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Planning for the future

No matter how old we are, our twilight years always seems to become a lot sooner than we ever thought possible, As the age of retiring approaches, we have to ask ourselves, “Am I financially ready to retire?”

We all have a responsibility to ourselves and loved ones to always plan for the future. The wages/earnings we make today and every day until death have to last us our entire lifetime. For the poor souls who thought and still think Social Security is going to be their financial salvation, it’s time to face facts. Social Security was never intended to be anything more than supplemental income to be used after the individual retires. It was never an excuse to not put money aside for the future.

For those of us who are now seeing reality, there are plenty of savings/investment options available to help us put aside savings for our twilight years. In the following sections, we will be discussing an Individual Retirement Arrangement (IRA) accounts.

What is an Individual Retirement Arrangement Account?

From website: “An account into which a worker makes contributions up to a certain limit throughout his/her working life, and from which he/she begins to take distributions following retirement.”

We’ll clarify this information. When people don’t have access to a qualified 401(k) plan through their employer or their own company, the federal government and IRS have made provisions for those people to still put retirement savings aside for their future. More than letting citizens set up retirement accounts, the government offers investors in these types of account many of the same benefits other people are getting from their 401(k) accounts. These benefits act as incentives to motivate people to plan for their days as a retired individual.

Most Popular IRA Options

We all live our lives under unique circumstances. What’s important to some of us might not matter at all to others. For that reason, the federal government and IRS decided it was a good idea to offer individuals a variety of individual investment options, allowing the individual the opportunity to choose the one that best suits their specific needs for now and into the future. Arguably, that’s as about as fair an approach can get.

With this in mind, there are as many as 7-8 different IRA options. We are going to focus on the 3 options that seem to be the most popular option among taxpayers. These 3 options are Traditional IRA, Roth IRA and Inherited IRA. Let’s investigate these options a little closer.

Traditional IRA

Taxpayers are permitted to contribute a portion of their wages/earnings up to $6,000 in 2019 into their retirement savings account. The contributions are made with pre-tax dollars with all contributions and subsequent earnings tax- deferred until the taxpayer decides to start taking distributions. The taxpayer can begin taking distributions at the age of 59 1/2 without penalty. Should they decide to take distributions prior to that age, they will be subject to a 10% penalty on the amount of said distributions.

In all cases, distributions will be subject to federal income taxes in the year the distributions are taken with the tax-rate based on the taxpayer’s statutory tax rate for the given year.

In addition to the $6,000 contribution limitation for 2019, taxpayers 50 years or older are also allowed to contribute an additional $1,000 in 2019 under a “catch-up” provision.

This option is best suited for taxpayers who anticipate they will fall under a lower tax bracket after retiring.

Roth IRA

While this option has some similarities to other IRAs, this option is not available to individuals who earn more than $137,000 when filing as a single person and $193,000 when taxpayers are filing jointly as a married couple. It’s worth noting that while these income limitations are statutory, there are some “backdoor Roth IRA” options available under certain circumstances (Consult IRS guidelines).

Otherwise, the Roth option allows the taxpayer to contribute up to $6,000 in 2019 with a catch-up provision of $1,000 in 2019 for taxpayers 50 years of age or older. Where the Roth option is substantially different than the Traditional IRA option is Roth contributions are made after taxes have been calculated.

The taxpayer’s benefit comes when they start taking distributions. All distributions are tax-free. Translated: even investment earnings will bear no taxes at the time the taxpayer starts taking distributions. As is the case with the Traditional option, all distributions taken prior to age 59 1/2 will be subject to a 10% penalty on the amount of the distribution.

This option is best suited for individuals who expect their personal effective tax-rate to increase closer to retiring age.

Inherited IRA

Of all retirement accounts, this is the option that confuses people the most. According to the website: “An inherited IRA is an account that is opened when an individual inherits a plan after the original owner dies. The individual (beneficiary) inheriting the account may be anyone — a spouse, relative, or unrelated party or entity (estate or trust).”

When opening said account, the beneficiary is allowed to choose which of the IRAs they want guiding their investment account. The possible options include Traditional, Roth, rollover, SEP and Simple IRAs. The election must be made within 9 months of the inheritance being finalized.

The transfer of funds from the inherited account must be done in a lump-sum. It is possible for spouses to roll over the amount into one of their own IRAs. No further contributions may be made under this option. If the original account owner had already started receiving minimum annuals payment, the new account owner must continue taking those distributions.

It’s noteworthy that this option is quite complicated. The rules actually differ based on the relationship of the beneficiary to the original account owner. For that reason, it’s important that everyone consult IRS guidelines before moving forward with options.

Investing for the Future

Given the fact these are funds we are going to be reliant upon after retiring, it’s important that said funds be invested wisely. For younger taxpayers, a more aggressive investment strategy often works well. For someone closer to the age of retiring, a more conservative approach should be considered. If these types of investment accounts are opened with reputable brokerage firms, the account owner should have access to a number of different investment options, including stocks, mutual funds, bonds, and in some cases precious metals and real estate. IRS guidelines dictate which investment options are acceptable.

Investment for the future

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