Challenges and Solutions of Retirement Planning for Women

Saving for retirement isn’t easy in ordinary circumstances. But with wage growth near non-existent and underemployment ridiculously high it becomes challenging for most and even harder for most women.

According to a recent study, only 62 percent of women said they were saving for retirement, just 15 percent said they were saving enough and 22 percent were barely saving at all!

There are numerous reasons why many women fall behind in saving for their post-career lives, ranging from lower pay and taking care of others to taking time off from the workforce.

“Women will save for their kids before they’ll save for themselves,” said Cindy Hounsell, president of the Women’s Institute for a Secure Retirement (WISER).

Have you planned well enough for retirement?

Cost of Being a Caregiver

Is this just a product of different saving and spending habits? Hardly. Women face special hurdles when it comes to saving for the so-called golden years.

For one thing, women are more likely than men to step out of the workforce, or work part-time to care for children or elderly parents.

When they do work, women are often confronted with the gender pay gap. That gap has narrowed since it was first identified, but on average, women still are paid just 78 percent of what men with equal qualifications receive, according to The American Association of University Women.

Divorce Recovery

Statistically, divorce tends to have more negative financial consequences for women than for men. A study conducted by a professor at the University of Connecticut found that after divorce, women who ramped up their careers fared worse in retirement than those who remarried or even those that never divorced initially.

Further, U.S. Census Bureau data shows that women who were divorced reported lower household income than men in the 12 months following the divorce and were more likely to receive public assistance.

Invest for Longevity

When women do save for retirement, another challenge they face is that they may invest too cautiously. Some research has found that some women view themselves as less financially knowledgeable than men do, thereby expressing less confidence in their financial decision-making.

A recent study of women’s financial behavior conducted by Prudential, found that the “Women we surveyed feel no more prepared to make wise financial decisions today than they did two years ago or even a decade ago.”

To top it off, since women have a longer life expectancy, whatever they do save has to last longer—only that’s not happening. The poverty rate among women older than 65 reached 11.6 percent in 2013, and elderly women accounted for two-thirds of the elderly poor.

Get Ahead of the Savings Curve

Fortunately, there are steps women can take steps to boost their nest eggs.

First, in terms of tax-deferred savings, it’s a great idea to take advantage any opportunity available:

• Contribute at least enough to your 401(k) or 403(b) to receive the maximum employer match.
• Contribute to a Roth IRA. The advantage of tax-free growth leaves more money to live on in retirement.
• Take advantage of the “Saver’s Credit”, which enables those below certain income thresholds ($61,000 for married couples filing jointly, $30,500 for single filers in 2015) to offset some of their retirement plan contributions.

Educate, Educate, Educate

Next, women can boost their financial knowledge and build their confidence in making financial decisions.

• Look for nonprofit organizations such as American Association of Retired Persons (AARP) or WISER that provide workshops or seminars on financial planning strategies.
• Consider taking classes on money & finance at your local community colleges and universities. There is comfort and empowerment for women learning about retirement planning together. The views, perspectives and ideas shared vary greatly from many of their male counterparts.
• Get a good read that covers knowledge of investing basics, not the do-it-yourself versions. Knowledge is power!

Consult a Qualified Professional

Equally as important as all the other techniques, seek out a financial professional, planner or registered investment advisor that:

• You feel comfortable with and understands your circumstances
• Is willing to coach/educate you during the planning/investing process
• Has logged years of experience in working with people like yourself
• Whose fees are transparent and recommendations are objective
• Adds value by listening and introducing fresh new ideas

You can take back control of your financial health! Every journey begins with the first step!

The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a financial professional, CPA or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

 

When It’s OK to Tap Your IRA

You’ve been saving diligently for your retirement, but now you need some of that cash to cover today’s expenses. Can you get to it without incurring Uncle Sam’s tax wrath? In some instances, the answer is yes.

When you take money out of an individual retirement account before you reach age 59½, the Internal Revenue Service considers these premature distributions. In addition to owing any tax that might be due on the money, you’ll face a 10 percent penalty charge on the amount.

But there are times when the IRS says it’s OK to use your retirement savings early.  Two popular, penalty-free withdrawal circumstances are when you use IRA money to pay higher-education expenses or to help purchase your first home.

OK for School

When it comes to school costs, the IRS says no penalty will be assessed as long as your IRA money goes toward qualified schooling costs for yourself, your spouse or your children or grandkids.

