Exploring the Mega Backdoor Roth: Is It The Right Strategy For You?

Contributed by: Kelsey Arvai, CFP®, MBA

As financial planning professionals, we often seek advanced strategies to maximize clients’ retirement savings. One such strategy that has gained considerable attention is the Mega Backdoor Roth IRA. But is this complex approach suitable for everyone? In this blog, we’ll explore what the Mega Backdoor Roth is, how it works, and whether it might be a beneficial option for your financial planning strategy.

What is a Mega Backdoor Roth?

The Mega Backdoor Roth IRA is an advanced retirement savings technique that allows high-income earners to contribute more to their Roth IRA than traditional limits permit. Typically, Roth IRA contributions are capped at $7,000 annually for individuals under 50 (or $8,000 for those 50 and older). However, the Mega Backdoor Roth strategy enables individuals to funnel significantly larger amounts into a Roth IRA by leveraging after-tax contributions made to a 401(k) or 403(b) plan.

How Does It Work?

Here’s a step-by-step breakdown of how the Mega Backdoor Roth works:

1. Contribute to Your 401(k) or 403(b) Plan: Start by contributing to your retirement plan up to the annual limit of $23,000 for individuals under 50, or $30,500 for those 50 and older, through pre-tax or Roth contributions.

2. Make After-Tax Contributions: Once you reach the annual pre-tax or Roth contribution limit, you can make additional after-tax contributions to your retirement plan. The total defined contribution limit for 2024 is $69,000, including employee and employer contributions.

3. Convert to Roth IRA: Periodically, or as your plan allows, you can roll over the after-tax contributions and any earnings into a Roth IRA. This conversion avoids taxes on the earnings as Roth IRAs grow tax-free.

Benefits of the Mega Backdoor Roth

• Increased Contribution Limits: The Mega Backdoor Roth allows you to contribute significantly more to your Roth IRA than the standard limits, which can be a substantial advantage for high-income earners seeking to maximize their tax-free retirement savings.

• Tax-Free Growth: Contributions to a Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free. This can be particularly beneficial for individuals who expect to be in a higher tax bracket during retirement.

• Flexibility: Roth IRAs offer flexibility in terms of withdrawal options. Contributions (but not earnings) can be withdrawn at any time without penalties or taxes, providing added financial flexibility.

Considerations Before Implementing

While the Mega Backdoor Roth offers compelling advantages, it’s not suitable for everyone. Consider the following factors before deciding if this strategy is right for you:

• Plan Availability: Not all retirement plans permit after-tax contributions or in-service withdrawals, which are necessary for executing the Mega Backdoor Roth strategy. Review your plan’s rules to ensure this option is available.

• Income and Contribution Limits: Ensure you are within the income limits and contribution caps that apply to your situation. The strategy is generally most beneficial for high-income earners who have already maxed out their regular 401(k) and IRA contributions.

• Administrative Complexity: Implementing the Mega Backdoor Roth can involve additional administrative steps and paperwork. Ensure you are comfortable with these requirements or seek assistance from a financial advisor to navigate the process effectively.

The Mega Backdoor Roth IRA is a powerful tool for those looking to significantly boost their Roth IRA contributions beyond standard limits. It offers the potential for substantial tax-free growth and flexible withdrawal options, making it an appealing strategy for high-income earners with the proper 401(k) plan structure. However, it’s important to weigh the benefits against the complexities and ensure they align with your overall retirement planning goals.

If you’re considering the Mega Backdoor Roth strategy, consult with a financial advisor to evaluate whether it fits your financial situation and to navigate the process efficiently. The right strategy can make a significant difference in your long-term retirement savings, and the Mega Backdoor Roth might be just the key to unlocking greater financial growth.

Kelsey Arvai, MBA, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Kelsey Arvai, MBA, CFP®, and not necessarily those of Raymond James.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Center Clients Donate over $1.3 Million in Tax-Savvy QCD’s in 2024!

Contributed by: Lauren Adams, CFA®, CFP®

We are proud to announce that The Center assisted clients in donating over $1,350,000 to charities using the Qualified Charitable Distribution (QCD) strategy in 2024!

The QCD strategy allows clients with assets in an IRA account and who are over age 70.5 to donate funds directly from their retirement account to a charity. Giving directly from an IRA to charity results in those dollar amounts not being included in taxable income for that year. That usually results in a lower tax bill for our clients and can also have positive downstream effects like lowering the amount they may pay for Medicare premiums and the portion of Social Security that is taxable to them, depending on their situation and income level. For those 73 or older, QCDs also count towards the distributions they need to take each year for their Required Minimum Distribution.

