On this episode of Retirement Unpacked, Al Smith delves into the intricacies of planning for your future. With the holiday season in full swing, it’s the perfect time to evaluate your financial strategies. Al introduces an upcoming event focused on ‘Essential Strategies for Retirement,’ sharing insights that promise to alleviate your fears about your financial future. Don’t miss the detailed discussion on retirement plans and the importance of knowing how much income you’ll have left after taxes.
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Welcome to Retirement Unpacked with Al Smith, owner of Golden Eagle Financial. You want a retirement plan that alleviates your fears about the future so you know your money will last. As a chartered financial consultant, Al Smith will help you find a balance between the risk and reward of the market and the safety of your retirement income. And now, here’s your host, Al Smith.
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Welcome to Retirement Unchecked. I want to thank you for tuning in this time of year. Most of us are busy with all kinds of things going on for the upcoming Christmas holiday, New Year holiday, and that is always a busy time for everyone. but it’s also a good time near the end to sort of prepare financially and take a look at things. And for that reason, we in the office my office golden eagle financial has scheduled an event january 10th called essential strategies for retirement it’s going to be full of really good information and there’s a lot of information that i was even unaware of myself until i began to prepare it deeply for the presentation that we’re going to be doing Because I think, like anything else, the more one prepares for something, the better one is able to handle it, whether it’s retirement or a planned vacation or a change in jobs or anything like that. And with respect to retirement, an important component of that is obviously how much income you’ll have in retirement. And that is to some degree determined by how much income will you have remaining after taxes. And we’re going to talk about some of those really important strategies. That event will be January 10th at Arapahoe Community College. That’s a Saturday from 10 till 1130. We’ll be talking about essential strategies for retirement. And there’s a lot of components to that which we will be going over. Today, I’m going to be talking about some of the rules for retirement plans. And there are a lot of those. So I could just refer you to several. It doesn’t make my show incredibly boring, but I’ll try to highlight the ones that I believe are most important. Many of you who are listening today Participate, if you’re still working, you have a 401k plan where you work. If you do really want to research something, there is a publication called Publication 560. It’s an IRS publication called Retirement Plans for Small Business. And it will go over 401K plans as well as some others. And I won’t go into the history of 401K plans because they’ve already done that in a previous show. But I will talk about two different types of plans. One of them is the traditional 401K plan. And that’s where employers set that up. It’s called a plan document. Now, if you work for an employer and you’re participating in your 401k plan, I would encourage you to go to HR or your immediate supervisor and ask them, say, I would like to see a copy of the plan document. because every plan document with every employer is the same. There’s a lot of leeway that an employer takes. It determines what percentage of your contribution will be matched. It also determines if there is a vesting schedule or if the employer contributions are immediately vested. It will determine if you can take loans from the 401 . Now, some of the parts of the plan document are going to be regulated by IRS and federal law. Some of them are subject to whatever the employer should decide on. I know some employers have different rules when it comes to vesting and things of that nature. But all that’s in a plan document. And there are a lot of rules that your employer has to follow, such as non-discrimination tests and so forth. So the retirement plan can’t discriminate in favor of highly compensated employees. And for that reason, a second type of 401 plan was developed called a safe harbor 401 . And one of the main differences between that and a traditional 401 is there is immediate vesting. So when your employer matches to whatever degree your employer matches, that is immediately vested also to the benefit of the employer. There is no non-discrimination test. As long as she or the employer is willing to vest their contributions, they don’t have to pass that non-discrimination test, so to speak. uh rules retirement plans with 401ks those um are pretty basic you are familiar with it i’m sure if you’re participating in that and some employers will have a waiting period before you can participate in your company’s 401k and and i think that makes sense Some employers have chosen to have automatic enrollment, which means as long as someone is on the payroll and she meets whatever the waiting period is, if there is, in fact, a waiting period, then he will automatically be enrolled. unless he should go to his employer or HR or something and say, I want to opt out. I think given the status of people who are over age 65 that are not in the very best financial shape, I think a mandatory participation is not a bad idea. I have met many, many people in my work with retired folks. I haven’t met any who thought that they saved too much retirement. So I don’t think that’s anything we need to worry about. Now, one of the things people often ask me about is, well, when can I take money out of my 401k? the distribution limits and things of that nature well that’s again that is up to the plan document but there are also certain federal you know regulations that can make an early distribution subject There is a publication, and I hate to keep referring