Through the back door to bigger retirement savings

“Backdoor” strategies let you enjoy the benefits of a Roth while getting around some of the limitations.

For people looking to build a balanced retirement savings portfolio, a Roth IRA can serve as a great companion to an employer plan such as a 401(k). But if you earn too much money, you may not qualify to invest fully – or at all – in a Roth IRA. And no matter how much you earn, you may find that contribution limits prevent you from building as fat a fund as you’d like.

Fortunately, there are “backdoor” strategies that may help you get around these limitations. Here’s what you need to know.

Backdoor Roth IRA
Once your modified adjusted gross income (MAGI) tops $161,000 for single filers or $240,000 if married and filing jointly, the IRS begins phasing out your ability to invest directly in a Roth IRA.

But you can contribute after-tax dollars to a traditional IRA, then shortly thereafter convert those funds to a Roth IRA. Because there are no income limits restricting your ability to put after-tax dollars in a regular IRA, you can use this backdoor strategy to build a Roth IRA no matter how much you earn.

You can’t go through this backdoor if you own any IRAs with any pretax dollars in them. The reasons for that are complicated, but it all boils down to two IRS rules (the pro rata rule and the aggregation rule). Consulting your financial advisor and tax professional prior to doing a backdoor Roth is a smart move, to ensure that you’re following every rule.

Mega backdoor Roth IRA
If your problem is not how much you earn but the size of contribution limits, there’s a mega backdoor strategy that could help boost your savings.

For 2024, the limits on how much you can contribute to an IRA are $7,000, or $8,000 if you’re over 50. A mega backdoor strategy may empower you to put away much more than that.

Your current employer must offer a 401(k) or 403(b) plan, and you must pay into it. Whichever of those plans you use must also allow employees to make after-tax contributions into the plan, which count above and beyond employee elective deferral limits.

This is simplest to achieve if your employer offers a Roth option attached to its retirement plans, one that supports in-plan conversions to the Roth – that’s your mega backdoor to a bigger retirement fund.

There are plan-specific limits on how much you may contribute in after-tax dollars to convert into the Roth, and are other rules affecting whether you can apply a backdoor strategy and how big a fund you can build. Again, a chat with your financial and tax advisors is an essential step in any backdoor plan.

Pros of backdoor Roth IRAs:

• You may still be able to fund a Roth IRA even if your income is above IRS limits.
• If you have access to an employer plan with a Roth feature, you may be able to save more than the usual IRA limits.
• Because the money going into the Roth has already been taxed, you can take tax-free distributions in retirement.

Cons of backdoor Roth IRAs:

• Not everyone will be eligible to apply a backdoor or mega backdoor approach.
• Typically, only high earners benefit.
• Both require careful planning with a tax professional.

Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

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. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

The 10-year rule for retirement accounts: How new guidelines could impact your IRA beneficiaries

In 2020, The SECURE Act changed the IRA inheritance landscape – terrain that would shift again in 2022 with the passage of the SECURE Act 2.0. Over the summer, that new ground was firmed up as the IRS finalized regulations that will go into effect January 1, 2025. Here’s a look at the rules and how they could impact your wealth and wealth transfer planning.

One of the biggest changes brought by the original SECURE Act was the introduction of the “10-year rule” for designated beneficiaries, which sought to stem the amount of time inherited money could grow tax-free.

Implemented in January 2020, the 10-year rule requires most non-spouse beneficiaries to withdraw the entire balance of an inherited IRA within 10 years. It also set parameters around timing, distributions and beneficiary categories.

SECURE Act 1.0:
Required with some exceptions, that the entire balance of an inherited retirement account be distributed within 10 years of the owner’s death; raised the age when RMDs must be taken:

RMDs begin at 72 for those born between July 1, 1949 and 1950.

SECURE Act 2.0:
Maintained the 10-year rule; further raised the age at which RMDs must be taken:

RMDs begin at 73 for those born between 1951 and 1959 and at 75 for those born after 1960.

Key guidelines

Required minimum distributions (RMDs)
The minimum amount that must be withdrawn from a retirement account each year after the account owner reaches the designated age.

Required beginning date (RBD)
The date by/on which the first RMD must be taken. This date is April 1 of the year after an IRA owner reaches their applicable RMD start age (currently 73).

