Month: April 2024

Brian J. O’Connor

Wed, Apr 10, 2024

While no one has a definitive answer to the question “How long will you live?”, coming up with an educated, realistic estimate goes a long way toward building a retirement plan that assures income security. Unfortunately, most U.S. adults lack what a new survey calls “longevity literacy,” a deficiency that can be a major retirement planning pitfall. Here’s what you need to know.

How Many People Lack ‘Longevity Literacy’

Less than 40% of adults were able to correctly estimate how long, on average adults are likely to live once they hit 65, according to new research by the Global Financial Literacy Excellence Center at the George Washington University School of Business and the TIAA Institute. The study’s authors defined the problem as “low longevity literacy” and found a link between longevity literacy and overall retirement readiness.

“Longevity literacy is particularly important since retirement income security inherently involves planning, saving and preparing for a period that is uncertain in length,” Surya Kolluri, head of the TIAA Institute, said in a statement. “Our research clearly demonstrates a lack of longevity literacy among the vast majority of U.S. adults.”

How Far Off the Mark Most People Are

The study’s results reflect answers to three multiple-choice questions, with only 12% of adults answering all three of the following questions correctly and 31% of adults responding with either a “don’t know” or an underestimate of life span for each question.

• On average how long will a 65-year-old live? 65% of respondents (age 18 and up) missed the answer, which is 84 years for men, 87 years for women.
• What is the likelihood that a 65-year-old will live at least until age 90? 68% of respondents answered incorrectly. The answer is 30% for men, 40% for women.
• What is the likelihood that a 65-year-old will not live beyond age 70? 54% of the respondents didn’t know the answer, which is 5%-10% for men, less than 5% for women.

Demographic Differences in Longevity Literacy

Longevity literacy varied by sex, race and generation, the study found. For example, women did better than men. “Women correctly answered a greater number of longevity literacy questions, while men answered a greater number of questions with either a ‘don’t know’ response or a response in the wrong direction of the retirement planning horizon – 32% of men show weak longevity literacy, compared with 29% of women,” the report stated.

Whites and Asians had higher longevity literacy than Blacks and Hispanics. The latter two groups “have essentially equal levels of longevity literacy, but it tends to be significantly lower than that of Asians and Whites,” the report stated. “Fewer than 10% of Blacks and Hispanics demonstrate strong longevity literacy. Approximately 40% of each has weak longevity literacy and one-quarter of each responded ‘don’t know’ to each question.”

The study revealed generational differences, including that 37% of Gen Z have weak longevity literacy compared with 34% of Gen Y (millennials), 30% of Gen X; and 28% of Baby Boomers. The study also found that strong longevity literacy was found in 10% of Gen Z, 12% of Gen Y, 11% of Gen X and 13% of Baby Boomers.

Longevity Literacy Can Lead to Retirement Income Security

Among people with good longevity literacy, 72% saved for retirement on a regular basis and half had calculated how much money they needed to save for their retirement. Further, 69% were very or somewhat confident that they’d have enough money to live comfortably in retirement.

Once in retirement, the study found people with a strong awareness of longevity issues tended to be doing better. Fully 77% of people with strong longevity literacy were more likely to say their retirement lifestyle was as good or better than they expected before retirement, while 62% of people with low longevity literacy reported doing that well.

Respondents with lower levels of longevity literacy scored worse on all questions, including questions about confidence. A big issue the researchers identified was that those respondents didn’t understand the term “life expectancy” and how it affects retirement planning and investing. The survey authors recommended that financial planners and others need to explain this terminology to make sure people understand the implications of longer lifespans in retirement.

These results all point to what financial planners call “longevity risk” in retirement, which comes down to the likelihood that a retiree will run out of money in retirement.

Bottom Line

Strong longevity literacy, knowing how long you’re likely to live and how long a spouse might survive you, is an important factor in planning your retirement investments and lifestyle. People who have a better understanding of those issues tend to feel more prepared for retirement and to enjoy their lifestyle in retirement. By contrast, not grasping longevity literacy can constitute a major pitfall to retirement income security.

Photo credit: ©iStock.com/davidf, ©iStock.com/real444, ©iStock.com/monkeybusinessimages

Source: https://finance.yahoo.com/news/long-live-most-people-dont-112000237.html

Deciding between a CD vs. high-yield savings account? Here’s how to choose.

