investment strategy Archives - Legacy Wealth Advisors

Why Roth IRAs Are Awesome Investment Vehicles

A Roth IRA is an unassuming powerhouse that brings a lot to the investment table.

With tax-advantaged growth, they may play an essential role in developing a well-rounded retirement income strategy. But what else makes these accounts so special?

Below we’re reviewing the basics of Roth IRAs and how you can make the most of them throughout your lifetime.

What’s a Roth IRA?

With a traditional IRA, the money you contribute is tax-deductible (unless you earn above the IRS thresholds or are covered by a workplace retirement plan), making it effective for reducing your annual taxable income. Plus, the funds in the account grow tax-deferred. However, your withdrawals in retirement are subject to ordinary income tax.

A Roth IRA works the opposite way.

You contribute to a Roth IRA with after-tax dollars, which won’t lower your taxable income. The advantage of a Roth IRA is that money in the account grows tax-free, and eligible withdrawals are also tax-free.

With a Roth IRA, you choose to pay taxes now to avoid paying them later. This is a significant benefit to those who expect to move into a higher tax bracket later in life.

Tax-Free Distribution Requirements

To avoid penalties when taking distributions, the account must be open for at least five years, and you must be 59.5 or older. You could face tax penalties if you don’t meet either of these requirements.

However, there are a few exemptions. You can withdraw from your Roth IRA penalty-free if you:

¹

Have a qualifying disability
Use the withdrawals to pay for qualifying higher ed costs
Are purchasing your first home
Use the withdrawals to pay for medical expenses that exceed 7.5% of your AGI

4 Big Reasons Why Roth IRAs Are Useful

Here are a few reasons why Roth IRAs may make an effective addition to your retirement income lineup.

Reason #1: You Can Withdraw Contributions At Any Time

With most retirement savings accounts, you can’t touch the funds without penalty unless you meet the age requirements.

What’s special about a Roth IRA is that you can withdraw the contributions you’ve made to the account at any point. Note that you cannot touch the earnings without incurring a tax penalty. This makes it especially important to track how much you contribute to your Roth IRA yearly.

Reason #2: Distributions in Retirement Are Tax-Free

Tax planning is critical for retirees, and amplifying your tax-free retirement income bucket gives you more freedom and flexibility in retirement. If you have a higher-income year, maybe with more realized gains or the sale of a home, drawing from that tax-free bucket supplements your income while keeping taxes at bay.

Remember, creating a tax-efficient plan for your retirement income helps extend the life of your investments.

Reason #3: Roth IRAs Don’t Have RMDs

Roth IRAs are the only type of retirement account that doesn’t have required minimum distributions (RMDs).

For traditional IRAs and 401(k)s, the IRS determines a set amount that account holders must withdraw each year—the formula considers the account balance and life expectancy. Depending on your birth year, your RMDs may begin the year you turn 73 or 75.

Since the funds in these accounts are tax-deferred, RMDs are subject to ordinary income tax. But with a Roth IRA, you don’t have to worry about RMDs—you can withdraw your funds in retirement when you need to.

Reason #4: They Make a Great Addition to Your Estate Plan

If you’re looking for a tax-efficient way to pass money to your loved ones, look no further than a Roth IRA.

Distributions from an inherited Roth IRA remain tax-free, and spouse beneficiaries can hold onto the account for as long as they like. If a non-spouse beneficiary inherits the account, they will need to withdraw all funds from the account within 10 years unless they are:

Disabled or chronically ill
Under the age of 18
Less than 10 years younger than the original account owner

But, Not Everyone Can Directly Contribute to a Roth IRA

For 2024, the total contribution limits for all of your Traditional IRAs and Roth IRAs are $7,000 per person, or $8,000 per person over the age of 50.

Roth IRAs do have income limits. If your modified adjusted gross income falls within the income phase-out range, you’re eligible to contribute a lesser amount. If you earn above the phase-out ceiling limit, you are not eligible to contribute at all.

