Caring for Your Aging Parents What is it?

Caring for your aging parents is something you hope you can handle when the time comes, but something you probably hope you never have to do. Caring for your aging parents means helping them plan for the future, and this can be overwhelming, both physically and emotionally. When the time comes for you to take care of your parents, you may be certain of only two things: Your parents need you, and you need help.

Start planning

Talk to your parents about the future

Start caring for your aging parents by talking with them about their needs and wishes if they are able. In some cases, however, they may not be willing to talk to you about their future, either because they are afraid to face it or because they resent your interference. If this is the case, you may need to do as much planning as you can without them, or, if their safety or health is in danger, step in as caregiver anyway.

Prepare a personal data record

The first step you should take is to ask your parents to help you prepare a personal data record (if they are unable to help you, you’ll have to search for the information yourself). A personal data record is a document that lists information that you might need in case your parents become incapacitated or die. Information that should be included is financial information, legal information, medical information, insurance information, and information regarding professional advisors and the location of important records.

When Marcia and her mother prepared a personal data record, Marcia realized that her mother did not have a durable power of attorney or health care proxy in case she became incapacitated and could not make decisions about her medical care. The next day, Marcia made an appointment with her mother’s lawyer to discuss this issue.

Get advice

You can’t know everything, and you probably don’t have enough time to learn everything you need to know to care for your parents. That’s why you should seek advice from professionals. Some advice will be free, and some you will have to pay for. If you live far from your parents or are too overwhelmed to handle all your parents’ affairs, you can hire a geriatric care manager who will evaluate your parents’ situation, suggest options, and coordinate professionals who can help. In addition, talk to your employer. Some employers have set up employee assistance programs that offer advice and assistance to people who are dealing with personal challenges, including caring for aging parents.

Get support

Don’t try to care for your parents alone. Many local and national caregiver support groups and community services are available to help you cope with caring for your aging parents. If you don’t know where to start finding help, call the Eldercare Locator, an information and referral service sponsored by the federal government that can direct you to resources available nationally or in your area. Call the Eldercare Locator at (800) 677-1116.

What kind of advice will you need?

Housing and health care advice

If your parents are like many older individuals, where they live will depend upon how healthy they are. As your parents grow older, their health may deteriorate so much that they can no longer live on their own. At this point, you may need to find them in-home health care or health care within a retirement community or nursing home. On the other hand, you may want them to move in with you. In addition, you will need information on managing the cost of health care, long-term care insurance, major medical insurance, Medicare, and Medicaid.

Contact:

  • National Association for Home Care
  • Visiting Nurse Associations of America
  • Centers for Medicare & Medicaid Services (formerly known as the Health Care Financing Administration)
  • American Association of Homes and Services for the Aging
  • American Association of Retired Persons (AARP)
  • Health Insurance Association of America

Financial advice

If your parents need help managing their finances, you may need to contact professionals whose advice both you and your parents can trust, including one or more of the following individuals or organizations

Contact:

  • Your financial planner
  • Your banker
  • Your investment counselor
  • Your tax attorney
  • The Social Security Administration

Legal advice

Legal advisors can help you plan for your parents’ incapacity (including preparing documents such as power of attorneys, medical directives, and living wills), contact nursing home ombudsmen, set up and monitor guardianship, prepare wills, give tax advice, and provide bill payment and representative payee assistance. Many states provide funds for the delivery of free legal services to the elderly and many attorneys specialize in elder law, so finding legal advice shouldn’t be difficult.

Contact:

  • Your attorney
  • National Association of State Units on Aging
  • American Bar Commission on the Legal Problems of the Elderly
  • Legal Counsel for the Elderly

What kinds of support and community services will you need?

Caring for your aging parents will be easier if you know what kinds of support and community services are available and where to locate them. The following is a list of the kinds of support and community services you can find locally and nationally, along with specific suggestions of who to contact for information.

Adult day care

If you need to work or run errands and you can’t leave your parents alone, consider using adult day care. These programs are located in hospitals, churches, temples, nursing homes, or community centers. Many are private nonprofit organizations. Adult day care can be expensive but is sometimes subsidized by the government, and fees may be based on a sliding scale. In addition, Medicare, Medicaid, long-term care insurance, or your health insurance may pay part of the cost.

Contact:

  • Your local senior center or community center
  • National Institute on Adult Day Care
  • The Alzheimer’s Association

Caregiver support groups (self-help)

Many self-help groups are available to provide information and emotional support on broad topics (such as aging) or specific topics (such as heart disease). You may find these support groups helpful if you know little about caring for your aging parents. Such groups might also provide an opportunity to help others by sharing your experiences.

Contact:

  • The Alzheimer’s Association
  • Children of Aging Parents
  • National Self-Help Clearinghouse

Caregiver training/health education

You may feel better about taking care of your parents if you are armed with knowledge. You may want to complete first-aid courses or take classes in gerontology.

Contact:

  • Your local college or university
  • Your local hospital
  • The American Red Cross

Geriatric assessment

If you are uncertain of your parent’s mental or physical capabilities, ask his or her doctor to recommend somewhere you can take your parent to undergo an assessment. These assessments can be done at hospitals or clinics. Your parent will be evaluated to determine his or her capabilities. The evaluation determines whether the individual can take care of himself or herself on a day-to-day basis, including such things as bathing, dressing, eating, using the telephone, doing housework, and managing money. Based on this evaluation, you and your parent will receive advice regarding care options.

Contact:

  • Your doctor
  • Your lawyer
  • The National Association of Professional Geriatric Care Managers
  • Aging Network Services

Respite care

When you are caring for your aging parents, you may feel guilty or even resentful because you don’t have limitless energy. Taking care of your parents is hard work, however, and everyone needs a break once in a while. If you are caring for your aging parents, look into respite care. Medicaid may pay for some respite-care services.