BY ERIN BENDIG

Unsure whether a CD or high-yield savings account is right for you? Both accounts keep your savings safe and accrue interest, but apart from that, they have significant differences. Understanding the differences between the two accounts can help you decide which is appropriate for your particular savings goals. Keep the following aspects in mind when deciding whether a CD or a high-yield savings account is the right choice for you.

When to choose a CD 

A certificate of deposit (CD) is a type of savings account that holds a set amount of money for a fixed period, ranging anywhere from 3 months to 5 years. Unlike high-yield savings accounts, you won’t be able to withdraw cash from a CD before its maturity date. Doing so will result in fees that can offset any interest earned (unless you have a no-penalty CD account).

Usually, CD rates are much higher than rates on traditional savings accounts, and in many cases, some of the best CD rates on the market feature an APY of over 4%. Another notable aspect of CDs is that interest rates are locked in when opening a CD account, meaning if rates go down (which they have been), your earnings won’t be affected. 

Not only should you compare interest rates before opening a CD, but you should also consider any early withdrawal penalties, fees and minimum balance requirements associated with the account, along with the amount of time you’re comfortable locking your cash away. You can compare current CD rates by using our tool below, powered by Bankrate. 

https://www.myfinance.com/as/4e9acdc9-95ed-49b6-b720-cb8e6aeffd7c?utm_campaign=kiplinger-cd-multi&utm_medium=embed&selector=%23article-body+%3E+div%3Anth-of-type%281%29&imre=aHR0cHM6Ly93d3cua2lwbGluZ2VyLmNvbS9wZXJzb25hbC1maW5hbmNlL2NkLXZzLWhpZ2gteWllbGQtc2F2aW5ncy1hY2NvdW50LXdoaWNoLWlzLWJldHRlcg%3D%3D&static=true&_mfuuid_=ad24e310-5005-4c06-9441-9c8d085b0091&width=800&subId=hawk-placeholder&ts=1714484701223

Because your money is locked away for a fixed time, CD accounts aren’t good options for cash you may need quick access to, like money in an emergency fund. What they are good for is saving for a particular goal, such as a future purchase, like a new car, or an event, like a wedding. For example, if you know you’re going to buy a car in three years, opening a three-year CD can help build your savings with minimal effort, thanks to compound interest, and also help you resist the temptation to spend your cash. 

CDs offer a fixed, predictable rate of return on your savings. Our savings calculator tool can help you determine just how much you’ll earn in compound interest once your CD reaches maturity.  

When to choose a high-yield savings account

A high-yield savings account functions in the same way as a traditional savings account, but with one main difference: high-yield savings accounts pay a higher than average APY on deposits. In fact, many of the best high-yield savings accounts offer well over 5%. However, unlike CDs, rates on high-yield savings accounts are not fixed, meaning they can fluctuate with the market. 

Below, you can compare current rates for high-yield savings accounts, thanks to a tool in partnership with Bankrate. As with CDs, before opening a high-yield savings account be sure to review any fees or balance requirements associated with the account. 

https://www.myfinance.com/as/7a30d080-14fc-4f77-9415-35efac6b1137?utm_campaign=kiplinger-savings-multi&utm_medium=embed&selector=%23article-body+%3E+div%3Anth-of-type%282%29&imre=aHR0cHM6Ly93d3cua2lwbGluZ2VyLmNvbS9wZXJzb25hbC1maW5hbmNlL2NkLXZzLWhpZ2gteWllbGQtc2F2aW5ncy1hY2NvdW50LXdoaWNoLWlzLWJldHRlcg%3D%3D&static=true&_mfuuid_=ad24e310-5005-4c06-9441-9c8d085b0091&width=800&subId=hawk-placeholder&ts=1714484701227

There’s no term length with a high-yield savings account, as funds in the account are readily accessible. Unlike CDs, you won’t be charged a fee for withdrawing your cash. Because of this, high-yield savings accounts are better suited towards short-term savings goals or to save cash you may need to spend at some point in the near future. 

Since you won’t be making a singular up-front payment when opening the account, like with a CD, these accounts are useful for individuals looking to gradually save by making regular deposits.

Bottom line on CD vs. high-yield savings accounts

With both CDs and high-yield savings accounts, your cash remains secure while also earning interest. High-yield savings accounts offer more flexibility when it comes to managing your cash. You won’t have to wait until the maturity date on the account before withdrawing funds, and you can add to the account whenever you like, unlike with a CD. 

