Tag Archives: Retirement planning

Business

Here’s how to report Roth IRA conversions on your taxes

Leave a comment

If you made a Roth individual retirement account conversion in 2022, you may have a more complicated tax return this season, experts say. 

The strategy, which transfers pretax or non-deductible IRA funds to a Roth IRA for future tax-free growth, tends to be more popular during a stock market downturn because you can convert more assets at a lower dollar amount. While the trade-off is upfront taxes, you may have less income by converting lower-value investments.

“You get more bang for your buck,” said Jim Guarino, a certified financial planner and managing director at Baker Newman Noyes in Woburn, Massachusetts. He is also a certified public accountant.

More from Personal Finance:
Tax season opens for individual filers on Jan. 23, says IRS
Here are 3 key moves to make before the 2023 tax filing season opens
After ‘misery’ for tax filers in 2022, IRS to start 2023 tax season stronger, taxpayer advocate says

If you completed a Roth conversion in 2022, you’ll receive Form 1099-R from your custodian, which includes the distribution from your IRA, Guarino said. 

You’ll need to report the transfer on Form 8606 to tell the IRS which portion of your Roth conversion is taxable, he said. However, when there’s a mix of pretax and non-deductible IRA contributions over time, the calculation may be trickier than you expect. (You may have non-deductible contributions in your pretax IRA if you don’t qualify for the full or partial tax break due to income and workplace retirement plan participation.)

“I see a lot of people making a mistake here,” Guarino said. The reason is the so-called “pro-rata rule” which requires you to factor your aggregate pretax IRA funds into the calculation. 

How the pro-rata rule works

JoAnn May, a CFP and CPA with Forest Asset Management in Berwyn, Illinois, said the pro-rata rule is the equivalent of adding cream to your coffee then finding you can’t remove the cream once it’s poured.

“That’s exactly what happens when you mix pretax and non-deductible IRAs,” she said, meaning you can’t simply convert the after-tax portion.

For example, let’s say you have a pretax IRA of $20,000 and you made a non-deductible IRA contribution of $6,000 in 2022.

If you converted the entire $26,000 balance, you would divide $6,000 by $26,000 to calculate the tax-free portion. This means roughly 23% or about $6,000 is tax-free and $20,000 is taxable. 

Alternatively, let’s say you have $1 million across a few IRAs and $100,000, or 10% of the total, is non-deductible contributions. If you converted $30,000, only $3,000 would be non-taxable and $27,000 would be taxable.

Of course, the bigger your pretax IRA balance, the higher percentage of the conversion will be taxable, May said. Alternatively, a larger non-deductible or Roth IRA balance reduces the percentage. 

But here’s the kicker: Taxpayers also use the Form 8606 to report non-deductible IRA contributions every year to establish “basis” or your after-tax balance. 

However, after several years, it’s easy to lose track of basis, even in professional tax software, warned May. “It’s a big problem,” she said. “If you miss it, then you’re basically paying tax on the same money twice.” 

Timing conversions to avoid an ‘unnecessary’ tax bump

With the S&P 500 still down about 14% over the past 12 months as of Jan. 19, you may be eyeing a Roth conversion. But tax experts say you need to know your 2023 income to know the tax consequences, which may be difficult early in the year.

“I recommend waiting until the end of the year,” said Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, noting that income can change from factors like selling a home or year-end mutual fund distributions. 

Typically, he aims to “fill up a lower tax bracket,” without bumping someone into the next one with Roth conversion income.

For example, if a client is in the 12% bracket, Lucas may limit the conversion to avoid spilling into the 22% tier. Otherwise, they’ll pay more on the taxable income in that higher bracket.

“The last thing we want to do is throw someone into an unnecessary tax bracket,” he said. And boosting income may have other consequences, such as reduced eligibility for certain tax breaks or higher Medicare Part B and D premiums.

Guarino from Baker Newman Noyes also crunches the numbers before making Roth conversion decisions, noting that he’s “essentially performing the Form 8606 calculation during the year” to know how much of the Roth conversion will be taxable income.

Read original article here

Business

What to know as record 8.7% Social Security COLA goes into effect

Leave a comment

Kathrin Ziegler | Digitalvision | Getty Images

As inflation has kept prices high in 2022, Social Security beneficiaries may look forward to a record high cost-of-living adjustment in 2023.

“Your Social Security benefits will increase by 8.7% in 2023 because of a rise in cost of living,” the Social Security Administration states in the annual statements it is currently sending to beneficiaries.

The 8.7% increase will be the highest in 40 years. It is also a significant bump from the 5.9% cost-of-living increase beneficiaries saw in 2022.

The increase is “kind of a double-edged sword,” according to Jim Blair, a former Social Security administrator and co-founder and lead consultant at Premier Social Security Consulting, which educates consumer and financial advisors on the program’s benefits.

More from Personal Finance:
Why more workers need access to retirement savings
If you’re unretiring, avoid this Social Security surprise
Why long Covid may be ‘the next public health disaster’

“It’s good for people on Social Security,” Blair said. “It’s not so good for the economy with inflation.”

Social Security benefit checks will reflect the increase starting in January.

The average retiree benefit will go up by $146 per month, to $1,827 in 2023 from $1,681 in 2022, according to the Social Security Administration The average disability benefit will increase by $119 per month, to $1,483 in 2023 from $1,364 in 2022.

