Possible Drawbacks to Early Retirement

Many workers dream of retiring early. Not everyone has a choice in the matter, but if you do, there are some disadvantages and challenges to be aware of. Even if you can afford to retire early, you might not want to.

Here are some disadvantages to be aware of when it comes to early retirement.

Finances

Savings in a traditional IRA or 401(K) can’t be withdrawn without penalty before age 59 ½, so in order to retire earlier, you’ll need to have enough savings in a traditional bank or brokerage account to cover your costs until then. As for social security benefits, you’re allowed to start claiming benefits at 62, but that’s before full retirement age, so claiming early could result in a permanent reduction in benefits (i.e. if your full retirement age is 66 and you claim benefits at 62, you’ll reduce your payments by 25%).

Healthcare

Medicare eligibility doesn’t kick in until age 65, so retiring earlier than that means having to absorb the cost of health insurance independently. If you retire with just a few months to go before Medicare kicks in, you have the option of obtaining short-term coverage, which helps pay for catastrophic medical events but doesn’t typically cover preventive care or pre-existing conditions. If you’re looking at a longer stretch between retirement and Medicare eligibility, you’ll need to shop around for major medical insurance. These plans are the most comprehensive for early retirees and cover a broad range of medical care, from doctor visits to major surgery.

Mental Health

Early retirees can have a difficult time adjusting to an unstructured schedule. With high levels of energy and drive, and a strong desire to still be productive, they risk sinking into boredom and depression as they progress deeper into retirement. Increased anxiety, dementia, and cardiovascular disease have all been linked to health risks of early retirement as well. For this reason, it’s a good idea to keep an open mind about returning to work should you start to feel that early retirement wasn’t as fulfilling as you’d hoped.

Be Prepared

Though there are some things to think about before retiring early, with careful planning and goal setting, you can make it work. It’s best to begin saving consistently (and early) – in a Roth IRA or traditional 401(K), but also in a nontraditional retirement plan so that you can have access to those funds before age 58 ½. Financial planners advise to save 30% of your income, as opposed to the conventional target of 10% or 15%. And transfer all tax refunds and bonuses into your nest egg as well. In short, cutting out your daily coffee house latte isn’t going to get you to early retirement.

Essential Money Moves to Make Before the Year’s End

The end of 2018 is quickly approaching, but there are a few key money moves you should make before the new year, especially in light of the Tax Cuts and Jobs Act. The higher standard deduction means more Americans will ditch itemizing their 2018 federal tax returns.

That means you should probably focus on year-end tax strategies that first lower taxable income, rather than maximize tax deductions. Here are a few key items to tackle before the ball drops on the new year.

Take Stock of Losses

If you follow the stock market, you know that the last few months have been volatile, so there’s a good chance that some of your investments have become losses. That might sound bad, but any losses that are in a taxable account, such as an investment account, bank account, or money market mutual fund, can be sold to offset other taxable investment gains in the same year. Furthermore, if your losses exceed your gains, you can apply up to $3,000 to offset ordinary taxable income from this year.

Max Out Retirement Savings

As close as possible, that is. The more money you put into your 401(k), the more financial security you’ll have in the long run, but a lot of these contributions also reduce your taxable income. At this point you probably only have one or two more paychecks from which to have funds withheld, but even a few hundred dollars more can provide some near-term tax relief as well as bolster your retirement savings.

Fund Your HSA

You have until the 2018 tax-filing deadline to fully fund your health saving account (HSA) in order to get a bigger deduction. The maximum limits are:

  • Individuals: $3,450
  • Families: $6,900
  • 55 or older: an additional $1,000 catch-up contribution

These accounts can roll over indefinitely, so they’re a smart way to save for future medical expenses. HSAs also have a triple tax benefit: contributions are tax-deductible (even if you don’t itemize), earned interest is tax-free, and withdrawals are tax-free as long as they’re used to pay for qualified medical expenses.

Use Up Your FSA

The funds in a flexible spending account typically don’t roll over to the next calendar year. However, some employers allow $500 to carry over into the new year or grant employees until March to spend FSA funds. Even so, now is a good time to use the pretax dollars for doctor appointments, flu shots, and even some “everyday” drugstore items, such as non-prescription reading glasses, contact lenses and solutions, and reading glasses.

Maximize Deductions

If you’re wondering whether you should itemize your 2018 tax returns or take the standard deduction, here are a few last things to keep in mind:

  • Medical treatment: If you spend more than 7.5 percent of your adjusted gross income this year on medical expenses, you can deduct those costs.
  • Property taxes: If you paid less than the $10,000 limit for state and local taxes, your state may allow you to prepay 2019 property taxes. This way you’ll get the most from the state and local taxes deduction.
  • Mortgage Interest: Provided you’re not near the cap on the mortgage interest deduction, which is $750,000 after the new tax law, you can make your January mortgage payment in December to boost the amount of interest you paid during the 2018 tax year.
  • Charitable donations: If you routinely give to charities, double up on contributions and make your 2019 donation before year’s end. If you put the double donation into a donor advised fund, which is like a charitable investment account, you’re eligible to take an immediate tax deduction. That means you can take the deduction for 2018 while your funds are invested for tax-free growth, allowing you to make distributions to charity next year or beyond.

This is How Retirement Contribution Limits Are Changing for 2019

The Treasury Department has announced retirement plan contribution limits, which are adjusted annually, for 2019. Because inflation has gone up a bit recently, contribution limits are also going up, which means you can save more money next year.

