5 Tips for Retirement Savings

#1: Don’t Take Early Withdrawals

If you take distributions from your traditional IRA or 401(k) account before you turn 59, not only will you have to pay taxes, you’ll also have to pay a 10% penalty, double ouch.

If you want to avoid penalties and taxes, you should do everything in your power not to take early withdrawals. Plus, the longer you keep your money in the account, the more your investment can grow giving the power of compounding that little bit longer to work.

#2: Don’t Touch Your Roth IRA EARNING

With Roth IRAs, the rules are a bit more complicated. Since Roth IRAs are funded with post-tax contributions, you can withdraw the money you have contributed at any time with zero penalties or taxes.

Withdrawing earnings is another story. If you are younger than 59.5 or have had your Roth account for less than five years, you’ll have to pay the 10% early withdrawal penalty AND pay taxes on the earnings… WOW that hurts!

So, while it’s perfectly acceptable to dip into your Roth IRA contributions to pay for an emergency, you should keep your hands off those earnings unless it’s absolutely necessary.

#3: Convert to a Roth IRA

If you have money in a traditional IRA or 401(k), the smart move is to convert your accounts to Roth IRAs.

With a traditional IRA, Uncle Sam will force you to start taking required minimum distributions (RMDs) once you turn 72, whether or not you need the money. Since traditional IRAs are funded with pre-tax money, you’ll have to pay taxes on your RMDs, even if you don’t want to take them.

How do you get out of taking RMDs? Convert your account to a Roth IRA. Unlike traditional IRAs, you are never required to take distributions from your Roth account, so you can let your investments grow as long as you want.

Weirdly enough, if you have a “designated” Roth 401(k) account, you’ll also be subject to RMDs. Luckily, you can roll your Roth 401(k) funds into a Roth IRA when you hit 72.

When you convert to a Roth IRA, you’ll have to pay taxes on the amount of money you convert, but it’s worth the cost. Investments in Roth IRAs grow tax-free, and you won’t be taxed if you decide to take distributions.

#4: Keep Your Distributions As Small As You Can

If you have your money in a traditional retirement account, you’ll have to pay taxes on any distributions you receive. While it might be tempting to take out more than you need, you need to be strategic about your withdrawals. If you take out too much money in one year, you can end up in a higher tax bracket, which will cost you even more in taxes.

Related:  5 Tips for Retirement Savings

#5: Generate Passive Income Through Rentals

One of the most underused retirement strategies is investing in rental properties. If you’re a BiggerPockets reader, you probably already knew this. What you may not know is that retirement savings tools like the solo/self-directed 401(k) and self-directed IRA (SDIRA) let you invest in real estate and grow your nest egg tax-free.

That means you can use your real estate investing know-how and strategic connections to find the best real estate opportunities. Once you’ve scored some great deals, you can rent those properties out to develop passive income streams that can flow into your retirement savings.

5 Tips for Retirement Savings

Retirement has the potential to be the best time of your life, but not having enough money saved could end up making it the worst and full of fear and stress. Financial troubles can make some new retirees even regret hanging up their hat. What they had hoped would be a relaxing vacation can quickly turn into a nightmare.

If you think you’re too young to begin thinking about retirement, think again. The earlier you’re able to start saving for it, the better off you will be. If you want to enjoy your golden years, you need to maximize your retirement savings and get time and compounding working for you!

A qualified estate planning attorney and CPA are important for helping you get the details of your individual sitiation squared away. With that said, here are several useful tips that come up over and over when looking into the topic of retirement. I hope some of these can help you make the most of both your retirement savings and your retirement.

Tip #1: Don’t Take Early Withdrawals

By taking distributions from your traditional IRA or 401(k) account before you turn 59, not only will you have to pay taxes, you’ll also have to pay a 10% penalty. OUCH!

To avoid penalties and taxes taking their toll on you account, you should try everything in your power not to take early withdrawals. The longer you keep your money in the account, the more your investment can grow.

Tip #2: Don’t Touch Your Roth IRA Earnings

With Roth IRAs, there are a bit more rules to withdrawals. Since Roth IRAs are funded with post-tax contributions, you can withdraw the money you have contributed at any time with zero penalties or taxes.

But to withdraw earnings is another story. If you are younger than 59.5 or have had your Roth account for less than five years, you’ll have to pay the 10% early withdrawal penalty AND pay taxes on the earnings defeating the purpose of the Roth and taking on additional fees.

While it is acceptable to dip into your Roth IRA contributions to pay for an emergency, we all know life happens, you should not touch your earnings unless it’s absolutely necessary.

Tip #3: Convert to a Roth IRA

If you have money in a traditional IRA or 401(k), the useful move is to convert your accounts to Roth IRAs.

With a traditional IRA, you will eventually be forced to start taking required minimum distributions (RMDs) once you turn 72, whether or not you need the money. Since traditional IRAs are funded with pre-tax money, you’ll have to pay taxes on your RMDs, even if you don’t want to take them, the government sort of got to invest long term with you and reap the rewards with you huh?

A way to get out of RMDs is to convert your account to a Roth IRA. Unlike traditional IRAs, you are not required to take distributions from your Roth account, so you can let your investments grow as long as you want.

When you convert to a Roth IRA, you’ll have to pay taxes on the amount of money you convert, but it’s typically worth the cost. Investments in Roth IRAs grow tax-free, and you won’t be taxed if you decide to take distributions. This is a great topic to bring up with your CPA to see if a conversion would be beneficial for you.