For 2024, the phase-out ranges are:

Single taxpayers and heads of household: $146,000 to $160,999
Married, filing jointly: $230,000 to $239,999
Married, filing separately (if you lived with your spouse at anytime during the year):
$0 to $9,999

How to Bypass Roth IRA Income Limits

There are ways for high earners to bypass Roth IRA income limits.

A backdoor Roth IRA and mega backdoor Roth IRA involve contributing to a traditional IRA or 401(k) before converting the funds into a Roth account. These can be fairly complex and may increase your tax liability in the year you make the conversion, so consult with a tax professional and financial advisor first.

Another option is to do an in-service rollover from your 401(k) to a Roth IRA. Not all plan providers allow in-service rollovers, however. Consult with your HR department or plan sponsor to determine if this is a viable option.

Make Your Roth IRA Work For You

Roth IRAs are effective tools for building wealth and growing your tax-free retirement income bucket.

In most cases, it makes sense to contribute to a Roth account when you’re in a lower income tax bracket than you anticipate being in during retirement. Or, if you believe taxes overall will increase by the time you retire, paying them sooner rather than later makes a lot of sense.

As you continue saving for retirement, don’t hesitate to reach out to our team. We’re here to help address all areas of your wealth, including your retirement savings strategies.

^Sources:

¹^{Publication 590-B (2023), Distributions from Individual Retirement Arrangements (IRAs)}

Disclaimer:

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

July 1, 2022/0 Comments/by Greg Carrico

Retirement

Can You Afford To Retire Tomorrow?

One of the most common questions clients present to us is,

“When can I comfortably retire?”

They want to know if the nest egg they’ve diligently accumulated over the years is enough to get them to and through a long retirement.

To help, we’ve outlined how you can evaluate your retirement savings needs, “test drive” your budget, and adjust your savings strategy before leaping into your golden years.

Go Gently Into The Retirement Red Zone

Legacy Wealth Advisors specializes in helping those entering the “red zone” prepare for retirement.

What’s the “red zone?”

No, it’s not the coveted field location in football that sets teams up to score. In terms of retirement, the “red zone” refers to the five to ten years before you leave the workforce.

Unlike an NFL red zone, where teams may be more apt to take risks and show off their offense, a retirement red zone is where many people benefit from strong defense. This translates to being more cautious with spending and saving—spending less and saving more.

The “red zone” is when we buckle down to ensure a smooth transition into retirement. It’s important because this approach is designed to protect your assets and cash flow. By letting up on the gas pedal a bit, we help mitigate the sequence of returns risk and offer a cushion against negative returns in the early years of retirement.

When you’ve reached this point, some critical things to consider include:

Evaluate your current savings
Identify potential savings gaps
Analyze spending and pinpoint habits you want to avoid
Test drive your retirement spending estimates

Let’s dive a bit deeper into each of these categories.

Evaluate Your Current Savings

When considering your countdown to retirement, start by identifying all of your assets, including anything in your retirement accounts (401(k), IRA, etc.), brokerage accounts, real estate, cash savings, etc.

Calculate everything to determine the size of your nest egg. From there, we can estimate how much you’ll have when you actually retire by calculating your investments’ projected rate of return.

Here at Legacy Wealth Advisors, we use financial planning software to provide real-time projections, enabling you to see how your savings could translate to spending when you retire. This tool can help give you confidence in your “retirement number” and help us create a strategy that will help support your future spending needs.

Estimating your projected income for retirement is necessary to identify any potential savings gaps.

Mind The—Potential—Savings Gaps

For some people, there’ll be a discrepancy between how much you have saved for retirement and how much you’ll truly need to maintain your current standard of living.

Remember, understanding this gap starts by assessing how much you’re projected to have in retirement.

If you aren’t sure how much you expect to spend, take your retirement savings for a “test drive.” Here’s a simple calculation. Multiply your current cost of living and how long you anticipate being in retirement.

The average U.S household income is $87,864.
Most people’s retirement will last about 20 years.
Based on the equation above, if you want to spend the same in retirement for 20 years, you’d need a $1.76 million nest egg.

Try that same exercise but with your expected numbers. Will your current (or projected) nest egg cover this amount? Can you make compromises on your spending? How can you create a savings/investment plan to boost your savings over the next decade?

