It’s Time to Pay Yourself First

When planning for retirement, you need to look at multiple sources of income and be sure that some of the income sources are tax-free. The more, the better. So, how do you plan for a retirement income stream that minimizes overall taxation?

Four Instruments that Provide tax-free Retirement Income

Here are four great ways to provide yourself with tax-free.

1. Roth IRA is a great retirement investment that can result in a steady stream of tax-free retirement income as long as they are considered qualified. However, you must qualify for an IRA and the requirements are adjusted year by year as is the amount eligible for savings. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

If you do qualify, money put into a Roth IRA is taxed when you receive it, so it is not taxed again when it is withdrawn. In 2018, the eligibility requirements are:

1. Single or head of household, earning less than $120,000 to fully contribute to a Roth IRA.
2. Married filing jointly or a qualified widow(er) earning less than $189,000 to fully contribute to a Roth IRA.
3. Married filing separately earning less than $10,000 to fully contribute to a Roth IRA. (Note that those married but filing separately can use the limits for single people as long as they have not lived with their spouse in the past year)
4. Municipal Bonds and Funds provide income distributions not taxable by the federal government though they are may be subject to state income tax. Because they are not subject to federal income tax, interest paid on these bonds is typically less than taxable bonds.

There is no income limit to investing in tax-free municipal bonds and funds.

3. Health Savings Accounts (HSAs) are available if your employer offers health insurance using an HSA. Combined contributions by the employer and employee to this account as of 2018 can be as high as $6,900.00 for qualifying plans.

Following the rules about which expenses are reimbursable, no taxes are paid on withdrawals.

In addition, the HSA funds and earnings can be held until retirement then uses to provide tax-free income by reimbursing the holder for past and current allowable expenses which include Medicare premiums.

4. Roth 401(k) or 403(b) allow Roth contributions inside these accounts making those contributions and their subsequent retirement earnings, tax-free. These accounts are not subject to income eligibility limits but they are subject to taxes in the year that contributions are made.

Making the Most of Your Home

Another way to make a smart investment for your retirement is to pay off any mortgage that you have on your home before you retire which allows you to live in your home for the cost of property taxes and home insurance alone.

For many retirees, this is a huge reduction in their monthly expenses allowing the money be used elsewhere.

The world of financial planning is so incredibly diverse. And so it is with financial professionals, as well. The challenge that most people have is that by not being familiar with the various types of advisors; styles, approaches, licenses, abilities, qualifications, etc., it makes it hard to know what questions to ask in order to formulate an opinion as to whom to work with. People tend to go with their “gut feelings” about someone. And while that certainly can be an indicator as to what kind of working relationship one might have with a particular financial professional, it is equally, if not more, important to have objective information at hand for that decision-making time, as well.

There are a few questions that advisors rarely get asked, but should be asked. Sometimes these questions get avoided because the person asking might not even realize these questions are important. Past experiences drive many of the questions people ask. But if the goal is to be as informed as possible, it’s important not to forget to ask these three questions:

Question #1: Are you a fiduciary? And how do you get paid?

Not all financial professionals are fiduciaries. There are various types of securities registrations a financial professional can acquire; some are simply registrations to sell certain products, some are registrations to give advice (as opposed to just suitable recommendations for product sales). In other words, some financial professionals are “Registered Representatives (RR)” who are affiliated with a broker/dealer, with some securities registrations that allow them to sell products. While some financial professionals are “Investment Advisor Representatives (IAR)” who are affiliated with a Registered Investment Advisory firm, who have a few more/different registrations that allow them to be fiduciaries within the advisory services they offer their clients. Some professionals are both a Registered Representative and an Investment Advisor Representative. Others are not. Many consumers don’t know the differences. Below is a very basic breakdown.

Responsibilities to Client:

IARs – Fiduciaries. Are legally bound to do what is in the best interest of their clients…above all else.

RRs – Are responsible for making sure the products they sell to their clients are suitable.

Primary Responsibility/Function:

IARs – Primary responsibility is as an advisor to their clients

RRs – Sell securities and handle sales transactions for their clients

Compensation:

IARs – Generally charge a flat % fee for advice surrounding assets under management (AUM)

RRs – Tend to be commission based. They get paid commissions for products they sell.

Compliance and Regulations:

IARs – Are associated with Registered Investment Advisory (RIA) firms that are regulated by the SEC and/or state regulatory agencies.

RRs – Are regulated by FINRA (Financial Industry Regulatory Authority), along with the SEC and other state regulatory agencies.

Question #2: What is your particular expertise?

Not all financial professionals have niche markets….or only specific types of clients that they work with. But it’s important to know if they do. Understanding what kind of experience and typical clients the advisor has is important to understanding what to expect from them in regards to knowledge and experience that is relatable. Knowing what kind of team they have, and what kind of experience the team as a whole has is important. What do they specialize in? What resources do they have access to?

Here are some examples:

Tax efficiency with investments

Protection Planning – Estate planning collaboration

Small business owners

Multi-generational planning

Etc.

Question #3: What is your ongoing service model?

Taking the initial steps to get things organized and onboard with a financial advisor can be activity-filled and very important. But equally important is the clear communication about expectations for moving forward. Understanding what to expect between the advisor and client is critical to insuring that communication and expectations are being managed positively for the relationship, from both sides.

How often does the advisor reach out to clients?

Is there a team to support clients? Or just one individual?

What can be expected in regards to calls? Meetings? Paperwork? Statements?

What method of communication is used? Phone calls, meetings, email, video conferencing, etc.?

How accessible is the advisor if the client has a question?

These are just a few questions that might prove important to ask when interviewing financial professionals. There is no generic right or wrong answer. At the end of the day, it’s all about understanding what the relationship would be, the expectations for the relationship for both the client and the advisor, and communication. Being logical with interviewing an advisor is critical…look for proof and conviction between what they say they do vs. what they can prove they do.

Our financial well-being is critical for empowering our lives….we work hard for the life we want. And there are almost always some form of financial element to all we do. So please, don’t be afraid to ask the intrusive questions of the advisors you are considering working with. It could mean a great deal to how life gets funded….now and through all ages.