Retire With Ryan

Want to make a Roth IRA contribution, but you earn over the adjusted gross income limit? Never fear, the backdoor Roth conversion is here! On this episode, I’m doing a deep dive into backdoor Roth conversions and the seven mistakes most people make when attempting this financial maneuver.

• What is a backdoor Roth IRA? [1:44]
• The Pro-Rata rule [3:49]
• Keeping IRA costs down [6:36]
• Completing the necessary paperwork [8:02]
• Why you need to invest [9:40]
• Reconciling your IRA providers [11:07]
• Making sure you have the correct retirement plan [11:34]

A backdoor Roth IRA conversion offers a workaround for contributing to a Roth IRA when your income surpasses the set limits. Typically, direct contributions to a Roth IRA have income thresholds. If you earn more than the specified modified adjusted gross income for your filing status, you're restricted from contributing directly. However, with the backdoor Roth, you can sidestep this limitation.

The process involves making a non-deductible contribution to a traditional IRA and then converting that amount into a Roth IRA. This method allows contributions regardless of income, but it's crucial to follow specific procedures to avoid potentially costly errors. Mistakes in the process could lead to tax liabilities or complications, so careful attention to the conversion steps is essential to make the most of this strategy.

One of the easiest mistakes when using a backdoor Roth conversion is forgetting the Pro-Rata rule. If you've got other IRAs—SEP, SIMPLE, or traditional—those sums factor into your conversion calculation. Imagine intending to move $6,500 from a traditional IRA to a Roth, thinking it's tax-free. But if that $6,500 is only a fraction of a larger total, say $100,000, only 6.5% of your conversion is tax-exempt. You end up paying tax twice! First for the non-deductible IRA contribution, then for the conversion. To avoid this, you want to clear out those IRAs before the year's end.

The trick lies in removing any other IRA funds from your name before the backdoor Roth maneuver. You could shuffle the money into an employer's 401k if you have one or create a self-employed 401k if applicable. Surprisingly, even starting a small business could qualify you to set up a 401k plan, allowing you to move those funds out of your name easily. Just remember if you plan to contribute to this new plan, it should match your earnings from that business. But if your goal is to simply clear the path for a backdoor Roth IRA, this method can do the trick. Listen to this episode for more backdoor Roth conversion tips!

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As the clock runs out for 2023, now is the time to consider your final tax moves of the year. On this episode, I’m breaking down seven tax reduction strategies for 2023 and beyond. Five of these tips need to be executed before the ball drops on New Year’s, so hit play now and start strategizing!

• Contribute to a state-sponsored 529 Plan [1:47]
• Take a tax loss [4:13]
• Perform a Roth conversion on your retirement account [4:58]
• Set up a 401k or profit-sharing plan as a small business [8:18]
• Purchase a vehicle for your business [9:36]
• Contribute to a traditional IRA [10:39]
• Fully fund your HSA [11:14]

As this year draws to a close, one savvy tax move is contributing to a state-sponsored 529 plan. With over 30 states offering tax deductions for such contributions, it's a strategy worth exploring. In my home state of Connecticut I can deduct up to $5,000 per person annually on my state income tax, potentially saving a couple up to $10,000. What's interesting is that even if I plan to use the funds shortly thereafter, I can still take advantage of the tax deduction without a mandatory holding period. 

Moreover, exploring other states' plans is an option, especially for those residing in Arizona, Alaska, Kansas, Minnesota, Missouri, Montana, and Pennsylvania, where deductions are allowed regardless of the chosen state plan. It's a smart financial move that not only supports education savings but also maximizes tax benefits.

Roth conversions are another strategic move to reduce taxes as you save for retirement. Starting at age 73 (or 75 as of 2033) retirees are obligated to take out a required minimum distribution (RMD), a percentage of their account set by the IRS. To proactively manage this, you can explore a Roth conversion. This is where money is withdrawn from a pre-tax retirement account, taxed at the current rate, and then transferred to a Roth IRA or Roth 401k. 

Timing is crucial, and opportune moments include years of lower income, such as during job transitions or early retirement before reaching the RMD age. Converting at the 12% tax bracket, which applies to taxable income up to $45,000 for singles or $90,000 for married couples filing jointly, allows for significant tax savings. This strategy is particularly beneficial for those with sizable IRAs not planned for immediate use, offering a way to strategically navigate future tax implications. Listen to this episode for more year-end tax-saving tips!