Now, there are some caveats for QCDs — you need to be at least 70.5. Also, the charity has to be a 501(c)(3). There are limits on how much you can give each year through this method, but that number is actually relatively high at $108,000 per person per year right now.

The Center’s mission is to improve lives through financial planning done right, and we are so proud to be able to help clients make such a positive impact on the world (bonus points for it being in a tax-savvy manner!).

Did you know that QCDs are only one of many charitable giving strategies that our team helps clients deploy? Watch this video to learn more about ways our clients make their charitable dollars stretch further for the causes they care about while potentially lowering their tax burden.

As always, we recommend you work with your tax preparer to understand how these strategies affect your individual situation. If you want to explore these strategies and more, contact your Center financial planner today!

Lauren Adams, CFA®, CFP®, is a Partner, CERTIFIED FINANCIAL PLANNER™ professional, and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Lauren Adams, CFA®, CFP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The Problem with Having Excess to Spend in Your Retirement Plan

Contributed by: Sandra Adams, CFP®

You spent your entire working life saving for your future retirement. You may have sacrificed things you wanted or wanted to do, at times, to make sure that you were saving enough for your future financial security. And now that you are retired, you may find that you saved so well that you have more than you need to support the retirement income you need for your projected life expectancy. What a problem to have!?!

Now, more likely than not, when you meet with your financial advisor each year, you discuss “what would add more to your life to add value and meaning” for which you might be using your excess funds. For many clients, this is a difficult question to answer. They feel that they have and have done most of the things that have meaning for them (or they are already doing them within their current cash flow and do not need to spend additional money to add further value to their life).

Many clients DO plan to leave legacy gifts to children, grandchildren, other family members, OR charities at the end of their lives. When there is excess in the retirement plan, even if a long-term care event were to occur for one or both spouses, the plan would still be in good shape, so giving thought to gifting during a lifetime might make sense.

For children, grandchildren, and other family members, at least taking advantage of the annual gift exclusion amounts (in 2025, $19,000 per person) to help fund retirement accounts, college education accounts, etc., is a wonderful way to gift. This is also a terrific way to help get family members started with their own financial planning and get them introduced to a planner (whether it is someone with the firm you work with or someone else they can trust). From a charitable perspective, beginning to use the various tools you have available, whether it be Qualified Charitable Distributions to gift directly from your IRA if you are over 70 ½, donating appreciated investment positions in an after-tax investment account so that both you and the charity avoid paying capital gains taxes (makes sense if you have enough other deductions to itemize), or potentially using a Donor Advised Fund to get a large deduction in the year you contribute cash or appreciated securities and then making grants from the fund to charities over time.

When you find that you have saved more than you ever thought you would, and you feel like spending to spend is not something you are not interested in doing, it might make sense to accelerate the legacy gifting you had planned for after your death and do the gifting during your lifetime. This will allow you to enjoy seeing the gifts “do their good work” during your lifetime and add value and satisfaction to your life that you might never have expected.

If any of these gifting strategies are of interest to you, please reach out to your planner at The Center to discuss. We are always happy to help!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Sandy Adams, CFP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

If You’re a Single Woman, These Are the Top 5 Things to Plan for Prior to Retirement!

Contributed by: Kali Hassinger, CFP®, CSRIC™

Retirement planning comes with its own unique set of opportunities and challenges. When you're a single woman, deciding to retire and the many subsequent decisions surrounding that life change can feel like it presents even more anxiety. Focusing on a few key areas to optimize your financial future can help ease these doubts and ensure you make the right financial choices. Here are the top five items to plan for as you consider retirement:

1. Build and maintain a Diversified Investment Portfolio

Throughout your career, you've successfully built your retirement savings pool. When you're working and living off of your income, it can be easier to weather the market's ups and downs. When your portfolio is needed to provide income for your lifestyle and well-being, the stakes are a bit higher. Building a balanced portfolio that aligns with your risk tolerance, time horizon, and retirement goals is extremely important. With those guidelines in mind, your investment portfolio should be well-diversified across various asset classes, sectors, and geographical regions.

2. Understand your Budget, Expenses, and Lifestyle Needs

At all stages of our lives, having a budget and understanding of spending is important. When making the decision to retire, you'll want to plan for both current and future expenses. Women often have longer life expectancies than men, meaning their savings need to last longer in retirement. A detailed budget and retirement spending projection can help you determine if you've saved enough to have a financially confident retirement.

3. Create a Comprehensive Withdrawal Strategy

A well-thought-out withdrawal strategy can help preserve your portfolio and ensure it lasts throughout your lifetime. One common approach is the "bucket strategy," where you segment your savings and portfolio into different buckets or investments based on when you will need to use the money. When working with clients, we recommend keeping approximately 12 months of your portfolio income need in cash or low-risk, cash-like positions that are not subject to market volatility. Beyond that 12-month need, your ability to handle risk can vary.