However, the downside is that you can’t lock in rates when opening a high-yield savings account. With a CD, the APY on the account stays the same from when it’s opened until it matures. If rates go down, your earning potential won’t be decreased, but it will, however, if your funds are in a high-yield savings account. 

Source:https://www.kiplinger.com/personal-finance/cd-vs-high-yield-savings-account-which-is-better

BY ERIN BENDIG

Don’t forget to spring clean your finances this year. Not only will it make managing your money easier, it could save you some money.

March 19 is the first day of spring, and you know what that means: It’s time to get started on your home’s annual spring cleaning. As you deep clean your home, however, there’s another thing that also needs tidying — your finances. 

Organizing and cleaning up your accounts can help you save money throughout the rest of the year, so it’s important to set aside some time to “spring clean” your finances in the coming weeks.  

Below are nine ways you can spring clean your finances, setting you up for financial success throughout the rest of the year.

1. Check your credit report

A good starting point to organize your finances this spring is by checking your credit report. It’s important to check for any errors on your report that could be negatively affecting your credit score, such as incorrect personal information, balance errors, incorrect accounts resulting from identity theft or incorrect balances. And errors on your credit report are more common than you may think. 

A study from the Federal Trade Commission stated that one in five Americans were likely to have errors in at least one of their credit reports. And according to Consumer Reports, the number of complaints about credit report errors has more than doubled from 2021 to 2023, jumping from 165,129 to 443,321. 

Fortunately, you can get a free credit report from each of the three major credit bureaus — Equifax, Experian and TransUnion — each week at AnnualCreditReport.com. Checking your report is also a good first step for those looking to improve their credit score. 

2. Get a better savings rate

If you haven’t been saving your hard-earned cash in a high-yield savings account, what are you waiting for? Now’s a great time to open one of the best high-yield savings accounts in order to maximize your savings throughout the rest of the year. 

By not taking advantage of the high APYs on these accounts — in many cases, over 5% — you’re leaving free money on the table. Use our tool below, powered by Bankrate, to compare high-yield savings rates today.

Similarly, if you’ve looking to invest in CDs, now’s a good time to lock in rates. Since the Federal Reserve began holding interest rates steady, savings rates have started to fall. If the Fed cuts interest rates later this year, as expected, CD rates will likely drop even further. Use the tool below, powered by Bankrate, to compare CD rates today. 

3. Get rid of unwanted subscriptions

You likely don’t need, and are even unaware of, all the subscriptions you’re paying for each month, which can eat up a big chunk of your budget. A great way to save a little (or a lot) of extra money each month is to get rid of the subscriptions you don’t use and don’t need. 

Unless you’re watching TV literally all day, you probably don’t need a subscription for more than one or two streaming services, like Netflix. And if you subscribed to a streaming service to watch a specific show, you’ve likely forgotten to cancel now that you’re caught up. There’s a whole number of other subscriptions that could be eating away at income each month, from meal-prep services to dating apps to music streaming.

Download an app that can track your monthly subscriptions and easily let you cancel them, like Rocket Money or PocketGuard. Many of these apps come with additional features that can help you manage your finances as well.

4. Turn your old stuff into cash 

When you spring clean your attic or basement this year, you may want to think twice about throwing everything away. Some of the old items you have collecting dust might actually be worth money — a lot of money. 

Certain old-school video games, vintage toys and Boy Scout memorabilia, to give a few examples, can all go for thousands of dollars on eBay. Make sure you read Kiplinger’s advice on 7 old things in your home that could be worth a fortune before you donate all those old boxes to your local Goodwill. 

5. Deal with debt

It’s time to spring clean your finances, which means it’s time to declutter your debt. It can be tricky to keep up with multiple loans from multiple lenders, all with different payments and interest rates. If this has caused you a great deal of financial stress, you could benefit from consolidating that debt into a single loan with a competitive interest rate. This can help you get a clearer picture of your overall finances, helping you pay down debt and save where you can.  

Additionally, if you’re struggling to pay down credit card debt, consider a balance transfer card. Credit card APRs increased to a record high in 2023, according to the Consumer Financial Protection Bureau, jumping from just 12.9% in 2013, to 22.8%. Therefore, it’s likely that your card’s interest rate is making it difficult for you to pay off your balance every month. If this is the case, a balance transfer credit card could help. These cards offer 0% introductory APR periods that can give you some breathing room to pay off credit card balances interest-free. 