You must make sure the eligible student attends an IRS-approved institution. This is any college, university, vocational school or other postsecondary facility that meets federal student aid program requirements. The school can be public, private or nonprofit as long as it is accredited.

Once enrolled, you can use retirement money to pay tuition and fees and buy books, supplies and other required equipment. Expenses for special-needs students also count. And if the student is enrolled at least half time, room and board also meet IRS expense muster.

First-Home Exemption

Then, there’s your home. Uncle Sam offers various tax breaks for homeowners. He’ll even bend the IRA rules a bit to help you get into your house in the first place.

You can put up to $10,000 of IRA funds toward the purchase of your first home. If you’re married, and you and your spouse are first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash.

Even better is the IRS definition of “first-time homebuyer.” Technically, you don’t have to be purchasing your very first abode. You qualify under the tax rules as long as you (or your spouse) didn’t own a principal residence at any time during the previous two years. In fact, you can even share your IRA wealth. The IRS says the first-time homebuyer using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild or a parent.

But be careful not to take out your money too soon. You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.

Different Treatment for Roth

These home buying IRA options apply to traditional retirement accounts. The rules are a bit different if your nest egg is in a Roth IRA.

The $10,000 you take out for your first home is a qualified distribution as long as you’ve had your Roth account for five years. This means you can take out your retirement money without penalty, and because Roth earnings are tax-free, you’ll have no IRS bill, either.

If, however, you opened your Roth IRA less than five years ago, the withdrawal is an early distribution. As with a traditional IRA early withdrawal, a Roth holder can use the first-home exception to avoid the 10 percent penalty but might owe tax on earnings that are withdrawn.

You can reduce the tax bite by first withdrawing the already-taxed contributions you made to your Roth. In fact, the IRS has specific rules about the order in which you can take unqualified Roth distributions: contributions, conversions from traditional IRAs and earnings. Check Chapter 2 of IRS Publication 590, Individual Retirement Arrangements for details.

Military Exceptions

Members of the military reserves also can receive early IRA distributions without penalty. To qualify, the following conditions must be met:

Conditions:

• You were ordered or called to active duty after Sept. 11, 2001.

• You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve unit.

• The distribution is from an IRA or from an elective-deferral plan, such as a 401(k) or 403(b) plan or a similar arrangement.

In addition, the early distribution cannot be taken before you received your orders or call to active duty or after your active duty period ends.

Personnel eligible for this early withdrawal exception include members of the Army or Air National Guard; the Army, Naval, Marine Corps, Air Force or Coast Guard Reserves; and the Reserve Corps of the Public Health Service.

Allowable, But Not Preferable, Distributions

Early IRA withdrawals also are penalty-free in a few other instances. Unfortunately, most of these are hardship situations that no taxpayer wants to face.

Hardship circumstances for penalty-free withdrawals:

• Payment of excessive unreimbursed medical expenses.

• Payment of medical insurance premiums while unemployed.

• Total and permanent disability.

• Distribution of account assets to a beneficiary after you die.

You also can get IRS-approved early access to your nest egg if you take IRA money on a specific schedule. Known as substantially equal periodic payments, this method allows you to begin withdrawing from your IRA early as long as the amounts are determined by an IRS-calculated life expectancy table.

Finally, keep in mind that the early withdrawal exceptions do not eliminate your tax bill if you take the money out of a traditional IRA. Unlike Roth accounts where you eventually can withdraw your money tax-free, taxes are merely deferred on traditional IRAs. So when you take the money out of such an account, regardless of your age or the purpose of the withdrawal, you’ll owe your regular tax rate on the amount.

But the early withdrawal exceptions do protect you from paying the IRS more in penalty charges. To let the IRS know that you used the retirement money early for a tax-acceptable purpose, file Form 5329. When you report your withdrawal here, you’ll also enter a code, found in the form’s instructions, that lets the IRS know the distribution is penalty-free.

The information herein contained does not constitute tax advice.  Any final decisions or actions should not be made without first consulting a CPA or Accountant.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Investment Moves that Increase Financial Aid

Financial aid season for college students doesn’t kick off for another five months, but parents should take a close look at their investments and assets now to help maximize their child’s aid eligibility.