Contact:

  • Your doctor
  • Your local hospital
  • The Alzheimer’s Association
  • National Association for Home Care

Financial and tax considerations for you

Caring for your aging parents is not only an emotional burden for you but may be a financial one as well, depending upon how well off your parents are and how much caring for them costs. Because many adults today are becoming first-time parents in their thirties, and others are remarrying and rearing second families, increasing numbers of adults are finding themselves in the “sandwich generation.” They face having to pay expenses of growing children (including college expenses), plan for their own retirement, and support their aging parents financially. Thus, it’s important to plan not only your parents finances, but your own as well.

Financial planning for your parents

Making sure that your parents won’t outlive their money is a critical step in ensuring that your own finances will remain sound. In particular, you’ll need to make sure that your parent is receiving all the benefits to which he or she is entitled and that his or her money is invested wisely. You’ll also need to create a financial profile for your parents, a statement that includes income, expenses, and net worth. If, after considering your parent’s financial condition, it’s clear that they won’t have enough resources to pay for their own care, you’ll need to find ways to supplement their income. You may need to look at Supplemental Security Income (SSI), for instance, or ask other relatives for help. You’ll also have to determine how much financial support you can give your parents (see below).

Financial planning for you

Besides caring for your parents, you have a lot of other financial obligations. Before you can determine the best way to help your parents financially, you’ll have to look at your own financial picture. Not only will you need to consider your current expenses, but you’ll have to look down the road a few years, considering how much you’ll need to save for your own retirement and, perhaps, for your child’s education.

Due to the complexities inherent in providing adequately for several generations in the same family, consider seeking the advice of a financial professional.

Tax benefits for children supporting aging parents

Federal income tax law provides several tax benefits to you if you are supporting your parents financially. If you have a dependent care account at work, you can put pretax dollars into the account that you can use to pay for some costs associated with caring for your dependent parents. You may be able to claim an exemption for your parents as dependents, and you may be entitled to claim a dependent care credit. In addition, you may be able to file your taxes as head of household and deduct medical expenses you paid for your parents. For more information consult your tax advisor.

Questions & Answers

If you are financially supporting your parent, is he or she entitled to receive Social Security benefits based on your earnings?

If you are providing at least one-half of your parent’s support at the time of your death, and he or she is age 62 or over and is not entitled to a retirement benefit that is equal to or larger than the amount he or she would receive based on your earnings record, then he or she may be entitled to receive a parent’s Social Security benefit equal to 82.5 percent of your primary insurance amount (PIA).

Adjusting to Life Financially after a Divorce

There’s no doubt about it — going through a divorce can be an emotionally trying time. Ironing out a divorce settlement, attending various court hearings, and dealing with competing attorneys can all weigh heavily on the parties involved.

In addition to the emotional impact a divorce can have, it’s important to be aware of how your financial position will be impacted. Now, more than ever, you need to make sure that your finances are on the right track. You will then be able to put the past behind you and set in place the building blocks that can be the foundation for your new financial future.

Assess your current financial situation

Following a divorce, you’ll need to get a handle on your finances and assess your current financial situation, taking into account the likely loss of your former spouse’s income. In addition, you may now be responsible for paying for expenses that you were once able to share with your former spouse, such as housing, utilities, and car loans. Ultimately, you may come to the realization that you’re no longer able to live the lifestyle you were accustomed to before your divorce.

Establish a budget

A good place to start is to establish a budget that reflects your current monthly income and expenses. In addition to your regular salary and wages, be sure to include other types of income, such as dividends and interest. If you will be receiving alimony and/or child support, you’ll want to include those payments as well.

As for expenses, you’ll want to focus on dividing them into two categories: fixed and discretionary. Fixed expenses include things like housing, food, and transportation. Discretionary expenses include things like entertainment, vacations, etc. Keep in mind that you may need to cut back on some of your discretionary expenses until you adjust to living on less income. However, it’s important not to deprive yourself entirely of any enjoyment. You’ll want to build the occasional reward (for example, yoga class, dinner with friends) into your budget.

Reevaluate/reprioritize your financial goals

Your next step should be to reevaluate your financial goals. While you were married, you may have set certain financial goals with your spouse. Now that you are on your own, these goals may have changed. Start out by making a list of the things that you now would like to achieve. Do you need to put more money towards retirement? Are you interested in going back to school? Would you like to save for a new home?

You’ll want to be sure to reprioritize your financial goals as well. You and your spouse may have planned on buying a vacation home at the beach. After your divorce, however, you may find that other goals may become more important (for example, making sure your cash reserve is adequately funded).

Take control of your debt

While you’re adjusting to your new budget, be sure that you take control of your debt and credit. You should try to avoid the temptation to rely on credit cards to provide extras. And if you do have debt, try to put a plan in place to pay it off as quickly as possible. The following are some tips to help you pay off your debt:

  • Keep track of balances and interest rates
  • Develop a plan to manage payments and avoid late fees
  • Pay off high-interest debt first
  • Take advantage of debt consolidation/refinancing options

Protect/establish credit

Since divorce can have a negative impact on your credit rating, consider taking steps to try to protect your credit record and/or establish credit in your own name. A positive credit history is important since it will allow you to obtain credit when you need it, and at a lower interest rate. Good credit is even sometimes viewed by employers as a prerequisite for employment.

Review your credit report and check it for any inaccuracies. Are there joint accounts that have been closed or refinanced? Are there any names on the report that need to be changed? You’re entitled to a free copy of your credit report once a year from each of the three major credit reporting agencies. You can go to annualcreditreport.com for more information.

To establish a good track record with creditors, be sure to make your monthly bill payments on time and try to avoid having too many credit inquiries on your report. Such inquiries are made every time you apply for new credit cards.