If you’re having trouble assessing your spending, grab out your credit card and bank statements over the last year to help get as accurate an estimate as possible.

If you believe there may be a gap, we recommend you use your time in the “red zone” to address this and create a strategic plan for filling it.

Test Drive Your Retirement Spending Budget

Test driving is an integral part of preparing for retirement.

To drill down deeper, we recommend thinking about how your spending habits may change—or stay the same—as you enter retirement.

Do you think your pace of spending will remain fairly similar, or is it possible you’re underestimating your lifestyle costs?
What significant costs do you anticipate in retirement, such as an out-of-state move, buying a vacation house/condo, increased travel, etc.?
How do you envision spending your time?

With more free time on your hands in retirement, you may be looking forward to joining a country club, traveling, starting a small business, and more. With changes like these, you’ll want to prepare a savings strategy that accounts for these new expenses.

Making Strategic Financial Decisions

During the years leading up to retirement, determine if you need to ramp up your savings or if you’re comfortable continuing to save at the same rate. By identifying whether or not you have a gap in your retirement savings and expectations, you can strategize accordingly.

Many of the financial decisions you make during this “red zone” period can help set you up for success in retirement, like increasing your retirement savings and reducing expenses.

Increase Retirement Savings

Once you reach 50, you can start making additional contributions—known as catch-up contributions— to certain retirement savings accounts. Taking advantage of catch-up contributions can help you fill the gaps in your savings strategy and even provide an extra cushion.

2022 contribution limits include:

401(k) & 403(b): $20,500 limit with $6,500 catch-up contributions
IRA: $6,000 limit with $1,000 catch-up contributions
HSA: $7,300 family limit with $1,000 catch-up contributions (For those 55 and older)

If you aren’t yet maxing out your retirement contributions, consider doing so as you enter the retirement “red zone.”

Reduce Expenses and Debt

Debt can look highly different before and after retirement.

When you have a steady paycheck coming in, the mortgage payment may not be as big of a concern, but once you retire, you’ll likely become much more aware of where you put your hard-earned money.

What debt are you still paying down? Consider addressing debts like car payments, mortgages, medical bills, personal loans, and more before entering into retirement. Debt, especially high-interest debt, can really chip away at your retirement savings when not managed properly.

Next, ask yourself, are there any expenses you can reduce before retirement? Take a look at your current cash flow plan and identify potential areas for improvement. Do you really want to put a bunch of money into home renovations when you plan on selling the house when you retire? If you’re paying for seven streaming services, are you comfortable parting ways with a few you never use?

Minor adjustments here and there can add up to significant savings over the span of retirement.

Ready to Retire?

Everyone’s on a different path when it comes to retirement. Whether you’re ready now or looking to wait a few years, working with a financial partner can be a complete game-changer.

At Legacy Wealth Advisors, we help those nearing retirement develop a comprehensive strategy and transition smoothly to financial independence. Reach out to our team anytime to talk about your personal journey toward retirement and how we may be able to help.

Disclosure:

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.

April 1, 2022/0 Comments/by Greg Carrico

Investing, Retirement

Should An Annuity Ever Have A Place In Your Retirement Plan?

As you continue building your retirement income strategy, you’ve likely come across annuities.

A neighbor may have recommended them, or maybe an insurance agent sent a letter advertising their offerings, or perhaps you saw a too-good-to-be-true ad on TV. So what exactly are annuities?

Annuities are financial products that can provide guaranteed income in retirement, but there’s more to them than meets the eye.

If you’re considering adding an annuity to your retirement plan, here are a few considerations to make first.

What Is an Annuity?

Simply, annuities are insurance products.

Purchasing an annuity creates a contract between you and an insurance company. You agree to pay a specific amount to the company, and they guarantee a set amount back in return.

When purchasing an annuity, you can make a lump-sum payment to the insurance company or make payments over time. Similarly, you can either receive a lump sum payment from the insurance company or a series of regular payments. You can also choose to receive money immediately or later, depending on how your annuity is established.