to IRS publications, but these are where the detailed answers can be found. Publication 575, Distributions from Retirement Plans. And assuming it’s in the plan document, you can take a distribution from your 401 , if there were a hardship. And they define what a hardship is. Some of those include education. And I don’t know that education is necessarily a hardship, but that’s the ones that’s listed there. And that may be an education for yourself or children. medical expenses, especially if they exceed the amount that is deductible under your federal income tax. A home purchase, it’s to prevent eviction. If someone is in dire straits, so to speak, and they’re about to be evicted or foreclosed if they own a Funeral expenses can be extracted from a 401k or you pay regular tax, not necessarily the penalty. Now, the rules of distributions are not necessarily the same as the rules as far as the taxation of those distributions. Some sound obvious, like payable to a beneficiary on death. So if someone dies and leaves their 401k to a beneficiary and the beneficiary takes the entire proceeds up front, rather than choosing an inherited IRA for herself or herself, there would be regular tax, but no penalty, no 10% penalty. Also, if there is a disability, there would be regular tax and also no penalty. There’s also a provision whereby if people… leave their employer, they can take distributions from a 401k or an IRA in this case under what’s called 72T. Now 72T is a provision where if someone takes uniform distributions from a 401k or an IRA and they’re over, I believe it’s age 50, then those uniform distributions will be taxed at ordinary rates rather than the normal penalty rates. This assumes the person’s under age 59 and a half, over 59 and a half, any distributions are going to pay the regular tax, but not necessarily the penalty. Now, it’s obvious if someone either leaves their employment or if they’re over 59 1⁄2, then that employee may choose to roll over or part of his 401k into an IRA. And IRAs have different rules than 401ks. There is one rule that we need to pay attention to, and that is what’s called the Rule of 55. And I’ll dive into that more deeply, but first I wanted to talk about another exemption, and that’s called the QDRO, well, that’s a distribution from an IRA that is part of a divorce decree. I think it’s a qualified distribution that’s a result of a divorce where one spouse gets the other spouse’s 401k. There may not be taxation on that for the other spouse beyond the normal taxation, assuming he or she puts it into their own retirement plan. Because, you know, 401Ks can be distributed as part of a divorce. Also, there is an IRS money can be taken out of 401Ks. to pay the IRS, there would be regular tax paid on that, but no penalty. Also disasters, such as any one of these national disasters that we’ve heard about, if the disaster is serious enough that there would be what they call IRS relief, where that’s a deduction on taxes. I think it has to be 7.5% of adjusted gross income, similar to the medical deduction on any withdrawal. There would be regular tax, but no penalty for something like that. So a lot of rules when it comes to 401k. And I’ll dive into one of the most important ones after the break.
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KLZ’s relational financial advisor Al Smith of Golden Eagle Financial can make a big difference in the success of your retirement. Al looks at your entire picture, your goals, your lifestyle, the time you want for volunteering, and even potential long-term care needs because it all matters. Working with a relational financial advisor means you’re not handed off to someone new every time you call Golden Eagle Financial. You talk directly with Al Smith. And because Al knows that life happens, he’s available when you need to talk about your finances by phone, video, or in person, whichever is most convenient for you. We’ll be right back. We’ll be right back.
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Welcome back to the second half of Retirement Unpacked. We’re talking about rules for retirement plans, and there are a lot of them, but I am trying to concentrate on the ones that are more likely to affect most of you out there who are listeners. One rule that I think is extremely important but isn’t talked about very much is what’s called the Rule of Fifty-Five. And what that rule means, and it affects not only 401 s, but also 403 s. Now, 403 s are very similar to 401 s, but they are for nonprofits and schools and hospitals. and places of that nature, but most all the rules of 403Bs are very similar to 401Ks, but that rule of 55, what it amounts to is if someone leaves their employer at age 55, and there is actually an exception to that that makes it as low as age 50 for certain state or federal employees, And any distribution they take from the 403 or 401 is subject to regular tax, but not the 10% penalty. Now, the reason this is really important is that many many people when they are oh somewhere between you know 55 and 60 or something like that if they leave their employer they rule the entire amount into a rollover array now usually that’s not a bad idea But if there is some purpose that the person, the man or the woman or the couple has a need for money, if the money is taken directly from the 401k or the 403b at the time of separation from employment after age 55, then only regular tax will be paid. Now, there is also a strategy if someone chose to take part of their 401k and pay the regular tax, and let’s say that these are certain investments. And those investments were put into what’s called a non-qualified investment account. That’s just a regular brokerage account. Non-qualified means it’s not part of a qualified retirement plan. Non-qualified accounts include just like a regular old bank account or an investment account you can have with Fidelity or Charles Schwab or someone. And with those, you get a statement each year That reflects