Your withdrawal strategy should also incorporate and consider the tax implications of your withdrawals to avoid unforeseen tax burdens.  Strategic tax planning can also help to extend the life of your portfolio.

4. Develop an Estate Plan

Estate planning is often overlooked, but it's one of the most critical steps in helping to ensure that your assets are distributed according to your wishes. Whether you choose family or charitable causes, deciding how your savings and possessions are handled can avoid unnecessary stress for your loved ones.

Without a spouse who would be the default decision-maker in a situation where you cannot make them yourself, it's extremely important to ensure that you've appointed a power of attorney for financial or healthcare decisions.

5. Understand your Social Security Benefits

For many, Social Security is the only fixed source of income in retirement, and the decisions are often irrevocable. As a single person, you'll want to optimize the Social Security benefits available to you. Although you can collect as early as age 62, your benefit will be higher if you collect at your full retirement age or even as late as age 70. A financial planner can help you determine the best strategy for you based on your assets, life expectancy, and retirement goals.

As retirement approaches, it's natural to feel overwhelmed by the decisions that need to be made. Working with a financial planner can provide you with the expertise and personalized advice to feel confident in your financial future. It can also provide a partner you can trust with any of life's financial decisions.

Kali Hassinger, CFP®, CSRIC® is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James.

Prior to making an investment decision, please consult with your financial adviser about your individual situation. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc®. Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

2025 Retirement Account Contribution and Eligibility Limits Increases

Contributed by: Robert Ingram, CFP®

The IRS has recently announced the annual contribution limits for retirement plans and IRA accounts in 2025. And while the increases to most of the limits are modest, there are some notable increases. In particular, the legislation Setting Every Community Up for Retirement Act of 2022 (SECURE Act 2.0) adds some special contribution limits starting in 2025. Here are some of the adjustments to contribution limits and income eligibility limits for some contributions that you should keep on your radar as you plan your savings goals and targets for the New Year.

Employer retirement plan contribution limits (401k, 403b, most 457 plans, and Thrift Saving):

• $23,500 annual employee elective deferral contribution limit (increases $500 from $23,000 in 2024)

• $7,500 extra "catch-up" contribution if age 50 and above (remains the same as in 2024)

• Total amount that can be contributed to a defined contribution plan, including all contribution types (e.g., employee deferrals, employer matching, and profit sharing), will be $70,000 or $77,500 if age 50 and above (increased from $69,000 or $76,500 for age 50+ in 2024)

*SECURE Act 2.0 contribution limit change

Under a change made in SECURE ACT 2.0, starting in 2025, there will be a higher catch-up contribution limit for employees aged 60, 61, 62, and 63 who participate in the above plans.

• $11,250 is the "catch-up" contribution for those aged 60, 61, 62, and 63  ($3,750 more than the age 50 and above "catch-up" amount)

Traditional, Roth, SIMPLE IRA contribution limits:

Traditional and Roth IRA

• $7,000 annual contribution limit (remains the same as in 2024)

• $1,000 “catch-up” contribution if age 50 and above (also remains the same as in 2024)

Note: The annual limit applies to any combination of Traditional IRA and Roth IRA contributions. (i.e., You would not be able to contribute up the maximum to a Traditional IRA and to up the maximum to a Roth IRA.)

SIMPLE IRA

• $16,500 annual elective contribution limit (increases $500 from $16,000 in 2024)

• $3,500 “catch-up” contribution if age 50 and above  (remains the same as in 2024)

*SECURE Act 2.0 also sets a higher “catch-up” contribution limit to a SIMPLE for those aged 60-63)

• $5,250 “catch-up” contribution if aged 60, 61, 62, and 63 ($1,750 more than the age 50 and above “catch-up” amount)

Traditional IRA deductibility (income limits):

You may be able to deduct contributions to a Traditional IRA from your taxable income.  Eligibility to do so depends on your tax filing status, whether you (or your spouse) is covered by an employer retirement plan, and your Modified Adjusted Gross Income (MAGI). The amount of a Traditional IRA contribution that is deductible is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range. For example,

• Filing Single

  • You are covered under an employer plan

    • Partial deduction phase-out begins at $79,000 up to $89,000 (then above this no deduction) compared to 2024 (phase-out: $77,000 to $87,000)

•  Married filing jointly

  • Spouse contributing to the IRA is covered under a plan

    • Phase-out begins at $126,000 to $146,000 compared to 2024 (phase-out: $123,000 to $143,000)