What’s more, standard Medicare Part B premiums will go down by about 3% next year to $164.90, a $5.20 decrease from 2022. Medicare Part B covers outpatient medical care including doctors’ visits.

Monthly Part B premium payments are often deducted directly from Social Security checks. Due to the lower 2023 premiums, beneficiaries are poised to see more of the 8.7% increase in their monthly Social Security checks.

“The good news about these letters is people are realizing 100% of the 8.7% lift,” said David Freitag, a financial planning consultant and Social Security expert at MassMutual.

“Of course, the economy is inflated at a frightful rate, but this represents the value of cost-of-living adjusted benefits from Social Security,” Freitag said.

Few other income streams in retirement offer cost-of-living adjustments, he noted.

What to look for in your Social Security statement

Justin Paget | Digitalvision | Getty Images

If you’re wondering how much more you stand to see in your checks, the personalized letter from the Social Security Administration will give you a breakdown of what to expect.

That includes your new 2023 monthly benefit amount before deductions.

It will also tell you your 2023 monthly deduction for premiums for Medicare Part B, as well as Medicare Part D, which covers prescription drugs.

The statement will also show your deduction for voluntary tax withholding.

The good news about these letters is people are realizing 100% of the 8.7% lift.

David Freitag

financial planning consultant and Social Security expert at MassMutual

After those deductions, the statement shows how much will be deposited into your bank account in January.

Of note, you do not necessarily have to be receiving Social Security checks now to benefit from the record 2023 increase, Blair noted.

“The good news is you don’t have to apply for benefits to receive the cost-of-living adjustment,” Blair said. “You just have to be age 62 or older.”

When you may pay Medicare premium surcharges

If your income is above a certain amount, you may pay a surcharge called an income related monthly adjustment amount, or IRMAA, on Medicare Parts B and D.

This year, that will be determined by your 2021 tax returns, including your adjusted gross income and tax-exempt interest income. Those two amounts are added together to get your modified adjusted gross income, or MAGI.

In 2023, those IRMAA premium rates kick in if your modified adjusted gross income is $97,000.01 or higher and you filed your tax return as single, head of household, qualifying widow or widower or married filing separately; or $194,000.01 or higher if you are married and filed jointly.

Notably, just one dollar over could put you in a higher bracket.

“It’s important for everyone to make sure that the amount of adjusted gross income that they’re using for the IRMAA surcharges agrees with what they filed on their tax return two years ago,” Freitag said.

If the information does not match, you “absolutely need to file an appeal,” he said.

Because the IRMAA surcharges can be extremely significant, that is an area to watch for errors, Freitag said.

When to appeal your Medicare surcharges

If your income has gone down since your 2021 tax return, you can appeal your IRMAA.

That goes if you have been affected by a life changing event and your modified adjusted gross income has moved down a bracket or below the lowest amounts in the table.

Qualifying life changing events, according to the Social Security Administration, include marriage; divorce or annulment; death of a spouse; you or your spouse reduced your work hours or stopped working altogether; you or your spouse lost income on from property due to a disaster; you or your spouse experienced cessation, termination or reorganization of an employer’s pension plan; or you or your spouse received a settlement from an employer or former employer due to bankruptcy, closure or reorganization.

To report that change, beneficiaries need to fill out Form SSA-44 with appropriate documentation.

How higher benefits could cost you

Andrew Bret Wallis | The Image Bank | Getty Images

As your Social Security income goes up with the 8.7% COLA, that may also push your into a different IRMAA or tax bracket, Freitag noted.

That calls for careful monitoring of your income, he said.

Keep in mind that two years in the future you may get exposed to IRMAA issues if you’re not careful.

In addition, more of your Social Security benefits may be subject to income taxes. Up to 85% of Social Security income may be taxed based on a unique formula that also factors in other income.

It is a good idea to have taxes withheld from Social Security benefits in order to avoid a tax liability when you file your income tax returns, according to Marc Kiner, a CPA and co-founder of Premier Social Security Consulting.

“Do it as soon as you can,” Kiner said of filling out the voluntary withholding request form.

To better gauge how IRMAA or taxes on benefits may affect you going forward, it may help to consult a tax advisor or CPA who can help identify tax-efficient strategies, Freitag said.

Read original article here

Health

10 medical tests every older adult should get

Leave a comment

Maintaining your physical fitness and mental well-being is crucial to living a longer and happier life.

There are about two dozen tests or screenings older adults can get to help ensure optimal health and wellness, based on recommendations from the U.S. Preventive Services Task Force, an independent panel of experts in primary care and prevention, and on Medicare’s coverage of preventive health service.

Of course, exactly which tests you need depends on a variety of factors, including your age, weight, sex, family history and risk factors, as well as on your doctor’s recommendations.

The Affordable Care Act mandates preventive care with no cost-sharing, so in 2011, Medicare began offering a variety of free preventive-health services. Some services may need to be ordered during an annual wellness visit in order to be covered; otherwise, you may need to cover the costs out of pocket or with private insurance.

“People are living into their 90s, independently and in the community, and loving it. But in order to get there, you’ve got to do this stuff,” said Richard Besdine, a professor of medicine and public health at Brown University. “Not all of these are fatal diseases, but they can take the fun out of life. And what’s the point of that?”

