If you are building your career still or have young children, you might not be thinking about retirement at this stage of your life. However, it will be top of mind at some point if you are lucky and start to save regularly.

To help make sure that your retirement is financially secure, it is a good idea to develop a plan as early as possible – or if you have not it yet – right now. For example, sending part of your paychecks to a tax-advantaged retirement savings plan can grow your wealth exponentially so you can have peace of mind during your golden years.

However, according to a 2020 survey conducted by the Employee Benefit Research Institute, only two-thirds of today’s employees have a good understanding of the retirement benefits that are available to them.

Key plan benefits for you to consider

Tax advantages are offered by nearly all retirement plans, whether it is when you take out withdrawals or available upfront while you are saving. Traditional 401(k) contributions, for example, are made using pre-tax dollars, which reduces your taxable income. By contrast, Roth 401(k) plans, for example, are funded using after-tax dollars, while withdrawals are tax-free. (Between the two, there are other significant differences.)

Certain retirement plans, like 403(b) or 401(k) plans have matching contributions from employers as well but some do not. Whenever you are attempting to decide whether you should go with an IRA (individual retirement account0or a 401(k) if your employer offers a match. if you can afford it do both.

If you were enrolled automatically in your employer’s 401(k) plan, be sure to check to ensure you are taking complete advantage of the employer match if there is available one.

Also, consider increasing your yearly contribution, given that many plans will start you with a small deferral level that isn’t sufficient to ensure a secure retirement. According to Vanguard, around fifty percent of all 401(k) plans to offer automatic enrollment have default savings deferral rates of only 3 percent. However, your goal should be to save a minimum of 15 percent of your income every year.

Self-employed individuals have several retirement savings choices to choose from. Along with the plans discussed below for entrepreneurs and workers, you also can invest in a traditional IRA or Roth IRA, subject to income limits ha have smaller yearly contribution limits compared to most other types of plans. There are also a couple of extra options that are not available to everybody, including the solo 401(k), the SIMPLE IRA, and the SEP IRA.

Defined contribution plans

Defined contribution plans (learn more about these here), including 401(k) plans, have practically taken over the entire retirement marketplace since they were first introduced during the early 1980s.

The most common define contribution plan among all sizes of employers is the 401(k) plan, while the 403(b) is similarly structured but offered to certain tax-exempt organizations and public school employees, while the 457(b) plan is offered mainly to local and state government employees.

A Roth version is offered by many defined contribution plans, like the Roth 401(k) where after-tax dollars can be used for contributions. However, at retirement, you can still withdraw the money tax-free.

The Roth election is a good option if you are expecting to have a higher tax rate after you retire compared to when you are making contributions.

401(k) plans

These are tax-advantaged plans that allow you to save for your retirement. With traditional 401(k)s, employees contribute to their plan using pre-tax wages. This means that the contributions are not treated as taxable income. With 401(k) plans, contributions are allowed to continue to grow tax-free until they are withdrawn during retirement. A taxable gain on distributions is created at retirement, although withdrawals made before 59 1/2 years old might be subject to additional penalties and taxes.

Pros: 401(k) plans make it easy to save for your retirement since you can set up a schedule for money to be taken from your paychecks and automatically invested. There are several different types of high-return investments that your money can be invested in, including stocks. you will not be required to pay tax on your gains until the funds are withdrawn (or even in the case of a Roth 401(k). Also, many employers provide a match on contributions, which gives you free money as well as automatic gains from simply saving for your retirement.

Cons: One major disadvantage that 401(k) have is you might be required to pay a penalty if you need to access the money in an emergency. Although many plans allow you to borrow from your funds for certain qualified reasons, there is no guarantee that this will be offered by your employer’s plan. There are limited investments available based on the funds that your employer’s 401(k) plan provides, so you might not be able to make the investments that you would like to.

IRA plans

The U.S. government created this valuable retirement plan (https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras) to help employees save for their retirement. In 2022, individuals can contribute a maximum of $6,000 to an IRA, and employees over 50 years old can contribute a maximum of $7,000.

Many different types of IRAs are available including the SIMPLE IRA, SEP IRA, rollover IRA, spousal IRA, Roth IRA, and traditional IRA. Here are the different types and how they vary from each other.

Traditional IRA

This tax-advantage plan offers significant tax breaks as you are saving for your retirement. Anybody who earns an income from working can contribute to an IRA plan using pre-tax dollars, which means any contributions that are made are not treated as taxable income. These contributions to an IRA are allowed to continue to grow tax-free until they are withdrawn at retirement by the account holder when they become taxable. If withdrawals are made earlier the employee might be required to pay additional penalties and taxes.

