We Answer Some of the Most Common Questions Pre-Retirees & Retirees Ask

Unfortunately, there’s no easy response to this question, as the amount of savings you need to comfortably retire depends on many factors, including your goals, current financial situation, amount of debt you carry, marital status, life expectancy, Social Security benefits, and more. The best way to know if you have enough money saved to live comfortably in retirement is by working with a qualified financial advisor. 

As a general rule of thumb, you may have enough retirement savings once you have achieved all of the following milestones:

• You have saved at least 10 times your annual take-home pay.
• You have paid off all dept, including your mortgage.
• You can live off an amount equal to approximately 4% of your total savings each year.
• You won’t need to depend on Social Security for monthly living expenses.

Of course, your financial situation and goals are unique. At MasterPlan Retirement Consultants, we run projections based on multiple scenarios to help you determine if you’re financially ready to retire. Once you’re ready, we help you establish a monthly source of retirement income you can’t outlive.

Yes, assuming you meet the eligibility requirements for both types of accounts, you can contribute to a traditional IRA and Roth IRA at the same time. However, the IRS sets a total limit for how much you can contribute to IRAs in any given year. In 2022, the maximum IRA contribution is limited to $6,000 ($7,000 for investors age 50 or older). 

Keep in mind, there are pros and cons to each retirement account type. Your financial advisor can help you make IRA investment decisions that are in line with your personal financial situation and future goals.

This is another important retirement decision that should be made by considering your overall financial situation. For some people, it makes sense to begin receiving Social Security benefits earlier in retirement, while others can maximize the amount they receive by waiting a few years.  

Your financial advisor can help establish a Social Security benefits strategy that aligns with your overall financial plan, retirement goals and personal financial situation.

It’s generally not advisable to take a lump sum distribution from any retirement account, as you’ll face a hefty tax bill during the year of your withdrawal. Plus, if you’re younger than 59 ½, you’ll face an additional 10% early withdrawal penalty. 

If you’re considering moving your 401(k) away from your former employer’s plan, it’s almost always a better idea to complete a direct rollover to an IRA. Your financial advisor can coordinate the rollover process to avoid triggering a taxable event and ensure your retirement assets remain invested for your retirement.

As with so many other retirement questions, the answer to this depends on your personal financial situation and goals for the future. If you are experiencing a year with significantly lower income than normal, it may make sense to complete a Roth conversion of all assets. However, it’s often unwise to convert all assets if doing so will push you into a higher tax bracket. Your financial advisor will complete an analysis of your specific situation to determine the best approach for completing a Roth conversion.

There are several reasons why it may make sense to pay Roth conversion taxes from an outside (taxable) account, rather than having them withheld from the converted amount. The best way to explain why is by using an example. 

Let’s say you have $30,000 of purely pre-tax money invested in a traditional IRA that you wish to convert to a Roth. When you compete the conversion, the $30,000 is reported to the IRS as ordinary income on line 4b of Form 1040. If you withhold 15% from the balance to cover taxes, you will pay $4,500 in taxes and transfer $25,500 to the Roth IRA.

If you instead elect to withhold nothing in taxes and pay the $4,500 directly to the IRS from an outside, taxable account, you will have a Roth IRA balance of $30,000, while lowering your outside account balance by $4,500. 

A tax-savings strategy becomes relevant when you consider the $4,500 paid in taxes. It is typically better to have that extra $4,500 growing tax-free in a Roth account than being subject to interest, dividends and capital gains taxes within the taxable account. 

Another benefit to paying taxes from an outside account occurs for those who have not yet reached age 59 ½ when initiating the conversion because the 10% early withdrawal penalty comes into play. Using the example above, if you decide to have the $4,500 withheld from your Roth conversion, only $25,500 of the original $30,000 account balance will end up in the Roth account. The IRS views the missing $4,500 as a distribution, which would trigger the early withdrawal penalty for any taxpayers under the age of 59 ½. 

Again, your financial advisor can help you determine the best course of action based on your personal financial situation.

It may make sense, depending on your personal financial situation. What likely does not make sense is taking on a mortgage that you will need to continue paying once you retire. If you decide to purchase a home, it’s wise to pay off the balance before retiring.

Yes! Tax planning is a vital part of your overall retirement roadmap.

Yes. If you have not yet reached age 59 ½, you will be subject to a 10% early withdrawal penalty on any IRA assets withdrawn. You will also be subject to ordinary income taxes on the withdrawn amount.