​Most Americans simply don't save enough for retirement. Nearly half of working-age households don't have any retirement assets, according to the National Institute on Retirement Security. Of those working-age households close to retirement (age 55 and above) nearly two-thirds have less than one year's worth of their annual salary in retirement savings.

So how much do you actually need to retire comfortably? There are many variables to consider, including retirement age, available pensions, and investment returns. Mutual fund broker Fidelity estimates you need enough savings to replace roughly 85 percent of your annual pre-retirement income. Many experts estimate you will have to save between eight and 12 times your pre-retirement annual income to reach this goal.

But the amount you need depends on when you plan to retire. For example, Fidelity estimates a person planning on retiring at age 65 will need to save 12 times their pre-retirement income. By delaying retirement by just five years, to age 70, their savings estimate lowers to eight times your annual income.

This may be why an increasing number of Americans plan on delaying retirement or working during retirement. A majority of workers (51 percent) surveyed in 2016 by the Transamerica Center for Retirement Studies said they plan to continue working during retirement.

There are steps you can take right now to put you in a better position during your golden years:

• Contribute as much as possible every year to your employer-provided retirement plans. With a 401(k) pre-tax retirement plan, up to $18,000 can be contributed each year, or $24,000 if you are age 50 or older.
• Contribute as much as possible to a Traditional or Roth IRA every year, up to the $5,500 maximum, or $6,500 if you are age 50 or older.
• If available, contribute as much as possible to a Health Savings Account, which can be used to offset medical expenses with pre-tax dollars. Individuals can contribute up to $3,400 a year, or $4,400 for ages 55 or older.

It is one thing to be taxed on retirement contributions and their related earnings when you withdraw funds from your Traditional IRA, it is quite another when you pay the tax plus a 10% penalty for early withdrawal. Need funds prior to retirement and want to avoid the early withdrawal penalty? There are cases when this can be done:​

1. ​Medical insurance premiums if unemployed. If you receive federal or state unemployment for 12 or more consecutive weeks, you may pay for medical insurance premiums from your Traditional IRA without paying the 10% early withdrawal penalty. The premiums may cover yourself, your spouse, and your dependents’ medical insurance premium.
2. Qualified higher education expenses. You may pay for tuition, books, fees, supplies, and equipment at a qualified post-secondary institution for yourself, your spouse, your child or grandchild from your Traditional IRA without paying the 10% penalty.
3. Medical expenses. If you need to withdraw from your IRA to fund medical expenses in excess of 10% of your adjusted gross income you may do so penalty-free.
4. First-time home buyer. IRA distributions of up to $10,000 to help pay for the qualified acquisition costs of a first-time home avoid the early withdrawal penalty too. This is a lifetime limit per individual. A first–time home buyer is defined by the IRS as not having an ownership interest in a principal residence for two years prior to your new home acquisition date. To qualify the home can be for you, your spouse, your child, your grandchild, your parent or even other ancestors.
5. Conversions of Traditional IRAs to Roth IRAs. Want to convert your Traditional IRA into a Roth IRA to avoid paying taxes on future account earnings? No problem, this too is considered a qualified event to avoid the 10% penalty.
6. You're the beneficiary. If you are the beneficiary of someone else’s IRA and they die, there is usually an opportunity to withdraw funds without the penalty. Plenty of caution is required in this case, because if treated incorrectly the penalty might apply.
7. Qualified reservist. If you were called to active duty after 9/11/2001 for more than 179 days, amounts withdrawn from your IRA during your active duty can also avoid the 10% penalty.
8. Annuity distributions. There is also a way to avoid the 10% early withdrawal penalty if the distributions “are part of a series of substantially equal payments over your life expectancy." This option is complicated and must use an IRS-approved distribution method to qualify.