6. Put an estate plan in place

If you’ve been underestimating its importance or simply putting it off until later, now’s a good time to go ahead and put an estate plan in place. In 2024, only 32% of Americans have a will, reports the Caring.com 2024 Wills and Estate Planning Study. This is a 6% decrease from 2023. They reported that 40% of Americans claim they don’t have a will because they don’t have enough assets to leave anyone. 

However, having an estate plan can be beneficial for anyone, despite how wealthy you are. Without one, the state is in charge of distributing your property, which can leave your loved ones to deal with lengthy legal disputes. 

If you already have an estate plan in place, make sure you review it, especially after any significant life changes. Also, make sure the beneficiaries on all your accounts are up to date, not just on your will. Beneficiaries named on documents like life insurance policies and 401(k)s take precedence over those named in a will. 

7. Clean up your budget 

This spring, take some time to clean up your budget. Take a closer look at how much you’re earning and how much you’re spending. Identify areas where you can cut back on spending in order to allocate this money elsewhere, like funding a retirement account or paying down debt.  

Also, review your financial goals for the year and make adjustments where necessary. Once you have a solid budget in place — one that prioritizes your specific financial goals for the year — consider setting up automatic payments for monthly bills and savings.

8. Review your insurance policies 

Save money this spring by reviewing your insurance policies and making sure you’re getting the best rate out there. Shop around and get quotes from several companies to compare prices, and if you haven’t already, consider bundling your home and auto insurance. According to Progressive, doing so can save you an average of 7% on your auto policy.

 9. Maximize credit card rewards

Also, check what credit cards you have in your wallet. Are you getting the most benefits from your credit card perks? Take a look at where you spend the most money, and see what cards let you maximize cash back in those spending categories. Plus, pay attention to any additional benefits offered by a card, as well as any sign-up bonuses that can help you save some extra cash throughout the rest of the year.

Source: https://www.kiplinger.com/personal-finance/spring-clean-your-finances

BY ELLEVEST TEAM

FEBRUARY 28, 2024

Updated for the 2024 tax year.

So your employer offers a 401(k). That’s great news for you — a 401(k) is an A+ tool to help you put money aside for retirement and save you some serious scratch on taxes. But how much to contribute to a 401(k) isn’t necessarily the only decision you need to make. Half of US employers offer both a traditional 401(k) and a Roth 401(k). Both have tax advantages, but they work differently from one another.

So..what actually is a Roth 401(k), and what do you need to know before you can pick?

First question: When do you want to pay taxes — now or later?

Income taxes are a thing. And the money you withdraw from your 401(k) when you retire is, technically, income. But by choosing between a traditional and a Roth, you do get to decide if you want to pay those taxes later or now (or some later and some now).

You might be able to save money in the long term if you pay those taxes now. It all comes down to tax brackets — because you’re probably not going to be in the same one forever.

Maybe you plan to live off less money during retirement than you’re making today. That would mean your tax bracket could be lower in retirement — which means you’d probably save money by waiting to pay your taxes until then.

Or you might expect your income to go up a lot between now and retirement. In that case, your tax bracket could be higher once you retire — which means you’d probably save money by paying taxes now. (Of course, all of this assumes that our general tax bracket structure stays the same. Who even knows.)

With a traditional 401(k), you pay taxes later. With a Roth 401(k), you pay taxes now. So if you think you’ll move down in tax brackets when you retire, you might choose a traditional, and if you think you’ll move up in tax brackets when you retire, you might choose a Roth. Or, if you’re like, “heck if I know,” you might plan for either reality by using both.

Traditional vs. Roth 401(k): More things to think about

Still not sure which is right for you? Here’s a rundown of the main ways a traditional 401(k) and a Roth 401(k) are similar and different.

How they’re the same

Income limits

Nada. You can contribute to a traditional or Roth 401(k) no matter how much you make. There’s one exception: If you’re considered a “highly compensated employee” (if you make $155,000 per year, are in the top 20% of earners in the firm, or own more than 5% of the company — the limit is called an “HCE threshold”— the limit is called an “HCE threshold”), your contributions may be capped because of the IRS’s non-discrimination requirements. Check with your HR team or 401(k) plan administrator if you think that might apply to you.