Review your insurance needs

Typically, insurance coverage for one or both spouses is negotiated as part of a divorce settlement. However, you may have additional insurance needs that go beyond that which you were able to obtain through your divorce settlement.

When it comes to health insurance, make having adequate coverage a priority. Unless your divorce settlement requires your spouse to provide you with health coverage, one option is to obtain temporary health insurance coverage (up to 36 months) through the Consolidated Omnibus Budget Reconciliation Act (COBRA). You can also look into purchasing individual coverage or, if you’re employed, coverage through your employer.

Now that you’re on your own, you’ll also want to make sure that your disability income and life insurance coverage matches your current needs. This is especially true if you are reentering the workforce or if you’re the custodial parent of your children.

Finally, make sure that your property insurance coverage is updated. Any applicable property insurance policies may need to be modified or rewritten in order to reflect property ownership changes that may have resulted from your divorce.

Change your beneficiary designations

After a divorce, you’ll want to change the beneficiary designations on any life insurance policies, retirement accounts, and bank or credit union accounts you may have in place. Keep in mind that a divorce settlement may require you to keep a former spouse as a beneficiary on a policy, in which case you cannot change the beneficiary designation.

This is also a good time to make a will or update your existing one to reflect your new status. Make sure that your former spouse isn’t still named as a personal representative, successor trustee, beneficiary, or holder of a power of attorney in any of your estate planning documents.

Consider tax implications

You’ll also need to consider the tax implications of your divorce. Your sources of income, filing status, and the credits and/or deductions for which you qualify may all be affected.

In addition to your regular salary and wages, you may have new sources of income after your divorce, such as alimony and/or child support.

Your tax filing status will also change. Filing status is determined as of the last day of the tax year (December 31). This means that even if you were divorced on December 31, you would, for tax purposes, be considered divorced for that entire year.

Finally, if you have children, and depending on whether you are the custodial parent, you may be eligible to claim certain credits and deductions. These could include the child tax credit, and the credit for child and dependent care expenses, along with college-related tax credits and deductions. Ask a tax professional for information on your individual situation.

Consult a financial professional

Although it can certainly be done on your own, you may want to consider consulting a financial professional to assist you in adjusting to your new financial life. In addition to helping you assess your needs, a financial professional can work with you to develop a plan designed to help you address your financial goals, make recommendations about specific products and services, and monitor and adjust your plan as needed.

What is the difference between a fixed annuity and a variable annuity?

An annuity is a contract with an insurance company in which you make one or more payments in exchange for a future income stream in retirement. The funds in an annuity accumulate tax deferred, regardless of which type you select. Because you do not have to pay taxes on any growth in your annuity until it is withdrawn, this financial vehicle has become an attractive way to accumulate funds for retirement.

Annuities can be immediate or deferred, and they can provide fixed returns or variable returns.

Deferred fixed annuity

A deferred fixed annuity is an insurance-based contract that can be funded either with a lump sum or through regular payments over time. Fixed annuity contracts are issued with guaranteed minimum interest rates. Although the rate may be adjusted, it should never fall below a guaranteed minimum rate specified in the contract. This guaranteed rate acts as a “floor” to potentially protect a contract owner from periods of low interest rates.

The funds in your fixed annuity are able to build and earn interest during the accumulation phase. You don’t have to pay taxes on interest earned until it is withdrawn. By postponing taxes while your funds accumulate, you keep more of your money working and growing for you instead of paying current taxes. This means an annuity may help you accumulate more over the long term than a taxable investment. Earnings that are withdrawn are taxed as ordinary income. Fixed annuities provide an option for an income stream that could last a lifetime. The guarantees of fixed annuity contracts are contingent on the financial strength and claims-paying ability of the issuing insurance company.

Immediate fixed annuity

Typically, an immediate annuity is funded with a lump-sum premium made to the insurance company, and annuity payments from the insurer begin within 30 days or can be deferred up to 12 months. Payments can be paid monthly, quarterly, annually, or semi-annually for a guaranteed period of time or for life, whichever is specified in the contract. Only the interest portion of each payment is considered taxable income. The rest is considered a return of principal and is free of income taxes.

Deferred variable annuity

A variable annuity is a contract that provides fluctuating (variable) rather than fixed returns. The key feature of a variable annuity is that you can control how your premiums are invested by the insurance company. Thus, you decide how much risk you want to take and you also bear the investment risk.

Most variable annuity contracts offer a variety of professionally managed portfolios called “subaccounts” (or investment options) that invest in stocks, bonds, and money market instruments, as well as balanced investments. Some of your contributions can be placed in an account that offers a fixed rate of return. Your premiums will be allocated among the subaccounts that you select.

Unlike a fixed annuity, which pays a fixed rate of return, the value of a variable annuity contract is based on the performance of the investment subaccounts that you select. These subaccounts fluctuate in value with market conditions, and the principal may be worth more or less than the original cost when surrendered.

Variable annuities provide the dual advantages of investment flexibility and the potential for tax deferral. The taxes on all interest, dividends, and capital gains are deferred until withdrawals are made.

When you decide to receive income from your annuity, you can choose a lump sum, a fixed payout, or a variable payout. The earnings portion of the annuity will be subject to ordinary income taxes when you begin receiving income, and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59½. Surrender charges may also apply during the contract’s early years.

Annuities have contract limitations, fees, and charges, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

Variable annuities are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

 

Retirement Plan Considerations at Different Stages of Life

Throughout your career, retirement planning will likely be one of the most important components of your overall financial plan. Whether you have just graduated and taken your first job, are starting a family, are enjoying your peak earning years, or are preparing to retire, your employer-sponsored retirement plan can play a key role in your financial strategies.

How should you view and manage your retirement savings plan through various life stages? Following are some points to consider.

