will look like

Retirement is a new era, but just like the rest of your life, it will all fall in place if you plan appropriately.  In each stage of your life, your concerns, goals and budgets (cash flow) will vary–therefore effective planning is essential.

 

You may want to break down your retirement in intervals to help simplify your retirement.

 

●    First 10 years of retirement. As you adjust to your new lifestyle, you’ll likely be in good health and excited by the transition into retirement and as long as you stick to your plan you can take vacations and enjoy life in a more bountiful manner.  It is important that you don’t overdo it on spending, as you must withdraw your retirement savings accounts appropriately because those funds still have to last you a while!

 

●    Second ten years of retirement. Hopefully you’ve had some fun during the first ten years, and now you might be settling down a bit—as spending usually drops some for most who are over age 70.  If you have downsized or paid off a mortgage and your housing costs are down you should be in great shape.  Be alert for home improvement or accessibility costs going up if you need them as you age, as well as healthcare costs.  If your investments have done better than expected and you need some extra cash you can utilize that cash if you have saved appropriately.

 

Third ten years of retirement. At this point, you may have a need to move into an assisted living facility or even needing long-term care.  You will likely spend less on everyday necessities, but be prepared for increased healthcare costs, especially if you need assistance.  As you slow down, you can increase your percentage of withdrawals further, though keep in mind how much you want to leave behind in your estate for your heirs.

 

Put a plan into action that will lead you to reach your “retirement number” that will position you to do what you desire during your retirement years

You must put effective forward moving plans in place if you are to reach your retirement goals.  That consists of knowing what you need to save annually to reach your desired goals and live out your life in a more joyful manner.

 

The 25x formula mentioned above or another retirement savings formula that provides you a way of reaching the number that you need to reach, can lead to you reaching the number that allows you to pay your monthly utilities, entertainment, taxes, charitable giving–along with traveling at the level that you desire during your retirement years.

 

It is important that you know the age that you want to retire along with the age that you can retire!  Their is no secret to your retirement success, you must save and manage your money consistently until you reach your retirement number!

 

While you can’t tell you how many grey hairs will be on your head by the time you are able to retire, you can help reduce stress in your life and estimate roughly when you’ll be financially ready to enter the “retirement zone” that you always aspired to reach by planning proactively and expecting success!

 

You have already assessed how much you’ve been able to set aside so far by doing the analysis above–and you now know what you can save moving forward (again based on the analysis that you did above)–therefore you must now do and review–as you already have the planto make your dreams come true–or you will soon have one!

 

Conclusion

Additionally, you want to know how much social security and other income that you and/or your household will receive, know when your required minimum distributions are required for your various retirement accounts and know the taxes that you will have to pay during your retirement years at the federal, state and local level (particularly your income taxes at the state and federal level, property and sales taxes in your area–along with any other taxes in your area that could be of a burdensome nature).

 

It is important that you get out in front of your retirement planning so that you can achieve greater success! 

 

With many now living well into their 80s and 90s–it is important that you plan for the years after you stop working with the expectation that you too will live well into your 80s or 90s (or beyond) so that you can enjoy life in a more bountiful manner.

 

You also want to be on the lookout for financial fraud as scammers are highly adept at creating accounts using your identity and getting your retirement benefits–particularly utilizing phishing scams and setting up fraudulent social security accounts.

 

Whether you anticipate receiving traditional IRA income, ROTH IRA income, pension income, 401k income, 403b income, railroad retirement benefits, government thrift savings plan payments, social security or any other source, you want to proactively plan for what those payments will be (in total) at the earliest time possible–if possible (no pun intended).

 

The monthly retirement payments that you will receive must be clear in your mind and not vague or cloudy–or even worse not even in the ballpark of what you need to carry on with your life in the manner that you intended–as no one cares more about you–than you–and that is as it should be.

 

By making a “real effort” to reach your “retirement number” you can put yourself in position to have a more rewarding and enjoyable retirement.

 

By applying what you sincerely feel can help you achieve your retirement goals more efficiently you will be putting yourself and your family in a better position as you age–and it is the desire of TheWealthIncreaser.com–that you will do just that as a result of visiting this page.

 

May all of your retirement dreams come true, as you now know what you must do–therefore the retirement success that you desire is now up to you!

 

You want to know at the earliest time possible what you value as far as saving for a more rewarding retirement and you want to put plans in place for what will happen after you transition because there is a good chance that you will have assets when you transition–and “you” can decide where they go if you plan now.

 

It is important that you utilize the values that you have acquired over your lifetime that are positive and uplifting so that you can reach your “retirement number” and improve humanity while you are here on planet earth–and even after you transition?

 

Do you have the endurance that you need to lead or are you at this time “not ready” to succeed–as you more effectively plant your retirement seed?