Besdine said a Mediterranean-style diet and daily exercise are at the top of the list of the most important habits for aging well. Adequate sleep is also crucial, as are quitting smoking and limiting alcohol.

Mental health is equally important. Many older adults face depression, loneliness and isolation amid life changes such as the loss of a spouse. Ask a doctor for a depression screening if you or a loved one are showing any signs of depression.

And keep up with vaccines, such as those for COVID-19, shingles and the flu. Also consider getting the pneumococcal polysaccharide vaccine (PPSV23), which helps protect against meningitis and bloodstream infections, and the pneumococcal conjugate vaccine (PCV13), which protects against pneumonia.

Here’s a rundown of routine tests you should get as an older adult:

Eye test
Eye health may decline gradually as people get older, but the changes may not be noticeable right away. Poor eyesight can affect your ability to drive, get around the house and perform daily tasks. Also, as you age, the risk for eye problems such as cataracts and glaucoma increases.

In addition, recent research has found that up to 100,000 U.S. dementia cases could have potentially been prevented with improved eye care.

According to a study published this year in JAMA Neurology, one of the top things you can do to help reduce your risk for Alzheimer’s and related dementias is to get vision problems corrected with the help of eye exams, eyeglasses and cataract surgery.

Researchers found that about 1.8% of U.S. dementia cases were associated with visual impairment and projected that by 2050, that total would rise to around 250,000 cases. The investigators also found that incidence of impaired vision in older adults was higher for Hispanic people, at 11%, compared with 8.3% on average for Black and non-Hispanic white people.

Last year, a study published in the British Journal of Ophthalmology also suggested that certain eye conditions including age-related macular degeneration, cataracts and diabetes-related eye disease may be associated with an increased risk of dementia.

“Avoiding dementia is the No. 1 job of physicians and patients,” Besdine said. “Do everything you can to maintain your mental and physical health.”

Hearing exam
While we’re talking about dementia, get your hearing tested — and get a hearing aid if you need one.

If you have hearing loss, you have a greater chance of developing dementia, according to a 2020 Lancet commission report that listed hearing loss as one of the top risk factors for dementia.

People with moderate hearing loss were twice as likely to experience cognitive decline as their peers, while those with severe hearing loss faced five times the risk, research has found.

In the U.S., hearing aids are now available over the counter — and they cost just hundreds of dollars, rather than the several thousands that prescription devices can cost. The White House estimated that people could save nearly $3,000 by buying over-the-counter devices.

Also read: ‘It democratizes what you get’: Hearing aids are now available over the counter — what you need to know

Walmart
WMT,
+1.51%,
Walgreen
WBA,
-0.95%,
CVS
CVS,
+2.55%
and Best Buy
BBY,
+2.88%
are among the national retailers that now sell hearing aids.

Dental exam
Gum disease increases the risk of a heart attack. That alone should get you to the dentist, but gum health can also be a good barometer of your overall health. Your teeth, gums, mouth and throat need to be checked by a dentist, ideally twice a year. Medicare does not cover dental checkups, however, so private insurance or out-of-pocket payments are necessary.

Blood-pressure screening
High blood pressure, or hypertension, is common; more than half of the adults in the U.S. have it. As you age, your arteries change and become stiffer. Left untreated, hypertension can lead to strokes, heart attacks and heart disease.

Diabetes screening
After age 65, both men and women should be screened for diabetes regularly. The American Diabetes Association recommends that a fasting blood-sugar test be done at least once every three years in order catch diabetes early and manage it so it doesn’t become a life-threatening disorder.

Breast-cancer screening
The Mayo Clinic supports screening for breast cancer beginning at age 40. Women up to age 75 should get a mammogram every one to two years, depending on their risk factors. Risk factors include having started menstruation before age 12, a family history of breast cancer, dense breasts and genetic mutations. After age 75, women should discuss the need for continued breast-cancer screening with their doctor.

Osteoporosis screening
As you age, your bones become thinner, which can make you more susceptible to fractures or breaks, especially in the hips and spine. All women older than 64 should get a bone-density scan at least once a year. Men over 70 should also consider getting screened for osteoporosis, especially if the condition runs in their family.

Prostate cancer
Prostate cancer is a common disease among men, especially those over the age of 65. Doctors can check for prostate cancer with a physical examination and a blood test. Some signs of prostate cancer include difficulty urinating, unexplained weight loss or blood in the urine.

Colon-cancer screening
Colorectal cancer is more common among older adults, with an average age at diagnosis of 68 for men and 72 for women. If you experience changes in bowel habits, abdominal pain or bleeding, see your doctor.

The U.S. Preventive Services Task Force recommends that adults age 45 to 75 be screened for colorectal cancer. Types of screening include stool tests, flexible sigmoidoscopy, colonoscopy and CT colonography (virtual colonoscopy). Adults ages 76 to 85 should talk to their doctor about whether they should continue to get screened.

Skin exam
The American Cancer Society recommends regular screening for skin cancer. Be sure to ask your doctor to check your skin if you have any unusual moles or skin changes or if you’re at high risk with a history of skin cancer, have close relatives with skin cancer or have a weakened immune system.

Read original article here

Business

401(k) balances fell 23% year-over-year due to market volatility: Fidelity

Leave a comment

Months of market swings have taken a heavy toll on retirement savers.