Just starting out

If you are a young adult just starting your first job, chances are you face a number of different challenges. College loans, rent, and car payments all may be competing for your hard-earned yet still entry-level paycheck. How can you even consider setting aside money in your employer-sponsored retirement plan now? After all, retirement is decades away — you have plenty of time, right?

Before you answer, consider this: The decades ahead of you can be your greatest advantage. Through the power of compounding, you can put time to work for you. Compounding happens when your plan contribution dollars earn returns that are then reinvested back into your account, potentially earning returns themselves. Over time, the process can snowball.

Say at age 20, you begin investing $3,000 each year for retirement. At age 65, you would have invested $135,000. If you assume a 6% average annual return, you would have accumulated a total of $638,231 by age 65. However, if you wait until age 45 to begin investing that $3,000 annually and earn the same 6% return, by age 65 you would have invested $60,000 and accumulated a total $110,357. Even though you would have invested $75,000 more by starting earlier, you would have accumulated more than half a million dollars more overall.1

That’s the power you have as a young investor — the power of time and compounding. Even if you can’t afford to contribute $3,000 a year ($250/month) to your plan, remember that even small amounts can add up through compounding. So enroll in your plan and contribute whatever you can, and then try to increase your contribution amount by a percentage point or two every year until you hit your plan’s maximum contribution limit. As debts are paid off and your salary increases, redirect a portion of those extra dollars into your plan.

Finally, time offers an additional benefit to young adults — the potential to withstand stronger short-term losses in order to pursue higher long-term gains. That means you may be able to invest more aggressively than your older colleagues, placing a larger portion of your portfolio in stocks to strive for higher long-term returns.2

Getting married and starting a family

You will likely face even more obligations when you marry and start a family. Mortgage payments, higher grocery and gas bills, child-care and youth sports expenses, family vacations, college savings contributions, home repairs and maintenance, dry cleaning, and health-care costs all compete for your money. At this stage of life, the list of monthly expenses seems endless.

Although it can be tempting to cut your retirement savings plan contributions to make ends meet, do your best to resist temptation and stay diligent. Your retirement needs to be a high priority.

Are you thinking about taking time off to raise children? That is an important and often beneficial decision for many families. But it’s a decision that can have a financial impact lasting long into the future.

Leaving the workforce for prolonged periods not only hinders your ability to set aside money for retirement but also may affect the size of any pension or Social Security benefits you receive down the road. If you think you might take a break from work to raise a family, consider temporarily increasing your plan contributions before you leave and after you return to help make up for the lost time and savings. Or perhaps your spouse could increase his or her contributions while you take time off.

Lastly, while you’re still approximately 20 to 30 years away from retirement, you have decades to ride out market swings. That means you may still be able to invest relatively aggressively in your plan. But be sure you fully reassess your ability to withstand investment risk before making any decisions.

Reaching your peak earning years

The latter stage of your career can bring a wide variety of challenges and opportunities. Older children typically come with bigger expenses. College bills may be making their way to your mailbox or inbox. You may find yourself having to take time off unexpectedly to care for aging parents, a spouse, or even yourself. As your body begins to exhibit the effects of a life well lived, health-care expenses begin to eat up a larger portion of your budget. And those pesky home and car repairs never seem to go away.

On the other hand, with 20+ years of work experience behind you, you could be reaping the benefits of the highest salary you’ve ever earned.

With more income at your disposal, now may be an ideal time to kick your retirement savings plan into high gear. If you’re age 50 or older, you may be able to take advantage of catch-up contributions, which allow you to contribute up to $27,000 to your employer-sponsored plan in 2022 (up from $26,000 in 2021), versus a maximum of $20,500 for most everyone else (up from $19,500 in 2021). (Note that some types of plans have different limits.)

In addition, if you haven’t yet met with a financial professional, now may be a good time to do so. A financial professional can help you refine your savings goal and investment allocations, as well as help you plan ahead for the next stage.3

Preparing to retire

With just a few short years until you celebrate the major step into retirement, it’s time to begin thinking about when and how you will begin drawing down your retirement plan assets. You might also want to adjust your investment allocations with an eye towards asset protection (although it’s still important to pursue a bit of growth to keep up with the rising cost of living).4 A financial professional can become a very important ally in helping to address the various decisions you will face at this important juncture.

You may want to discuss:

  • Health care needs and costs, as well as retiree health insurance
  • Income-producing investment vehicles
  • Tax rates and living expenses in your desired retirement location
  • Part-time work or other sources of additional income
  • Estate planning

You’ll also want to familiarize yourself with required minimum distributions (RMDs). The IRS requires that you begin drawing down your retirement plan assets by April 1 of the year following the year you reach age 72. If you continue to work for your employer past age 72, you may delay RMDs from that plan until the year following your actual retirement.5

Other considerations

Throughout your career, you may face other important decisions involving your retirement savings plan. For example, if your plan provides for Roth contributions, you’ll want to review the differences between these and traditional pre-tax contributions to determine the best strategy for your situation. While pre-tax contributions offer an up-front tax benefit, you’ll have to pay taxes on distributions when you receive them. On the other hand, Roth contributions do not provide an up-front tax benefit, but qualified withdrawals will be tax free.6 Whether you choose to contribute to a pre-tax account, a Roth account, or both will depend on a number of factors.

At times, you might face a financial difficulty that will tempt you to take a loan or hardship withdrawal from your account, if these options are available in your plan. If you find yourself in this situation, consider a loan or hardship withdrawal as a last resort. These moves not only will slow your retirement saving progress but could have a negative impact on your income tax obligation.7

Finally, as you make decisions about your plan on the road to retirement, be sure to review it alongside your other savings and investment strategies. While it’s generally not advisable to make frequent changes in your retirement plan investment mix, you will want to review your plan’s portfolio at least once each year and as major events (e.g., marriage, divorce, birth of a child, job change) occur throughout your life.

IRA and Retirement Plan Distributions

What is it?