The idea of an annuity is to provide retirees with a fixed stream of income. It’s an alluring offer—steady income in a world where turbulent markets, low-interest rates, and high inflation seem to be the mainstay. But annuities are complex vehicles with a significant amount of fine print—let’s get reading.

Types of Annuities

There are three common types of annuities for individuals to choose from:

Fixed annuity
Variable annuity
Indexed annuity

Fixed Annuity

If you purchased a fixed annuity, the insurance company offers you a minimum rate of interest on the annuity and a predetermined amount of recurring payments. State insurance commissioners oversee and regulate fixed annuities.

Variable Annuity

There’s more flexibility in a variable annuity, as the company you purchase it from will allow you to direct your payments to different investment vehicles. The most common option is a mutual fund.

Because there’s flexibility in where you invest your money, your payout, too, will vary. It will depend on how much money you put in, your rate of return on the investments, and any associated expenses. The SEC regulates this type of annuity.

Indexed Annuity

An indexed annuity acts almost like a hybrid between fixed and variable, meaning it combines common features of insurance products and securities.

The idea is that the insurance company you purchase your annuity from will provide you payouts with a return based on the stock market index, like the S&P 500. In a fixed index annuity, you remain protected from market volatility while still benefiting from market upswings.

Just like fixed annuities, state insurance commissioners regulate indexed annuities.

Pros of Annuities

People choose to purchase annuities primarily for these three reasons:

Regular payments over time
Death benefits
Tax-deferred growth

Let’s take a closer look at each potential benefit.

Regular Payments Over Time

Perhaps the most consistent fear about retirement is running out of money.

It’s challenging to structure a retirement income and spending plan that will sustain you for the rest of your life, and a guaranteed income stream can be a great comfort in that department.

When you purchase an annuity, your provider establishes a set schedule of payments to be made over a specific period. Doing so creates long-term, stable income that helps bring peace of mind to individuals and couples during retirement.

The payout period may be over the remaining lifetime of the annuity holder or even over the lifetime of their spouse, or other designated beneficiary, meaning that annuities could also be part of your estate plan.

Death Benefits

Should you die before you begin receiving payments, your beneficiary will still be able to benefit from monthly payouts from your annuity.

Tax-Deferred Growth

Any growth due to returns earned from your annuity isn’t taxed until you begin receiving payments. This perk allows you to save money over time without paying taxes on the growth until you make withdrawals.

Cons of Annuities

While guaranteed income in retirement is appealing, there are some significant considerations to make before purchasing an annuity.

A few common concerns include:

Fees and commissions
Lack of liquidity
Conservative returns

Fees and Commissions

Annuities come with a cost—often a high cost.

And for some, the cost of added fees and commissions makes them a less-than-desirable retirement income option. You can expect different annuity types to come with different price tags.

The more complex, the more expensive the product is likely to be.

Lack of Liquidity

Once you’ve put your money into an annuitized contract, you’ve made a long-term commitment that can be very difficult and costly (if even possible) to get out of.

For younger couples who have their peak earning years still ahead, it may not make financial sense to tie up so much of their money in this long-term financial product, especially if they have short-term goals like buying a home or paying for a child’s education.

Conservative Returns

Again, an annuity offers steady, guaranteed income. With that said, it’s a conservative investment option. This can make it appealing for those approaching retirement who don’t have time on their side to ride out potential market volatility. But for a younger couple, these more minimal returns would almost surely be an unnecessarily conservative option.

Legacy Wealth And Annuities

Financial advisors tend to have mixed reactions to annuities.

Our Legacy Wealth advisors understand that they can be a good fit for some, but their cost is often a significant deterrent. We tend to see annuities oversold by other advisors, even when a better-suited option may be available for their clients.

If you’re considering purchasing an annuity, it’s a big financial decision that you shouldn’t take lightly. Our team would be happy to help you take a closer look at the benefits and considerations of annuities, just reach out to schedule a time to talk.

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

March 3, 2022/0 Comments/by Greg Carrico

Investing

Time or Money Weighted: Is There A Better Strategy To Measure Your Portfolio Performance?

While investing doesn’t offer guarantees, you want to make sure the strategy you’ve built puts you on a path toward your goals.

