IRA Contribution Strategies: How You Need to Alter Your Retirement Savings After the SECURE Act
Thinking about leaving a legacy?
The SECURE Act changed the rules for inheriting IRAs, potentially impacting your financial plans. Learn how you can change your savings strategy to minimize taxes for your heirs.
What You'll Learn:
The 10-Year Distribution Rule: Understand how the SECURE Act affects how beneficiaries access inherited IRA funds.
The Power of Roth IRAs: Discover why Roth IRAs are even more important now for tax-free retirement income.
Strategic IRA Withdrawals & Alternatives: Explore strategies like controlled withdrawals and life insurance to manage tax implications and secure your heirs' future.
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Welcome to me Financial, the podcast designed to inspire your financial life.
Welcome to the podcast. I am Michelle Moses, your host. I am a certified financial planner and licensed realtor, and today we are going to be talking about maximizing employee benefits. To save on taxes and to talk about this, I have Carina Vara, Degos, MBA, here to talk about it. Thank you for coming.
Thank you for having me. Yeah. So this is her second show actually, if you've listened to the other one. Carina is a financial services professional with over 25years of experience specializing in tax. Mortgage and insurance planning. She's the owner of Keen Financial Solutions here in Phoenix, Arizona.
She's passionate about helping families create and protect wealth, increase liquidity, and reduce tax liability. That's right. Yeah. So thanks for coming again. Thanks for having me. So Corina does taxes and when we met, I was.[00:01:00]She does all kinds of things, actually do mortgages and taxes, and she reviews insurance.
And so we had a wealth of things to talk about in terms of what she sees out in the market place. And I thought this was a really great topic because I think we all get those employee benefit packets and it's a little overwhelming. And they're all different. Every single one of 'em, right? Yeah.
Is it a 4 0 3 B? Is it a 4 57 A? Is it a 401k? They have all these different numbers and if you're not in the industry, it's really hard to figure it out. Yeah. And what is tax deductible? If I buy life insurance through my group plan? Is that tax deductible or is it not? So people often don't know 'cause they have things that are offered that often are not tax deductible, but they get them cheaper through their employer.
And so what we're gonna talk about today are the things that you can buy through your employer that are tax deductible. And if we do not talk about it and for your information, the life insurance is not tax deductible. You just get it for cheaper. Yes.[00:02:00]And that we're gonna talk about these things that you can deduct on your taxes.
And we're gonna start with some things that we think are underutilized and that people don't understand.
Dependent Care Flexible Spending Accounts
And so what we're gonna start with is what's called the dependent care assistant, flexible spending accounts. So I think we've all heard of flexible spending accounts, the FSAs but the dependent care as assistance, flexible spending accounts are new.
So would you like to talk about that? Yeah. Yeah. And I wanna clarify something that this benefit is not. Deductible on your tax return, but it can save you because the dependent care flexible spending account is designed to help you set aside. Pre-tax dollars that you're gonna spend anyway to take care of either an adult family member or your child.
So childcare is very expensive. 800, a thousand, $1,500 a month simply for one child. You're gonna have to pay that cost anyway in order for you to be able to go to work. If your employer[00:03:00]offers a dependent care, flexible spending account. Take advantage of it. 'cause it allows you to set aside up to$5,000 pre-tax and that's, that can be a significant savings for you.
That you're setting aside. And you can use those monies to pay your childcare provider. It could be struggling to, to pull up on tutor time or something like that. So you can use those monies for childcare and it can be an individual or it can be, a childcare facility, an institution, something like that.
As long as they have a ta, a iden, a tax identity number, a TIN. You could, if you were using, let's say your neighbor was taking care of your, of your child, for example. Your return is going to ask you for those, their social security number. But if they refuse to give it to you for one reason or another, you can still, oh, you can, yeah.
Oh, okay. You can still take advantage of that. Okay. Absolutely. And can you use it for elderly parents? Absolutely. You can still use it for elderly parents. As long as. That person, your parents obviously is not your spouse, but you could[00:04:00] have an ill spouse. So as long as they're dependent on you though.
They're dependent on you. So it could be either your spouse or Oh, so it could be a parent, but they have to be dependent parent. It has to be. So you're saying it's a dependent. On your taxes correct. So if you claim someone as a dependent on your taxes, you can use this FSA account for 'em? That is correct.
Okay. Yes. All right. I got it. Yeah. And you can claim an elderly parent, even if they don't live with you, if you're paying more than half of their support. Okay. Okay. And so for like adult daycare or Yes. Somebody coming in to help. Okay. But I do think that the ch the, that one, a lot of times there are.