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• How To Turn Your Investment Losers Into Winners With Tax Loss Harvesting, #174

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As we move into the final months of 2023, it's again time to talk about tax loss harvesting and other tax-efficient investment strategies. On this episode, I'm going to discuss how you can potentially turn some of your investment losers into this year's winners when it comes to tax planning.

• Developing tax-efficient investment strategies [1:44]
• The ins and outs of tax loss harvesting [5:52]
• Consolidating mutual funds and switching to ETFs [11:36]

Developing tax-efficient investment strategies involves a careful understanding of market fluctuations and the implications of timing on investment outcomes. After all, the unpredictability of markets dictates that not every investment will yield positive returns each year. The S&P 500 is a prime example of market volatility. Since 1970, it has seen declines in 11 out of 53 years, indicating a 20% chance of investments losing value. This underscores the need for vigilance in managing portfolios as well as monitoring unrealized gains and losses for potential tax-saving opportunities. 

One key strategy is using investment losses strategically to offset tax obligations. This approach not only lessens the current tax burden but also shapes a more tax-efficient portfolio for the future. I'm also a big believer in index-based investment strategies, particularly ETFs, as they typically generate fewer annual capital gains due to their structure. This makes them more tax-efficient compared to actively managed mutual funds.

Tax loss harvesting offers a savvy way to mitigate tax liabilities by strategically selling investments at a loss to offset gains. The process involves several key points to consider. Selling an investment at a loss allows one to offset taxable capital gains for the year or deduct up to $3,000 against ordinary income. It's crucial to reinvest immediately to remain in the market, although buying back the same investment within 30 days risks triggering a wash sale, nullifying the loss. 

A prudent approach involves comprehending the nuances: differentiating substantially identical investments, understanding the categorization of gains and losses, and being mindful of the wash sale rule. Evaluating options and considering fluctuations in the market during the 30 days before or after the sale becomes essential, urging a cautious yet strategic approach in leveraging tax loss harvesting to one's advantage. Consulting an accountant or utilizing accounting software can assist in navigating these complex but rewarding tax strategies. Listen to this episode for more on tax loss harvesting!

• Retirement Readiness Review
• Morningstar

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Do you know where your assets are going when you die? Do you have a plan in place for making medical and financial decisions if you become incapacitated? If either answer is no, you need an estate plan! On this episode, I sit down with estate planning expert Natalie Perry to discuss the ins and outs of planning your estate and ensuring a smooth post-mortem transition for your family and loved ones.

• What is estate planning? [1:14]
• Essential documents for estate planning [4:12]
• Using a trust versus a traditional non-trust estate plan [10:28] 
• Tips for simplifying the estate planning process [20:09]
• Listener question and final thoughts [24:34]

Estate planning can be a complex but crucial process in ensuring the seamless transfer of assets and managing decisions in times of incapacity or death. From the basics of asset titling to a comprehensive estate plan involving wills, trusts, and powers of attorney, the importance of these documents cannot be understated.

The absence of proper estate planning documents can result in the court's involvement through probate. Probate procedures might be required both upon one's passing and in situations of incapacity where someone is needed to manage financial assets. This process can take considerable time, from months to even a couple of years, depending on various factors, including state and county backlogs, familial agreement or disagreement, and potential creditors. This is why having these documents completed ahead of time is so key!

The core documents that form the foundation of an estate plan are a will, powers of attorney for property and healthcare, and a Living Will (depending on the state). A will is crucial to directing assets to intended beneficiaries. There's a misconception that everything automatically transfers to a spouse. This simply isn’t true and can get quite complicated if children are involved. 

Powers of attorney for property and healthcare are significant, granting the authority to make decisions in financial and medical matters if incapacitated. These documents are often as vital as the will. Trusts, particularly revocable living trusts, can help avoid probate and offer immediate liquidity, privacy, and clear instructions for asset distribution. And of course, revisiting and updating estate plans every three to five years or when significant life events occur is definitely recommended. Listen to this episode for more on estate planning!

• Retirement Readiness Review
• Follow Natalie on LinkedIn
• Harrison LLP

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A plethora of changes for Social Security and Medicare Part B premiums were recently announced and I want to break them down for you. On this episode, we’ll take a look at the 2024 Social Security cost-of-living adjustment (COLA), changes to Medicare Part B, and other Social Security shifts that could impact your retirement.