The average 401(k) balance sank for the third consecutive quarter and is now down 23% from a year ago to $97,200, according to a new report by Fidelity Investments, the nation’s largest provider of 401(k) plans. The financial services firm handles more than 35 million retirement accounts in total.

The average individual retirement account balance also plunged 25% year-over-year to $101,900 in the third quarter of 2022.

Still, the majority of retirement savers continue to contribute, Fidelity found. The average 401(k) contribution rate, including employer and employee contributions, held steady at 13.9%, just shy of Fidelity’s suggested savings rate of 15%.

“The market has taken some dramatic turns this year,” Kevin Barry, president of workplace investing at Fidelity, said in a statement. “Retirement savers have wisely chosen to avoid the drama.”

“One of the most essential aspects of a sound retirement savings strategy is contributing enough consistently — in up markets, down markets and sideways markets — to help reach your goals,” Barry said.

More from Personal Finance:
Credit card balances jump 15%
Here’s the inflation breakdown for October 2022
How to save on groceries amid food price inflation

Just 4.5% of savers changed their asset allocation in the most recent quarter, with most moving their savings into a more conservative investment option, Fidelity said. Some retirement savers seem to have been spooked after suffering big losses amid worries tied to inflation, interest rates, geopolitical turmoil and other factors, 401(k) administrator Alight Solutions also found.

‘It’s best to take a long-term approach to retirement’

“We encourage people not to make changes to their account based on short-term market events because often that can do more harm than good,” said Mike Shamrell, Fidelity’s vice president of thought leadership.

“It’s best to take a long-term approach to retirement.”

And despite the ongoing inflationary pressure straining most households, only 2.4% of plan participants took a loan from their 401(k), Fidelity said.

Federal law allows workers to borrow up to 50% of their account balance, or $50,000, whichever is less. However many financial experts similarly advise against tapping a 401(k) before exhausting all other alternatives since you’ll also be forfeiting the power of compound interest. 

Subscribe to CNBC on YouTube.

Read original article here

Business

Inflation causes 54% of adults trimming or stopping retirement savings

Leave a comment

Brandon Bell | Getty Images

‘Make a plan’ to replenish your retirement account

If rapidly rising prices have interfered with your ability to save for retirement, it’s important to try to get back on track with savings as soon as you can, experts say.

“Make a plan now about how and when you’ll do it,” said certified financial planner David Mendels, director of planning at Creative Financial Concepts in New York. “Maybe you know you’re getting a raise and you know when it’s coming, and so you say that money will go into your retirement account.”

The danger, he said, is that without a plan, “it’s way too easy to keep on sliding.”

Look for ways to reduce your spending

While smaller (or no) retirement contributions right now may help your cash flow for current expenses, “it’s critical that you think of this as a temporary stopgap,” Mendels said. “You’ll have to figure out how to reduce your spending to [increase] your retirement savings.”

If you examine how you spend your money, you may discover that there are expenses you could cut back on. 

“Don’t view it as black-and-white,” Mendels said. “Maybe you stop going out to dinner twice a week and only go once a month, or maybe you take a less expensive vacation.

“Wherever you can make costs a little lower, little by little they add up,” he said.

Dipping into retirement savings may mean a penalty

Also be aware that if you dip into your retirement savings early, there may be tax implications.

Depending on the type of retirement account and the circumstances, withdrawals made before age 59½ could come with a 10% tax penalty. For traditional 401(k)s and IRAs, if you don’t meet a qualifying exception, you’d pay that penalty on top of any taxes owed on the amount of your withdrawal.

If it’s a Roth account — whose contributions are made after-tax — you can take out any money you’ve contributed without taxation or penalty. However, withdrawing earnings could come with the penalty, depending on the specifics.

Next year, retirement savers can contribute up to $22,500 in 401(k)s, with people age 50 or older allowed an additional $7,500 in so-called catchup contributions. For IRAs, the contribution limit in 2023 is $6,500 and the catchup amount is $1,000.

Read original article here

Business

A New Survey Reveals Americans’ Magic Number for Retirement

Leave a comment

The magic number to retire just went even higher.

Americans now think their households will need at least $1.25 million to retire comfortably, a 20% jump from a year ago, according to a survey released Tuesday by financial services company Northwestern Mutual.

While Americans say they will need more money after they retire, the average amount in a retirement savings account has dropped this year to $86,869, an 11% decline from 2021, the survey said. 

The expected retirement age also ticked up to 64 years of age, compared with 62.6 last year.  

read more about retirement

Christian Mitchell,

chief customer officer at Northwestern Mutual, said rising inflation and volatility in financial markets are weighing on people’s mind-sets. That is changing people’s expectations around how much savings they will need for retirement, he said.

The survey, which polled 2,381 American adults in February, comes as consumers have been squeezed by rising inflation. That has put pressure on their spending power and their ability to save. 

Stock and bond markets have also fallen sharply this year. A typical 60/40 portfolio, where investors put 60% of their money into the stock market and 40% of their money into bonds, is on track to deliver its worst returns in 100 years as of mid-October, according to

Bank of America.

As inflation has surged, the federal government has taken steps to try to mitigate the pain for retirees and investors. 

