When Saving for Retirement in Taxable Account Is a Good Idea

Tax and Financial News June 2019

When Saving for Retirement in Taxable Account Is a Good Idea

When Saving for Retirement in Taxable Account Is a Good Idea, 401k, 403b

Most people associate saving for retirement with tax deferred or non-taxable accounts: 401(k)s, 403(b)s, Traditional IRAs, Roth IRAs, etc. The tax benefits of these types of retirement accounts give individuals advantages over simply investing in a regular taxable brokerage account.  

Savings for retirement in a standard taxable account can also have its place – and the option shouldn’t be ignored. In this article, we’ll look at a handful of reasons why doing so might just be the best option.

Your employer doesn’t offer 401(k), 403(b) or similar type plan

Some employers, especially very small ones, don’t offer retirement plan options to their employees due to the cost or administrative burden. Others have restrictions on participation, such as waiting periods (sometimes up to one year) or cut out part-time employees.

In this situation, your options may be limited to opening an IRA, but contributions are limited ($6,000 or $7,000 per year, depending if under or over 50) so an IRA alone may not allow you to save enough to meet your goals. Savings in a taxable account can help bridge the gap between what the IRA allows and your target needs.

You have maxed out and still want to save more

Even if you have access to a tax advantaged savings plan, contributions are limited. For example, 401(k) plans limit contributions to $19,000 ($25,000 if age 50 or older) in 2019. Depending on your income or projected needs, this might not be enough.

Consider for example that many experts say a target savings rate of approximately 15 percent is needed to give a retiree sufficient income. Someone earning $200,000 a year should be putting away $30,000 per year using the 15 percent rule, considerably more than what a 401(k) permits.

Accessibility to your investments

Retirement accounts come with strings attached to those tax benefits. Taking money out of a 401(k), 403(b) or IRA early can trigger steep costs in terms of penalties and taxes.

If you’re someone who values options and access to long-term investment savings, a taxable account provides flexibility. You can add and remove money without limits, penalties or restrictions. You’ll also have more control in retirement as there will be no required minimum distributions later in life.

Benefits for your heirs

Passing on the balance of a 401(k), 403(b) or Traditional IRA to an heir puts him or her in a taxable situation. Typically, someone who inherits an IRA will have to pay taxes on the distributions as if they were ordinary income, just like the retiree during their lifetime. Generally speaking, someone who inherits a taxable account receives a step-up in basis (at the date of death or other depending on elections).

Let’s look at a simple example to understand this better. Assume you bought 1,000 shares of Apple for $20 ($20,000) and when you passed away it was worth $200 per share ($200,000). If you purchased this in your 401(k), then your heir would have to pay tax on the entire $200,000 as ordinary income as it’s distributed. If this investment was held in a taxable account, however, they could receive a step-up in basis. This means that while your basis was the $20,000 you originally paid, your heir’s basis would step up to the $200,000 value. This means he could sell the $200,000 worth of stock and pay zero in taxes.

Conclusion

As you can see, tax deferred and advantaged accounts offer many perks that make them excellent vehicles for saving; however, taxable accounts are often needed as well. The need to save beyond contribution limits or desire to pass on an inheritance in a tax-advantaged manner can behoove looking beyond 401(k)s and IRAs.

 

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Financial Planning June 2019

Social Security: News, Tips and Trends

Social Security: News, Tips and Trends

There are a number of threats that both retirees and pre-retirees are facing right now when it comes to drawing Social Security benefits. For example, there’s a new scam this year. Seniors are being solicited by callers who claim to be with the Social Security Administration (SSA). The caller says he regrets to inform that the elderly person’s Social Security payments have been suspended. The caller says it’s either because the beneficiary has been involved in a crime or there has been suspicious activity related to their benefit. Here’s the interesting part: the caller then requests that the senior repay a certain amount of his benefit to Social Security by gift card. The scammer is then able to use this money quickly with no paper trail.

If that sounds absurd, consider that over the span of just two months Social Security beneficiaries collectively lost upward of $6.7 million by falling prey to this a new, highly effective scam. Even if an elderly person is suspicious or knows the call is fraudulent, he may acquiesce anyway for peace of mind. Seniors who rely on Social Security as their primary source of income are of no mind to mess around when that income is threatened. If you or anyone you know is in this situation, be aware that the SSA does not make direct phone calls, does not threaten to stop paying benefits, and certainly does not ask to be refunded payments by gift card.

From a longer-term perspective, Social Security payments could be threatened by – ironically enough – the current administration’s strict immigration policy. The former chairman of the Federal Reserve, Alan Greenspan, recently noted that in 2010 alone, unauthorized foreign workers paid about $12 billion in tax revenues that went directly into Social Security’s coffers. Because many immigrants pay FICA taxes whether they are documented or not, this revenue source has been a mainstay to our Social Security, Medicare and Medicaid programs for as long as they’ve been in effect. Based on 2016 government data, even before the recent immigration policies were implemented, Pew Research reports that the number of unauthorized immigrants had dropped to its lowest level (10.7 million) since its peak (12.2 million) in 2007.