 

All the best as you operate daily at a level that will lead to your retirement success…

 

 

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10 Questions you must ask prior to your retirement…

What will I receive from Social Security on a monthly basis…

Retirement Cautions

5 Common Mistakes to Avoid

20-30-40–plan for success–for those who are age 30 or less

 

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Adjustments, Benefits, Credits, Deductions & Your Taxes

Learn more about taxes and how you can save on your income taxes at this time…

 

It is important that you realize that there are ways that you can benefit from the tax code if you are a taxpayer in the United States and possibly its territories (and you file income taxes) that could mean more money in your pocket.

 

Even though you may be unable to use the large array of loopholes in the tax code that many millionaires and billionaires take advantage of, there are ways that you can benefit even if you have modest income.

 

In this discussion TheWealthIncreaser.com will discuss ways that you can possibly use adjustments, credits and deductions so that you can benefit yourself and your family so that you can build wealth more efficiently and achieve meaningful goals.

 

In the following paragraphs you will learn about adjustments that could possibly benefit you–along with credits and deductions that you can use to help make your desire to pay lower taxes actually come true!

 

Adjustments

If you contribute to an IRA (and you qualify) and/or you are a teacher and you have teacher expenses that you pay out of pocket, you can adjust your earned income by claiming an “adjustment to your income” which would have the effect of lowering your taxes and possibly increasing your refund amount or reducing the amount of taxes that you would pay if you were in the unfortunate position of “owing” on your taxes.

 

As a taxpayer you can possibly subtract certain expenses, payments, contributions, fees, etcetera from your total income.  The adjustments (Schedule 1 Part II) would be subtracted from total income on Form 1040 and would help you establish your adjusted gross income (AGI) that goes on your 1040 tax return.

 

Common “adjustments to income” include such items as educator expenses, student loan interest, alimony payments or contributions to a retirement account–among others, and you can possibly take these adjustments even if you don’t “itemize” on your tax return.

 

Other Benefits You Must Know About

You must be able to tell if you can benefit more by claiming the standard deduction or the itemized deduction and you must know whether it is best to use the standard mileage rate or the actual expenses (in order to switch from standard mileage to actual expenses–you must use standard mileage rate in year 1) when claiming the use of your vehicle for your business or farm–at a minimum.

 

Because all tax situations are unique–your tax professional may be able to clue you in on “other areas of your tax position that you are unaware of” to see where and if there are other areas in the tax code that you could possibly benefit from.

 

You may be able to contribute to your company retirement plan and get a pre-tax benefit as well as an employer match–and you definitely want to know about that so that you could contribute at a level that is best for not only your current tax position but also at a level that allows you to meet or exceed your future goals so that you can do what you desire most during your retirement years.

 

If your income is at the right level, you may be able to qualify for a Retirement Savings Contributions Credit (a federal income tax credit designed to encourage low- and modest-income individuals to save more aggressively for retirement).  The credit equals 10% to 50% of your contributions for the year, up to certain limits and is based on your income qualification.

 

Credits

There are many tax credits that are available, and it is important that you (or your tax professional) know of the “tax credits that may apply to your situation” and how they could possibly be of benefit to you and your family at tax time or possibly benefit you and your family in future tax years.

 

To name a few, energy credits, earned income credit, child tax credit, other dependent credit, childcare credit, clean vehicle credit for electric car purchases, savers credit and the home improvement credit, along with many others may be able to help you lower your taxes (technicalities must be met to qualify for many credits).

 

If you or your spouse are elderly and disabled you may be eligible for a credit–or if you anticipate future educational expenses, there are ways that you can use educational savings accounts such as 529 plans among others, that provide tax advantages at the federal, state and possibly local level, if utilized appropriately.  In future years (when you utilize funds to pay for qualified educational expenses for yourself or your children) you may be able to take advantage of the American Opportunity Credit or Lifetime Learning Credit so that you can reduce the amount of taxes you owe–or increase the amount of your refund.

 

In addition, you (or your tax professional) want to be aware of what is possibly available at the state level as well, as in many cases “you will have to apply for the credit(s)” that are offered in a particular state.

 

Tax credits are more valuable than a tax deduction as you would have a dollar-for-dollar reduction (your tax credit would be $1,000 if you were eligible for a credit of $1,000 unless your taxes owed was below $1,000 and the credit was non-refundable, or you owed no taxes, and the credit was non-refundable) as opposed to the deduction being tied to your tax bracket.

 

If you are in the 22% tax bracket and you have a “$1,000 deduction” you would save $220–NOT $1,000 (.22 multiplied by $1,000) on your taxes–when computing your tax deduction.

 

Deductions

You can choose between a standard deduction (2022 amounts provided by the IRS) or an itemized deduction (includes medical expenses, state income or sales taxes, property taxes, mortgage interest, charitable contributions etcetera that you paid or contributed in 2022), depending on which one is most valuable to you from an overall perspective when you combine your federal and state taxes.