The government increased Social Security checks by 8.7% for 2023, the largest cost-of-living adjustment to benefits in four decades. The Internal Revenue Service also made inflation adjustments for 401(k) savings accounts, increasing contribution limits by $2,000 to $22,500 for 2023. About 60 million American workers have 401(k) plans, according to the Investment Company Institute.

The Northwestern Mutual survey found that many Americans are worried about their prospects for retirement. About four in 10 people said they don’t think they will have enough money when they retire. Nearly half of the people surveyed also said they can envision scenarios where Social Security no longer exists. 

The amount of money a household will need to retire depends on many variables, including where people live and their standard of living, Mr. Mitchell said. Whether a person expects to care for parents or children in retirement are also factors to consider, he said. 

The government has increased Social Security checks by 8.7% for 2023.



Photo:

Nam Y. Huh/Associated Press

“The $1.25 million for some households, that may be right, it might be too high, it might be too low,” Mr. Mitchell said. 

SHARE YOUR THOUGHTS

Are you financially prepared for retirement? Join the conversation below.

The Covid-19 pandemic has also shaken up retirement plans for Americans. About one in four people said they now plan to retire later because of the pandemic, the survey said. Of those who are putting off retirement, 59% said they wanted to work more to save money. And 45% said they were worried about rising healthcare costs or had unexpected medical costs. 

But about 15% of people said they planned to retire early because of the pandemic.

Write to Joseph De Avila at joseph.deavila@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Read original article here

Business

How to save above 401(k) deferral limits with after-tax contributions

Leave a comment

If you’ve already maxed out 401(k) plan contributions for 2022 and you’re eager to save more for retirement, some plans have an under-the-radar option, experts say.

For 2022, you can defer $20,500 into a 401(k), plus an extra $6,500 for investors 50 and older. But the total plan limit is $61,000 per worker, including matches, profit sharing and other deposits. And some plans let you exceed the $20,500 deferral limit with so-called after-tax contributions. 

“It’s definitely something higher-income people may want to consider at the end of the year if they’re looking for places to put additional savings,” said certified financial planner Ashton Lawrence, a partner at Goldfinch Wealth Management in Greenville, South Carolina.

More from Personal Finance:
Investors can defer up to $22,500 in a 401(k) and $6,500 in IRAs in 2023
63% of Americans now live paycheck to paycheck as inflation outpaces wages
IRS: Here are the new income tax brackets for 2023

After-tax versus Roth accounts

After-tax contributions are different than Roth 401(k) plans. While both strategies involve saving money after taxes, there are some key differences.

For 2022, if you’re under 50, you can defer up to $20,500 of your salary into your plan’s regular pretax or Roth 401(k) account. The percentage of plans offering a Roth 401(k) saving option has surged over the past decade.

However, some plans offer additional after-tax contributions to your traditional 401(k), which allows you to save more than the $20,500 cap. For example, if you defer $20,500 and your employer kicks in $8,000 for matches and profit-sharing, you may save another $32,500 before hitting the $61,000 plan limit for 2022.

While the number of plans offering after-tax 401(k) contributions has been rising, it’s still less common among smaller companies, according to an annual survey from the Plan Sponsor Council of America.

In 2021, roughly 21% of company plans offered after-tax 401(k) contributions, compared to about 20% of plans in 2020, the survey found. And almost 42% of employers of 5,000 or more provided the option in 2021, up from about 38% in 2020.

Despite the uptick, after-tax 401(k) participation declined in 2021, dropping to about 10% from nearly 13% the previous year, the same survey showed.

Leverage the ‘mega backdoor Roth’ strategy

Once you’ve made after-tax contributions, the plan may allow what’s known as a “mega backdoor Roth” strategy, which includes paying levies on growth and moving the funds for future tax-free growth.

“That’s a nice way to go ahead and start boosting that tax-free money for those future years,” Lawrence said.

Depending on the plan rules, you may transfer the money to a Roth 401(k) within the plan or to a separate Roth individual retirement account, explained Dan Galli, a CFP and owner at Daniel J. Galli & Associates in Norwell, Massachusetts. And with many details to consider, working with an advisor may be worthwhile.

However, “there’s a fair number of professionals — from CPAs, attorneys, wealth managers and financial planners — who don’t understand or are not familiar with in-plan Roth [401(k)] rollovers,” he said.  

There’s a fair number of professionals — from CPAs, attorneys, wealth managers and financial planners — who don’t understand or are not familiar with in-plan Roth [401(k)] rollovers.

Dan Galli

Owner at Daniel J. Galli & Associates

While the “knee-jerk reaction” is to roll after-tax 401(k) funds out of the plan into a Roth IRA, investors need to “know the rules” and possible downsides, such as losing access to institutional pricing and funds, Galli said.

“There’s no right or wrong,” he said. “It’s just understanding the advantages, and my impression is most people don’t understand that you can do this all within the 401(k).”

Read original article here

Business

Social Security COLA will be 8.7% in 2023, highest increase in 40 years

Leave a comment

Azmanjaka | E+ | Getty Images

Amid record high inflation, Social Security beneficiaries will get an 8.7% increase to their benefits in 2023, the highest increase in 40 years.

The Social Security Administration announced the change on Thursday. It will result in a benefit increase of more than $140 more per month on average starting in January.