There's coverage, the parent has money or, but if you are paying, obviously, but I think more people would probably use it for childcare. Yes. A majority of people use it for childcare. Absolutely. Because there are oftentimes that is the biggest burden in a family's household, right after their housing and their food.
Then there's childcare what do we do with the kids and for us to go to work? But when the money comes out, you're not taxed on it. Or are you taxed on it? No. So you have your wages. Your employer is gonna [00:05:00] set aside these monies up to $5,000 pre-tax. Then you're just like a 401k, just like a 401k.
It's not a, you take it out kind of thing where you're not. Taking it out and using it and spending it. You're using those monies to pay your provider well but what I'm saying is that because when you bring your money out of an IRA, you have to pay taxes on it. Is this the same thing?
No. So when you pay, then when you pay, you don't have to pay. So it's like an SHSA you get the de the deduction, or you're not getting a deduction. You're just not taxed in the first place. You're just not taxed on that money. It, you're just not taxed in the first place. And then if you use it for a qualified expense, there's no tax that you're gonna pay on that too.
Okay. Yeah. Wonderful. Yeah. I think I'm just using the wrong terminology. Perhaps yeah. You're thinking of it like an IRA and it's not, yeah it's essentially if you're spending $5,000 or more on your childcare, why not save money on and have it set aside for you pre-tax and not pay tax on that five grand versus not utilizing the dependent care FSA and just paying it straight [00:06:00] with after tax dollars so you have less money to use to pay that expense that you're gonna pay anyway. Because you didn't take advantage of this.
Medical Flexible Spending Accounts
And so then a, there is a regular FSA flexible spending account. Yes. It's a medical for health, right? So if you have an employer Yeah. And you have an FSA, it is normally paired with when you have health insurance, regular, like a PPO. Yes, Uhhuh or health insurance.
And basically what that means is you go to the doctor and they pay for it versus having a high deductible plan. And so you have an FSA, and so then you can use the FSA funds to pay for your medical visits. Testing your portion of whatever is left over. Yeah. Out-of-pocket expenses eyeglasses, dentures, things like that that you might need.
You could use them for prescription sunglasses. And so that's, if you're somebody who has put a good amount of money in that FSA and it's right around now, October, November, and you're like, I still have a thousand dollars in there. Let's see what it is that you use that you can stock up on. If you have [00:07:00] children.
There's certainly lots of, over the counter medications, if you give those to your children that you can stock up on first aid items you can stock up on. You can even use your FSA for feminine products as well.
And so a lot of women don't know that, but they can use that for their menstrual products as well. And if you're getting to the end of the year and you're like, I am out of things to use, go get yourself another pair of prescription sunglasses. Get the ones that you really wanted. That made, it may have been more pricier or something. See, but here's my thing with the FSA, and we were talking about this before we even started this episode, you guys, is that I always see the FSAs where people have money in it.
They don't even know. They're like, I just started putting money in that thing. And they don't know that it doesn't roll over. Yeah. So you have to use it by the end of the year and only $640 rolls over this year. So if you've got $2,500 in there. Then and you, whatever you were planning on doing LASIK surgery and you ended up not doing it.
You've got to plan it and pay for it by the end of the year. And, but what I see in my[00:08:00]office is most of the money gets lost and it just goes to the insurance company and why they have this rule that the money isn't your money. 'cause why? It makes more sense that it would be like an HSA account where it's just your money, it grows forever.
And then you could use it in retirement. And FSA could be the exact same thing. If you had a P, it's just paired with a different health insurance plan. And I don't understand why it doesn't roll over because I always see people lose money. Never once have I seen someone use all the FSA or they separate from service and then they lose all the money to anyway.
O oftentimes the, your employer, many employers do provide a grace period that allows you to use your eligible funds up until March 15th of the following year. And you could. It does take some foresight and planning, right? It does require you to think about how much it was that you spent on your out-of-pocket medical expenses last year, and then put at least that amount in the fSA for this coming year. And let's pretend, what if you wanted to do [00:09:00] lasik and that was. $4,000 let's say. Yeah. So I'll tell you, could you front load it like in January, February so that you had that I told you exactly. Okay. Yeah, exactly. That's exactly what I did, especially so I wanted to have LASIK surgery.
I knew that my employer and. All employers front load those monies in there. So that's in part why it, you can't it's use it or lose it because your employer front loaded all of the money that you elected to put in there upfront. On the first of the year, you could very easily go and get your LASIK done or whatever required surgery you needed to have at the beginning of the year.
And then later decide that you're gonna separate from service from that company. Two months later, the company is out that money, but you maybe only contributed a few thousand, but you were able to use all four grand. So their portion of it, they front load? Yeah. Or, okay. No they front load the whole amount.
