Institutional Services

Money Mastery Webinar Series OnDemand

If you missed our Money Mastery webinar series or just want to revisit any portion of the series given by our CERTIFIED FINANCIAL PLANNER(CFP®) professionals, the replays are now available OnDemand by clicking the links below.

Connecting the Dots to Your Financial Future (Part 1) – Learn the importance of creating a budget, strategies to pay down debt, and tips to build and maintain good credit.

Connecting the Dots to Your Financial Future (Part 2) – Create healthy financial habits and learn about the keys to investment success.

A Definitive Guide for Education Planning – Understand your options with student loans and learn about the best ways to save for college and maximize student aid.

Mega Back Door Roth Conversions

There may be potentially a way for you to put up to $37,500 in a Roth IRA or Roth 401(k) this year. The goal here is to put as much money as possible into a Roth account to take full advantage of the tax-free growth. This is a wonderful strategy for the lucky few who qualify and can take advantage of it. The reality is that your employer-sponsored plan may not allow it. Let us take a closer look at this little-known strategy and how it works.

Understand the Basics

A backdoor Roth conversion is an excellent strategy for the high wage earner to make Roth contributions if they are above the income limitations of a Roth IRA. With this strategy, someone can contribute a max of $6,000 ($7,000 if 50 or older) into a Traditional IRA as a non-deductible contribution and then convert this amount directly into a Roth IRA. There are some additional qualifiers like the pro-rata rule, so discuss this with a tax advisor before completing a backdoor Roth conversion.

The mega backdoor Roth takes this concept to a whole new level. This strategy can allow for an additional $37,500 Roth contribution by taking advantage of the rules with your employer-sponsored plan.

The Factors to Make a Mega Backdoor Roth Conversion Work

There are many moving parts with this strategy as you will see below so consult with a financial planner and tax professional before trying this on your own. Here are the factors to make a mega backdoor Roth conversion work:

1. An employer-sponsored plan (either a 401(k), 403(b) or 457) that allows after-tax contributions. After-tax contributions are generally done after you have maxed out your normal $19,500 ($26,000 if 50 or older for “catch-up” contributions) per year contributions into the plan. The after-tax contributions are separate from your Traditional or Roth buckets. Note special catch-up limits apply to certain participants in 403(b) and 457(b) plans.

2. Your employer allows you to move the after-tax money into the Roth bucket in the plan. The alternative is that the plan allows for in-service rollovers, which would allow you to move money out of the employer-sponsored plan while you are still working. It is best to check with your plan administrator or HR to see if your plan allows either option.

3. You can make large contributions to the retirement account and still have other savings. Remember, these after-tax contributions are above the normal limit to max out your 401(k) contributions of $19,500 or $26,000 if 50 or older.  You will also need to have sufficient cash flow to meet your other expenses and have enough savings that are not in the retirement account.

If you have met these three requirements, then you may want to consider using the mega backdoor Roth strategy.

How to Calculate How Much You Can Contribute   

For 2020, the plan contribution limit is $57,000, or $63,500 if you’re age 50 or older. For example, assume a worker over the age of 50 maxes out the Roth contributions to the plan for $26,000 and the employer offers a 5% match on contributions based on a $100,000 salary, so they contribute $5,000 as well. This means that the max this person is eligible to contribute for mega backdoor Roth contributions is $32,500 ($63,500 plan max  – $26,000 max Roth contributions – $5,000 employer contributions). For a small number of individuals contributing to 401(k) plans, the amount may be less based on non-discrimination tests.

Alternatives to Consider

Before making a mega backdoor Roth conversion or if you are not eligible you may want to explore simpler options first:

1. Make Roth contributions to your employer-sponsored plan (there are no income limits).

2. If this is not possible, or you want to make further Roth contributions use a Roth IRA if your Modified Adjusted Gross Income (MAGI) is under $124,000 (single) or $196,000 (married filing jointly).

3. If you are over the Roth IRA income contribution limits then consider a backdoor Roth contribution. This is where you make after-tax contributions into a Traditional IRA and then convert the contributions into a Roth IRA.

There are some rules about pro-rata so make sure to speak with a financial planner or tax advisor before completing a backdoor Roth conversion.

2020 Year-End Planning Checklist

We are now a few weeks from officially being in fall. This is the time of year to begin tax planning for your 2020 taxes. The mistake most people make is they do not plan for taxes until after the new year and by then there is little to no planning that can be done. Below is a helpful checklist with important deadlines to be aware of to help you with year-end tax planning:

October 1st

Establish a SIMPLE IRA for 2020 – Although not as common anymore if you are a business owner establishing a new SIMPLE IRA it must be done by October 1st.

October 15th

Establish and fund a SEP-IRA for 2019 – If you are a business owner who filed an extension for your business the deadline to establish or fund a SEP-IRA for 2019 is October 15th.

Withdraw or Recharacterize 2019 IRA Contributions Without Penalty – Any excessive contributions to an IRA or Roth IRA can be reversed by October 15th. After this deadline excess contributions have a 6% penalty charged against them. Keep in mind this deadline does not apply to Roth Conversions since they are no longer eligible for recharacterization.