  • Spouse contributing is not covered by a plan, but the other spouse is covered under a plan

    • Phase-out begins at $236,000 to $246,000 compared to 2022 (phase-out:  $230,000 to $240,000)

Roth IRA contribution (income limits):

Similarly to making tax-deductible contributions to a Traditional IRA, being eligible to contribute to a Roth IRA depends on your tax filing status and your income. Your allowable contribution is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range. For 2025, the limits are as follows:

• Filing Single or Head of Household

  • Partial contribution phase-out begins at $150,000 to $165,000  compared to 2024 (phase-out:  $146,000 to $161,000)

•  Married filing jointly

  • Phase-out begins at $236,000 to $246,000 compared to 2023 (phase-out: $230,000 to $240,000)

If your MAGI is below the phase-out floor, you can contribute up to the maximum. Above the phase-out ceiling, you are ineligible for any partial contribution.

Eligibility for contributions to retirement accounts like Roth IRA accounts also requires you to have earned income. If you have no earned income or your total MAGI makes you ineligible for regular Roth IRA contributions, other strategies such as Roth IRA Conversions could be good alternatives in some situations to move money into a Roth. Roth Conversions can have different income tax implications, so you should always consult with your planner and tax advisor when considering these types of strategies.

As always, if you have any questions surrounding these changes, don’t hesitate to contact us!

Have a happy and healthy holiday season!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Any opinions are those of Bob Ingram, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Three Financial Planning Questions for Small Business Owners

Contributed by: Lauren Adams, CFA®, CFP®

One of the most rewarding types of clients we have the honor of working with are business owners. These folks have built their companies from the ground up across a wide variety of industries or worked their way up through the ranks to now serve at their company’s helm. They are masters of their fields of expertise and savvy strategists. However, they are often frustrated when their expertise in their domain doesn’t translate into know-how to manage their finances. This is why many choose to outsource the management of their finances to professionals. If you are a business owner devoted to your business and perhaps putting your own planning on the back burner, we’ve put together a few questions for you to consider.  

1. Are you optimizing your retirement savings?

Two of the most popular retirement savings vehicles for small business owners are the SEP (Simplified Employee Pension) IRA and the solo 401(k).

SEP IRAs are one of the most common retirement accounts for self-employed individuals and small business owners; they are popular for their simplicity and flexibility. They are similar to traditional IRAs in many ways but with some twists. With a SEP IRA, you can most likely contribute much more than a traditional IRA. Depending on your business entity structure, a business owner’s limit is generally the lesser of 25% of compensation (up to $69,000 in 2024). These accounts tend to be ideal for folks who have very few (or zero) other employees because owners must contribute proportional amounts for each eligible employee.

SEPs also offer a lot of flexibility: you can freely roll over the account into a Traditional IRA in the future, and you can make contributions until your taxes are due the following year. Some limitations to consider: you don’t have the ability to take a loan from your SEP IRA (like you can from a 401(k)), there is no Roth contribution option with SEPs (contributions will always be tax deductible up front and withdrawals will always be taxed when taken out), and typically the self-employed person would need to earn a lot to be able to max out their annual contribution limit ($300k+ in 2024).

Solo 401(k)s are a simplified version of the popular corporate 401(k) savings plan. They might be a fit for owner-only businesses whose only employees are the owner or the owner and spouse. With solo 401(k)s, the owner gets to decide how much to contribute as the employee and the employer. Contributions can be pre-tax or Roth, and 401(k)s do allow for tax-free loans (if the proper procedure is followed). There are some nuances to the employee and employer contribution limits, but solo 401(k)s have the same high contribution rate as SEP IRAs, and typically, you can get there faster (with an overall lower level of total compensation) than the SEP. A downside of solo 401(k)s is that they have some added cost and complexity. Plan documents need to be established, and the IRS requires owners to file a Form 5500 if it has $250,000 or more in assets at the end of the year.

Luckily, these are both great savings options for business owners to build long-term retirement savings and diversify the wealth they are building inside their businesses. We have experience assisting our business owner clients with both types of plans.

2. Are you taking advantage of the QBI deduction?

The qualified business income (QBI) deduction is a potential 20% deduction for self-employed individuals and owners of pass-through entities like LLCs, partnerships, and S corps that was created by the 2017 Tax Cuts and Jobs Act. There is a threshold and phaseout of this deduction if you make too much money, and the rules and calculations around it are complex. We won’t get into the nitty-gritty here, but we want to ensure it is on our business owner clients’ radar. In our experience, many business owners are not aware of this deduction, or they may be paying themselves too high a salary than legally necessary (thus increasing their FICA taxes and limiting their profits and the amount of the potential deduction they are eligible for).