The maximum pre-tax contribution limit for an Individual Retirement Account (IRA) is increasing to $6,000 in 2019 after a six-year stall at $5,500. An extra $500 may not seem like a big deal, but the investment will compound over time, making the increase especially valuable for younger workers. For example, an investment of $500 annually will amount to an extra $100,000 in retirement savings over 35 years.

Employees who participate in a 401(k) or similar workplace retirement plan can expect an increase from $18,500 in 2018 to $19,000 in 2019. That limit will also apply to 403(b), the Federal Government’s Thrift Savings Plan (TSP), and most 457 plans. As a result of this change, workers can defer paying income tax on approximately $42 more per month.

For those 50 years old and over, catch-up contribution limits remain the same for 2019: $6,000 for workplace plans and $1,000 for IRAs. All of this combined means that savers over 50 have the potential to stash away $32,000 in 2019.

The maximum amount of annual compensation that can be taken into account when determining employer and employee contributions is increasing in 2019 from $275,000 to $280,000. However, highly compensated employees may face additional limits on contributions. Earning more than $120,000 in 2018 may qualify you as highly compensated for 2019 contribution limits, and earning more than $125,000 in 2019 may qualify you as highly compensated for 2020 contribution limits.

If you have any questions or would like to review your retirement plan contribution amounts together, please give me a call at 317.549.3091 or email me to schedule an appointment.

Hidden Retirement Fees to Be Aware Of

Financial advisors commonly advise their clients to seek investments with high returns in order to maximize their retirement funds, but most investors don’t realize that high fees are eating into those earnings.

While fund fees have steadily declined in recent years, many investors don’t realize how much they’re paying in fees to begin with or how much these expenses and other investment costs are eating into their retirement savings. Remember that as your investment returns compound over time, so do the fees, which means your payments could accumulate to 2% or more.

Below are some of those hidden fees and what you can do to avoid them.

Expense Ratios

This refers to the annual fees charged by all mutual funds, index funds, and exchange-traded funds as a percentage of your investment in the fund. Expense ratios apply to all types of retirement funds, such as your 401(k), individual retirement account, or brokerage account, and they cut a percentage of your investment in the fund depending on its annual yield.

Mutual Fund Transaction Fees

This is a fee you pay a broker to buy and sell some mutual funds on your behalf, similar to a “trade commission” that a broker would charge to buy or sell stock.

Sales Load

These fees surface when a broker successfully sells a fund to you that has a sales charge or commission.

Administrative Fees

These fees are associated with maintaining your portfolio or brokerage account.

Brokerage Account Inactivity Fees

If your account allows you to buy and trade at any time, you could face an unexpected inactivity charge if you don’t trade for a few months.

To determine whether your retirement fees are too high, check the fee disclosure and look at the expense ratios on the mutual funds you are invested in. Likewise, check these fees before you invest in a mutual fund you are interested in.

To help balance your investment accounts and minimize your retirement fees, take advantage of lower-fee mutual funds if your 401(k) plan already has an expense ratio of over 1%.

Finally, be aware that fees may also be related to how much advice you’re getting and where that advice is coming from. Human advisors are more expensive than robo-advisors, and an actively managed fund will cost more than an index fund or an exchange-traded fund (ETF).

How to Determine if Your Taxes Will Increase for the 2019 Tax-Filing Season

President Trump signed the Tax Cuts and Jobs Act in December of last year, but the income tax credits, deductions, and individual tax rates aren’t applicable until the 2019 tax-filing season. Various factors, such as your tax bracket, can influence whether your taxes will increase under the new tax code. Below are some indicators that could signal an increase on your tax bill.

Do You Have a Large Family?

The new tax code eliminated personal and dependent exemption deductions, which was estimated to have been $4,150 each in 2018 under previous law. However, standard deductions were nearly doubled. For 2018-2025 the deductions are as follows:

  • $12,000 for single (previously $6,350)
  • $24,000 for joint-filing marries couples (previously $12,700)
  • $18,000 for heads of households (previously $9,350)

The elimination of dependent exemptions hurts some families and benefits others. Large families, who don’t benefit from increased standard deductions, will be hit the hardest.

Are You an Average Taxpayer?

If you have a conventional job, file a W-2, and don’t own a lot of property or foreign investments, your taxes won’t likely increase. Instead, you should see a modest decrease as a result of lower tax rates, increased standard deduction, and an increased child tax credit. Despite this, however, there are thousands of potential tax situations that could affect the average taxpayer differently (i.e. a wealthier couple with children who itemize state and local taxes would be limited to a $10,000 deduction under the new law – a loss of $20,000 in deductions – and would likely have higher taxes under the new tax code).

Are You Withholding Enough from Your Paycheck?

The IRS changed the tax withholding tables back in February. The tables are calculated by how much income you earn and the number of allowances you claim. If you aren’t withholding enough from your paycheck, you could end up owing taxes. Check the tax withholding tables on IRS.gov to determine how much income tax should be withheld from your paycheck.

Do You Have Older Children?

The new tax code increases the child tax credit from $1,000 to $2,000 per child under the age of 17. Taxpayers with children over 17 only receive a $500 tax credit.

Do You Have High Property Taxes?

Under prior law you could claim an itemized deduction for an unlimited amount of personal state and local income and property taxes. So, a big property tax bill could be completely deducted if you itemized. However, under the new tax code, itemized deductions for personal state and local property taxes and personal state and local income taxes are capped at $10,000 ($5,000 if you use married filing separate status).

Even considering the above factors, with the myriad of potential tax circumstances and the complexity of the changes implemented by the Tax Cuts and Jobs Act, it’s difficult to predict how your taxes will be affected until you run the numbers.

If you have any questions about how to plan for your 2018 tax return, please feel free to contact me at jmiller@mkrcpas.com.