the capital gains and dividends. Now, if you withdrew a part of your 401k because you reached age 55 and you separated employment and you decided to take part of that out, well, you would have to tax on it, but only the regular tax rate. Now, the future growth of that account, if it’s in a non-qualified account, would be subject to the taxation of capital gains and dividends. Now, there is no tax on capital gains and dividends for a couple if their income does not exceed $60,000. And… It’s actually $64,500. And with the new increase in standard deduction for older people, I think this is very significant because that means part of the money could be from a qualified account and placed into a non-qualified account. And depending on the people’s tax circumstances, there would be either no tax or very little tax. The first bracket after $64,700 is only 15%. And that’s on a graduated basis. So I think having part of… into a personal investment account makes a lot of sense. And after the regular tax is paid, then the growth of that investment account and the dividends paid, they’re subject to a much lower tax rate than our normal tax rates, with the exception of the very lowest one, which at this point is 12%. Now, some other rules for retirement plans. How much can we contribute? Well, IRAs, those are pretty simple. $7,000 each year. And if you’re over age 50, it’s $8,000. And there are certain what are called phase-out provisions. If people’s income is extremely high, the phase-out provisions are thresholds after which people can or cannot contribute. And those phase-out, I will… read those to you. For example, for a regular IRA, joint income can not exceed $146,000 and single income $89,000. For a spousal IRA, it’s all the way to $246,000. So essentially, if someone’s income or a couple’s income exceed these amounts, they can’t participate in the Now, a Roth phase-out is $246,000 for joint income for a couple, $165,000 for single. Now, there’s also what’s called a backdoor Roth. So if you’re able to contribute to a regular IRA but not a Roth because of these phase-out provisions, you can open a traditional IRA and then convert it to Roth, which is called that backdoor provision, so to speak. Now, we were also talking about contribution limits. There’s other types of retirement plans other than 401ks and IRAs. There’s what’s called an SEP IRA. I have some clients who have SEP IRAs, and they make their contributions each year. With an SEP IRA, people can contribute as much as $70,000 if it does not exceed 25% of gross income. There’s also something called a simple IRA. With a simple IRA, the maximum contribution is $16,500. Over age 50, it’s $20,000. Over age 60, $21,750. Now, the limitations on a traditional 401 case are substantially higher. The standard elective deferral, that’s the deferral that the employee himself or hers can make, is $23,500. Unless the employee is over age 50, they add what’s called a catch-up provision. They add an extra $7,500. So for over age 50, the limitation is 31,000 and these are 2025 tax limitations that I’m referring to. So this is the most current tax. Now for people over age 60, there is a larger catch up of $34,750. And the maximum total contribution limit for both the person’s deferral and the company matching is $70,000. For highly compensated employees, it’s $160,000. And there is what’s called a top-heavy threshold. The maximum on that is $230,000. And the maximum compensation taken in account for all qualified plans, $350,000. So the important thing is when you’re participating in your company’s 401 case, go to your human resources person and say you would like to see a plan documented. Because every employee, they get to participate and they get to sign up for enrollment, and I’m sure it’s all online. But they have probably not seen the plan document, and that’s where all the rules are included. Who can participate? What are the rules about loans? Things like that. Loans, for example, are available in most 401 plans. The provision must be in the plan document. It can’t exceed 50% of the balance in the account, and it also cannot exceed $50,000 total. And there must be a provision to pay back the loan within a five-year period. Now, I have had the experience working with someone who had a 401k just about the time he was going to retire. And he had a loan to do some home improvements in his 401k. And once he retired, that was treated automatically as a distribution. So if you’re getting close to retirement, taking out a loan may not be the best option. 1099 might be a 1099-R that will show you basically took a withdrawal from your 401 . So those of you who are younger, it’s not a bad choice. But keeping in mind, you don’t want to raid your retirement because even though it may sound like an easy way to get a loan for whatever purpose, you don’t want to. minimize what you’re going to get in the years when you’re no longer going to be working, especially if it might jeopardize that provision that if you leave your employer or retire early or your company decides you’re going to retire early or something of that nature, then that loan, once you sever employment, that loan will be treated as a A lot of things to be thinking about when it comes to the rules that are associated with 401Ks, IRAs, 403Bs, and so forth. A lot of rules. Now, some of these affect taxation. And that’s something that we’re going to be talking about January 10th at Arapahoe Community College from 10 until 1130. It will be in room 3750. If this is something in which you’d like to participate, contact my office at 303-744-1128, or you can contact KLZ directly. If you do, they’ll put you in touch with me by email, or you can give me a call at If I’m here, I often answer the phone and we’ll be sure that you get a spot. Again, it’s at Arapahoe Community College, January 10th. God bless you. Thank you for tuning in. And hopefully you’ll be here next week. Bye now.
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