Also, this benefit is scheduled to sunset on December 31, 2025 (unless Congress votes to extend it). So you want to make sure you’re making the most of it while you can, as it can translate into potentially large tax savings under the right circumstances. Don’t wait – call your CPA today and discuss ways you can maximize this benefit while it is still around.

3. Are you planning for the future?

As business owners ourselves, we understand how easy it is to get caught up in working “in” the business instead of “on” the business. That’s why we’ve found helpful tools like Gino Wickman’s Traction and the EOS Resources (https://www.eosworldwide.com/). Dedicating time to work on the business itself can pay dividends in your own quality of life and the equity value of the business itself.

If you are contemplating a sale in the future, don’t assume that you need to wait until after you cash out to call a financial advisor. We can employ many tactics leading up to your business sale (such as tax-loss harvesting strategies like direct indexing or tax-advantaged charitable giving) to help mitigate the tax bite of this watershed moment in your life.  

We hope these questions have helped get you thinking about some opportunities you might be missing and showcase how important prioritizing your own financial planning can be. Reach out to talk through your personal situation together. We’d love to help!

Lauren Adams, CFA®, CFP®, is a Partner, CERTIFIED FINANCIAL PLANNER™ professional, and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Lauren Adams, CFA®, CFP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Are You and Your Partner on the Same Retirement Page?

Contributed by: Matt Trujillo, CFP®

Retirement and Longevity

Many couples don't agree on when, where, or how they'll spend their golden years.

When Fidelity Investments asked couples how much they need to have saved to maintain their current lifestyle in retirement, 52% said they didn't know. Over half the survey respondents – 51% – disagreed on the amount needed to retire, and 48% had differing answers when asked about their planned retirement age.*

In some ways, that's not surprising – many couples disagree on financial and lifestyle matters long before they've stopped working. However, adjustments can become more complicated in retirement when you've generally stopped accumulating wealth and have to focus more on controlling expenses and dealing with unexpected events.

Ultimately, the time to talk about and resolve any differences you have about retirement is well before you need to. Let's look at some key areas where couples need to find common ground.

When and Where

Partners often have different time frames for their retirements, an issue that can be exacerbated if they are significantly older. Sometimes, differing time frames are due to policies or expectations in their respective workplaces; sometimes, it's a matter of how long each one wants – or can physically continue – to work.

The retirement nest egg is also a factor here. If you're planning to downsize or move to a warmer location or nearer your children, that will also affect your timeline. There's no numerical answer (65 as a retirement age just isn't relevant in today's world), and this may be a moving target anyway. But you both need to have a general idea on when each is going to retire.

You also need to agree on where you're going to live because a mistake on this point can be very expensive to fix. If one of you is set on a certain location, try to take a long vacation (or several) there together and discuss how you each feel about living there permanently.

Your Lifestyle in Retirement

Some people see retirement as a time to do very little; others see it as the time to do everything they couldn't do while working. While these are individual choices, they'll affect both of you as well as your joint financial planning. After all, if there's a trip to Europe in your future, there's also a hefty expense in your future.

While you may not be able to (or want to) pin everything down precisely, partners should be in general agreement on how they're going to live in retirement and what that lifestyle will cost. You need to arrive at that expense estimate long before retirement while you still have time to make any changes required to reach that financial target.

Your Current Lifestyle

How much you spend and save now plays a significant role in determining how much you can accumulate and, therefore, how much you can spend in retirement. A key question: What tradeoffs (working longer, saving more, delaying Social Security) are you willing to make now to increase your odds of having the retirement lifestyle you want?

Examining your current lifestyle is also a good starting point for discussing how things might change in retirement. Are there expenses that will go away? Are there new ones that will pop up? If you're planning on working part-time or turning a hobby into a little business, should you begin planning for that now?

Retirement Finances

This is a significant topic, including items such as:

• Monitoring and managing expenses

• How much you can withdraw from your retirement portfolio annually

• What your income sources will be

• How long your money has to last (be sure to add a margin of safety)

• What level of risk you can jointly tolerate

• How much you plan to leave to others or to charity

• How much you're going to set aside for emergencies

• Who's going to manage the money, and what happens if they die first

... and the list goes on. You don't want to spend your retirement years worrying about money, but not planning ahead might ensure that you will. Talk about these subjects now.

Unknowns

"Expect the unexpected" applies all the way along the journey toward retirement, but perhaps even more strongly in our later years. What will your healthcare costs be, and how much will have to come out of your pocket? Will you or your spouse need long-term care, and should you purchase insurance to cover that? What happens if the market suffers a severe downturn right after you retire?