Eligible designated beneficiaries (EDBs)
Beneficiaries who may take distributions over their life expectancy – but may also choose to apply the 10-year rule, depending on their situation, including:

• Spouses
• Individuals not more than 10 years younger than the retirement plan account or IRA owner (this includes an individual older than the IRA owner)
• Minor children of the retirement plan account or IRA owner only (note: these must be children of the account owner – not a grandchild, niece, nephew, etc. – and after they reach age 21, the account must be depleted within 10 years)
• Disabled individuals
• Chronically ill individuals

Non-eligible designated beneficiaries (NEDBs)
Beneficiaries who are subject to the 10-year rule, including:

• Those not falling into any of the above groups, who inherited from someone who died before their RBD.
• Those not falling into any of the above groups, who inherited from someone who died after their RBD.

“The changes will have the biggest impact for beneficiaries of larger accounts, further exacerbated if those beneficiaries are successful themselves and taxed at higher rates. This compressed time period could force distributions into higher taxer brackets,” said Jim Kidney, CPA®, CPWA®, who supervises the financial planning consulting practice at Raymond James. “Before the 10-year rule, the ‘stretch IRA’ strategy enabled inheritors to spread distributions – and the tax impact – across their life expectancies.”

While that possibility is much more limited now, there are alternative strategies for maximizing IRA funds in line with current regulations.

Considerations for IRA owners

Roth conversion
Converting a traditional IRA to a Roth IRA before an account owner reaches their RBD can keep those converted dollars at a lower tax bracket compared to if they were forced to take it as an RMD from the Traditional IRA later. Furthermore, the converted dollars and associated earnings will be tax free to the owner and ultimately to a beneficiary, provided several conditions are met.

Life insurance
A somewhat more involved planning strategy is to consider using distributions from a pre-tax retirement account to purchase life insurance, allowing the policy holder to name as beneficiary the same person they intended to inherit their retirement account.

Considerations for IRA beneficiaries

Inheritance circumstances
The finer points of how a beneficiary inherits an account will impact how the 10-year rule is applied and how RMDs are managed.

If the account owner dies before their RBD:

A non-eligible beneficiary will need to deplete the account by December 31 of the tenth year following the owner’s death but will not have to take RMDs.

If the account owner dies after their RBD:

A non-eligible designated beneficiary will need to take RMDs in years one through nine, with a final distribution in year 10. This RMD requirement is generally based on the single life expectancy of the beneficiary.

Missed RMDs
Because final guidance regarding the 10-year rule has been shared four years after the rule’s introduction, some beneficiaries could have needed to take RMDs in the intervening period. In many of these cases, the IRS is issuing waivers for missed RMDs. This waiver only applies to non-eligible designated beneficiaries under the 10-year rule who inherited from an IRA owner who died after their RBD.

Distribution timing
For beneficiaries in high tax brackets, it’s important to weigh strategic timing options for distribution. For example, if a beneficiary plans to retire five years after inheriting, it may be most efficient to take minimum distributions while they’re still working and increase payments to deplete the account in their first five years of retirement.

While this rule is settled, the climate is sure to change again, inviting new tax and financial planning implications. To keep your footing, work closely with your financial advisor and, when appropriate, experienced estate planning and tax professionals.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Raymond James does not provide tax or legal advice. Please discuss these matters with the appropriate professional. Withdrawals from tax-deferred accounts may be subject to income taxes, and prior to age 59.5 a 10% federal penalty tax may apply.

Rolling from a traditional IRA into a Roth IRA may involve additional taxation. When converted to a Roth, you pay federal income taxes on the converted amount, but no further taxes in the future. 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 are permitted. Each converted amount is subject to its own five-year holding period, unless the owner is 59.5 or older.

Investments & Wealth Institute™ (The Institute) is the owner of the certification marks “CPWA®” and “Certified Private Wealth Advisor®.” Use of CPWA and/or Certified Private Wealth Advisor signifies that the user has successfully completed The Institute’s initial and ongoing credentialing requirements for investment management professionals.

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. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Dispelling Medicare misconceptions

Between its parts and plans and supplements, many pre-retirees find Medicare hard to navigate without some guidance. Here are the facts about five common Medicare myths:

Myth: Medicare offers free healthcare.