• Diving into the 2024 Social Security cost-of-living-adjustment [1:22]
• Changes for Medicare and Part B premiums [4:38]
• Increases to the Social Security Wage Base [8:06]
• Does COBRA count as creditable coverage instead of signing up for Medicare? [10:03]

Starting in January of next year, Social Security beneficiaries will receive a 3.2% increase in their benefit checks. While it's slightly less than the substantial 8.7% bump we saw last year, it's still higher than the historical average of 2.8% for cost-of-living adjustments. This increase is determined by measuring the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter and comparing it to the previous year. The days of a 3% minimum rule from the 1970s are long gone, and now COLAs happen automatically based on the yearly rise of the CPI-W.

The best part is, you don't need to rush to contact Social Security. They'll be sending out notifications by mail in early December with your updated monthly benefit amount. If you're eager to stay ahead of the game, you can visit the Social Security website at ssa.gov to set up email or text notifications. So, whether you're already receiving Social Security or planning to start, rest assured that the 2024 COLA will factor into your benefits, providing a little extra financial security in an ever-changing world.

Significant changes are afoot for Medicare Part B premiums in 2024, impacting current and prospective beneficiaries. The base premium for Medicare Part B will increase from $164.90 in 2023 to $174.70 in 2024. This shift comes after a slight decrease in Part B premiums last year, providing some respite for Social Security recipients. However, the waters get murkier with the introduction of IRMAA (Medicare Income-Related Monthly Adjustment Amount) charges, which can further inflate Part B premiums. These additional charges range from $69.90 to $419.30, depending on your income, and the thresholds for IRMAA triggers have also been raised for 2024. 

Single filers with incomes exceeding $103,020 and married couples filing jointly with incomes over $206,000 will find themselves subject to IRMAA. You need to keep an eye on your income and explore strategies to mitigate IRMAA charges, as these adjustments also apply to Part D prescription drug plans for those on Original Medicare with Medigap coverage. Remember, informed financial planning is the key to navigating these changes effectively. Listen to this episode for more on Social Security changes in 2024!

• Retirement Readiness Review

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Does recent stock market performance have you itching for a change-up? Have you considered small-cap stocks or small-cap stock funds? On this episode, I’m taking a look at constructing a diversified portfolio and if investing in small-cap stocks is right for you.

• Understanding small and large-cap stocks [1:18]
• Evaluating stock market performance to construct your portfolio [3:27]
• Investment strategies for small-cap stocks [5:19]

As the stock market recovers from a tough August and July, now is a good time to explore small-cap stocks. Large-cap stocks, such as those in the S&P 500 and the NASDAQ, have performed well this year. However, their growth potential is limited due to their size. Small-cap stocks, with market capitalizations of around $2 billion, offer the promise of greater growth combined with higher volatility and risk. 

While giants like Apple can weather economic storms thanks to diversification, smaller companies may struggle if they rely on a single product or revenue stream. So, diversifying your portfolio with small-cap stocks can be a strategy to consider. You just have to balance the allure of growth with risk awareness in today's dynamic financial landscape.

Over the past century, small-cap stocks have consistently outperformed their larger counterparts. Small-caps have an average annual return of 11.57% compared to 9.57% for large-caps until the end of 2022. However, this outperformance has come with more significant fluctuations in returns. Looking at the most recent decade, small caps earned 10% while large caps surged by 21.62% in the last year. Over five years, the S&P 500 delivered 10% annually, while the S&P 600 averaged 3.7%. Over the past decade, the S&P 500 boasted an average return of 12%, while the S&P 600 averaged 8%. 

This recent underperformance has led to an undervaluation of small-cap stocks, currently trading at a P/E ratio of 13 compared to the S&P 500's 21. If small-cap stocks regain fair valuation, there's a growth opportunity that could potentially outshine their larger counterparts. Although market dynamics may not always follow historical patterns. Listen to this episode for more on making small-cap stocks a part of your portfolio!

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A big part of saving for retirement is choosing retirement plan options whose fees won’t eat into your valuable nest egg. On this episode, I’m discussing all things retirement plan fees, how to know what you’re paying, and how to potentially lower those fees so that you can grow your money faster.

• The three levels of retirement plan fees [2:29]
• Active funds vs. index funds [6:55]
• Using a brokerage window to diversify your investment options [12:07]

Understanding the three levels of retirement plan fees is crucial for optimizing your savings. The first level is administrative fees. These cover essential plan maintenance and services and can be either a fixed amount per employee or an asset-based charge determined by a percentage of your plan balance. While you may not have direct control over these fees, it's worth discussing with your employer and encouraging them to explore cost-saving options, as high administrative fees can eat into your retirement savings.