While you obviously can't plan precisely for an unknown, talking about what might happen and how you'd respond will make things easier if the unexpected does occur. Included here is the reality that one of you will likely outlive the other, so your estate planning should be done together, and the day-to-day manager of your finances should be sure that their counterpart can take over when needed.

Communication is vital, especially when it comes to something as important as retirement. Almost all of us will have to make some tradeoffs and adjustments (as we do throughout our relationships), and it's important to remember that the earlier you discuss and negotiate what those are going to be, the better your chances of achieving the satisfying retirement you've both worked so hard to achieve.

*2021 Fidelity Investments Couples & Money Study

Matthew Trujillo, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James.

Financially Preparing to Become a Pet Parent

Contributed by: Kelsey Arvai, CFP®, MBA

Contributed by: Nick Errer and Ryan O'Neal

Typically, we celebrate National Pet Month in May and Pet Appreciation Week in the first week of June. Year-round, we acknowledge the love, joy, and companionship our furry, feathered, or shelled friends bring into our lives. We reflect on the importance of responsible pet ownership and acknowledge the profound impact that pets have on our well-being. 

To say that our pets make us happy is selling short the real physical and mental health benefits of pet ownership. The National Institute of Health (NIH) found that pet owners are encouraged by the motivation and social support provided by their pets and are more likely to adopt a physical exercise routine. Furthermore, pet ownership has been associated with lowered blood and cholesterol levels while increasing our levels of serotonin and dopamine. Although it is easy to focus on the positive effects our pets have on us, it is equally important to acknowledge the caretaking commitment and financial burden we are taking on. 

Be honest: Does your lifestyle allow room for a pet? Consider your lifestyle, work, family, financial, and housing situation. Does your situation support a healthy and happy environment for a pet?

According to the American Society for the Prevention of Cruelty to Animals, the average annual cost for dog and cat ownership lies at $1,391 and $1,149, respectively. This doesn't factor in other financial planning aspects, such as pet insurance and estate planning for your pets. Pet insurance can help cover the cost of medical care for your animals. Typical policies can cost around $60 per month for dogs and $30 per month for cats. Premiums will vary depending on your pet's age, breed, cost of services, where you live, and the policy you choose. Pet insurance isn't right for everyone, but it is helpful if you are struck with an unexpected medical expense which can cost over $1,000. Since most plans won't cover pre-existing conditions, starting as soon as possible is important. The alternative is to "self-insure" by paying out-of-pocket expenses that arise. As a guideline, an average pet insurance policy with a $5,000 annual coverage, a $250 deductible, and an 80% reimbursement level will cost about $50 per month in 2024, according to Forbes Advisor.

I always recommend that everyone have enough cash on hand in an emergency fund to cover a minimum of three to six months of living costs. Once you are a pet owner, you'll need to consider increasing the amount to include expenses for your pets. While pet ownership is a choice, once you have a pet, taking care of it is not.

According to a USA Today Blueprint Survey, some dog owners spend up to $376 per month on their dogs, or $4,512 per year. This includes all day-to-day expenses like food, supplies, grooming, routine vet care, insurance, training, and dog walking, but it also includes occasional costs such as boarding and vet care in case of illness.

Research breed characteristics – explore the unique needs of your potential pet and assess how it could impact your budget. Consider home insurance and rental fees (some home insurers may increase your premiums or choose not to cover you if you own certain dog breeds). If you become a dog owner, you may want to consider additional liability coverage in case of dog bites. If you rent, some landlords require additional "pet deposits" or "pet rent".

In support of National Pet Month, The Center partnered with two local nonprofits this past May to support rescue and caretaking efforts. As part of our commitment, we donated $1,000 each to Happy Paws Haven Co. and Almost Home Animal Rescue. These organizations provide care, comfort, and compassion to animals in need. We hope our contribution helps further their mission and brings comfort to our furry friends in search of forever homes.  

Kelsey Arvai, MBA, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

Opinions expressed in the attached article are those of the authors and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

You've inherited an IRA – Now What?

Contributed by: Kali Hassinger, CFP®, CSRIC®

Receiving an inheritance can be confusing and filled with mixed emotions. However, when inheriting a traditional IRA, the confusion can be compounded by the multitude of rules, regulations, and tax implications surrounding these accounts. How you manage the account in the future can depend on several factors, such as your relationship with the deceased and the age of the deceased at death.

You've Inherited an IRA from your Spouse

If you inherited an IRA from your spouse, and you are the sole beneficiary, you have several options on how to manage the account in the future. The first option is to simply allow the account to remain in your deceased spouse's name.  In this example, if your spouse hadn't yet reached RMD or Required Beginning Date age (as of right now, this is age 73, but it has changed several times in the last few years), you wouldn't need to begin taking Required Minimum Distributions (RMDs) until your spouse would have reached age 73. With this process, you will have additional elections to make regarding which life expectancy table will be used to determine your RMDs.