IRAs and employer-sponsored retirement plans (e.g., 401(k) and profit-sharing plans) play a central role in retirement planning. After all, the tax benefits are hard to beat. With traditional IRAs and most employer-sponsored retirement plans, pre-tax money is contributed and grows tax deferred. It’s not until you take funds out of the account that you pay income tax on the distributions. With Roth IRAs and Roth 401(k)/403(b)/457(b)s, the money that you contribute comes from after-tax dollars, and qualifying distributions are completely income tax free.

But to get the tax advantages of IRAs and retirement plans, you need to be familiar with the complicated distribution restrictions, requirements, and tax rules that apply to these retirement investments. At their most basic level, the IRS rules try to discourage you from receiving retirement funds too early or from leaving the funds in a tax-deferred plan or account for too long.

Options for taking distributions from employer-sponsored retirement plans and IRAs

Employer-sponsored retirement plans

In general, the Internal Revenue Code and IRS regulations determine the distribution options that are available under employer-sponsored retirement plans. However, employers are not required to offer all of the available distribution options in their plans. Therefore, it is important that you review the specific terms of your plan to see which options are available to you. These provisions normally include a lump-sum distribution of your entire balance under certain conditions, an annuity payout after separation from service, and a rollover to an IRA or another employer’s plan. Other distribution options may also be available upon your termination of employment, upon your death, or even while you are still employed.

Whether taxes are due on distributions depends on whether pre-tax or after-tax contributions have been made. Where funds have not been previously taxed, they are generally taxed upon distribution.

Employer contributions, employee pre-tax contributions, and earnings are generally taxed as income when withdrawn from the plan (subject to certain exceptions, such as tax-free rollovers). An additional 10% premature distribution penalty may also be assessed on taxable portion of distributions taken from the plan prior to age 59½ (subject to certain exceptions).

Special rules apply to after-tax Roth 401(k)/403(b)/457(b) contributions. These contributions are free from federal income tax when paid to you from the plan and, if certain conditions are met (a “qualified distribution”), all investment earnings on these contributions are also tax free and penalty free when paid to you.

IRAs

IRA distributions can be made purely at the IRA owner’s discretion. The taxation of distributions from IRAs depends on the type of IRA (traditional or Roth), the source of the contributions (pre-tax or after-tax), and whether all tax requirements have been met.

With traditional IRAs, distributions taken from the account may or may not be taxable income. Distributions of contributions are generally taxable only if they were tax deductible at the time you made them. Amounts you contributed that weren’t eligible for a tax deduction (after-tax contributions) can generally be withdrawn income tax free (because tax has already been paid on those dollars). By contrast, distributions of investment earnings from these accounts are always taxable.

Your age is also a key factor in terms of the tax consequences and advisability of withdrawing IRA funds. That’s because a 10% premature distribution tax applies to the taxable portion of IRA distributions taken prior to age 59½ (subject to certain exceptions).

Roth IRAs are subject to special rules. Your Roth IRA contributions are free from federal income tax when paid to you from your account and, if certain conditions are met (a “qualified distribution”), all investment earnings on these contributions are also tax free and penalty free when paid to you.

Designating a beneficiary for your IRA or retirement plan

If you have a traditional IRA or participate in an employer-sponsored retirement plan, carefully consider your choice of beneficiary. Your beneficiary will receive the money in your IRA or plan when you die. Your choice of beneficiary can determine (1) the tax deferral and distribution timing options available to your beneficiary and (2) whether the funds will be taxed in your estate for death tax purposes.

Because Roth IRAs are unique, the considerations regarding beneficiary designations for Roth IRAs are unique as well.

Inherited IRAs and employer-sponsored retirement plans

If you have inherited an IRA or retirement plan account, you need to be aware of the available options for taking or deferring distributions. With traditional IRAs and retirement plans, you usually have to pay income tax on the funds that you receive. Rather than simply taking all of the money from the IRA or plan at once (and paying tax on the lump-sum distribution), you may be able to defer and delay distributions from an inherited account (or plan) for a period of time, letting the dollars continue to grow tax deferred. The terms of the IRA or retirement plan will govern the distribution options available to you.

How can we save for retirement and our child’s college education at the same time?

It’s seldom easy to achieve a balance between saving for your retirement and saving for the ever-increasing cost of a college education within your present income. Yet it’s imperative that you save for both at the same time. To postpone saving for your retirement means missing out on years of tax-deferred growth and playing a near-impossible game of catch-up. To postpone saving for college means possibly significant borrowing and years of student loan payments. In a perfect world, you want to contribute to each. But to accomplish both goals, you may need to compromise.

The first step is to thoroughly examine your funding needs for both college and retirement. On the retirement side, remember to include the estimated value of any employer pension plans, as well as your Social Security benefits. This evaluation may prompt you to examine some deeply held beliefs about your financial goals. For example, is it important that you retire early or travel regularly in retirement, or is it more important that your child attend a prestigious college?

If you discover that you can’t afford to save for both goals, the second step is to consider some compromises:

  • Defer your retirement and work longer.
  • Reduce your standard of living, now or in retirement.
  • Increase your family income by seeking a better paying position in your present career, getting a second job, or having a previously stay-at-home spouse join the work force.
  • Seek out more aggressive investments (but beware of the higher risks).
  • Expect your child to contribute to college costs. Some parents may find it difficult to accept, but the majority of college students finance a portion of their education with student loans. Many students also work during high school and college to save money for tuition.
  • Investigate less expensive colleges. You may find that some less expensive state universities have more to offer in certain programs than their pricey private counterparts.
  • Consider other ways to reduce the cost of college, including online learning, accelerated degree programs, starting off at community college and then transferring to a four-year college, joining the military, or searching for college scholarships.
  • If you absolutely can’t save for both goals, then it’s best to err on the side of retirement. At college time, your child can take out loans. But you can’t do that for retirement. Another idea is to split your available funds in a way that favors retirement, but with some going toward college. For example, an 80-20 or 70-30 split can get you started on both goals.