The average Social Security retiree benefit will increase $146 per month, to $1,827 in 2023, from $1,681 in 2022.

The Senior Citizens League, a non-partisan senior group, had estimated last month that the COLA could be 8.7% next year. 

More from FA Playbook:

Here’s a look at other stories impacting the financial advisor business.

The confirmed 8.7% bump to benefits tops the 5.9% increase beneficiaries saw in 2022, which at the time was the highest in four decades.

The last time the cost-of-living adjustment was higher was in 1981, when the increase was 11.2%.

Next year’s record increase comes as beneficiaries have struggled with increasing prices this year.

“The COLAs really are about people treading water; they’re not increases in benefits,” said Dan Adcock, director of government relations and policy at the National Committee to Preserve Social Security and Medicare.

“They’re more trying to provide inflation protection so that people can maintain their standard of living,” Adcock said.

How much your Social Security check may be

Beneficiaries can expect to see the 2023 COLA in their benefit checks starting in January.

But starting in December, you may be able to see notices online from the Social Security Administration that state just how much your checks will be next year.

Two factors — Medicare Part B premiums and taxes — may influence the size of your benefit checks.

The standard Medicare Part B premium will be $5.20 lower next year — to $164.90, down from $170.10. Those payments are often deducted directly from Social Security benefit checks.

“That will mean that beneficiaries will be able to keep pretty much all or most of their COLA increase,” Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League, told CNBC.com this week.

That may vary if you have money withheld from your monthly checks for taxes.

To gauge just how much more money you may see next year, take your net Social Security benefit and add in your Medicare premium and multiply that by the 2023 COLA.

“That will give you a good idea what your raise will be,” said Joe Elsasser, an Omaha, Nebraska-based certified financial planner and founder and president of Covisum, a provider of Social Security claiming software.

How the COLA is tied to inflation

The COLA applies to about 70 million Social Security and Supplemental Security Income beneficiaries.

The change is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.

The Social Security Administration calculates the annual COLA by measuring the change in the CPI-W from the third quarter of the preceding year to the third quarter of the current year.

Benefits do not necessarily go up every year. While there was a record 5.8% increase in 2009, the following two years had 0% increases.

“For seniors, because they spend so much on health care, those years were difficult,” Adcock said.

A similar pattern may happen if the economy goes into a recession, according to Johnson.

What the COLA means if you haven’t claimed benefits yet

If you decide to claim Social Security benefits, you will get access to the record-high COLA.

But you will also have access to it if you wait to start your benefit checks at a later date, according to Elsasser.

If you’re 62 now and don’t claim, your benefit is adjusted by every COLA until you do.

The amount of the COLA really should not influence claiming.

Joe Elsasser

CFP and president of Covisum

What’s more, delaying benefits can increase the size of your monthly checks. Experts generally recommend most people wait as long as possible, until age 70, due to the fact that benefits increase 8% per year from your full retirement age (typically 66 or 67) to 70. To be sure, whether that strategy is ideal may vary based on other factors, such as your personal health situation and marital status.

“The amount of the COLA really should not influence claiming,” Elsasser said. “It doesn’t hurt you or help you as far as when you claim, because you’re going to get it either way.”

How a record-high increase may impact Social Security’s funds

Social Security’s trust funds can pay full benefits through 2035, the Social Security Board of Trustees said in June.

At that time, the program will be able to pay 80% of benefits, the board projects.

Tetra Images | Tetra Images | Getty Images

The historic high COLA in 2023 could accelerate the depletion of the trust funds to at least one calendar year earlier, according to the Committee for a Responsible Federal Budget.

Higher wages may prompt workers to contribute more payroll taxes into the program, which may help offset that. In 2023, maximum taxable earnings will increase to $160,200, up from $147,000 this year.

What could happen to future benefit increases

While 2023 marks a record high COLA, beneficiaries should be prepared for future years where increases are not as high.

If inflation subsides, the size of COLAs will also go down.

Whether the CPI-W is the best measure for the annual increases is up for debate. Some tout the Consumer Price Index for the Elderly, or CPI-E, as a better measure for the costs seniors pay. Multiple Democratic congressional bills have called for changing the annual increases to that measure.

Read original article here

Business

Here’s why the $39 trillion U.S. retirement system gets a C+ grade

Leave a comment

Siriporn Wongmanee / Eyeem | Eyeem | Getty Images

The U.S. retirement system may seem flush — yet it ranks poorly in relation to those in other developed nations.

Collectively, Americans had more than $39 trillion in wealth earmarked for old age at the end of 2021, according to the Investment Company Institute.

However, the U.S. places well outside the top 10 on various global retirement rankings from industry players, such as the Mercer CFA Institute Global Pension Index and Natixis Investment Managers 2021 Global Retirement Index.

According to Mercer’s index, for example, the U.S. got a “C+.” It ranked No. 17 on Natixis’ list.  

Here’s why the U.S. falls short, according to retirement experts.

The U.S. has a ‘patchwork retirement design’

Iceland topped both lists. Among other factors, the country delivers generous and sustainable retirement benefits to a large share of the population, has a low level of old-age poverty, and has a higher relative degree of retirement income equality, according to the reports, which use different methodologies.

