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  • How to prepare for the $84 trillion wealth transfer | Long Island Business News

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    The great is upon us.

    DAVID MAMMINA: ‘It really depends on the person themselves on how they want to determine how their money goes when they pass.’

    An estimated $84 trillion to $124 trillion is expected to go from to Gen Xers, millennials and Gen Z over the next 20 years or so, notes David Mammina, partner and financial advisor for Coastline Wealth Management.

    With these numbers and factors in mind, a reputable estate attorney, CPA and financial planner can help manage that transfer of wealth.

    “The team can really look at what’s the best way to deploy trusts. The CPA can determine the best way to save on taxes,” said Mammina, adding that a financial planner can help clients determine how much can be gifted.

    Advisors can tailor a program to an individual’s desires: Whether they want to set up philanthropic donor trusts, gift early so they can see the next generation enjoy it, or invest so there’s a bigger pot for their heirs to inherit.

    “It really depends on the person themselves on how they want to determine how their money goes when they pass,” Mammina said.

    Financial planners will bring in estate attorneys to set up trusts, which helps expediate the transfer of assets. Accountants can start converting IRAs and 401Ks into Roth IRAs, so the assets grow and transfer to the next generation, tax free.

    Teaching the next generation about investing, compounding interest, diversification and risk is also key.

    “It just makes it a little bit of an easier transition when everybody is part of the picture,” Mammina said.

     

    Focus on income taxes

    ASHLEY WEEKS: ‘Very often, it makes sense to involve a professional. It could be a lawyer that serves as trustee. It could be an accountant, a bank or financial institution.’

    As baby boomers age, wealth management starts to center on helping younger generations become good stewards of these resources, notes Ashley Weeks, a wealth strategist at TD Bank.

    “How do we pass the wealth along with the least amount of friction and protect ‘‘ going forward?,” said Weeks, noting that the focus should be on income taxes on retirement accounts.

    Instead of selling an asset, you can borrow against it, using it as collateral.

    “You don’t have to pay tax when you take out a loan and let that property benefit from the step up in basis at death,” she said.

    There are challenges in passing along retirement accounts, which don’t get the benefit of a step-up in basis. One possibility is to convert an IRA into a tax-free Roth account.

    “You can pay tax now, but your heirs are not going to be forced to pay taxes on that money when they pull it out after they inherit it,” Weeks added.

    A revokable trust allows assets to bypass the probate process and help protect assets from heirs’ spouses, in the event of divorce.

    To prevent disputes between heirs, grantors should choose their trustees wisely.

    “Very often, it makes sense to involve a professional. It could be a lawyer that serves as trustee. It could be an accountant, a bank or financial institution,” she said.

     

    Diversify your portfolio

    BHAKTI SHAH: ‘It’s important to have an independent valuation to understand what the business is worth.’

    For family business owners, their company is typically their largest asset and the one that’s most dear to them, notes Bhakti Shah, partner and chair of PKF O’Connor Davies’ trusts and estate division.

    If they have concentrated risk in that business, one strategy would be to diversify.

    “Diversify by maybe selling some shares outright to create a more mixed allocation in their asset portfolio,” Shah said.

    If selling is not an option, gifting–either in outright gifts or in a trust—is another possibility.

    Irrevocable trusts provide a greater layer of protection than outright gifts: The asset is protected from creditors or former spouses.

    Work with a team of trusted advisors: An accountant to ensure assets are properly transferred; a lawyer, for a trust, which is a legal entity; and a financial advisor, to manage the transfer of assets.

    “That whole team of professionals is working for you to make sure they’re looking at it from all different angles so that your wishes are being handled according to plan,” Shah said.

    For business owners, having a plan that defines the transition and ownership will put you ahead of the game.

    “It’s important to have an independent valuation to understand what the business is worth,” said Shah, who adds that it could help determine their options as they transition out of the business.

     

    Keeping the peace

    DAVID FRISCH: ‘The founder has to understand the tax consequence of selling. Then you start bringing the family in.’