Pros: Traditional IRAs are very popular accounts for retirement investing since some very valuable benefits are provided. You are also able to buy a nearly limited number of different investments, including real estate, CDs, bonds, and stocks. The biggest benefit of all, however, is you will not have to pay any taxes on the money until it is withdrawn after you retire.

Cons: If money needs to be withdrawn from your traditional IRA account it can be very expensive to withdraw it, due to the additional penalties and taxes. Also, with an IRA you are required to invest the money on your own, no matter what type of investment it is. You will need to determine how and where your money will be invested, even if you just ask an adviser how you should invest your money.

The traditional IRA account is one of the top retirement plans that are available, although if you can obtain a 401(k) plan that has a matching contribution, it is slightly better. However, if a defined contribution plan is not offered by your employer, then traditional IRAs are available instead, although, at higher income levels, the tax deductibility on contributions is eliminated.

What Are Self-Directed IRAs (SDIRA)?

These are a kind of individual retirement accounts that can hold various types of alternative investments that are usually prohibited from being in regular IRAs. This type of account gets administered by a trustee or custodian but is managed directly by the person who owns the account, which is why they are called self-directed.

Self-directed IRAs are available as either a Roth IA (where you get tax-free distributions) or a traditional IRA (where tax-deductible contributions are made). They are best suited for smart investors who understand alternative investments already and are interested in diversifying using a tax-advantaged plan.

The major difference between self-directed IRAs and other types of IRAs is the kinds of investments you can hold in your account. Generally speaking, IRAs can only invest in exchange-traded funds (ETFs), mutual funds, CDs, bonds, and stocks.

However, self-directed IRAs make it possible for owners to invest in a broader range of asses. You can hold real estate, tax lien certificates, limited partnerships, private placements, commodities, precious metals, and other types of alternative investments.

Self-directed IRAs are needed for investors that want to add physical gold and silver to their portfolio.  This is becoming an increasingly popular option as inflation and geo-political uncertainty ravage global economies.  A popular way to fund these account is with a gold IRA transfer.  This is where you transfer all or a portion of an old retirement savings account, to a self-directed IRA that is allowed to hold physical precious metals.

Therefore, the account owner of a self-directed IRA requires more due diligence and initiative.

Roth IRA

This is a new approach to traditional IRAs, offering significant tax benefits to investors. Roth IRA contributions are made using after-tax money, which means you have paid taxes already on the money going into your account. At retirement, you will not be required to pay taxes on any earnings or contributions that are withdrawn from your account.

Rollover IRAs

This type of IRA is created when a retirement account is moved, like an IRA or 401(k), into a new IRA account. The money is rolled from one account into the rollover IRA account, while still being able to take full advantage of an IRA’s tax benefits. A rollover IRA can be established at any institution that allows them. A rollover IRA may be either a Roth IRA or a traditional IRA. There are no limits to how much money you can transfer to a rollover IRA.

With a rollover IRA, you can also convert the retirement account type, from a 401(k) or traditional IRA to a Roth IRA. However, tax liabilities can be caused by these kinds of transfers, so it is critical to have a thorough understanding of the consequences before deciding how you will proceed.

There is a home loan that older individuals can obtain called a reverse mortgage. Differing from a regular mortgage, it is a mortgage that is absent in monthly payments. In contrast, the person borrowing money will receive payments, directly from the lender, either as a credit line, one lump sum or as a monthly allotment.

People that have reached the age of 62 can take advantage of these reverse mortgages, yet it may apply to those that are just 55. Gaining access to this equity can improve their ability to pay for monthly living costs once they have retired.

If you want to know more about reverse mortgages, the following information will help you determine if this is the best choice for you.

When you take out a reverse mortgage, you are accessing the equity of your home. You can receive this money immediately, or you can simply take out money when you need it.

Once the borrower dies, however, the reverse mortgage will come due if the borrower has been outside of their home for more than a year, or if they decide to sell their property or simply stop paying the taxes.

Once someone has retired, if they have a free and clear home, they can use this equity to assist them while they are retired. This can provide a much-needed influx of cash for traveling, or home repairs as well.

Different Types Of Reverse Mortgages

There are different types of reverse mortgages which include: single-purpose reverse mortgages, proprietary reverse mortgages, and also HECMs.

Similar to a regular mortgage, you may obtain one with either an adjustable or a fixed rate. If you decide to get one with a fixed rate, throughout the entire loan, the interest will never change. With adjustable-rate mortgages, it can fluctuate dramatically.

Let’s compare these different types of mortgages.

Home Equity Conversion Mortgage (HECM)

These are federally backed loans that you can obtain as an FHA, as well as through HUD. If you do obtain one through HUD, it can only be accessed through an approved lender.