The third step is to re-evaluate your plan from time to time as your circumstances and wishes change. The important thing is to earmark a portion of your present income for both goals and do the best you can.

Note: All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

Five Keys to Investing for Retirement

Making decisions about your retirement account can seem overwhelming, especially if you feel unsure about your knowledge of investments. However, the following basic rules can help you make smarter choices regardless of whether you have some investing experience or are just getting started.

1. Don’t lose ground to inflation

It’s easy to see how inflation affects gas prices, electric bills, and the cost of food; over time, your money buys less and less. But what inflation does to your investments isn’t always as obvious. Let’s say your money is earning 4% and inflation is running between 3% and 4% (its historical average). That means your investments are earning only 1% at best. And that’s not counting any other costs; even in a tax-deferred retirement account such as a 401(k), you’ll eventually owe taxes on that money. Unless your retirement portfolio keeps pace with inflation, you could actually be losing money without even realizing it.

What does that mean for your retirement strategy? First, you might need to contribute more to your retirement plan than you think. What seems like a healthy sum now will seem smaller and smaller over time; at a 3% annual inflation rate, something that costs $100 today would cost $181 in 20 years. That means you may need a bigger retirement nest egg than you anticipated. And don’t forget that people are living much longer now than they used to. You might need your retirement savings to last a lot longer than you expect, and inflation is likely to continue increasing prices over that time. Consider increasing your 401(k) contribution each year by at least enough to overcome the effects of inflation until you hit your plan’s contribution limits.

Second, you may consider investing a portion of your retirement plan in investments that can help keep inflation from silently eating away at the purchasing power of your savings. Cash alternatives such as money market accounts may be relatively safe, but they are the most likely to lose purchasing power to inflation over time. Even if you consider yourself a conservative investor, remember that stocks historically have provided higher long-term total returns than cash alternatives or bonds, even though they also involve greater risk of volatility and potential loss.

Past performance is no guarantee of future results.

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund.

2. Invest based on your time horizon

Your time horizon is investment-speak for the amount of time you have left until you plan to use the money you’re investing. Why is your time horizon important? Because it can affect how well your portfolio can handle the ups and downs of the financial markets. Someone who was planning to retire in 2008 and was heavily invested in the stock market faced different challenges from the financial crisis than someone who was investing for a retirement that was many years away, because the person nearing retirement had fewer years left to let their portfolio recover from the downturn.

If you have a long time horizon, you may be able to invest a greater percentage of your money in something that could experience more dramatic price changes but that might also have greater potential for long-term growth. Though past performance doesn’t guarantee future results, the long-term direction of the stock market has historically been up despite its frequent and sometimes massive fluctuations.

Think long term for goals that are many years away and invest accordingly. The longer you stay with a diversified portfolio of investments, the more likely you are to be able to ride out market downturns and improve your opportunities for gain.

3. Consider your risk tolerance

Another key factor in your retirement investing decisions is your risk tolerance — basically, how well you can handle a possible investment loss. There are two aspects to risk tolerance. The first is your financial ability to survive a loss. If you expect to need your money soon — for example, if you plan to begin using your retirement savings in the next year or so — those needs reduce your ability to withstand even a small loss. However, if you’re investing for the long term, don’t expect to need the money immediately, or have other assets to rely on in an emergency, your risk tolerance may be higher.

The second aspect of risk tolerance is your emotional ability to withstand the possibility of loss. If you’re invested in a way that doesn’t let you sleep at night, you may need to consider reducing the amount of risk in your portfolio. Many people think they’re comfortable with risk, only to find out when the market takes a turn for the worse that they’re actually a lot less risk tolerant than they thought. Often that means they wind up selling in a panic when prices are lowest. Try to be honest about how you might react to a market downturn and plan accordingly.

Remember that there are many ways to manage risk. For example, understanding the potential risks and rewards of each of your investments and their role in your portfolio may help you gauge your emotional risk tolerance more accurately. Also, having money deducted from your paycheck and put into your retirement plan helps spread your risk over time. By investing regularly, you reduce the chance of investing a large sum just before the market takes a downturn.

4. Integrate retirement with your other financial goals

Think about establishing an emergency fund; it can help you avoid needing to tap your retirement savings before you had planned to. Generally, if you withdraw money from a traditional retirement plan before you turn 59½, you’ll owe not only the amount of federal and state income tax on that money but also a 10% federal penalty (and possibly a state penalty as well). There are exceptions to the penalty for premature distributions from a 401(k), such as having a qualifying disability or withdrawing money after leaving your employer after you turn 55. However, having a separate emergency fund can help you avoid an early distribution and allow your retirement money to stay invested.

If you have outstanding debt, you’ll need to weigh the benefits of saving for retirement versus paying off that debt as soon as possible. If the interest rate you’re paying is high, you might benefit from paying off at least part of your debt first. If you’re contemplating borrowing from or making a withdrawal from your workplace savings account, make sure you investigate using other financing options first, such as loans from banks, credit unions, friends, or family. If your employer matches your contributions, don’t forget to factor into your calculations the loss of that matching money if you choose to focus on paying off debt. You’ll be giving up what is essentially free money if you don’t at least contribute enough to get the employer match.

5. Don’t put all your eggs in one basket

Diversifying your retirement savings across many different types of investments can help you manage the ups and downs of your portfolio. Different types of investments may face different types of risk. For example, when most people think of risk, they think of market risk — the possibility that an investment will lose value because of a general decline in financial markets. However, there are many other types of risk. Bonds face default or credit risk (the risk that a bond issuer will not be able to pay the interest owed on its bonds, or repay the principal borrowed). Bonds also face interest-rate risk, because bond prices generally fall when interest rates rise. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, and economic and political risk unique to the specific country. This may result in greater share price volatility. Political risk is created by legislative actions (or the lack of them).