    For planning, founders must decide how involved they want to remain with the business. In instances when they’re closely linked to their companies, founders usually get a higher payout if they stick around for a year or longer before transitioning out, notes David Frisch, founder and CEO of Frisch Financial Group.

    “The first step—before the family gets involved—is having the conversation with the owner to say, ‘What do you want to do?” Frisch said.

    There’s also the question of how to divide all major assets between the children: the business, real estate holdings and the brokerage account.

    “The founder has to understand the tax consequence of selling,” said Frisch, adding, “Then you start bringing the family in.”

    In addition to a financial advisor and attorney, you might want to also bring in a psychologist to handle the emotional issues of who gets what, who becomes the boss, etc.

    “If nobody wants to run it, it’s certainly easier to sell to a third party, because it takes a lot away from the potential fighting that may be involved,” Frisch said.

    He advises that founders should plan well ahead of retiring:  “Five years before is typically when the founder should start thinking about the next chapter.”


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  • Ask an Advisor: I Want to Roll Over My Money to a Roth IRA. How Do I Avoid Paying Taxes?

    Ask an Advisor: I Want to Roll Over My Money to a Roth IRA. How Do I Avoid Paying Taxes?

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    Ask an Advisor: If I Have a Tax-Deferred 401(K). Can I Convert It to a Roth IRA Without Paying the Deferred Taxes When I Roll It Over?

    If I have a tax-deferred 401(k). Can I convert it to a Roth IRA without paying the deferred taxes when I roll it over?

    -Tommy

    Generally, the answer here is no. There’s typically no method to totally dodge taxes on a Roth conversion. Eventually, Uncle Sam will come to collect on your tax-deferred retirement accounts – either when you execute a Roth conversion, withdraw funds or collect your required minimum distributions (RMDs).

    That said, your inability to totally dodge taxes doesn’t translate to an inability to reduce them. Here are some savvy strategies to reduce your tax bill on a Roth conversion. (For more information on taxes and retirement, consider working with a financial advisor.)

    Strategies to Reduce Your Tax Bill on a Roth Conversion

    Ask an Advisor: If I Have a Tax-Deferred 401(K). Can I Convert It to a Roth IRA Without Paying the Deferred Taxes When I Roll It Over?Ask an Advisor: If I Have a Tax-Deferred 401(K). Can I Convert It to a Roth IRA Without Paying the Deferred Taxes When I Roll It Over?

    Ask an Advisor: If I Have a Tax-Deferred 401(K). Can I Convert It to a Roth IRA Without Paying the Deferred Taxes When I Roll It Over?

    To reduce the tax consequences of rolling a tax-deferred account to a Roth, consider these methods:

    Execute a Tax-Aware Partial Roth Conversion

    One strategy for reducing the tax liability of a Roth conversion involves spacing out your rollovers over several years. To use this strategy, convert just enough to push your total income to the limits of your current tax bracket without entering the next bracket up. (For more information on taxes and retirement, consider working with a financial advisor.)

    If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

    Roll Over Your Money in a Low-Tax Year

    For many folks, a prime time for Roth conversions takes place during the years after retirement but before Social Security and RMDs kick in. Those can be relatively low-income years during which initiating a conversion can result in a triple benefit. Those benefits are: lower tax bills, reduced RMDs and future tax-free growth.

    Speaking of timing, if you suspect tax rates will increase at the anticipated sunset of the Tax Cuts and Jobs Act or due to political machinations on Capitol Hill, making a Roth conversion now can be an option.

    You’ll lock in your current tax rate and hopefully ride out any future increases. Keep in mind that nobody has a crystal ball, and this strategy involves making predictions about the future. (For more information on how tax policy may impact retirement planning, consider working with a financial advisor.)

    Pay the Tax Wisely

    Many experts recommend paying the tax on your Roth conversion with nonretirement assets. That’s opposed to withholding some of your retirement funds to pay the bill. This will allow you to move the greatest amount into your new Roth account and continue to watch it grow tax-free.

    Work With a Financial Advisor

    A financial advisor may be able to help you take a holistic look at your tax and retirement profile, identifying opportunities to minimize taxes while adhering to an investment philosophy that matches your life stage.

