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There are not many people who know all the details of the known retirement plans out there, knowing this, you can also say that not many people know which retirement plan is the best. When a person is working on his or her retirement plan this involves a form of saving money periodically for a certain time, that way that person can enjoy a nice time without the need to work in the, so called, golden years. The government encourages people to do so by giving tax deductions and other benefits. This is what we call an Individual Retirement Plan also known as IRA. With an IRA you are sure of having no a lot of financial worries during your retirement years.
Several types of retirement plans in the USA
The most popular retirement plan is the IRA in it's most traditional form. This plan is simply a savings plan with a custodian like a financial institution, bank or brokerage. Your job would be to deposit an amount of money (most times) on a monthly basis. The custodian would then invest that money in such a way that the returns are as high as possible. You benefit in a few ways from this type of IRA, of course one benefit is the saving itself but you are also entitled to get tax deduction for the part that is invested. There are strict criteria to be eligible for this IRA and these are regulated by the Internal Revenue Service (IRS) of the United States of America.
The second plan we will talk about is the Roth IRA retirement plan, this is also a very popular type of plan in the US. With a Roth IRA retirement plan you invest the funds in securities and stock and these would provide a high return. One of the downsides of this plan is that it is not possible to deduct it from your taxes. Another downside would be the 10% penalty when you decide to make an early withdrawal.
The third plan, and final one we will discuss here, is the plan known as the simple IRA. In this plan the employer plays a major part. If a company has less than 100 employees and they earned up to $5000 the year before the employer can help in two ways. The employer can contribute 2% towards a retirement savings plan without the need of the employee to do any saving. Or the employer can do a 100% match with the monthly saving the employee does with a maximum of 3% of the employees monthly income. The minimum, however, should not go below 1%. An employee can stop his or her contribution any time they want. The employer has the benefit of getting a tax deduction for the contributions it makes, and the employee has the benefit that any savings they make are taxed the moment they withdraw the money from the plan and not at the time of the savings. So in the present time they don't pay tax over that part. The employer, in this way, has a nice benefit for the employees and it can give them a form of loyalty towards the employer.
Plan your retirement, that is the best advice one can ever give to you. How you do it is the next problem but to be aware of the fact that you need to start saving now is a first big step. The earlier the better.
Internal Revenue Code rules that determine how IRA's, 401(k)'s and other retirement plans are taxed are complex. But, don't take time to understand them and you could make unintentional, costly mistakes.
In this “Retirement Plan Update”, I'll reveal 4 of these common mistakes and how to avoid them.
Mistake Number One Not Planning to Reduce Tax on Your Retirement Plan at Death
Do no planning to reduce or eliminate tax on your IRA at your death and you may force you heirs to pay up to 80-90% of your retirement plan balance in tax when they inherit it.
When combining the tax impact of I.R.D. taxes (income taxes on a deceased person's IRA) and estate taxes, more of your IRA or 401(k) could be paid to the IRS at your death than is paid to your heirs. In fact, it's not uncommon for the tax paid to the IRS to be 3 times the amount that your heirs are allowed to keep.
The good news is that many times with proper planning, this tax could be reduced or even eliminated altogether.
Mistake Number Two Not Using a Beneficiary Designation That Will Allow Your Heirs to Spread Out the Tax Over Their Lifetime.
Many IRA taxpayers miss this one. And force their heirs to do one of 2 things as a result when their retirement plan is inherited–
1- Pay all income taxes due on the retirement account immediately
2- Pay all the income taxes due on the retirement account within 5 years of inheriting the
retirement account.
These choices are not necessarily the best choices for many IRA holders. With proper planning it may be possible to allow your heirs to spread out the tax on the retirement plan that they inherit from you over their lifetime, or in other words, allow your heirs to ‘adopt' your IRA.
The obvious benefit to this strategy, if you take time to implement it, is that your heirs have the ability to continue to get tax deferred growth of YOUR IRA account over THEIR lifetime.
While this strategy is available to almost any retirement plan investor, many aren't even aware that it exists.
Mistake Number Three Not Using a Formula to Invest Your Retirement Plan Assets
Many successful investors use a 3-step formula to help them manage their IRA and retirement plan assets.
Step One: Use a systematic formula to determine what investments you buy and how much of them you buy.
Nobel prize winner, Harry Markowicz, came up with an idea called ‘Basic Portfolio Theory'. Simply put, Mr. Markowicz, determined that the best possible portfolio was an ‘efficient' portfolio, or one that had the smallest possible risk for an expected level of return. In other words, you need to follow a formula to have a ‘blend' of different types of investments to minimize risk, while maximizing return.
Step Two: Use a systematic formula to know when to buy and sell different investments in your portfolio.
By using a ‘rebalancing formula' an investor may be able to ‘buy low' and ‘sell high', the ultimate goal of any investor. The problem is that many investors simply ‘let it ride' and hope for the best. A rebalancing formula may allow an investor to systematically take profits.
Step Three: Use an exit strategy to protect your investments from major market downturns
May investors could improve returns through the simple use of an exit strategy. An exit strategy is nothing more than a clearly defined point at which an investor will sell their fund shares to potentially protect their capital from a decline.
Mistake Number Four- Procrastinating
This is likely the biggest and most frequent mistake people make. If you want to avoid these mistakes, you need to take a little bit of time out of your schedule and plan. The truth is with proper planning almost anyone can improve their financial situation.
Due to the complexities of retirement accounts and the many changes slated to occur, it's extremely difficult to explain each application of these strategies here in print. While one client may be able to benefit from a strategy by using it one way, another client may be able to benefit from a different application of the same strategy.
If you or someone you know needs some help managing retirement assets, setting up a retirment savings plan, or have life insurance needs, just give me a call at 801-545-0696.
Respectfully,
Mark K. Lund, CRFA
Wealth Manager
Stonecreek Wealth Advisors, Inc.
10421 So. Jordan Gateway, Suite 600
So. Jordan, UT 84095
801-545-0696
www.stonecreekwealthadvisors.com
Securities offered through Sammons Securities Company, LLC
Member NASD and SIPC