Other nations, including Norway, the Netherlands, Switzerland, Denmark, Australia, Ireland and New Zealand, also got high marks. For example, Denmark, Iceland and the Netherlands each got “A” grades, according to Mercer’s index.

More from Personal Finance:
6 money tips from pro athletes Isaiah Thomas and Dexter Fowler
How the top financial habits of ‘super savers’ can help build wealth
5 ways to save amid record food price inflation

Where the U.S. largely lags behind those countries, experts said, is that its retirement system isn’t set up so that everyone has a chance at a financially secure retirement.

“Even though we have $40 trillion invested, it’s a very uneven, fragmented, patchwork retirement design that we work with in the U.S.,” said Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University. “Some people do very, very well but a lot of other people are left behind.”

Consider this statistic: Just three of the 38 countries in the Organization for Economic Co-operation and Development rank worse than the U.S. in old-age income inequality, according to the bloc of developed countries.  

Indeed, poverty rates are “very high” for Americans 75 years and older: 28% in the U.S. versus 11%, on average, in the OECD.

Many Americans don’t have workplace retirement plans

The U.S. retirement system is often called a “three-legged stool,” which consists of Social Security, workplace arrangements such as pensions and 401(k) plans, and individual savings.

One of the structure’s primary shortfalls is a lack of access to workplace savings plans, according to retirement experts.

Just over half — 53% — of U.S. workers had access to an employer-sponsored retirement plan in 2018, according to a recent estimate by John Sabelhaus, a senior fellow at the Brookings Institution and adjunct research professor at the University of Michigan. That’s an improvement from nearly 49% a decade earlier, he found.

Even though we have $40 trillion invested, it’s a very uneven, fragmented, patchwork retirement design that we work with in the U.S.

Angela Antonelli

executive director of the Center for Retirement Initiatives at Georgetown University

Approximately 57 million Americans fell in the retirement savings coverage “gap” in 2020, meaning they didn’t have access to a workplace plan, according to a Center for Retirement Initiatives analysis.

The U.S. has a voluntary retirement savings system. The federal government doesn’t require individuals to save, or businesses to offer a pension or 401(k). Individuals also shoulder more personal responsibility to build a nest egg as businesses have largely transitioned away from pension plans.

By contrast, 19 developed nations require some level of coverage, by mandating businesses offer a retirement plan, that individuals have a personal account, or some combination of the two, according to OECD data. In 12 of the countries, the arrangements cover more than 75% of the working-age population. In Denmark, Finland and the Netherlands, for example, the share is near 90% or more.

In Iceland, where coverage is 83%, the private-sector retirement system “covers all employees with a high contribution rate that leads to significant assets being set aside for the future,” Mercer wrote.

IRAs aren’t a catchall for workers without a 401(k)

Of course, people in the U.S. can save for retirement outside the workplace — in an individual retirement account, for example — if their employer doesn’t offer a retirement plan.

But that often doesn’t happen, Antonelli said. Just 13% of households contributed to a pre-tax or Roth IRA in 2020, according to the Investment Company Institute.

IRAs held nearly $14 trillion in 2021, almost double the $7.7 trillion in 401(k) plans. But most IRA funds aren’t contributed directly — they were first saved in a workplace retirement plan and then rolled into an IRA. In 2019, $554 billion was rolled into IRAs — more than seven times the $76 billion contributed directly, according to ICI data.

Lower annual IRA contribution limits also mean individuals can’t save as much each year as they can in workplace plans.  

Americans are 15 times more likely to stash away retirement funds when they can do so at work via payroll deduction, according to AARP.

“Access is our No. 1 issue,” Will Hansen, chief government affairs officer at the American Retirement Association, a trade group, said of workplace retirement savings. Employees of small businesses are least likely to have a 401(k) available, he added.

“[However], the retirement system is actually a good system for those who have access,” Hansen said. “People are saving.”

But the retirement security offered by that savings is tilted toward high-income households, according to federal data.

Low earners, by contrast, “appear more prone to having little or no savings in their [defined contribution] accounts,” the Government Accountability Office wrote in a 2019 report. A 401(k) plan is a type of defined contribution plan, whereby investors “define,” or choose, their desired savings rate.

Just 9% of the bottom quintile of wage earners have retirement savings, versus 68% of middle-income earners and 94% of the top quintile, according to a Social Security Administration report from 2017.

Overall savings are also “constrained” by low wage growth after accounting for inflation and increasing out-of-pocket costs for items such as health care, the GAO said. Longer lifespans are putting more pressure on nest eggs.

Social Security has some structural issues

Social Security benefits — another “leg” of America’s three-legged stool — help make up for a shortfall in personal savings.

About a quarter of senior households rely on these public benefits for at least 90% of their income, according to the Social Security Administration. The average monthly benefit for retirees is about $1,600 as of August 2022.

“That doesn’t put you much above the poverty level,” Antonelli said of Social Security benefits for people with little to no personal savings.

There are also some looming structural issues with the Social Security program. Absent measures to shore up its financing, benefits for retirees are expected to fall after 2034; at that point, the program would be able to pay just 77% of scheduled payments.

Further, individuals can raid their 401(k) accounts in times of financial distress, causing so-called “leakage” from the system. This ability can infuse much-needed cash into struggling households in the present, but may subject savers to a shortfall later in life.