    A good advisor can talk you through whether a Roth conversion makes sense right now. He or she can also discuss alternatives, such as converting your 401(k) into a traditional IRA, transitioning to a new employer’s 401(k) or making a partial conversion.

    Tips for Handling Taxes in Retirement

    • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

    • Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

    Susannah Snider, CFP® is SmartAsset’s financial planning columnist and answers reader questions on personal finance topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

    Please note that Susannah is not a participant in the SmartAdvisor Match platform and is an employee of SmartAsset.

    Photo credit: ©Jen Barker Worley, ©iStockPhoto/AndreyPopov

    The post Ask an Advisor: I Want to Roll Over My Money to a Roth IRA. How Do I Avoid Paying Taxes? appeared first on SmartAsset Blog.

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  • Ask an Advisor: I Made $310,000 Last Year and Have $546,000 in Retirement Savings, But My Spouse Doesn’t Work. How Can I Save More?

    Ask an Advisor: I Made $310,000 Last Year and Have $546,000 in Retirement Savings, But My Spouse Doesn’t Work. How Can I Save More?

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    Financial advisor and columnist Michele Cagan

    I am 48 years old. I made $310,000 last year and I currently have $546,000 in my retirement plan at work. My husband is on disability and doesn’t work and does not have a 401(k) plan. I wanted to open a Roth IRA but I read that I make too much money. What options do I have to save more money for retirement? I’m debt-free except for my mortgage, which I’m trying to get rid of in the next two years before my daughter goes to college. What would you advise? 

    – Nilda

    Navigating retirement account rules can be confusing and frustrating, making it seem harder to save as much as you want to. You already have a solid foundation to build on, and more options than you might realize to beef up your savings.

    Even though you have a workplace plan, you can still contribute to a traditional IRA, though your contribution would be non-deductible. You can also create and contribute to a spousal IRA for your husband. And while you make too much money to directly contribute to a Roth IRA, you may be able to contribute through a backdoor Roth IRA.

    As for your mortgage, if your interest rate is lower than 4%, it might be worth not making extra payments and either saving or investing that money instead. High-yield savings accounts, for example, currently yield around 5%. One-year certificates of deposit (CDs) are even paying up to 5.5%, or more. Remember, just because savings or investments aren’t in an official tax-advantaged retirement account doesn’t mean you can’t use them to fund your retirement.

    Consider speaking with a financial advisor for more help saving and planning for retirement.

    Contribute to a Workplace Plan and an IRA

    A woman reviews her IRA and workplace retirement plan balances. A woman reviews her IRA and workplace retirement plan balances.

    A woman reviews her IRA and workplace retirement plan balances.

    Anyone can contribute to both a workplace plan and a traditional IRA, but your contribution may not be deductible, depending on your income.

    You can contribute up to $6,500 ($7,500 if you’re 50 or older) to an IRA for 2023. If neither you nor your spouse are covered by a workplace retirement plan, your contributions will be deductible.

    However, if you or your spouse has a workplace retirement plan like a 401(k), that contribution may be only partly deductible or completely non-deductible. Even if you can’t take a current tax deduction for your contribution, you’ll still get tax-deferred growth in the account. The growth and earnings will be taxed when you take withdrawals in retirement.

    Another plus: Having money in the IRA gives you the option of converting it to a Roth IRA. (And if you need help planning out your Roth conversion, talk it over with a financial advisor.)

    The deductibility you might have depends on your household income and filing status:

    Single or Head of Household Covered by Workplace Plan

    If you are single or the head of your household and have a workplace plan in 2023, IRA contributions are:

    Married, Filing Jointly and You Have a Workplace Plan

    If you are married, file jointly and have a workplace plan in 2023, IRA contributions are:

    Married, Filing Jointly and Your Spouse Has a Workplace Plan, But You Don’t

    If you are married, file jointly and have a spouse with a workplace plan in 2023 (but you do not), IRA contributions are:

    Create and Fund a Spousal IRA

    In general, you have to earn income in order to contribute to an IRA. The exception is if you have a spouse who works and earns enough to cover two IRA contributions. You can open a spousal IRA for the nonworking spouse. A spousal IRA gives your family a chance to double down on retirement savings.