Fact: The Affordable Care Act allows Medicare beneficiaries an annual wellness check at no charge. Beneficiaries also are entitled to free recommended preventive screenings, such as mammograms and colonoscopies, annual wellness visits and personalized prevention plans. For most people, Medicare Part A – which covers hospital stays and services up to certain limits – does not require a premium. But that’s it. You’re still responsible for copays, coinsurance and deductibles.

Medicare Part B, which covers medically necessary and preventive services, has monthly premiums that start at $174.70 for individuals earning less than $103,000 in 2024 up to $594.00 for individuals earning more than $500,000. Part D, which covers prescriptions, has added surcharges for those making more than $103,000.

Many Medicare beneficiaries also purchase a Medigap supplemental insurance plan to help cover out-of-pocket costs.

Myth: Medicare covers everything.

Fact: Not true. Dental, vision and hearing are not covered by Medicare. Prescription drug coverage is only offered through Part D and Medicare Advantage plans. What’s more, you are responsible for the premiums, deductibles and copayments associated with the coverage you choose.

Myth: A Medicare Advantage plan or Part D coverage will fill gaps in my coverage.

Fact: Medicare can be complicated. Medicare Advantage plans – sometimes known as Part C – offer optional coverage through private insurance companies. Many of these plans cover dental, vision, hearing and prescription drug costs not covered by Parts A and B, which the government sometimes calls “Original Medicare.” However, the plans may have limited networks to keep costs down and beneficiaries will have cost-sharing structures that may vary with different plans.

Part D is optional prescription drug coverage that has myriad variables, such as premiums, copays, coverage gaps and coinsurance. You can choose which prescription drug plan best fits your needs.

Myth: Medicare may not cover me.

Fact: One major advantage of original Medicare is that you can’t be rejected for coverage or be charged higher premiums because you’re sick. However, if you’re a high earner, you’ll pay higher premiums for Medicare Part B and Part D. In addition, the Affordable Care Act now prohibits discrimination based on a pre-existing condition. However, private “medigap plans” can have underwriting after the initial guaranteed issue period.

Myth: I will be notified when it’s time to sign up for Medicare.

Fact: No. Unless you are already receiving Social Security benefits, you must apply for Medicare. You will not receive any official notification on when or how to enroll.

If you’re over 65, still working and covered by employer healthcare, you may want to delay enrollment in Part B to avoid paying for coverage you don’t need. Once you stop working, you must enroll within eight months to avoid permanent late penalties. COBRA Or retiree benefits are not considered creditable coverage and you will be penalized if you have COBRA and sign up for Medicare past the age of 65.

For those without employer coverage, it’s a good idea to sign up when you’re first eligible for Part B.

Source: Medicare.gov

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. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Social Security increases benefits by 2.5% for 2025

The 2025 Social Security cost-of-living adjustment (COLA) has been announced.

The Social Security Administration has announced a cost-of-living adjustment (COLA) to recipients’ monthly Social Security and Supplemental Security Income benefits. Nearly 68 million Americans will see the 2.5% increase in their payments beginning in January 2025.

The 2.5% increase aims to help beneficiaries keep up with inflation. Although lower than the 3.2% COLA for 2024 and significantly less than the 8.7% increase in 2023 and 5.9% in 2022, it still provides a welcome boost to recipients’ monthly payments. The COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures the average change in prices over time that consumers pay for a basket of goods and services. The COLA is designed to ensure that the purchasing power of Social Security and SSI benefits is not eroded by inflation.

According to the Social Security Administration, on average, retired workers currently collect $1,927 per month in Social Security payments, or roughly $23,124 per year. The 2.5% COLA will add about $49 per month to those payments or $588 for the year.

Keep in mind all federal benefits must be direct deposited. So if you haven’t already started receiving benefits, you need to establish electronic transfers to your bank or financial institution. Connect with your advisor to better understand how this COLA adjustment may impact your overall financial plan.

Source: Social Security Administration

The consumer price index for urban wage earners and clerical workers is a monthly measure of the average change over time in the prices paid by urban wage earners and clerical workers for a market basket of consumer goods and services.

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. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.