The whole thing of what you're saying. You're gonna put in, if you're putting in the maximum of $3,200 into that account, then that's gonna be, a hundred and something, [00:10:00] $190, maybe every pay period. Okay. Something like that. If the, your employer is gonna front load all $3,200 in there, and let's say you use all that money to do your LASIK surgery in January, and then you decide to separate from that company in March.
I. Then you ended up the winner. Okay. So it just really takes some planning with the FSA. It does. It takes some planning. Yeah. And I think a lot of people are really confused by them and as I said, I've never seen somebody use all of it and then they're always like, I don't know what that's for, what I should buy with it, and things like that.
Yeah. And I think it's a lot like credit card offers. We don't even know, like all the things that are on there and then you read it and you're like, oh, I could be using such and get a $10 credit, or, whatever it is. It's like that. Okay, so let's move on. 'cause I think if you guys have an FSA, it's important to look in it.
That's the point of this talking about it. And they are. They're very different and they do vary. So I'm just encouraging you to read whatever your employer is offering just because employee benefits vary so much. The next one I wanna move on to is an employee stock purchase[00:11:00]plan. Yeah. So that one you can purchase with pre-tax money.
And you usually get a discount price on the stock. Correct. So those, you can you can't purchase it with the pre-tax dollars. But they do, so it comes out after tax. But many employers will allow you to purchase the company stock at a discount. There are companies that can Oh, so that's why you have it on your Okay.
On the list. Okay. 'cause they allow you to purchase that stock at a discount. So it's an immediate profit. And if you hold it for at least a year in one day. So that it's now a term capital gain. Then you're gonna save substantially on taxes by making a long-term gain, because you're only gonna pay either zero, 15, or 20%on that long-term gain, but it's immediate profit when you're buying it at a discount.
And I, most people, I think they participate in their employer stock purchase plan. I think that's a pretty normal, 'cause they know that the discount is worth something. Yeah. I think those who are savvy enough to know and to take advantage of it. Yeah, absolutely. There are some [00:12:00] firms that don't, that don't offer a discount. So it's less attractive. But if your company is offering you a discount on that purchase that stock purchase, you should absolutely begiving it some sort of consideration. 'cause that's immediate profit. Okay, so the next one on your list is an HSA, which is a health savings account.
My favorite, yeah. I love health savings account and I have thought about doing just. Like a solo show on HSAs. We should because I love them so much me, and if you have access to one. It's, they are only paired with a high deductible health insurance plan, which means it's over $2,500 deductible.
Is that correct? Usually it's, the minimum high deductible is $3,500. It's 3,500now. Okay. So if you have a deductible, $3,500, then you can also do the HSA and the amount that you can put in differs, whether you're single or married and family and and all that. And it changes from year to year. But the point is that there is no limit on your income versus like a Roth IRA or regular IRA or a lot of these tax advantage things that you can [00:13:00] do with an HSA you can always put the money in. It's always yours. You can have it grow until retirement. Yep. And then when you get into retirement, you can use it to even pay for like long-term care premiums.
For for insurance, yeah. And things like that. You could use it to pay, obviously pay for your health insurance, or you could just use it for retirement in general. Yeah. When you get to that age, you can use it for your retirement in general. Up until that time, you can only use it for qualified medical expenses, anything.
If you use that money for something. Other than a qualified medical expense, then you're gonna be paying an additional tax on those monies. But I love HSAs. I think they're underutilized. They're, you just explain the triple tax benefits of it. I really appreciate being able to divert some of the monies in the HSA to a, to an account with, like Schwab or eBay or something like that, so that I can use those monies that I accumulate to.
Further grow. You can invest it in the market. Yeah. And get it working for me. Yeah, absolutely. My only thing about[00:14:00]HSAs you guys, is that a lot of people charge like 10 95 a month. They charge a lot and you can find ones that are free. Yes. So if you're paying for your HSA on a monthly even 4 95,you do not need to pay.
So get online and look for a free HSA with a debit card because if you don't have a debit card, it makes it so hard to, you have to. Go buy the thing and then go log on and repay yourself. But if you have a debit card, obviously, then you can just use it wherever you're at. And it just makes it so easy.
Yes, but do not pay for those that I think people, they get price gouged too. Can you tell I'm cheap? I'm like talking about all these. No I mean it, Hey we're in the business of money and we have to, for ourselves, look for ways in which we can save on taxes.
Save here and save here. Yeah. You gotta pay. I just think that there's so many of these companies that. Prey on these things to charge fees? Oh yeah. Can I plug one that I use personally? Yeah. Yeah. I've used Lively for many years personally, and no fees on the balance that's in.