    Despite its name, a spousal IRA is no different than a regular IRA in how it’s set up or its tax benefits. It’s not a joint account, either. Only the nonworking spouse owns this IRA. To qualify for a spousal IRA, you have to use “married filing jointly” as your income tax filing status, though.

    The same contribution limits for Roth IRAs and deductibility limits for traditional IRAs apply the same way they would for any retirement account. Traditional spousal IRAs are also eligible for Roth conversions. (And if you have more questions about spousal IRAs, consider matching with a financial advisor.)

    Is a Backdoor Roth IRA Right for You?

    A couple sets up a spousal IRA on a laptop. A couple sets up a spousal IRA on a laptop.

    A couple sets up a spousal IRA on a laptop.

    Roth IRAs come with a few beneficial twists that make them desirable for many taxpayers. For one thing, as long as you follow the rules, all withdrawals – including growth and earnings – are completely tax-free. For another, you don’t have to take required minimum distributions (RMDs), so your money has more time to grow.

    Unfortunately, Roth IRA contributions are subject to income limits, locking many people out of them. For 2023, single filers earning $153,000 or more and married filing jointly filers earning $228,000 or more can’t contribute to Roth IRAs.

    That’s where the backdoor Roth comes into play. This conversion process allows higher earners the opportunity to move money sitting in their traditional IRAs into Roth IRAs. (And if you need help setting up a backdoor Roth, talk it over with a financial advisor.)

    The process is pretty simple. If you don’t already have a Roth account set up, you’ll create one. You tell your IRA administrator that you want to convert all or a part of your traditional IRA to a Roth IRA. You fill out some paperwork, and the administrator handles the rest.

    Some other caveats to keep in mind:

    • There’s a special pro rata tax rule requiring that you have to consider all of your traditional IRAs as a whole, both pre-tax and after-tax contributions, to determine how much tax you’ll owe on the conversion. You can’t pick and choose which IRA money you want to convert.

    That said, the tax-free withdrawals in retirement may be well worth all the potential complications.

    Bottom Line

    You can increase your retirement savings by contributing to an IRA and a spousal IRA even if you have a workplace plan. You can also create tax-free retirement income streams by converting some of your retirement funds to Roth IRAs.

    Tips for Finding a Financial Advisor

    • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

    • Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.

    Photo credit: ©iStock.com/Moyo Studio, ©iStock.com/LaylaBird

    Michele Cagan, CPA, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

    Please note that Michele is not a participant in the SmartAdvisor Match platform, and she has been compensated for this article.

    The post Ask an Advisor: I Made $310,000 Last Year and Have $546,000 in Retirement Savings, But My Spouse Doesn’t Work. How Can I Save More? appeared first on SmartReads by SmartAsset.

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  • What Is a Roth IRA? How It Works and How to Get One Started

    What Is a Roth IRA? How It Works and How to Get One Started

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    When it comes to retirement, saving sooner is better than saving later. But if you’ve already maxed out your 401(k) or don’t have the option to use a 401(k), you’ll have to turn to an IRA or individual retirement account.

    Traditional IRAs are just one of your options, however. You can instead put money into a Roth IRA. Financial advisors can help you navigate the ins and outs; however, knowing about Roth IRA withdrawal restrictions and annual contribution limits is essential before investing in this type of account.

    This article will explain a Roth IRA, how it works and how you can start one at the earliest opportunity.

    Related: When converting from an IRA to a Roth, do I have to file self-employment tax?

    What is a Roth IRA?

    A Roth IRA is a type of individual retirement account. As a tax-advantaged individual retirement account, Roth IRAs allow you to contribute after-tax dollars. The best way to understand a Roth IRA is to compare it to a traditional IRA.

    A traditional IRA is a tax-deferred account. You contribute money to a regular IRA pre-tax, so you don’t have to pay income taxes on any of those contributions (lowering your gross income).