Tip #4: Keep Your Distributions as Small as Needed

If your money is in a traditional retirement account, you’ll have to pay taxes on any distributions you receive. While it might be tempting to take out more than you need, you need to be strategic about your withdrawals. If you take out too much money in one year, you can end up in a higher tax bracket, which can be even more costly in taxes.

Tip #5: Generate Passive Income Through Rentals

One of the most underused retirement strategies is investing in rental properties. What you may not know is that retirement savings tools like the solo/self-directed 401(k) and self-directed IRA (SDIRA) let you invest in real estate and grow your nest egg tax-free.

That means for those who already have the know how and invest in real estate have a great option here. Once you’ve landed those great deals, you can rent those properties out to develop passive income streams that can flow into your retirement savings with the tax benefits afforded you by checkbook control, meaning you have complete control over how you invest.

This last tip as well as all are excellent options if utilized the right way. Make sure to consult with your lawyer, CPA, or other tax professional before making these important changes to your future.

The Only 3 Books You Need To Retire Rich

It’s essential to start investing as soon as you can. The earlier you begin, the higher total returns you can earn. But you also have to invest wisely, which is where investing books and knowledge come into play.

Whether you’re a complete beginner, a seasoned professional, or somewhere in between, reading investing books can sharpen your knowledge and deepen your understanding of how the market works. If you’re able to learn one new thing to apply the rest of your life from each book you read on finance and investing, you will reap those rewards throughout your life and you will be sure glad you did when it comes time to retire.

These books were written with the absolute beginner in mind, covering the fundamentals of personal investing. You don’t need any prior investing knowledge or experience to understand these books, only a willingness to learn.

These will provide you the foundation required to place you far ahead of the average investor. The three combined offer actionable steps, that are simple and well laid out. Starting with building a spending plan getting rid of bad debt and investing in dependable albeit conservative investments, likely to match the broad market over the long term allowing you to retire rich. 

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#1. I Will Teach You To Be Rich

Ramit Sethi, the mind behind I Will Teach You to be Rich  which is also the name of his blog — is an entrepreneur with deep understandings of psychology and personal finance. He’s released several online courses covering sales, psychology, business, personal finance and career development.

I Will Teach You to be Rich operates on the premise of you being in charge of your own life to include your finances. It’s written in a humorous and brash style that is aimed at younger investors looking to optimize their finances.

You’ll learn a lot about what drives spending, saving and investing. The book emphasizes the importance of overcoming “analysis paralysis” — the phenomenon where overthinking a situation can lead to a lack of action. He emphasizes how it is more important that you automatically invest in a good fund with low fees rather that stress out and spend all your time hunting and moving money around for that extra 0.2% when that difference isn’t going to make a significant difference.

While he recommends targets date funds that is a choice for you to decide, but index funds or target date will both get the job done with low fees and minimal effort on your part.

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#2. A Random Walk Down Wallstreet

Most proponents of the random walk theory apply it to short- and mid-term trading. They don’t argue that long-term values move unpredictably. they follow trends. However daily, weekly and even monthly stock prices have no consistent basis for prediction. We can see this in practice by looking at the graph on nearly any individual stock as of late, and look at how crazy some of the swings have been in 2020.

Random walk theory says it’s impossible to predict how a stock will move at any given time. In the short- and mid-term, a stock’s price doesn’t have any known relationship with either its historic value or the value of any other assets on the market. The lack of any known pattern means that standard investing tools like market timing and technical or fundamental analysis don’t work.

Most of the book focuses on the many ways used of analyzing the market to find an edge – and goes on to show us how they are largely junk.

This book is very easy to read with a sense a humor within all the great information, and the information itself is presented in a way that’s easily digestible.

If you have any interest in how the stock market works, you should definitely read A Random Walk Down Wall Street. It gives a very critical look at what people are always saying about the stock market – and why a most of it is rubbish. 

Of course, there are many other perspectives on the market, and the truth is that the stock market can be exploited by individuals, but that exploitation requires a lot of work, work that is simply not feasible for most people, and in many cases even professionals.  

The Bogleheads' Guide to Investing ebook by Taylor Larimore,Mel Lindauer,Michael LeBoeuf

#3. The Bogleheads Guide To Investing

The Bogleheads Guide to Investing contains investing advice based on the philosophy of the founder of Vanguard, John C. Bogle — who is also credited with creating the first index fund, a type of investment fund that tracks a particular market index.

This book was written by Taylor Larimore, a prolific reader of investing books and a big believer in Bogle’s long-term, conservative investment philosophy. 

The book starts by instructing you to get your finances in order as well as teaching you the right mindset, (which you already did if you read the first two books) From there, you cover all the basics of investing — from knowing what you’re buying, to allocating your assets, to retirement planning. 

It is a fantastic guide for investing for the long term, minimizing the costs and taxes associated with investing, and most of the basic principles of conservative investment (diversifying your portfolio widely, not betting the whole farm on stocks, and so on).

The book basically moves deliberately from the basics behind investing and what you need to get started, then moves from investment to investment, explaining the ins and outs of each and explaining the fundamentals of an overall investment philosophy.

This book offers a clear beginning to end describing an overall philosophy about what to do with your money. Many other books of this type simply provide a bunch of rules to follow; this one is rooted in the basic idea that you should be an investment conservative: low risk with growth targeting the long haul. It’s an interesting approach – and it makes for a very interesting book.

Summary

These books read and applied in this order can be extremely powerful in building real wealth in the long term. They will help you save more, smash debt,  automate where your money goes, maximize tax advantaged retirement accounts while still doing the things you love. In the end you too can retire rich!