The second level consists of individual service fees, typically charged per transaction, such as taking a 401(k) loan or doing a plan rollover. While these fees are usually modest, they are set by the plan provider and beyond your control. The final level is investment fees, which offer you the most control. These fees stem from the investments you choose within your plan and are typically the highest. They are generally asset-based, meaning they are also a percentage of your account balance. It's essential to understand these fees, as they can range from very low to as high as 2%. Being aware of and managing these fees is key to maximizing your retirement nest egg.

When reviewing your participant fee disclosure for your retirement plan, it's important to pay attention to the expense ratio of the mutual funds or investments you're considering. Most 401(k) plans primarily offer mutual funds as investment options, and within the fee disclosure, you'll find information about these costs. My approach when helping clients navigate this process is to begin by identifying investment options with the lowest expense ratios. Often, these options are index-based investments.

Index funds are designed to track specific market segments, like the S&P 500, which represents the 500 largest U.S. stocks. These funds tend to have lower ongoing investment charges because they require minimal management. In contrast, actively managed funds aim to outperform these indexes, but they come with higher costs, typically around 1% to 2% per year. Numerous studies have shown that most active funds and managers struggle to consistently beat their benchmark indexes over time. Therefore, while active management may offer the potential for higher returns, the odds are not in your favor. Opting for index funds provides a more prudent, less speculative approach to investing. That's why I strongly recommend them to my clients. Building a diversified portfolio using various index-based strategies across different asset classes can help you achieve your long-term financial goals while minimizing unnecessary risk. Listen to this episode for more on lowering your retirement plan costs!

• Retirement Readiness Review
• Fiduciary (Book)

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Last month, we saw major stock market declines, with the S&P 500 down over 5% and the NASDAQ dipping 6.5%. This begs the question: Is September a bad month to own stocks? And if it is, which month is the best? On this episode, I’m exploring the historical performance of the S&P 500 and its monthly returns, as well as a listener question about receiving social security benefits from your ex-spouse. You don’t want to miss it!

• Receiving social security benefits from an ex-spouse [1:44]
• Examining the historical performance of the S&P 500 [4:44]
• Determining the best month to own stocks [7:13]

To find out which month is best to own stocks, let's focus on the S&P 500. The Standard and Poor's Index was founded 66 years ago on March 4, 1957. It represents 500 of the largest companies on the U.S. stock exchange. Before its official launch, the S&P only had 90 stocks, which grew to 233 before becoming the S&P 500.

Historically, the S&P 500 has seen an average annual growth rate of 9.8%, including dividends, and an annual standard deviation of 20.81%. However, it's crucial to understand that the stock market doesn't consistently deliver a monthly return of 0.81% (9.8% divided by 12 months). There are ups and downs, making it essential to prepare for volatility. When examining monthly returns, a few months stand out as particularly strong. As of May 2023, only four months have had an average annual return exceeding 1%, with July leading at 1.7%, followed by April (1.4%), December (1.3%), and January (1.2%). The end of the year and the beginning of the new year, often called the Santa Claus Rally period, tend to perform well.

On the flip side, three months have historically produced average annual losses for the S&P 500 since 1926. September stands out as the worst, with a negative 1.1% average return, followed by February (negative 0.1%) and May (negative 0.1%). This weakness in February and May is often attributed to profit-taking following strong performances in December, January, and sometimes April. Additionally, the period from May to October tends to see lower average and median returns compared to other six-month periods. This phenomenon has led to the saying "Sell in May and go away." September is usually marked by investors returning from summer vacations and possibly selling stocks to lock in gains for the year. Families also face financial obligations such as tuition and back-to-school expenses during this time. Moreover, mutual fund companies start paying distributions in September, requiring them to free up funds by selling investments, including stocks.

However, it's crucial to remember that historical trends are not a crystal ball for predicting future market movements. While April may have risen 80% of the time in the past, it doesn't guarantee a positive April this year. Market conditions change, and various factors influence stock performance. Therefore, rather than trying to time the market based on monthly averages, a more prudent approach is to have a diversified portfolio with a suitable asset allocation that matches your risk tolerance. Regularly rebalance your portfolio to maintain your desired risk level while minimizing the urge to make impulsive decisions during market fluctuations. Ultimately, a long-term investment strategy focused on a diversified portfolio is more likely to help you achieve your financial goals.