    You can deduct contributions from your IRA each tax year. However, when you withdraw money from your regular IRA, you must pay taxes on those withdrawals since they are no longer tax-deductible.

    A Roth IRA is the opposite. You contribute money to the Roth IRA and are taxed on those contributions, just like the rest of your regular income.

    However, since that money is taxable income, you don’t owe any taxes when you withdraw money from your Roth IRA. You walk away with more money in Roth IRA income than traditional IRAs.

    You can still only take penalty-free withdrawals (or qualified distributions) after you are 59 1/2 years old, according to the SIPC. Still, Roth IRAs are excellent for securing tax-free income when you’re older, regardless of filing status. Roth IRAs are also FDIC-insured in most cases, usually up to $250,000.

    Roth IRAs are primarily advantageous if you think you’ll be in a higher tax bracket when you withdraw your money (which is true for many Americans). For instance, if you don’t have much money in your 20s and 30s but earn much more in your 60s, you’ll have to pay more taxes on your withdrawals if you use a traditional IRA.

    A Roth IRA allows you to circumvent this downside and have more retirement savings for your golden years. Thus, opening a Roth IRA at a trusted brokerage could be a great way to enjoy tax-free growth of your savings.

    How does a Roth IRA work?

    A Roth IRA works very similarly to a traditional IRA. You sign up for a Roth IRA account at a financing institution, like Fidelity or Vanguard, and regularly contribute to the account.

    Depending on your preferences, you can select your investments individually or have a fund manager take care of them. You can find a Roth IRA from many different financial sources, including:

    You have access to many different investment options through a Roth IRA, even if you do a Roth IRA conversion from another account.

    Note that all standard Roth IRA contributions have to be made in cash. Therefore, you can’t contribute money to your Roth IRA in the form of property or securities; you have to report those contributions, so they’re taxed according to your tax rate.

    Just like regular IRAs, Roth IRA investments grow tax-free. Notably, Roth IRAs are much less restrictive compared to other retirement accounts. You can maintain your Roth IRA indefinitely, and unlike traditional IRAs, there aren’t any required minimum distributions (RMDs).

    The early withdrawal penalty for this type of IRA is the same as with a standard IRA, even if you have a brokerage account handle it.

    Related: Do You Know the Difference Between a Traditional IRA, a Roth IRA, and a 401k?

    Are Roth IRAs insured?

    It depends. If your Roth IRA is at a bank, it may be classified under a separate insurance category compared to regular deposit accounts. Because of this, insurance coverage for most IRA accounts isn’t as comprehensive or robust.

    That said, the Federal Deposit Insurance Corp. (or FDIC) does provide insurance protection worth up to $250,000 for both traditional and Roth IRAs. Note that account balances are combined instead of protected individually, however.

    Contribution rules for Roth IRAs

    Roth IRAs, like other IRAs and retirement accounts like 401(k)s, have contribution limits. Roth IRA contribution limits prevent account holders from investing too much money into their accounts at once.

    For instance, in 2023, the total yearly contribution you can make to a Roth IRA is $6500 if you are under 50. If you are 50 or older, you can contribute another $1500 to your account as a catch-up contribution.

    Withdrawing from a Roth IRA

    Just like a traditional IRA, Roth IRAs have specific rules around withdrawals. Specifically, you cannot withdraw any earnings from your Roth IRA without incurring fees unless you are 59 ½ or older.

    Note that that’s not the same thing as contributions; you can withdraw contributions (such as the original amount of money you put into the account) at any point. This earnings withdrawal limit prevents people from using their Roth IRA as a traditional investment or stock trading account.

    Since most people retire around 59 ½, the government charges a 10% penalty and other taxation fees if you withdraw any earnings or gain money from your Roth IRA early.

    In addition, there’s a “five-year rule” to keep in mind. If you start your Roth IRA late in life, you can withdraw your earnings tax-free only if you withdraw that money five years after your first contribution to any Roth IRA under your name.