Contribution limits

The annual 401(k) contribution limit in 2024 is $23,000 (or $30,500 if you’re over 50). How (and whether) you split that between a traditional and Roth account is up to you.

Age requirement for withdrawals

You can’t take your money out of a 401(k) until you’re 59½ (unless you’re going through a hardship or meet one of the IRS’s other exceptions). Otherwise, you’ll have to pay all the taxes you owe plus a 10% penalty fee. Ouch.

Required minimum distributions (RMDs)

You have to start withdrawing your money in the year you turn 72 (unless you’re still working for that employer or 73 if the account owner reaches age 72 in 2023 or later). If you don’t there are — you guessed it — more hefty fees.

Taxes while your money’s growing

Good news: You won’t pay taxes on any capital gains, dividends, or interest that your contributions earn. (Nice.)

How they’re different

Taxes today

With a traditional 401(k), you don’t pay income taxes on the money you put in today — which is why you might see them called “pre-tax” retirement accounts. Instead, they usually come out of your paycheck before taxes, and they reduce your total taxable income. So if you made $60,000 and put $8,000 into your traditional 401(k), those contributions would cut your taxable income down to $52,000.

With a Roth 401(k), you make contributions “post-tax,” meaning you’ve already paid income tax on that money. You don’t get to deduct them, but that’s OK — the tax benefits of a Roth come later.

Taxes at retirement

Uncle Sam has a long memory. If you use a traditional 401(k), he’ll have been waiting for you to retire so he can finally collect those taxes you didn’t pay yet. So when you make withdrawals during retirement, they’ll be taxed according to your tax bracket at that time.

With a Roth 401(k), your tax bill is already paid, so you’ll get to withdraw your money (and earnings!) tax-free, as long as your account is at least five years old.

FYI: Your employer match won’t go into a Roth

Many employers offer a 401(k) contribution match, meaning if you put money into your 401(k), they’ll put some in, too. (Yes, that means free money.) This is pretty straightforward with a traditional 401(k), because you’ll pay all your taxes later, when you retire.

But with a Roth 401(k), you’re using after-tax dollars, and your employer isn’t going to pay income taxes for you. So they’ll probably deposit your matching contributions into a separate, traditional 401(k), and you’ll pay taxes on them during retirement.

Keep an eye on fees

With a 401(k) — traditional or Roth — your employer selects a range of investment options for you to pick from. Because you don’t have a ton of options, you might have less control over how much you’re paying in fees — and sometimes those fees can be high.

For many people, even if the fees aren’t quite as low as you could get with an IRA, the additional tax benefits of a 401(k) outweigh the cost in fees. That being said, it’s definitely worth making sure just in case.

And if you leave your job, you won’t be able to contribute to that 401(k) (or get all the same tax benefits) anymore. That’s a good time to look into rolling your old 401(k) over into either an IRA or your new employer’s 401(k).

So, which one is right for you?

The whole traditional-vs-Roth 401(k) question has a lot to do with taxes, and everyone’s tax situation is different. Ellevest isn’t a tax pro, so we can’t tell you exactly what’s right for you.

Here’s what we can tell you: If you think your tax rates are going to go up in retirement, consider the Roth. If you think your tax rates are going to go down in retirement, or you need to reduce your taxable income today, then consider the traditional.

Something else to think about: If federal tax rates go up in the future, then the decision to use a traditional will have less of a payoff. If federal tax rates go down, the decision to use a Roth could come back to bite you.

There’s no way of knowing that, so one way to hedge your bets is to use both a traditional and a Roth 401(k). You can divide your contributions between the two any way you want — you just can’t do more than $23,000 ($30,500 if you’re over 50) in total. If your main account is a Roth and your employer gives you a match, as mentioned above, this strategy might come built-in. Either way, it’s a good idea to talk to a tax pro to really understand what’s right for you.

The whole “which type of 401(k)” question isn’t half as important as just getting started. Putting money toward your future regularly and often is step one in going after the retirement you deserve.

Source: https://www.ellevest.com/magazine/retirement/401k-vs-roth-401k

Age plays a pivotal role in several tax credits, deductions, and rules — sometimes for the better.

BY KELLEY R. TAYLOR

Did you know that several tax credits, deductions, and rules hinge on your age? For instance, age might determine how much you can deduct on your federal tax return for long-term care insurance premiums. In other cases, your age dictates when you must begin complying with specific rules that affect your tax liability, such as taking required minimum distributions (RMDs). 