The unfortunate consequence of fewer immigrants is that payroll taxes may have to increase and/or Social Security benefits reduced in coming years. One economist projected that if we continue down this current path of highly restrictive immigration policies, Social Security benefits would need to be cut by nearly 25 percent.

To make the most of their benefits, many retirement planners recommend that retirees wait as long as possible to begin drawing Social Security income. The longer you wait, the higher the benefit. However, those in poor health or diagnosed with a terminal illness (only two to four years to live) may be better advised to begin taking benefits. However, there is a caveat to this strategy that should be considered. Delaying benefits not only ensures a higher payout for the primary beneficiary, but also for the surviving spouse. When the primary breadwinner takes Social Security before full retirement age, his monthly benefits are permanently reduced – that is, the amount his widow will be stuck with for the rest of her life. If you don’t actually need the income, it might be worth delaying benefits to increase the amount a dependent spouse receives upon your death.

Another little known fact about Social Security is that you can have a do-over. If you retire, start drawing benefits and then decide to go back to work, you can actually stop taking the payout and let it continue to accrue until you’re ready again. Of course, there are restrictions in place. First, you must be under age 70. Second, you have to alert SSA of this plan by submitting the appropriate form within 12 months of applying for benefits. And third, you must pay back all the money you’ve received to date. The good news is that you can reapply later and enjoy a higher benefit as if you were drawing it for the first time.

 

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Tip of the Month June 2019

Best Road Trips on a Budget

Best Road Trips on a Budget

Summer is here and it’s time for getting out of town. However, you don’t want to set off on the open road without a plan. While there are an endless number of places to visit across the United States, here are a few road trips that are filled with natural parks, mountains and beaches, all of which are notably affordable, if not free.

From New York City to Charleston, South Carolina

First stop, Cape May, NJ, where you can hit Cape May Beach for some sun, then walk/bird watch for free at The Meadows. Next stop, Ocean City, MD, where there’s a 3-mile-long boardwalk with lots of arcades and fast-food joints (read: kid-friendly and affordable).

After that, head toward the fabled Outer Banks of North Carolina. Lots of adorable towns and free public beaches pepper this area, but you can’t miss Cape Hatteras. Should you want a break from the sand, you can take in all the critters at the Pea Island National Wildlife Refuge, then climb to the top of the Cape Hatteras Lighthouse – both free. Last stop, iconic Charleston, where the eye-popping architecture is complimentary, as is visiting The Battery, biking the Palmetto Trail and swooning over the miraculous Angel Oak Tree.

From Chicago, IL, to Santa Monica, CA, via Route 66

Starting in Grant Park, the official beginning of Route 66, you can walk and hike across lots of gorgeous tree-filled greens, bike along Lake Michigan, snap pics by Buckingham Fountain and check out sculptures and installations, all gratis.

Head next to Carthage, MO, to the 66 Drive-In, where you can watch one movie and get the second one for free. After this, make your way to bucket list-worthy national parks, including Yosemite, Grand Canyon and Petrified Forest National Parks. While they do charge entrance fees, they’re minimal and the jaw-dropping nature is priceless. Last stop, beachy Santa Monica, where the waves, the pier, the mountains – everything is waiting to greet you.

From Houston, TX, to Portland, OR

First stop is Dallas, where you can see the JFK Memorial and the Calatrava Bridge, both without charge. Next stop, Amarillo, where a must-see is the Cadillac Ranch, rows of old Caddies nose-down in the ground. Free and a great photo op.

Head to Denver, where Rocky Mountain National Park is just a heartbeat away. Stop by Red Rocks Park in the city for awesome natural formations (no charge), followed by the Denver Museum, which is free every first Saturday of the month.

After this, head to Boise, ID, where you can hike/walk in the Boise River Green Belt, hoof it around the Idaho State Capital Building, then get yourself back into nature at the Camel’s Back Park. Last stop, Portland, where a few free things of note include visiting Mill Ends Park, the world’s smallest park. The Vacuum Museum, (yes, you read that right), where you’ll see vintage vacuums. And then, of course, what you came here for, the nature stuff: Forest Park, where you can check out the Witch’s Castle. The Urban Waterfall at Ira Keller Forecourt Fountain Park and of course, Columbia River Gorge, for crazy gorgeous waterfalls and all kinds of outdoor fun.

These three road trips are just a sliver of the many routes that offer freebies along the way. But remember: head for the great outdoors. More often than not, you’ll see some memorable sites that won’t cost an arm and a leg.