    The five-year time clock begins with your first contribution to any Roth IRA, not just the one from which you want to withdraw funds.

    Of course, there are some exceptions to these rules. You could avoid the 10% taxation and penalty rate if you use the earnings from your Roth IRA to buy a home for the first time. But in this case, you can only take out $10,000.

    Furthermore, if you have a permanent disability or pass away, you or your beneficiary can take money out of your Roth IRA.

    Bottom line: Try to plan that won’t be withdrawing money from your Roth IRA until you retire.

    Related: Should I Use a Roth IRA to Pay for College?

    What can you invest in with a Roth IRA?

    Once you open a Roth IRA, you can invest in a wide range of funds, stocks, assets and other investments. You can invest in the following:

    • Stocks

    • Mutual funds

    • Bonds

    • Exchange-traded funds or ETFs

    • Certificates of deposit or CDs

    • Money market funds

    • Cryptocurrencies, but remember that the IRS does not let you contribute cryptocurrency directly to your Roth IRA (unless you use a new type of Bitcoin IRA)

    Related: Best Retirement Plans – Broken Down By Rankings

    What are the benefits of Roth IRAs?

    Many people open Roth IRAs in conjunction with a 401(k) or instead of traditional IRAs, as Roth accounts offer particular advantages. Some of these include:

    • No minimum distributions are required: You don’t have to contribute a certain amount each year when you have a Roth IRA.

    • No income tax for inherited Roth IRAs: Therefore, if you pass your Roth IRA to an error or beneficiary, they can also get tax-free withdrawals (provided that you meet the five-year rule).

    • Easier withdrawals: With a Roth IRA, you can withdraw any contribution money without taxes or penalties (though you may face penalties if you withdraw investment earnings before the age of 59 ½).

    • Flexible contribution schedules: You can decide how much you contribute to a Roth IRA and when.

    • Plenty of time to add contributions: You have until the tax deadline each year to contribute more money into your Roth IRA to reach the $6500 limit.

    • Extra savings for retirement: You can combine your Roth IRA contributions with a 401(k) retirement plan.

    • Tax-free distributions: After you’ve held your Roth IRA for five years and are 59 ½ years old, you can take any distributions, including investment earnings, from your Roth IRA without paying federal taxes.

    • Open at any age: Anyone can open a Roth IRA at any age, provided they have earned income.

    How can you start a Roth IRA?

    Knowing how to start one for yourself and your retirement future is essential, given the benefits and importance of a Roth IRA.

    Check eligibility

    Your first step is ensuring you are eligible to open a Roth IRA account. Note that you must have earned some income for the current tax year — this does not include any inheritance money you may have received from others.

    Furthermore, income limits may prevent you from opening a Roth IRA. For instance, in the 2023 tax year, the income “phase-out” range (the income bracket allowed to make reduced contributions) is $138,000 and $153,000 as an individual or $218,000-$228,000 as a couple filing jointly.

    Remember, too, that there are limits on how much you can invest into your Roth IRA each year.

    Related: Learn How to Invest Beyond Stocks, FDs, Property And Gold

    Find an investment platform

    Your next step is finding the right investment platform to open a Roth IRA. Practically every stock investment company offers Roth IRA accounts. If you already have a 401(k) or traditional IRA account, you can open a Roth IRA at the same organization, which may be easier than finding another organization.

    Regardless, if you find a good platform or financial institution, ask questions like:

    • Whether there are fees to open or maintain your account (such as annual fees).

    • What kind of customer service the company provides.

    • What types of investments the company offers for your Roth IRA.

    • Whether it costs money to trade with your IRA, which could be important if you plan to buy and sell stocks or securities with your account.

    Examples of institutions that offer Roth IRAs include Fidelity Investments, Vanguard and Charles Schwab.

    Apply for a Roth IRA

    Now it’s time to complete the necessary paperwork and apply for a Roth IRA. You can usually do this online or in person if there’s a local branch of your financial institution nearby.

    In any case, you’ll need a few pieces of key information to complete the process:

    • Your Social Security number or SSN.

    • Your driver’s license or some other type of photo ID.