Knowing which tax regulations and benefits link to which ages can aid in tax planning and potentially reduce your tax burden before and during retirement.

To get you started, here is a list of six tax breaks that change as you get older and the associated ages at which you can become eligible. As always, and in any case, if you are unsure whether any tax provision, credit, or deduction applies to you, consult a trusted tax professional or financial advisor.

Extra tax breaks for people 50 or older

Note: The following is a short list of some common tax changes and amounts that depend, at least in part, on your age. This list is not exhaustive, meaning it does not include all tax provisions triggered by age nor all tax credits and deductions available for (or rules applicable to) people 50 and older.

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Contribution limits over 50

If you are 50 or older, you can take advantage of catch-up contributions to retirement accounts such as IRAs and 401(k)s. These contributions allow additional savings beyond standard annual contribution limits, which can help bolster your retirement funds. 

According to the IRS, the limit on annual contributions to an IRA increased to $7,000 for 2024, up from $6,500 for the 2023 tax year. The SECURE 2.0 Act changed the IRA catch‑up contribution limit for individuals age 50 and over to include an annual cost‑of‑living adjustment but remains $1,000 for 2024. (So, the total annual IRA contribution if you are 50 and older is up to $8,000.)

The 401(k) catch-up contribution limit for employees age 50 and older and those participating in 403(b) and most 457 plans and the federal government’s Thrift Savings Plans is $7,500 for 2024. 

• Participants in 401(k), 403(b), and most 457 plans, as well as the federal government’s Thrift Savings Plan who are 50 and older, can contribute up to $30,500 in 2024. (That’s the $23,000 limit plus the catch-up of $7,500.)
• The catch-up contribution limit for employees 50 and over participating in SIMPLE plans is $3,500 for 2024.

Note on a catch-up contributions change for high earners: Under the SECURE 2.0 Act, passed a couple of years ago, if you are at least 50 and earned $145,000 or more in the previous year, you can make catch-up contributions to your employer-sponsored 401(k) account. But there’ is a catch. Beginning in 2026, you must make those extra contributions on a Roth basis, using after-tax money. 

• When the IRS implements the rule, you won’t be able to get tax deductions on those catch-up contributions as you would with typical 401(k) contributions.
• But you could withdraw the money tax-free when you retire. 
• The SECURE 2.0 Roth catch-up contribution rule won’t apply to taxpayers making $144,999 or less in a tax year.

What about HSA contribution limits? If you are 55 or older by the end of the tax year, the IRS says you can increase your annual HSA contribution by up to $1,000 a year. As Kiplinger has reported, the IRS announced record-high HSA contribution limits for 2024. Individuals can contribute up to $4,150 to their HSA accounts for 2024, and families can contribute up to $8,300.

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Early withdrawal penalty

People age 59½ and older can make penalty-free withdrawals from traditional IRAs and 401(k)s, avoiding the usual 10% early withdrawal penalty. Penalty-free withdrawals can give you more flexibility in accessing retirement savings and managing finances.

• Qualified distributions (i.e., from a Roth account at least five years old since you first contributed and when you are 59½ years or older) are tax-exempt. 

Additionally, if you are 65 and older, you can withdraw HSA funds for non-medical expenses without paying the additional tax penalty. However, ordinary income tax rates apply to distributions for medical expenses other than qualified ones. 

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Free tax help

The IRS offers tax counseling for people age 60 and older. (If you have a joint tax return, only one spouse must meet the age threshold.) This counseling program, known as TCE, or Tax Counseling for the Elderly, operates in partnership with the AARP Foundation’s Tax-Aide program. It utilizes IRS-certified volunteers specializing in pensions and other retirement-related concerns unique to older adults. The IRS provides an online lookup tool to find a TCE provider. 

There are also several other ways to file taxes for free this tax season, not tied to age. For more information, see Ways to Free File Your Taxes This Year.

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Extra standard deduction: 65 and older

Once you turn 65, you become eligible for an additional standard deduction on top of the regular standard deduction. This extra deduction reduces taxable income, potentially lowering overall tax liabilities and allowing retirees to keep more of their hard-earned money.

However, the amount of this extra standard deduction can vary based on factors like filing status and whether you or your spouse are 65 or older. Another factor is whether you or your spouse is blind.