 

Deductions are not as valuable as a tax credit as a deduction will be based on your tax bracket–and “is not” dollar for dollar!

 

To reiterate to further enhance your understanding, if you are in the 22% tax bracket and you have a $1,000 deduction you would save $220 (.22 multiplied by $1,000) on your taxes.  On the other hand, if you had a $1,000 credit you would save $1,000 on your taxes generally speaking–get the picture?

 

Conclusion

It is important that you realize that “effective tax planning” is a “year-round process” and you need to know the importance of why you must be able to distinguish between a tax credit and a tax deduction as by having the ability to distinguish between the two–you can make better tax and wealth building decisions.

 

In addition, be aware of how you can use tax shelters such as starting a business, utilizing rental property or investing in a tax efficient manner to possibly lower your taxes.  You want to assess and identify what you potentially can (or need to do) do to plan your tax moves in a proactive manner in order to better predict your future outcomes–thereby reducing your risk of owing on your taxes or having other surprises at tax time.

 

Always be aware that some tax credits are refundable, and some are not!

 

On the other hand, a tax deduction or an adjustment to your income can still be of value as it helps lower your taxable income, which means you’re paying less in taxes overall.  It can also increase your refund, but this depends on how big the deduction or adjustment is, what kind it is, your tax bracket, your income and your filing status.

 

A tax deduction (and/or adjustment) can only lower your taxable income and the tax rate (puts you in a lower tax bracket thus saving you additional dollars that you would be paying if you remained in the higher tax bracket) that is used to calculate your tax!

 

This can result in a larger refund of your “tax withholding” on your W-2, 1099-R, estimated tax payment(s) or other documents in which taxes were withheld.

 

A tax credit reduces your tax dollar-for-dollar–giving you a larger refund of your withholding, but certain tax credits can give you a refund even if you have no withholding (it is a refundable credit)!

 

Whether they go by adjustments, credits, deductions or any other name, the key point to remember is that if they can be of benefit to you at tax time–you want to know about them!  Even though you don’t have to be a tax expert, you want to at least be aware of credits, deductions and other ways of sheltering income that are outlined in the tax code that can benefit you and your family when you decide to file your taxes.

 

All the best as you are now aware of the ABCD test, that you can use right now to analyze your taxes and make adjustments to benefit yourself and your family.  You are now fully aware of why you need to know about how you can use credits and deductions so that you can avoid financial destruction and build a foundation of wealth building that cannot be shaken–because the knowledge that you now possess–cannot be taken!

 

You are now in a better position to achieve at a level that is your absolute best, thereby ensuring that your finances won’t be a mess–as you achieve unlimited success–because you have decided to master the ABCD test–and put “the procrastination of your past” to rest.

 

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Retirement Planning & Wealth Building

Learn the importance of properly preparing for your retirement years so that you can build wealth more effectively…

 

It is important that you plan for a prosperous retirement at the earliest time possible.  In addition to knowing your cash flow position at this time and how you can use financial statements to achieve more–you also need to have an awareness of your “financial retirement number” that you will need to reach at a later time so that you can live out your retirement years in a dignified manner.

 

Regardless of whether you contribute to a 401k, 403b, thrift plan, railroad retirement plan, social security, IRA’s or other retirement funding vehicles, you must have a target amount that you need to hit to make your retirement years enjoyable and more beneficial.

 

There are a number of retirement funding vehicles and strategies that you can use to reach your “retirement number” once you get a handle on what that number is!

 

If you are conservative, and you desire to create a diversified portfolio, you can use a United States total market index fund, a United States total market bond fund, and a broad-based international fund.

 

You can simplify your choices even more by selecting a balanced fund or target date funds to reach your goals.  If you are more riskier, you can use Exchange Traded Funds, Mutual Funds, Stock Portfolios and other more exotic investment vehicles to reach your goals.

 

The key is you must have a plan at some level–and the sooner you get started–the better the odds are that you can reach your retirement number and live out your retirement years in the manner that is best for you and your family!

 

In this discussion TheWealthIncreaser.com will discuss the importance of planning appropriately for your retirement years so that you can “achieve your goals” and live out your retirement in the manner that you choose so that you can have more enjoyment during your golden years.

 

It is imperative that you have a basic understanding of retirement planning at a minimum and you have a willingness to learn more as you approach your retirement years.

 

Common Types of Income During Your Retirement Years

 

Social Security

In retirement you will have social security if you reside in the U.S. and worked and contributed at a level that allows you to collect benefits during your retirement years.  You can generally start receiving social security in your mid 60’s and the payments would continue throughout your lifetime.

 

Pension

Although pensions are a distant memory and thing of the past for most, some companies still provide them and if you now receive one or are on track to receive pension income in the future you must know what to expect and when to expect this stream of income.  There are also 401k ROTHs, Simplified Employee Pensions, solo 401ks and other retirement products on the market that may be appropriate for you–depending on your unique financial position.