• Retirement Readiness Review

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The merger of TD Ameritrade Brokerage and Charles Schwab Brokerage, now known as Schwab, has been completed! And in this episode, I want to provide my insight into how the merger went. I’ll also share some of the issues I and other clients have found since the merger solidified.

• Unpacking the merger between TD Ameritrade and Charles Schwab [1:38]
• Where have my spouse’s accounts gone? [3:38]
• Issues with tax withholding [6:06]
• Using caution before changing beneficiaries [9:21]
• Better notifications for financial planners [10:30]
• Final thoughts on the merger [12:40]

The merger between TD Ameritrade and Charles Schwab was completed over Labor Day weekend of 2023. Overall, I think it went pretty well, considering I didn't have any clients whose accounts didn't transfer over, and there are zero missing funds. However, in the weeks following the merger, we found several issues that we were not made aware of before the merger. 

The joining of these two institutions to form Schwab has been in the works for two years. In that time, my team and I have attended numerous conference calls and webinars to see if this merger would be the right fit for our clients. We even decided to use Schwab for all new clients so we could learn their system. And while we are quite comfortable using the Schwab Advisor Center, there are still a few outstanding issues we need to navigate.

Clients who are new to Schwab can access their account online through the Schwab Alliance platform. However, the first issue we've encountered is clients being unable to see their spouses’ or partners’ retirement accounts through the portal. While you can’t have a joint retirement account, TD Ameritrade allowed clients to sign a form to gain access to their partners' accounts. Oddly enough, Schwab didn’t honor this arrangement at launch, leaving clients to believe everything didn’t transfer correctly. Thankfully it’s an easy fix, but it left many people understandably startled.

Another issue we’ve encountered with Schwab has to do with their tax withholding settings. It’s always my goal as a financial planner to ensure clients pay what is required in taxes without giving the government an interest-free loan by overpaying. TD Ameritrade had multiple options for withholding amounts, while Schwab seems to only have two for state income tax: 0% or the maximum 6.99%. This leaves clients either owing money or subsidizing the government. I’m actively petitioning Schwab for answers, and I will keep you posted. Listen to the episode for more on the Schwab merger!

• Retirement Readiness Review
• Schwab Client Login 

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As the air crisps and the leaves change, you know what that means: Fall is here! But it also means that Medicare Open Enrollment is about to begin. On this episode, I’m going over five Medicare Open Enrollment mistakes you want to avoid and answering a listener's question about Health Savings Accounts.

• Can you draw from two HSA accounts to pay for one individual's medical expenses? [1:43]
• Is it too early to start looking at enrollment options? [4:13]
• Is last year’s Medicare plan still the best option? [6:02]
• Should monthly premiums be the only deciding factor for Medicare plans? [7:09]
• Examining the real cost of Medicare plans [8:50]
• Will your Medicare plan let you see your doctor? [10:31]

Medicare Open Enrollment starts on October 15th and lasts until December 7th, but is now a good time to start looking at your options? Absolutely it is! You don’t have to wait until October to research the best Medicare plan for your needs. Talk to friends and supplemental Medicare representatives, attend seminars, and even go to medicare.gov to compare and contrast the numerous choices available. 

One mistake current Medicare enrollees make is assuming that the plan they selected last year is still the best plan for them. Many Medicare Advantage plans offer an initially low or free premium plan to get people to sign up, only to significantly increase the price the following year. You definitely want to compare your options annually to ensure you're getting the best plan for the right price.

A big mistake to avoid during Medicare Open Enrollment is using your plan's monthly premium as the only deciding factor for signing up. While your monthly premium may be low, out-of-pocket costs can get out of control. Prescriptions, labs, and doctor’s visits may not be covered by a low premium plan, so you definitely want to do your research. Paying a higher premium for better coverage may be your best option.

A huge shock for some Medicare enrollees is finding out their existing doctor will not accept their Preferred Provider Organization (PPO) plan. A PPO is a health care plan that allows members to see out-of-network doctors, usually for a higher price. Just because your plan allows you to see out-of-network providers does not mean YOUR provider accepts that plan. Double-check with your doctor to make sure everything is compatible before signing up. Listen to this episode for more on Medicare Open Enrollment!

• Retirement Readiness Review
• Chris Humphries
• Medicare

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