• If you have yet to file your 2023 tax return, the additional standard deduction for the 2023 tax year is $1,850 if you are single or file as head of household. If you are married, filing jointly or separately, the extra standard deduction amount is $1,500 per qualifying individual. 
• If you are 65 or older and blind, the 2023 extra standard deduction is $3,700 if you are single or filing as head of household. It’s $3,000 per qualifying individual if you are married, filing jointly or separately.
• For information on the extra standard deduction amounts for 2024 (tax returns you’ll file in 2025), see Kiplinger’s report: The Extra Standard Deduction for 65 and Older.

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Charitable IRA rollover: QCDs

If you are 70½ or older, you can make qualified charitable distributions (QCDs) directly from your IRA to eligible charitable organizations. These distributions can be helpful for retirees who want to support charitable causes while minimizing their tax liability. QCDs fulfill required minimum distributions (RMDs) without being included in adjusted gross income (AGI).

• QCDs are not subject to tax.
• You can benefit from a QCD even if you claim the standard deduction. (However, a QCD is not deductible as a charitable contribution.)
• There are other rules to follow and a limit: For 2024, the IRA QCD limit is $105,000. For the 2023 tax year (if you haven’t yet filed), the limit is $100,000. For married couples, each spouse can exclude up to the limit for a total, for the 2023 tax year, of up to $200,000 and for 2024, up to $210,000.

A note on RMDs: Due to changes brought about by the SECURE 2.0 Act, 73 is the age at which you must start taking distributions from retirement savings accounts (other than Roth IRAs). You have until April 1 of the following year to take your first required minimum distribution. Different RMD rules may apply to inherited IRAs.

Source: https://www.kiplinger.com/taxes/tax-breaks-that-come-with-age

By DARIA UHLIG

Published March 4th, 2024

Retirement planning is a confusing but necessary financial step. There are many retirement account types that may be good for you, depending on a few key factors, like your employer and how you prefer to be taxed. Here’s a look at the top nine types of retirement plans.

What Are the Top 9 Retirement Plans?

Some retirement plans are designed for people with full-time jobs. Some are meant exclusively for business owners. Others are adaptable to anyone, no matter their situation. Each has its own benefits and drawbacks.

1. Traditional IRA
2. Roth IRA
3. SEP-IRA
4. SIMPLE IRA
5. 401(k)
6. Solo 401(k)
7. 403(b)
8. Annuity
9. Defined benefit plan

1. Traditional IRA

An individual retirement account is a savings plan that any individual with a taxable income can open and manage themselves. An IRA offers a tax advantage because once you contribute, your money will grow and you won’t pay taxes until you withdraw it.

Different financial service companies offer different IRA plans. This makes them adaptable for anyone, no matter the income, because you have the freedom to choose the investment options you can afford.

2. Roth IRA

A Roth IRA is similar to a traditional IRA. The primary difference between them is that with a traditional IRA, you pay taxes when you withdraw your contributions. With a Roth IRA, you pay taxes on contributions as you make them, but you don’t pay when you withdraw the money upon retirement.

Also, unlike some of the alternatives, a Roth IRA will allow you to start withdrawing money early under certain circumstances.

3. SEP-IRA

A Simplified Employee Pension IRA is an IRA specifically designed for people who are self-employed or run their own businesses.

A SEP-IRA plan has a similar structure to a traditional IRA. The main difference is that an employer can contribute more than a traditional IRA would allow. As of 2024, the employer is allowed to contribute 25% of an employee’s income up to a maximum amount of $69,000.

Given that the contribution is dependent on income, in years when the business makes less money, you can make smaller contributions. This is beneficial if you are the employer, but less so if you are the employee.

4. SIMPLE IRA

A Savings Incentive Match Plan for Employees IRA is also intended for use by small-business owners. To qualify for a SIMPLE IRA, a business must have 100 employees or fewer.

Under this plan, the employer matches up to 3% of an employee’s salary per year. If an employee leaves the company, they keep the contributions that the employer has already made.

5. 401(k)

A 401(k) is the most common retirement plan offered by employers. A 401(k) is tax-free until you are ready to withdraw the money, at which point you pay income tax on the amount you take out. Generally, with some exceptions, you must be at least 59 1/2 to start withdrawing funds without incurring an early withdrawal tax penalty.