HECMs offer some payment options:

Get a one-time payment: After closing, payment is upfront. This will only apply to those that are obtaining a fixed-rate reverse mortgage.

Obtain monthly payments: This will be money that you will receive, called term payments, for a specified period, but you must remain at your primary house of residence to receive these tenure payments.

Get a line of credit: As you need money, you can simply withdraw the funds. The principal balance, that which is used, will continue to grow. An example of this would be obtaining a $200,000 credit line, with just 4% interest, after which the principal loan amount could rise, over 10 years, to as much as $270,000.

Essentially, you are going to owe substantially more money than the initial amount that you borrowed, yet you will have more funding to access. Overall, throughout the life of the loan, larger amounts of cash will be available.

Combining everything above: one other option is to combine monthly payments, called tenure or term payments, along with receiving a credit line. You cannot, however, combined receiving a large lump sum of money with a payment option.

With a HECM, in 2022, the maximum amount that you can borrow is $880,500, yet this will be dependent upon how much your home is appraised for, as well as how much your existing mortgage balance is, along with any other financial details that would be applicable. By speaking with your lender, they can start the process of appraising your property so that you can move forward.

HECMs Overview

HECMs are called non-recourse loans and our insured specifically by the FHA which means there will never be the fear of owing more than the loan amount, even if your house increases in value and you decide to take out more money.

If you are 62 or older, you can qualify for this loan, but it will require going through a HECM counseling session, with a HUD-approved professional, to get this reverse mortgage. There are also certain requirements that you must be aware of such as tax implications, as well as repayment options, that apply only to HECM loans.

These are similar to FHA loans, which do require the recipient to pay a mortgage insurance premium, which is similar to other HUD-related programs. The total cost is going to be 3% of the total loan amount, with the recipient first thing half a percent of the total balance annually.

While the markets may be underperforming this year, the bright side is that investors can sell securities that are losing money to offset their capital gains. This tax loss harvesting strategy helps to minimize tax burdens, easing the struggle consumers have when dealing with such a tumultuous year with the markets.

Tax loss harvesting, however, is only effective for taxable investment accounts. Done correctly, this strategy helps investors refocus attention on past progress. Investing is all about the long game, and that’s why it is so important not to dwell on temporary losses and financial setbacks.

While tax loss harvesting favors wealthy families, the strategy relies upon numerous factors that can spell out tax benefits for lower-income families as well. Outside of taxable income, additional factors include the allocation of assets, an individual’s time horizon, and tax rates.

If you plan to take advantage of tax loss harvesting, you must be aware of what’s called the wash sale rule. This rule prevents investors from buying a security within 30 days of having sold the same security at a loss for tax purposes.

This rule helps the SEC prevent investors from offsetting gains with losses if those investors plan to turn around and buy the same security days later to ride the rebound for profits.

3 Key Tax Strategies for Investors

Tax Swapping

Tax swapping is perhaps the easiest way for investors to minimize tax burdens without also missing out on a market rally. To execute this strategy, an investor would place a sell order for the original investment. A replacement asset is then purchased using the proceeds. It is wise for investors to choose securities that are in the same sector and class.

For example, a person might sell Home Depot (HD) only to turn around and purchase shares in Lowes (LOW). Finding a replacement investment prevents an investor from falling victim to the wash sale rule.

Doubling down

In some instances, investors do not wish to choose or are unable to find a replacement investment in the same sector and class of the security being sold. Investors can always wait 30 days after selling an investment to repurchase and prevent consequences of the wash sale rule, but doing so can also mean that these investors leave potential capital gains on the table.

The doubling-down strategy solves this problem. Simply put, to double down, an investor first purchases additional shares of a company before selling the original shares. You must wait an additional 30 days, however, before making that sale. Additionally, this strategy requires an investor to have extra capital on hand to make the preemptive purchase.

Waiting 30 days to sell also comes with possible consequences in the form of additional losses. If the price of a particular security was to continue dropping during the 30 days, an investor would incur a greater loss. A rally during the same 30-day period could mean an investor is unable to use the doubling-down strategy to offset capital gains.

Tax Overlay Strategy

Consistent tax loss harvesting trades on a smaller scale help investors offset capital gains. This preferred strategy complements the market, which typically ushers in short-lived losses but continues to move on up over longer periods. Using the tax overlay strategy, all portfolio adjustments are made with tax loss harvesting in mind. This type of systematic approach can help minimize tax burdens for investors.

Not only does the tax overlay strategy provide investors with a better approach to loss harvesting, but it also helps minimize the impact of capital gains on portfolios as well. For example, trades can be postponed if investors are about to deal with long-term vs short-term capital gains.

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