These are only a few of the various types of risk. However, one investment may respond to the same set of circumstances very differently than another. Putting your money into many different securities, as a mutual fund does, is one way to spread your risk. Another is to invest in several different types of investments — for example, stocks, bonds, and cash alternatives. Spreading your portfolio over several different types of investments can help you manage the types and level of risk you face.

Participating in your retirement plan is probably more important than any individual investing decision you’ll make. Keep it simple, stick with it, and value time as a strong ally.

Financial Planning: Helping You See the Big Picture

Do you picture yourself owning a new home, starting a business, or retiring comfortably? These are a few of the financial goals that may be important to you, and each comes with a price tag attached.

That’s where financial planning comes in. Financial planning is a process that can help you target your goals by evaluating your whole financial picture, then outlining strategies that are tailored to your individual needs and available resources.

Why is financial planning important?

A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you’ll be better able to focus on your goals and understand what it will take to reach them.

One of the main benefits of having a financial plan is that it can help you balance competing financial priorities. A financial plan will clearly show you how your financial goals are related–for example, how saving for your children’s college education might impact your ability to save for retirement. Then you can use the information you’ve gleaned to decide how to prioritize your goals, implement specific strategies, and choose suitable products or services. Best of all, you’ll know that your financial life is headed in the right direction.

The financial planning process

Creating and implementing a comprehensive financial plan generally involves working with financial professionals to:

  • Develop a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, your investment portfolio, your tax exposure, and your estate plan
  • Establish and prioritize financial goals and time frames for achieving these goals
  • Implement strategies that address your current financial weaknesses and build on your financial strengths
  • Choose specific products and services that are tailored to help meet your financial objectives*
  • Monitor your plan, making adjustments as your goals, time frames, or circumstances change

Some members of the team

The financial planning process can involve a number of professionals.

Financial planners typically play a central role in the process, focusing on your overall financial plan, and often coordinating the activities of other professionals who have expertise in specific areas.

Accountants or tax attorneys provide advice on federal and state tax issues.

Estate planning attorneys help you plan your estate and give advice on transferring and managing your assets before and after your death.

Insurance professionals evaluate insurance needs and recommend appropriate products and strategies.

Investment advisors provide advice about investment options and asset allocation, and can help you plan a strategy to manage your investment portfolio.

The most important member of the team, however, is you. Your needs and objectives drive the team, and once you’ve carefully considered any recommendations, all decisions lie in your hands.

Why can’t I do it myself?

You can, if you have enough time and knowledge, but developing a comprehensive financial plan may require expertise in several areas. A financial professional can give you objective information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered.

Staying on track

The financial planning process doesn’t end once your initial plan has been created. Your plan should generally be reviewed at least once a year to make sure that it’s up-to-date. It’s also possible that you’ll need to modify your plan due to changes in your personal circumstances or the economy. Here are some of the events that might trigger a review of your financial plan:

  • Your goals or time horizons change
  • You experience a life-changing event such as marriage, the birth of a child, health problems, or a job loss
  • You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, paying long-term care expenses)
  • Your income or expenses substantially increase or decrease
  • Your portfolio hasn’t performed as expected
  • You’re affected by changes to the economy or tax laws

Common questions about financial planning

What if I’m too busy?

Don’t wait until you’re in the midst of a financial crisis before beginning the planning process. The sooner you start, the more options you may have.

Is the financial planning process complicated?

Each financial plan is tailored to the needs of the individual, so how complicated the process will be depends on your individual circumstances. But no matter what type of help you need, a financial professional will work hard to make the process as easy as possible, and will gladly answer all of your questions.

What if my spouse and I disagree?

A financial professional is trained to listen to your concerns, identify any underlying issues, and help you find common ground.

Can I still control my own finances?

Financial professionals make recommendations, not decisions. You retain control over your finances. Recommendations will be based on your needs, values, goals, and time frames. You decide which recommendations to follow, then work with a financial professional to implement them.

Determining Your Retirement Income Needs

What is it?

Determining your retirement income needs is a process that helps you identify your retirement planning needs based on your desired standard of living and the resources you’ll have available. Today, you can typically no longer rely on Social Security benefits and a company pension check to fulfill all your retirement income needs. Social Security benefits will probably satisfy only a fraction of your overall retirement income needs, and generous company pensions have largely been replaced in many cases with employer-sponsored retirement plans that are funded largely with employee dollars. A successful and rewarding retirement requires you to plan ahead in order to help ensure that you have sufficient retirement income to last you for your entire retirement. Determining your retirement income needs requires a discussion of the various stages of retirement planning, including preretirement, the transition into retirement, and retirement.

Preretirement

Your retirement is sometime in the future–maybe 10 years, maybe 30 years down the road. If so, you’ve got a little breathing room. The single biggest mistake that you can make right now is to put off thinking about your retirement. The more time you have, the more you can hope to accomplish, so the sooner you start, the better off you should be. You’ve got a lot to think about. There are many factors to consider, including your expected sources of retirement income, your retirement income needs, and how you can use those sources of retirement income to fulfill your retirement income needs.

The transition into retirement

If retirement is right around the corner, you’ve got some important decisions to make. If you haven’t done so, spend some time forming a good picture of your retirement financial position. To the best of your ability, estimate your retirement income and expenses as discussed in preretirement. As retirement approaches, though, you have to consider the impact of when you retire. Early retirement and delayed retirement, through choice or necessity, can raise certain issues you’ll want to understand.

Retirement

When you retire, there are still some retirement issues that you may need to consider. These include the effect of working during your retirement, and the impact of other sources of income on your Social Security benefits. Also, required minimum distributions from your IRA or employer-sponsored retirement plan may be an issue.