Spouses can also transfer the account assets into their own traditional IRA. This option is specific to spouses only. With this election, the account is treated no differently than an IRA established in your name. Required Minimum Distributions would not begin until your RMD age. 

However, if you want to access the funds earlier than 59.5 without a 10% tax penalty, it could make more sense to open a beneficiary IRA. This account will be subject to annual required distributions, but again, without a tax penalty.

You've Inherited an IRA from Someone Else

If you recently (since 2020) inherited an IRA from someone else, such as a parent, aunt, or uncle, and as long as they were more than ten years older than you, you will likely need to open an inherited IRA and distribute the entire account within ten years!

If the deceased was subject to Required Minimum Distributions before their death, you must also take an RMD each year (Note: This requirement has been waived in recent years but is set to begin in 2025.) Given that traditional IRA withdrawals, whether inherited or not, are subject to ordinary income tax, this can create significant tax implications for beneficiaries. Purposeful tax planning is essential to avoid unforeseen or forced distributions in later years.

The options discussed here are certainly not exhaustive, and rules differ for beneficiaries who are disabled, chronically ill, minors, or entities (as opposed to individuals). These differing rules also apply to instances in which the beneficiary is less than ten years younger than the deceased account holder.

If you've inherited an IRA and are looking for guidance on which option or planning path is best for you, we are here to help.

Kali Hassinger, CFP®, CSRIC® is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Kali Hassinger, CFP®, CSRIC® and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Top 5 Tips for Managing Beneficiary Selections

Contributed by: Nick Defenthaler, CFP®, RICP®

Checking your beneficiary designations each year on your investment accounts is always a wise move. Our team does this before each planning meeting with our clients, and I can't tell you how many times this has prompted an individual or family to make a change. As tax law has continued to evolve and new rules related to inherited retirement accounts have emerged, it's now even more important to be intentional with your beneficiary selections.

Here are my top five tips and considerations when it comes to prudent beneficiary management and selection:

1. Review Beneficiary Elections Annually

As we all know, mistakes happen, and life changes. Kids might now be older and more responsible for making financial decisions, family members you've listed may have passed away, and dear friends you've named as a beneficiary might no longer be part of your life. Let’s look at a hypothetical investor who we’ll call “Sam”. Sam is in his early 70s and had become divorced three years prior. Sam was also less mobile and, as a result, decided he wanted to hire a new adviser who was closer to his home.

His former wife had been named on his retirement account, which had grown to $1M. If Sam didn't take any action of the time of his divorce, his account would go to his ex-wife, and not his two children as he wants. When we identify a beneficiary that needs to be updated, we make sure the client addresses it immediately as that determines who gets that account.

2. Charitably Inclined? Consider Pre-Tax Retirement Accounts

If you have the desire to leave a legacy to charity, naming the charity as a partial or 100% primary beneficiary on a retirement account could be a very smart tax planning move. Unlike an individual, when a charitable organization receives assets from an individual's pre-tax IRA, 401k, etc., the charity does not pay tax on those dollars. Let’s look an at example client who owns a pre-tax traditional IRA ($1M) and a Roth IRA ($500k). She indicates that she wants 10% of her $1.5M portfolio to go to her church, with the remaining amount being split evenly amongst her four adult children.

To accomplish this goal, we’ll name her church as a beneficiary on her traditional IRA for a specific dollar amount of $150,000. The entire bequest would come from the traditional IRA and nothing from her Roth IRA. This amount could be adjusted as needed. By specifically naming the IRA as the account to fund her charitable bequest, more of her Roth IRA will ultimately go to her kids. If the charity received proceeds from her Roth IRA upon death, the charity would still receive the assets tax-free, so it would be foolish to not have more of these assets go to her kids. Assuming each child is in the 25% tax bracket, this move helped to save her estate almost $38,000 in tax.

3. Naming a Trust? Understand the Ramifications

It is common for clients to name their trust as either the primary or contingent beneficiary of their retirement account. However, when naming a trust, it's important to understand the tax ramifications. Irrevocable trusts aren't used as often as revocable living trusts but have a place in certain cases. While irrevocable trusts typically offer a high level of control, the tax rates for these trusts upon the death of the original account owner are much higher than individual rates with much less income.