How can you do that?

Determine your investment rate of return. Sure there are averages and estimations you can look at, but what do your numbers say? There are two ways to measure this performance stat: time and money-weighted calculations.

Time is money, or is it?

What’s A Time-Weighted Rate of Return?

Before we dive into these two classifications, it’s important to remember that numbers are malleable, meaning that they can change based on the conditions surrounding them. You’ll notice that you can measure rates of return in different ways, but it is important that you understand your investment strategy and how it’s working for you.

Let’s start with time-weighted returns, or what you can think of as big picture returns.

Time-weighted rates of return are a common indicator used to measure the performance of larger market indices like the S&P 500, mutual funds, or fund manager performance. It’s also a common way you’ll see your returns communicated, like in a brokerage account.

With a time-weighted return, you look at the return of the initial investment over a select period. For example, investing $1,000 in the S&P 500 for a year. Your statement might indicate the change in the asset’s price or the price and the income and dividends.

A time-weighted approach breaks the portfolio into time “snapshots” and evaluates its performance over that period to illustrate the broader trend.

While a time-weighted return looks at investment performances, this method doesn’t include cash flow factors like contributions, withdrawals, or any cash movement in and out of the portfolio.

Why would this strategy discount this seemingly crucial element?

Cash flow is unpredictable, and the outcomes are dependent upon each individual investor. A fund manager, for example, can’t always control the cash flow of the fund, investors do, so their performance is measured without that uncontrollable factor.

Time-weighted returns are used to evaluate the performance of particular investments over time.

What’s A Money-Weighted Rate of Return?

Money (or dollar) weighted rate of return often paints a much more vivid performance picture for individual investors because it does consider how cash flow, like contributions and withdrawals to the portfolio, impacts the performance.

On top of that, it also considers the size and timing of the contributions. If you contributed a lump sum of $10,000 to your 401(k), your portfolio would feel the impact.

While the calculations get a bit in the weeds, the main thing you should know is that the portfolio’s performance is given more weight when there is more money in the account.

Since cash flow is an essential element in money-weighted calculations, let’s break it down a bit further into inflows and outflows from your portfolio.

Cashflow into the portfolio

Contributions
Dividends or interest received
Proceeds from the sale

Cashflow out of the portfolio

Reinvested dividends or interest
The price paid for an investment
Withdrawals or cash removed.

If there are no cash flows in or out of the portfolio, both a time-weighted and money-weighted calculation should have the same conclusion.

Why Money-Weighted Works For Individual Investors

Both time and money-weighted rates of return offer investors a glimpse of how their investments are doing. While different, they both provide helpful information.

However, if you’re looking for the most descriptive rate of return that accounts for your cash flow habits, stick with money-weighted. Since it includes your cash flows in and out of the portfolio, you see how your investment choices impact your portfolio performance.

Accounting for investment behaviors is critical because so much about investing is understanding the non-financial elements that drive your portfolio: risk tolerance and capacity, time horizon, goals, and more.

Time-weighted is a valuable metric, but it can be too high to portray the performance of many individual portfolios accurately. Just because it isn’t as effective on an individual basis, time-weighted returns are an excellent way to see the bigger picture of your investments.

There is no standard for calculating your investment returns. Each company and advisor will have its own process and system for tracking those numbers. It’s important to know how your advisor and investment accounts calculate this figure, as they may be different. For example, many 401(k)s use money-weighted returns, and many advisors use time-weighted returns. So you can’t really compare apples to oranges.

Instead of comparing, be sure you understand precisely how your returns are calculated and what that means for your investments moving forward.

Find Confidence In Your Investment Strategy

You should understand how your investments work.

Reading and fully comprehending your rates of return is a great place to start. Now that you have a better idea of how your portfolio’s performance is measured, you’ll find more confidence as you track your progress and invest in your future.

Ready to read your returns like a pro? Get in touch with our team to review them today. We’d love to hear from you and help you find clarity and confidence in your investment plan.

Disclosure:

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

October 1, 2021/by Greg Carrico

Tag Archive for: investment strategy