All About IRAs

An individual retirement arrangement (IRA) is a personal retirement savings plan that offers specific tax benefits. In fact, IRAs are one of the most powerful retirement savings tools available to you. Even if you’re contributing to a 401(k) or other plan at work, you might also consider investing in an IRA.

What types of IRAs are available?

There are two major types of IRAs: traditional IRAs and Roth IRAs. Both allow you to make annual combined contributions of up to $6,000 in 2022 (unchanged from 2021). Generally, you must have at least as much taxable compensation as the amount of your IRA contribution. But if you are married filing jointly, your spouse can also contribute to an IRA, even if he or she does not have taxable compensation. The law also allows taxpayers age 50 and older to make additional “catch-up” contributions. These folks can put up to an additional $1,000 in their IRAs in 2022 (unchanged from 2021).

Both traditional and Roth IRAs feature tax-sheltered growth of earnings. And both typically offer a wide range of investment choices. However, there are important differences between these two types of IRAs. You must understand these differences before you can choose the type of IRA that may be appropriate for your needs.

Traditional IRAs

Practically anyone can open and contribute to a traditional IRA. The only requirement is that you must have taxable compensation. You can contribute the maximum allowed each year as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount you earned.

Your contributions to a traditional IRA may be tax deductible on your federal income tax return. This is important because tax-deductible (pre-tax) contributions lower your taxable income for the year, saving you money in taxes. If neither you nor your spouse is covered by a 401(k) or other employer-sponsored plan, you can generally deduct the full amount of your annual IRA contribution. If one of you is covered by such a plan, your ability to deduct your contributions depends on your annual income (modified adjusted gross income, or MAGI) and your income tax filing status. You may qualify for a full deduction, a partial deduction, or no deduction at all.

Traditional IRAs – Tax Year 2022
Individuals Covered by an Employer Plan:

Filing status Deduction is limited if MAGI is between: No deduction if MAGI is over:
Single Head of Household $68,000 – $78,000 $78,000
Married joint* $109,000 – $129,000 $129,000
Married separate $0 – $10,000 $10,000

* If you’re not covered by an employer plan but your spouse is, your deduction is limited if your MAGI is $204,000 to $214,000, and eliminated if your MAGI exceeds $214,000.

What happens when you start taking money from your traditional IRA? Any portion of a distribution that represents deductible contributions is subject to income tax because those contributions were not taxed when you made them. Any portion that represents investment earnings is also subject to income tax because those earnings were not previously taxed either. Only the portion that represents nondeductible, after-tax contributions (if any) is not subject to income tax. In addition to income tax, you may have to pay a 10% early-withdrawal penalty if you’re under age 59½, unless you meet one of the exceptions. For details on these exceptions, please visit the IRS website.

If you wish to defer taxes, you can leave your funds in the traditional IRA, but only until April 1 of the year following the year you reach age 72. That’s when you have to take your first required minimum distribution (RMD) from the IRA. After that, you must take a distribution by the end of every calendar year until your funds are exhausted or you die. The annual distribution amounts are based on a standard life expectancy table. You can always withdraw more than you’re required to in any year. However, if you withdraw less, you’ll be hit with a 50% penalty on the difference between the required minimum and the amount you actually withdrew. (Note: If you reached age 72 before July 1, 2021, you will need to take an RMD by December 31, 2021.)

Roth IRAs

Not everyone can set up a Roth IRA. Even if you can, you may not qualify to take full advantage of it. The first requirement is that you must have taxable compensation. If your taxable compensation is at least $6,000 in 2022, you may be able to contribute the full amount. But it gets more complicated. Your ability to contribute to a Roth IRA in any year depends on your MAGI and your income tax filing status. Your allowable contribution may be less than the maximum possible, or nothing at all.

Roth IRAs — Tax Year 2022
Filing status Contribution is limited if MAGI is between: No contribution if MAGI is over:
Single/Head of household $129,000 – $144,000 $144,000
Married joint $204,000 – $214,000 $214,000
Married separate $0 – $10,000 $10,000

Your contributions to a Roth IRA are not tax deductible. You can invest only after-tax dollars in a Roth IRA. The good news is that if you meet certain conditions, your withdrawals from a Roth IRA will be completely free of federal income tax, including both contributions and investment earnings. To be eligible for these qualifying distributions, you must meet a five-year holding period requirement. In addition, one of the following must apply:

  • You have reached age 59½ by the time of the withdrawal
  • The withdrawal is made because of disability
  • The withdrawal is made to pay first-time homebuyer expenses ($10,000 lifetime limit from all IRAs)
  • The withdrawal is made by your beneficiary or estate after your death

Qualified distributions will also avoid the 10% early withdrawal penalty. This ability to withdraw your funds with no taxes or penalty is a key strength of the Roth IRA. And remember, even nonqualified distributions will be taxed (and possibly penalized) only on the investment earnings portion of the distribution, and then only to the extent that your distribution exceeds the total amount of all contributions that you have made.

Another advantage of the Roth IRA is that there are no required distributions after age 72 or at any time during your life. You can put off taking distributions until you really need the income. Or, you can leave the entire balance to your beneficiary without ever taking a single distribution.

Making the choice

Assuming you qualify to use both, which type of IRA might be appropriate for your needs? The Roth IRA might be a more effective tool if you don’t qualify for tax-deductible contributions to a traditional IRA or if you want to help reduce taxes during retirement and preserve assets for your beneficiaries. But a traditional deductible IRA may be a better tool if you want to lower your yearly tax bill while you’re still working and possibly in a higher tax bracket than you’ll be in during retirement.

You can have both a traditional IRA and a Roth IRA, but your total annual contribution to all of the IRAs that you own cannot exceed the annual contribution limit.