Revocable living trusts are the most common trusts we see with a client's name listed as a beneficiary (primary or contingent). However, the correct language must be used within the trust to ensure tax-efficient distributions for the beneficiaries of the actual trust (ex., 'see through' trusts). As always, be sure to consult with your attorney on this matter. Our team always wants to collaborate with your attorney and other professionals on your financial team to ensure the right strategy is in place for you and your family.

4. Beneficiaries in Different Tax Brackets: How to Choose

In addition to intentionally identifying which account would be best served to go to a charity, the same rule applies to individuals who find themselves in very different tax brackets. Let's look at a family we'll call the 'Jones Family' as an example. Mrs. Jones is recently widowed and is in her early 80s. She has two adult children: Ryan (51) and Mark (55). All of them reside in Florida, where there is a 0% state income tax. Mrs. Jones' current portfolio value sits at just shy of $1.1M, allocated as follows: $575,000 in a traditional IRA, $300,000 in a Roth IRA, and $200,000 held in an after-tax brokerage account. Her youngest son, Ryan, finds himself in the 12% federal tax bracket, while her older son, Mark, is in the 35% tax bracket. While Mrs. Jones still wants her estate to be split 50/50 between Ryan and Mark, she wants to make sure the least amount of income tax is paid over time on the inheritance her boys will be receiving. To accomplish this goal, we structure her beneficiary designations as follows:

• Ryan: 100% primary beneficiary on traditional IRA (Mark 100% contingent).

• Mark: 100% primary beneficiary on Roth IRA and after-tax brokerage account (Ryan 100% contingent on both accounts).

• Ryan would be subject to Required Minimum Distributions (RMDs) from the Inherited traditional IRA from his mother, and the account must be depleted in 10 years. However, he would only pay 12% in tax on these distributions. If we assume he stays in this bracket for the next decade, Ryan will end up with $506,000 net of tax [$575,000 x .88 (1 – 12% tax rate)] from the account.

• Being that Mark is in a significantly higher tax bracket, it would be much more tax-efficient for him to inherit his mother's Roth IRA and after-tax brokerage account. While Mark's Inherited Roth IRA will also carry an annual RMD and must be depleted in 10 years, the RMDs he would be taking would NOT be taxable to him. The after-tax brokerage account would also receive what's known as a 'step-up' in cost basis upon Mrs. Jones' death, thus eliminating any large, unrealized capital gains she had in several meaningful stock positions in her account.

While there is never a 'perfect' beneficiary plan, the one outlined above accomplishes Mrs. Jones' goal in the best way possible. If we had named Ryan and Mark as 50% beneficiaries on each account, the total tax burden on the overall inheritance would have been $66,000 higher, primarily due to Mark paying a much higher tax rate on the RMDs from the traditional IRA. Our plan gives Ryan and Mark' net' the same amount. This means more of Mrs. Jones' estate is staying with her family, and a lot less will be going towards tax.

5. End of Life Tax Planning Strategies

As clients age in retirement, they may spend less money and/or incur large medical costs that would result in significant tax deductions. If the owner of a traditional IRA or 401k finds themselves in this situation, they should closely evaluate completing Roth IRA conversions (full conversions, a single partial Roth conversion, or partial conversions over the course of several years).

When converting funds from a traditional IRA to a Roth IRA, the converted funds are considered taxable income. In general, a conversion only makes sense if the rate of tax paid today on the conversion will be less than the tax rate on distributions in the future (either by the current account owner or a future beneficiary). If an individual or family is spending much less and is now well within the 12% bracket, it could make sense to complete annual Roth conversions to completely 'fill up' this low bracket. Another common occurrence that clients might experience is large medical deductions. Unfortunately, these tax deductions ultimately either go to waste or are greatly diminished because there is not enough taxable income to offset the deduction. I have seen scenarios where clients could have converted $30k+ to a Roth IRA completely tax-free due to a large medical deduction. However, the deduction essentially went to waste because no income was generated on the tax return for this deduction to offset. In a sense, this is like striking a match to free 'tax money'. Keep in mind that inherited IRAs cannot be converted to one's own Roth IRA or an Inherited Roth IRA, so exploring conversions during the original account owner's life is imperative. Roth conversions will not make sense for everyone, but when they do, the potential tax dollars saved can be massive.

Naming beneficiaries and having a clear understanding of how you would like funds allocated is step one. Once this is known, the job is usually not complete. A quality adviser who has extensive knowledge of tax planning should be able to offer guidance on how to accomplish this goal in the most tax-efficient manner possible. As mentioned previously, collaboration with other professionals on the client's financial team (ex., CPA and attorney) is ideal. Doing so could allow more of your hard-earned money to stay in the pockets of those you care most for and less going to the IRS!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

These examples are hypothetical illustrations and are not intended to reflect any actual outcome. they are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.