The “leakage” factor, coupled with relatively low minimum Social Security benefits for lower earners and the projected shortfall of the Social Security trust fund, “will have a significant impact on the ability for the U.S. pension system to adequately provide for its retirees in the future,” said Katie Hockenmaier, U.S. defined contribution research director at Mercer.

‘There’s been a tremendous amount of progress’

Of course, it can be tough to compare the relative successes and failures of retirement systems on a global scale.

Each system has evolved from “particular economic, social, cultural, political and historical circumstances,” according to the Mercer report.

“It’s hard to state the U.S. is really far behind when there are so many other external policies countries make that impact their citizens and how effective their retirement will be in the long run,” Hansen said.

Flaws in health-care and education policy bleed into people’s ability to save, Hansen argued. For example, a high student debt burden or big health bills may cause an American borrower to defer saving. In such cases, it may not be fair to place primary blame on the structure of the U.S. retirement system, Hansen said.

And there have been structural improvements in recent years, experts said.

The Pension Protection Act of 2006, for example, ushered in a new era of saving, whereby employers started automatically enrolling workers into 401(k) plans and increasing their contribution amounts each year.

More recently, 11 states and two cities — New York and Seattle — have adopted programs that require businesses to offer retirement programs to workers, according to the Center for Retirement Initiatives. They can be 401(k)-type plans or a state-administered IRA, into which workers would be automatically enrolled.

Federal lawmakers are also weighing provisions — such as reduced costs relative to factors like plan compliance and a boost in tax incentives — to promote more uptake of 401(k) plans among small businesses, Hansen said.

“In the past 15 years — and now with considerations of additional reform in Secure 2.0 [legislation] — there’s been a tremendous amount of progress in recognizing there’s room for the improvement of design of our U.S. retirement system,” Antonelli said.

Read original article here

Health

People who do this one thing have HALF the Alzheimer’s risk

Leave a comment

The things to remember about dementia are that it is absolutely horrible for you and everyone around you; it’s a high probability; and when it comes to fighting it or avoiding it you are pretty much on your own.

Read: Here’s a simple way to save on retirement’s No. 1 expense

Alzheimer’s disease and related dementias are currently killing 6.5 million people in the United States and devastating the lives of many times that when you count the patients’ friends and family. The National Institutes of Health reckons this number is likely to double in the next four decades.

The last study found that people in their 70s had nearly a one in three chance of getting this horrific brain disease before they died, and that was a study of the people born in the 1920s. Those born later, who are likely to live longer, face an even higher risk.

Read: The crushing financial penalties for marriage in your later years — courtesy of Uncle Sam

Meanwhile the amount that the federal government spends each year on research to fight this disease is less than 0.1% of the amount it spent during two years fighting Covid. Or, to put it another way, at current rates, Uncle Sam will take more than 1,000 years to spend as much on Alzheimer’s research as he spent fighting COVID-19. Meanwhile, a new scandal has raised questions about how much research into dementia over the past 15 years was based on faulty data.

So I’ll take the good news where I can get it, and some very heartening new data has just been published in JAMA (Journal of the American Medical Association) Neurology.

In a nutshell: Just walking a lot more could do a lot to cut our risks of developing dementia. It could actually cut our risk in half.

Read: I’m 62, single and never had a retirement account. I have $100,000 to invest, but is it too late?

And, remarkably, the ideal target is about 9.800 steps a day: In other words, just shy of the magic 10,000 steps a day figure — a number that was apparently plucked out of the blue by the marketing department of a Japanese clock company several decades ago.

Weird, but true.

Read: This is now the No. 1 preventable cause of Alzheimer’s in America

The latest findings were based on a study of nearly 80,000 people in the U.K. over several years. They involved comparing actual data from step counters, such as Fitbits, worn by subjects with follow-ups 7 years later.

“In this cohort study, a higher number of steps was associated
with lower risk of all-cause dementia,” report the authors. “The findings suggest that a dose of just under 10,000 steps per day may be optimally associated with a lower risk of dementia. Steps performed at higher intensity resulted in stronger associations.”

Those who walked 3,800 steps a day had a 25% lower risk of developing dementia in the study. Those who walked 9,800 had a 50% lower risk. Those who walked at least 6,000 steps and who walked reasonably quickly for about half an hour a day had 62% lower likelihood of developing dementia.

Naturally in the real world there are all sorts of caveats. How far are we looking at correlation or causation? Will other studies find similar things? If the follow-ups were just 7 years later, what would longer term numbers show?

We’ll have to stay tuned for more research, as usual. Meanwhile, I will take what I can get. I bought a $25 step counter for my wrist from Amazon a couple of years ago. It’s rapidly turning into my best healthcare investment.

There are three key takeaways from the research.

The first is that the benefits of walking really seem to kick in if you average at least 3,800 steps a day.

The second is that the optimum average is about 9,800.

And the third is that just casually wandering around doesn’t get you the full benefit. For maximum advantage, we should try to walk “purposefully,” at a rate of “112 steps a minute,” for at least half an hour a day.

Human beings, of course, spent most of the last million years walking lots every day, eating unprocessed foods, and fasting a lot when there was no food around. It is probably no coincidence that despite all the gazillions spent on advanced medical techniques, we are slowly rediscovering that our bodies really want to walk a lot, eat unprocessed foods, and fast a lot.

Who knew?

Read original article here