The Free Application for Federal Student Aid (FAFSA), which students must fill out in order to apply for federal, state and some school aid, determines the expected family contribution (EFC) – the amount that your family could be responsible to pay out of pocket toward college education. The lower the EFC, the more financial aid a student is likely to receive.

Positioning for Financial Aid

Parents who are considering selling investments, like stocks or mutual funds, or real estate should consider the impact their capital gains or losses will have on their child’s financial aid eligibility. In general, capital gains increase a family’s adjusted gross income (AGI), which tends to decrease their financial aid. In addition, this year presents a new opportunity for high income-earning investors to roll over their Individual Retirement Account (IRA) into a Roth IRA, which can provide plenty of tax perks but can hurt their request for financial aid.

Here are four investment moves that can impact the amount of financial aid a student gets.

Rolling an IRA into a Roth IRA

This year, a new opportunity became available to retirement savers, which permits those with more than $100,000 in annual modified gross income to roll over savings from a traditional IRA into a Roth IRA. With a Roth IRA, you’ll pay taxes upfront and you can withdraw tax free, assuming you’re at least age 59 1/2 and have one Roth IRA account open for at least five years. The upshot here is if you think your personal tax rate will be higher when you retire, it might be better to bite the bullet now and pay the taxes while you’re in a lower bracket. The drawback is that you’ll have to pay full income taxes on the conversion. And for individuals with children about to enter or in college, this rollover could lead to a smaller financial aid package. That’s because the entire amount that gets converted to the Roth IRA will show up on their tax return as income.  This could be extremely damaging for a family that would [otherwise] qualify for financial aid.

There is a way for parents to accomplish a rollover without sacrificing their child’s aid eligibility. The Department of Education is permitting colleges to ignore this conversion when they’re reviewing a family’s income for financial aid purposes. The ultimate decision will be made by each individual college, and parents will need to contact the school to request that they ignore this rollover as part of their income. Otherwise, there’s a greater chance that the school will take the rollover into account.

Managing capital gains and losses

Given the recent volatility in the U.S. markets, it’s likely that many investment portfolios have taken a hit. Although selling a stock at a loss is never ideal, such a move can help increase the amount of aid your child will receive.

Selling at a loss may only make sense if the individual isn’t planning to hold on to the investment for the long run. However, if you were investing for the short term or if you were hoping to use this money to help pay for college tuition, it might be time to sell. You may be better off to sell sooner rather than waiting for the future when you may have gains that would count against them in the financial aid formula. It might be better to take the loss that would be deducted from your earned income on their tax return and will lower the adjusted gross income.

Selling an investment at a profit will increase your AGI, which would likely lower the amount of financial aid  you can get. However, taxpayers in the 10% or 15% tax brackets who have long-term capital gains (requires a holding period of more than a year) pay zero taxes through the end of 2010.

Consider impact of selling real estate

Homeowners thinking about selling their home may or may not impact their child’s financial aid eligibility depending on how much their property fetches.

Currently, there is a capital gains exclusion of gains up to $250,000 in profit per person or $500,000 in profit per couple who files jointly; the sale doesn’t show up in your AGI unless the home sells and you’re left with a gain higher than these amounts. Homeowners must have owned and lived in the home for at least two years. (Sales of investment properties show up on your AGI regardless of how much they sell for.)

To determine capital gains, the cost basis, which is the price at which you bought your home and the cost of the improvements that you made, is subtracted from the selling price (including commission).

Shifting assets from child to parents

Parents often move assets into their children’s names for tax purposes – but this tactic will almost certainly hurt them come financial aid time. The federal needs analysis formula assesses child assets at a rate of 20%, while parent’s assets are assessed at up to 5.64%. The EFC will probably be higher when the assets remain in the child’s name and they could lose out on need-based aid, assuming they qualify.

One option is to move the assets from the student to the parent’s name before filing the FAFSA. Or parents can move some of their cash into their child’s 529 plan, which is treated as a parental asset. This money, however, will have to be used for educational purposes; otherwise, when you withdraw, the earnings will be taxed as ordinary income and hit with a 10% tax penalty. Also, such a move will probably make the most sense for someone moving cash from a bank account into a 529 plan.

* Consider the investment objectives, risks, charges and expenses of the 529 Plan carefully before investing.  Consultation with a tax adviser is recommended as Compass Asset Management Group. LLC does not provide tax advice.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.