Many employers match contributions that you make into a 401(k). You may not be allowed to keep all of your employer’s contributions if you leave the company before you are fully vested. However, you can roll over contributions into your new employer’s 401(k) plan or into an IRA.

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6. Solo 401(k)

A solo 401(k) is similar to a standard 401(k), but it’s for self-employed individuals with no employees. This type of retirement plan treats you as both an employer and an employee. That means you can make contributions as both — which translates to potentially more tax-deferred savings than you’re allowed with a standard 401(k).

You can contribute as much as 100% of your earned income from self-employment, up to contribution limits. The limit on contributions you can make as an employee is $23,000 in 2024, plus a catch-up contribution of $7,500 if you’re age 50 or older. The limit on your contributions as an employer is 25% of your employee compensation from the business, up to $69,000, plus a catch-up contribution of $7,500 if you’re age 50 or older.

The IRS has a formula for calculating earned income for the purpose of determining your contribution limits. The formula can be tricky and mistakes can be costly, so consider talking with a financial advisor or accountant before you begin contributing to a solo 401(k) account.

7. 403(b)

A 403(b) plan is similar to a 401(k), but it’s offered to employees of public schools and certain nonprofits, such as churches and 501(c)(3) organizations.

As with 401(k) contributions, 403(b) contributions are tax-deferred, and so is the growth of funds in your account. You’re not taxed until you withdraw the money.

Some employers offer Roth versions in addition to standard 403(b)s. With a Roth 403(b) account, you make contributions from after-tax income and withdraw funds tax-free in retirement.

8. Annuity

Annuities are contracts between you and an insurance company. In exchange for your purchase, whether you pay a lump sum or in installments, the insurance company agrees to make one or more payments, and perhaps pay a death benefit, to you. You can take the payout as a lump sum or as a series of payments.

There are three primary types of annuities:

• Indexed annuity: Returns are tied to an index, such as the S&P 500
• Fixed annuity: Offers a fixed interest rate on your funds and periodic payments of a predetermined dollar amount
• Variable annuity: Allows you to invest funds, which grow tax-free at a variable interest rate

Annuities have fees and risks you should be aware of before you purchase one. While only variable annuities are considered securities, a fee-only investment advisor might be the best person to help you determine whether any kind of annuity you’re considering is the right choice for you.

9. Defined Benefit Plan

A defined benefit plan is the type of retirement plan most people probably associate with employee pensions. Recipients receive a fixed, predetermined benefit when they retire. The benefit can be a set dollar amount or a percentage of your salary, set according to your years of service. The benefits of defined benefit plans are that your employer contributes most of the funds, and you know in advance how much you’ll receive — your employer can’t retroactively decrease the amount, according to the IRS.

Most defined benefit plans are annuities that pay out for the rest of your life or your and your spouse’s lives.

Final Take

Choosing from the retirement account types that are available can be overwhelming, but it is important. If your employer offers a specific plan, that may take the choice out of your hands. If they don’t, then consider what you want out of your plan now in terms of investments and taxation, and what you expect out of it once you retire.

FAQ

• What are the most common types of retirement plans?
  • A 401(k) is the most common type of retirement plan offered by employers, edging out defined benefit plans, according to an IBISWorld analysis. However, an IRA is the most common retirement plan chosen by individuals.
• What is the simplest retirement plan?
  • A traditional IRA is the most straightforward retirement plan. Anyone who earns an income can open one, so there are fewer hoops to jump through to see if you qualify.
• What is better than a 401(k) for retirement?
  • A retirement plan is a personal choice, dependent on when you would rather be taxed and what kind of employer contributions you expect. The best plan for a business owner is not the best plan for an employee, so deciding if a 401(k) or another retirement account type is best requires research or the advice of a professional.
• What is the difference between a 403(b) and a 401(k)?
  • The primary difference between a 403(b) and a 401(k) is the type of employer that offers them. Public schools and certain charitable organizations sponsor 403(b) plans, while for-profit companies sponsor 401(k)s.
• Is a Roth IRA better than a 401(k)?
  • They’re different products, and one isn’t necessarily better than the other. Roth IRAs have the benefit of being individual plans — you don’t need an employer to sponsor one. In addition, you withdraw money tax-free in retirement. The main benefits of a 401(k) are the higher contribution limits and your employer’s ability to contribute funds on your behalf.

Source: https://www.aol.com/types-retirement-plans-choose-one-223307908.html?guccounter=1