    • The bank routing number and checking or savings account number that you want to use to contribute money to your account.

    • The name and address of your employer.

    • The name, address and Social Security number for your plan beneficiary; this is the person who can receive money in your Roth IRA if you die.

    Choose your investments

    After opening your Roth IRA, you get to pick your investments. Most financial institutions have advisors to help you choose suitable investments for your portfolio based on your goals.

    For instance, if you want to grow your Roth IRA slowly but surely, your investment advisor may recommend that you choose safe investments.

    If, on the other hand, you are young and looking to save aggressively, they may recommend more aggressive, risky investments since you have time to make up for any lost income.

    Because many people live longer than before, it may be wise to keep many stocks in your portfolio as you age. Since you live longer, it could be wise to continue holding assets in your Roth IRA even after you retire so you can continue making money to pull from.

    Related: Roth IRA – Entrepreneur Small Business Encyclopedia

    Make contributions

    Now, you have to make regular contributions to your Roth IRA. Remember, there are no limits on when you can make contributions; you just have to contribute up to the limit to maximize your portfolio’s growth.

    As you can see, there’s a lot to like about Roth IRAs, and getting one started is just as easy as starting a traditional IRA. Consider your options carefully before contributing to any retirement account, as the penalty for withdrawing ahead of retirement can make switching your plans more costly than you think.

    Looking for more? Explore Entrepreneur’s vast library of professional and business resources here.

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    Entrepreneur Staff

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  • Everything You Know About Your 401(k) is Wrong. Here’s Why.

    Everything You Know About Your 401(k) is Wrong. Here’s Why.

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    Opinions expressed by Entrepreneur contributors are their own.

    Retirement savings is crucial for everyone because relying on social security is not enough to sustain yourself through your twilight years, especially considering that without any changes, the current social security system will only be able to pay benefits at 80% in 2035 and beyond. And the sooner you start, the better off you are.

    It’s true that tax-deferred accounts like traditional IRAs, 401(k)s, defined contribution plans and cash balance plans allow you to save a portion of each paycheck, tax-deferred, to live on once you hit retirement age. Still, everything you’ve learned about these types of accounts is wrong. And here’s the scary part — it’s not that the people spreading incorrect information are uninformed. Many of them absolutely do know that what they’re telling investors is wrong, but they continue because they have a financial incentive to do so.

    So in this article, I’m going to break down why what you know about your tax-deferred accounts is wrong and what you can do to ensure your retirement is spent living the life you love rather than struggling to make ends meet.

    Related: A 401(k) is Risky. Here’s a Safer Investment Strategy.

    Tax deferral plans only sound good in theory

    While most tax-deferred accounts may seem like a great thing, they actually come with a lot of severe disadvantages that adversely affect your investment and retirement goals.

    You’ll face higher taxes in the future

    You may get a perceived tax break right now by putting money into your tax-deferred accounts, but all you’re really doing is deferring your taxes. It’s true that this does allow you to accumulate a larger balance due to compounding, but that also means you’ll pay higher taxes when you eventually do begin withdrawing your money.

    As time goes on, there’s always the risk of higher tax rates when you take distributions. This alone should make you reconsider because you could easily end up paying more tax than you would now. In many cases, your tax-deferred compounding may not make up for the higher taxation, especially in the new economy of stagflation and higher interest rates.

    Most people today go through their daily lives with a false sense of security in their financial decisions. That’s both because we’ve all been misinformed by many in the financial industry and because most people have delegated their financial decisions to someone who has a vested interest in them investing in certain financial asset classes.

    It’s only much later in life, near or after retirement, when most people realize that they’ve made the wrong financial decisions, and by then, it’s usually too late.

    Related: Searching for Talent? Consider Setting Up a 401(k) for Your Small Business to Keep Up in the Market.

    Your money is locked until you’re 59.5 years old

    Any money you place into a tax-deferred account is locked until you reach age 59.5. This means that unless you want to pay a hefty penalty to access it earlier, you’re stuck letting Wall Street handle your funds. There’s no ability to access or use the money for a better investment opportunity that may come along.