 

401k, 403B, Thrift Plans and others

By contributing to retirement plans during your working years you can use pre-tax contributions to build your retirement nest egg in a more efficient manner.  There may be an employer match component to the plan and if so, you can use effective investing to achieve your goals even more efficiently.

 

IRA’s

You may be able to contribute to IRA’s (Traditional or ROTH) if you qualify and build a sizable nest egg that you can have available to fund your living conditions during your retirement years if you contribute to the max “and” you have a decent rate of return and choose a fund with low management fees.

 

There are tax and compounding advantages of using these retirement vehicles and they are worth real consideration if you qualify.

 

Railroad Retirement Benefits

If you work for the railroad system in the United States you could be eligible for a retirement plan that is generally more generous than that of the social security system.

 

Home Sale, Refinance, Home Equity Loan or Reverse Mortgage

If you were to sell your personal residence and downsize you could possibly be eligible for a $250,000 exclusion on the gain if you were single and you otherwise qualified–or $500,000 if you were married and otherwise qualified.  You can also refinance your personal residence (or your rental properties if you had any) to pull money out, get a home equity loan or home equity line of credit–or if your situation was dire (you failed to save appropriately during your working years) and you exhausted all other possibilities–possibly a reverse mortgage.

 

Keep in mind that when using any of the above approaches–you must do so strategically as your financial position is uniquely your own and what may be effective for others–may not be effective for you.

 

Investment Income

If you invested during your working years outside of your retirement accounts and reinvested you could have also possibly built a large nest egg that could be used during your retirement years to help fund your lifestyle.

 

Keep in mind an Exchange Traded Fund is more efficient for investing than a mutual fund when you are investing outside of your retirement as you will not have capital gains that would be taxable on an annual basis.  Other investments held outside of your retirement accounts may or may not be taxable.  Municipal bonds, individual stocks that are not sold may avoid or defer the payment of taxes.

 

Conclusion

You have the option of planning now for a more effective and rewarding retirement regardless of the life stage that you are now in.  Whether you invest in a traditional manner or you invest in cryptocurrency and other more exotic investment vehicles–you must have a plan to reach a level of success that allows you to not outlive your income sources–but also live comfortably and possibly leave something behind for your heirs or other causes that are dear to your heart.

 

When investing for your retirement years there are a number of key concerns that you should be aware of and you want to avoid common mistakes that many have made in the past by being aware on the front end and not being complacent during your working years.

 

You particularly want to be aware of fees that you pay and you want to minimize those fees on the front end because at retirement time it would be too late!  Look for no-load funds that don’t charge a percentage of your upfront investment.  Also choose a fund with a low expense ratio, which includes management fees and other costs of running the fund.

 

You can generally find this information on the funds website or in advertising brochures.

 

It is not uncommon to see retirees who invest $100,000 over a 30-year period with high fees end up with tens of thousands less than those who invest in funds with a low expense ratio.

 

You can change the direction that you are now on to that of real success if you now decide to plan appropriately–and give it your best.

 

You must analyze the sale of your home and the tax consequences (basis, depreciation, exclusion from taxes on gain must be analyzed) prior to and after you retire on the front end to ensure that you make the best decision for the short and long run regardless of where you are now at in your life stage.

 

Even if you have to pay for good advice, the value will more than likely be greater than the cost as you can avoid costly mistakes at the wrong time that have held so many back as they were building wealth.

 

It is important that you do all that you can to fund your retirement so that you can reach your retirement number and live at a level of comfort that you desire or need to live at.  Also keep in mind that with many retirement vehicles you will have mandatory withdrawals beginning at age 72.

 

If you project monthly income of $8,000 and monthly expenses of $5,000 and you are age 65 and you plan on living until at least age 95 you must hit the target number that will allow you to have “for a 30 year period” the $8,000 monthly income when all sources are added up.  You also want to know the tax implications and the effects of inflation on your retirement income so that you are “not surprised” during your retirement years.

 

Isn’t it time you try a new informative, powerful, revolutionary and results oriented approach to wealth building as opposed to the same tired approach that has been presented by many others in the finance industry over the years?

 

When it comes to retirement planning and wealth building  reaching your retirement number and having streams of income that are stable, reliable and predictable during your retirement years should be your primary goal.

 

When you combine your social security benefits, pension, other retirement income and all other sources of income during your retirement years, will it provide you with what you need to live out your retirement years in comfort?

 

By being particular, precise, clear and concise–about what you expect to happen during your retirement years–you set yourself up to avoid financial fears and eliminate financial tears during your golden years!

 

All the best to your retirement wellness and a lifetime of success as you are now in position to proactively give it your absolute best…

 

 

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