So I don't have any monthly fees and [00:15:00] it's very easy to use. And they does have an app. So when I have a medical. Expense when I'm at the doctor's office. It takes, just a few seconds for me to snap a picture of that receipt and upload it into the Lively app and then I can reimburse myself later because I didn't bring the debit card with me.
So it makes it really easy and they don't charge any fees and they even will pay you some interest on the monies that you have in that account. That's wonderful. Yeah. Good. So I would definitely recommend you guys to check out Lively. Yeah. Okay. Good. Thank you for the recommendation.
And then the last thing here for is employee benefits. As tax benefits we have is your 401k, your 4 0 3 B. Yeah. And I think you guys all know about that. And I think when you get to be a higher earner, it becomes harder and harder to save on taxes. I think that we all know that. And maxing out your 401k or 4 57 B or whatever you've got at your job, I think is.
An important thing to do. Yeah, absolutely. And I'm glad that you brought this up because I think, our audience is probably regularly already contributing to their 4 0 1 [00:16:00] Ks, but I wanna bring this up because it needs to be a conversation that parents are having with their adult kids as they're entering the workforce.
And even if their adult kids are, already generation in generation X and already in their forties, talk to them about this particular thing because. They may not betaking advantage of it. Just because you know about it, doesn't, don't assume that your kids know about it.
Have a conversation with them. Take some time to educate them as well on this kind of thing because especially if they're working for a larger firm that does a company match, they're doing themselves a disservice by not contributing, just, for themselves to at minimum. We hear a lot about young people who are cash strapped.
They don't feel like they can save. This is one way that they can save and it doesn't feel the bite in their paycheck isn't as big because it's pre-tax. You, if you're making $75,000 a year, your first job out of college contributing that 3%of your income to your 401k. Even though your contribution per pay period might be [00:17:00] $85, what you're gonna see as far as what's taken out of your pay is only $65 because you saving them tax on that tax.
Yeah. And that can be pretty significant over a year's time. And make sure that they're paying less tax so that they're take home pay is higher, it is richer while also still paying themselves first and saving whatever little that they can to afford in that. In that. Yeah. And I think getting them in the habit of just doing something.
Yeah, exactly. Yeah. And then when they get a raise, putting, yeah, having that increasing percentage, having that automatic increase if your employer allows it to, for you to set your automatic increase to, one to two to 3%. Pretty soon, I think next year it's gonna be, most plans are gonna be going into automatic enrollment.
Yes. So it's, there's a lot of changes. Coming in with 4 0 1 Ks Oh, there is herein the next year or so. Oh, it's coming in the pipeline. Some states have already implemented the requirement for all employers who have, even as little as five employees are required to automatically enroll their employees in and some sort of a retirement plan.
And if you guys are business owners there are a lot. [00:18:00] Of incentives right now to set up a 401k plan, and you could almost do it for free. You're not gonna have all those upfront fees. They're really, the government is doing a huge push through. I think it's like $5,000, $4,500. It's pretty big.
Yeah. I'd have to go back and look at what it is, but there is a huge incentive to implement a 401k for your company, and it can go a long way with employee retention as well. Absolutely. Yeah. I think it's, that's a big deal 'cause people wanna feel like they're valued, but also that they're getting somewhere.
And then for yourself, if you are contributing to a 401k and maybe you're doing like the Roth 401k or something, doing the mix I think what's becoming popular for a lot of the Henrys out there the high earners are. Doing Overfunding, the401k and then doing a Roth conversion. Yes. So that might be something that you wanna do too, is that you could contact your employer and see if you could max fund your 401k or overfund it, I should say, and then you could roll it over into a Roth because then it.
You're taxed on the money anyway, so you might as well get it into a vehicle where [00:19:00] it's not taxed for the future. Yeah. Now's the time to start looking at those strategies. If you don't have a tax professional, we're happy to help you. If you do already have one, certainly be proactive and make an appointment with them to talk about.
What's going on. And so that you can try to take advantage as often, as much as you can before the end of the year. Yeah. I just had that conversation with my tax pro. Yeah. I don't even do my own, I have somebody else. And I think a lot of people, they do the max and then they get maxed out around the.
Time. And so then their paycheck goes way up. And so if you could use the last couple of months of when you've matched out your 401k, if you can use these last couple of months to overfund your 401k and then do the Roth IRA that way. So they call it a mega backdoor. Roth IRA. In case you guys are wanting to look it up.
Conclusion and Final Thoughts
So anyway, thank you Karina for being on. You're welcome. I appreciate it. This is great. For number two. I appreciate it. And you guys, thank you for listening. If you have some time, please review the show. I, the starred reviews really help the algorithm and help me find other people that wanna listen.
And have a great day. I hope this helped[00:20:00]you
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.