    With few and limited exceptions, if you leave the workforce before age 59.5, you can’t live off of your investments if they’re all in a tax-deferred account. A Roth IRA will let you withdraw your contributions but not your earnings, providing some flexibility with those funds.

    You learn little to nothing about investing

    When you put your money into these tax-deferred accounts, you’re trusting your financial future to the financial advisors and money managers who have a vested interest in you following the status quo. Essentially, they make their money by getting you to invest in certain financial instruments and have no direct responsibility or liability for actual performance.

    This teaches you nothing about how to make the most of your wealth, how to use your assets to generate cash flow or how to ensure you’re making solid investments. This is, in my opinion, the biggest disadvantage that no one talks about: Abdication of your own financial future.

    If you discover a fund, stock or another investment that you want to buy, but your retirement plan doesn’t offer it — you’re simply out of luck. The limited choices are meant to keep administrative expenses low, but those limitations prevent you from having full control over the growth of your assets.

    Related: 4 Ways to Save for Retirement Without a 401(k)

    Loss of other tax benefits

    Other tax benefits, such as cost segregation, depreciation and long-term capital gain lower tax rates, are void inside these tax-deferred accounts. You also lose the stepped-up basis tax mitigation allowance for assets you wish to pass to heirs, which greatly reduces the ability to create generational wealth.

    Ridiculous fees and costs

    The small company match in your 401(k) isn’t much more than a little bit of extra compensation. If you’re only using a 401(k) for retirement, you’re doing yourself a disservice. They’re full of fees, from plan administration fees to investment fees to service fees and more. And the smaller the company you work for, the higher these fees tend to be.

    Even if your fee is just 0.5%, which is the absolute bottom of the fee range, you’re still paying far more for your 401(k) than you should, and that money could be invested in other places to help fuel your retirement growth. For example, if you’re maxing out your contributions at $19,500 per year, with an additional $3,000 in employer contributions, you’ll pay about $261,000 in fees, which translates to 9.5% of your returns.

    Opting out of a 401(k) retirement plan enables you to take that 9.5% and invest it in other more effective ways that will provide a higher return. But what should you do instead?

    Self-direction and Roth IRA conversion

    Qualified retirement accounts not tied to an employer-based plan may be “self-directed.” This means that you, the account owner, can choose from an unlimited number of investment assets, including alternatives such as real estate. Moving such accounts from your existing custodian to one that allows for full self-direction is easy to do and should be high on consideration for those who want more control over their investments.

    Roth conversions can be a great way to save money on future taxation. You can convert your traditional IRA into a Roth IRA, which means you will pay taxes on the money you convert in the year of conversion, but after conversion, your money will grow tax-free. This is a great way to save money on taxes in the long run since you won’t have to pay taxes on the money you withdraw from your Roth IRA in retirement.

    Don’t forget the J-Curve strategy

    The idea behind the J-Curve is that if a non-cash asset is converted from a traditional IRA to a Roth IRA and it experiences a temporary loss in market value, the tax on the asset conversion can be proportionally lowered based on the reduced asset value at the time of conversion.

    This strategy is available to anyone who’s invested in stocks, bonds, mutual funds and index funds and experienced a market loss. In the alternative space, however, the decreased valuation is based on information known in advance, with a plan based on a future value add to the asset. This means that while you don’t take a realized loss over the long term, you can benefit from a paper loss to reduce your tax exposure in the short term.

    The J-Curve strategy is underutilized, mainly because so few people know about it, but it can save you hundreds of thousands of dollars when properly applied.

    Ignore what you’ve been taught about retirement savings

    If you want to dramatically change the trajectory of your retirement and create generational wealth for your family, I have a simple piece of advice — ignore everything the financial industry has taught you about tax-deferred accounts.

    Take the time to learn about investing, and avoid the traditional tax-deferred accounts like traditional IRAs, 401(k)s, defined contribution plans, and cash balance plans — instead, leverage assets like Roth IRAs and real estate, which are superior in literally every way.

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    Dr. David Phelps

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