Make 2019 Employer Contributions to a SIMPLE IRA – If you are a business owner who filed an extension for your business the deadline to fund the SIMPLE IRA for 2019 is October 15th.

October 31st

Provide Trust Beneficiary Documentation to Custodian or Administrator – If an IRA, Roth IRA, or employer-sponsored plan owner died in 2019 and has a trust named as the beneficiary then the deadline to get this paperwork to the custodian or administrator is October 31st.

December 30th

Utilize Coronavirus Related Distributions – The CARES Act allows for distributions up to $100,000 from IRAs or employer-sponsored plans (i.e. 401(k) or 403(b)). These distributions waive the 10% early distribution penalty and the tax implications can be spread over three years and the deadline for them is December 30th.

December 31st

Required Minimum Distributions (RMDs) are waived for 2020 – Another part of the CARES Act was that RMDs were waived for 2020. So this deadline nothing needs to be done but it does create some interesting planning opportunities so talk with us today.

Make a Qualified Charitable Distribution (QCD) – The deadline to make up to $100,000 charitable contribution from your tax-deferred account is December 31st. If you are charitably inclined you will want to speak with us or and initiate these by December 15th to ensure they are completed by year-end.

Roth Conversions for 2020 – With RMDs not being required for 2020, Roth conversions are an attractive option for many this year. Consult with us and your tax adviser before completing a conversion and they must be done by December 31st.

Complete Net Unrealized Appreciation (NUA) Transactions – NUA is when you convert employer stock in your 401k or retirement plan with your employer into a taxable account. There are potentially huge tax savings for individuals using this strategy. The transaction must be done by December 31st but should be started by November 1st to ensure plenty of time to complete the transaction by year-end. Please talk with us or your tax advisor to learn more.

Max out HSA Contributions – For 2020 the maximum amount you can contribute for self-only is $3,550 or $7,100 for families. There is an additional $1,000 catch up contribution allowed for individuals that are 55 or older.

Max Out Employer-Sponsored Plan – For 2020 if you want to maximize contributions to your employer retirement plans the maximum contribution is $19,500 for those under the age of 50. For individuals that are 50 or older can contribute up to $26,000 for 2020

Personal Gifts of $15,000 – You can gift up to $15,000 per individual annually to loved ones without tax implications.

Happy National 401(k) Day

You started the week with Labor Day and get to end the week with Retirement – Happy National 401(k) Day! Now is the perfect time to make sure you’re taking full advantage of your employer’s sponsored retirement plan.

You can make pre-tax contributions to the retirement plan through payroll deductions. “Pre-tax” means that your contributions are deducted from your pay and contributed into your plan account before federal (and most state) income taxes are calculated. This reduces the amount of income tax you pay now. Moreover, you don’t pay income taxes on the amount you contribute — or any returns you earn on those contributions — until you withdraw your money from the plan.

Your retirement plan might also offer a Roth account. Contributions to a Roth account are made on an after-tax basis. Although there’s no up-front tax benefit when contributing to a Roth plan, withdrawals of earnings are free from federal income taxes as long as they are “qualified.” (Note: With Roth accounts, taxes apply to withdrawals of earnings only; withdrawals of contribution dollars are tax free.)

The decision of whether to contribute to a traditional plan, a Roth plan, or both depends on your personal situation. If you think you’ll be in a similar or higher tax bracket when you retire, you may find Roth contributions more appealing since qualified income from a Roth account is tax free. However, if you think you’ll be in a lower tax bracket in retirement, then contributing to a traditional pre-tax account may be more appropriate. A tax advisor can help you decide.

Employers are not required to contribute to employee accounts, but many do through what’s known as a matching contribution. Your employer can match your pre-tax contributions, your Roth contributions, or both. Most match programs are based on a certain formula — say, 50% of the first 6% of your salary that you contribute. If your plan offers an employer match, be sure to contribute enough to take maximum advantage of it. The match is a valuable benefit offered by your employer. In the example formula above, the employer is offering an additional 3% of your salary to invest for your future. Neglecting to contribute the required amount (and therefore not receiving the full match) is essentially turning down free money.

The IRS imposes combined limits on how much participants can contribute to their traditional and Roth savings plans each year. In 2020, that limit is $19,500. Participants age 50 and older can make additional “catch-up” contributions of $6,500 per year. [Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.]

An employer-sponsored retirement savings plan offers a tax-advantaged opportunity to save for your future. Participating in your plan could be one of the smartest financial moves you make.

Announcing our Money Mastery webinar series

After great reviews from our Summer Webinar Series, we are pleased to announce a complimentary follow-up slated for the rest of September (kicking off next week, September 15th, at 3:30 PM PDT) – this time focusing on financial literacy, and meant for those in their teenage years through mid-career. While a great program to watch on your own, for those with children this entire series is geared to bring them in to watch with you, hopefully sparking conversations around money habits and education planning.

Each session will be approximately 30 minutes, with interactive polling for those logged in on the computer, followed by a live Q&A session.

Below are the dates and times for the webinar and click on the links to register:

September 15th at 3:30 PM PDT – Connecting the Dots to Your Financial Future (Part 1)

September 22nd at 3:30 PM PDT – Connecting the Dots to Your Financial Future (Part 2)

September 29th at 3:30 PM PDT – A Definitive Guide for Education Planning