Tag: financial planner

Backdoor IRA’s for High Income Earners

Backdoor IRA’s – The Dirty Little Secret

By this point in the year, most of us have filed our taxes and the 2016 tax year is behind us. Not many people have taxes on the mind and they will probably put off re-visiting the topic until next year, however; there is no time like the present to plan for how you can save on your future tax payments. If you are looking to pad your retirement savings, a backdoor IRA may be just the remedy for you.

What you need to know

Roth IRAs are a very popular and attractive investment vehicle for many reasons, and they are a great vehicle to facilitate a backdoor IRA.  The accounts are funded with after-tax dollars, withdrawals in retirement are tax-free, and any earnings in the account are tax-deferred.  Unlike the Traditional IRA, Roth IRAs are not subject to required minimum distributions during retirement, which makes them very appealing when it comes to tax planning.

Unlike with a Traditional IRA, there are income limits to opening a Roth IRA which has left many people earning high salaries believing it is not an option for them.  The law states that a single person with an annual adjusted gross income of $133,000 or more, and a married couple making more than $196,000 cannot directly fund a Roth IRA.  Despite this limitation, there have been no income limits placed on converting funds to a Roth IRA.  This allows for strategic planning to have more tax-free money available in retirement.  For high income earners, this is a fantastic planning tool.

How to do it

This work-around is called a “backdoor” approach.  Most high-income earners are most likely contributing the maximum allowances to their 401k plans. This means additional contributions can be made to a non-deductible Traditional IRA.  The backdoor approach would then have these investors turn around and move/convert those dollars to a Roth IRA.  Because the funds are coming from another retirement account, they are not considered to be a contribution.  The advantage to converting these funds is the tax-free growth that is provided in a Roth IRA. Deploying backdoor IRA’s is a little used strategy because it is widely unknown. Make sure to consult your finance and tax professionals before deploying this strategy.

For more information on this and other strategies for high earners, visit us here.

6 Steps to Get Out of Debt

6 Steps to Get Out of Debt

Unfortunately there are no classes in high school or college that teach you how to pay off a loan or credit card, but there are plenty of companies out there willing to lend you the money you need for your next big purchase. Knowing that a portion of your hard earned money will be going towards digging yourself out of a hole instead of wealth preservation can be discouraging; but that doesn’t mean you can’t cover up that hole and walk away debt free.

Getting out of debt requires a plan and commitment. Here are six simple strategies to help you pay off any kind of debt:

Figure out how much you owe

Gather your statements, and log onto those accounts to see how much you owe for each account. Make a list of your accounts, the balances, and the interest rates being charged.

Rank your debts in order of size or interest rate

Next, you need to decide the order you want to pay off your debts. One strategy is the “snowball method.” This is where you start with your smallest debt, and work your way up to the bigger ones. The idea is that as you are able to check accounts off of your list as being paid off, you gain both a confidence and mental boost to keep on going. Another strategy would be to tackle the most expensive debt first. Find the account with the highest interest rate, and pay down that debt. Once that is paid, move onto the next highest interest rate, and so on. Doing this will ultimately have you paying less over the life of your loans.

Know how much you’re spending

It is important to know how much money you have coming in vs. how much money you have going out. After you have a good idea of the amount left over every month, it will be much easier to determine the amount you can comfortably devote to paying down your debt.

Allot cash for minimum payments

Although earlier we established what debt we would like to pay down first, we can’t forget that the rest of the accounts have the minimum payments that need to be made each month. It is important to take these minimum payments into account before allocating extra funds to the first debt on your list to pay off.

Automate your payments

Regardless of if you’re making a minimum payment or throwing extra money toward the debt to get it paid off, it’s always a good idea to make your payments automatic. It’s as simple as a few clicks online or a quick phone call to set up. Not only will you be sure not to miss a payment, but it’s a little bit easier to part ways with your money when you don’t have to manually make the payment every month.

Reduce your regular expenses

Many times we don’t know just how much we’re spending on certain things until it’s all laid out in a budget. Setting a limit to the amount of money you allocate to different categories on a monthly basis is a good way to free up extra cash to put towards your debt. It’s always a good idea to check back each month and see how you can improve your spending habits, and make any changes to better suit your needs. If you would like additional help on budgeting, you can find resources here.

About the Author

Kristi Desepoli is an associate financial advisor at Heritage Financial Advisory Group. Heritage specializes in investment management and financial planning for business owners, executives, and doctors.