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​Other Things to Consider​

• Remember, the above ideas help you avoid an early withdrawal penalty for funds taken out of your Traditional IRA prior to reaching the age of 59 ½. After this age, there is no early-withdrawal penalty. The penalty is also waived if you become permanently or totally disabled or use the funds to pay an IRS tax levy.
• While the above events allow you to avoid the 10% early withdrawal penalty you will still need to pay the income tax due on the withdrawn funds.
• While generally the same, the 10% early withdrawal penalty rules are slightly different for defined contribution plans like 401(k)s and other types of IRAs.
• Before taking any action, call to have your situation reviewed. It is almost always better to keep funding your traditional IRA until you retire.

In 2012 my Social Security was launched to allow online access to your Social Security account. To date, over 30 million Americans have created an account. Effective June 10 there will be a second way to authenticate your identity and gain access to your online information using your e-mail account.

Background
Given the increased risk of identity theft, the Social Security Administration (SSA) recently required you provide a cell phone number in addition to your username and password to access your account. After tremendous backlash from users, the SSA rolled back this additional authentication procedure.

Current Situation
To solve this problem the new SSA login protocol adds authentication through either a one-time-use code sent to your cell phone or a one-time-use code sent to your requested e-mail.

To access my Social Security after June 10 you will first enter your username and password. You will then be required to enter your security code sent to you via cell phone or your email address.

Which method to use?
If you think the SSA is vulnerable to hack, you may wish to choose the email option since they already have your email in their system. Adding your cell phone number to your account provides yet another piece of personal information that could be stolen. Just be sure your email does not place the one-time security code in junk or spam folders.

The SSA is launching a campaign to announce this change along with recent updates to their website. Look for this correspondence, but do not lower your attention to the possibility of fraud.  Would-be crooks could use this announcement as an opportunity to send out fake messages. 

Two-thirds of the Baby Boomer generation are now working or plan to work beyond age 65, according to a recent Transamerica Institute study. Some report they need to work because their savings declined during the financial crisis, while others say they choose to work because of a greater sense of purpose and engagement that working provides for them.

Whatever your reason for continuing to work into your golden years, here are some tips to make sure you get the greatest benefit from your efforts:

1. Consider delaying Social Security. You can start receiving Social Security retirement benefits as early as age 62, but if you continue to work it may make sense to delay taking it until as late as age 70. This is because your Social Security benefit may be reduced or be subject to income tax due to your other income. In addition, your Social Security monthly benefit increases when you delay starting the retirement benefit. These increases in monthly benefits stop when you reach age 70.
2. Don't get bracket-bumped. Keep in mind that you may have multiple income streams during retirement that can bump you into a higher tax bracket and make other income taxable if you're not careful. For instance, Social Security benefits are only tax-free if you have less than a certain amount of adjusted gross income ($25,000 for individuals and $32,000 for married filing jointly in 2017), otherwise as much as 85 percent of your benefits are taxable.
3. Required distributions from pensions and retirement accounts can also add to your taxable income. Be aware of how close you are to the next tax bracket and adjust your plans accordingly.
4. Be smart about health care. When you reach age 65, you'll have the option of making Medicare your primary health insurance. If you continue to work, you may be able to stay on your employer's health care plan, switch to Medicare, or adopt a two-plan hybrid option that includes Medicare and a supplemental employer care plan.
5. Look over each option closely. You may find that you're giving up important coverage if you switch to Medicare prematurely while you still have the option of sticking with your employer plan.
6. Consider your expenses. If you're reducing your working hours or taking a part-time job, you also have to consider the cost of your extra income stream. Calculate how much it costs to commute and park every day, as well as the expense of meals, clothing, dry cleaning and any other expenses. Now consider how much all those expenses amount to in pre-tax income. Be aware whether the benefits you get from working a little extra are worth the extra financial cost.
7. Time to downsize or relocate? Where and how you live can be an important factor determining the kind of work you can do while you're retired. Downsizing to a smaller residence or moving to a new locale may be a good strategy to pursue a new kind of work and a different lifestyle.
8. Focus on your deeper purpose. Use your retirement as an opportunity to find work you enjoy and that adds value to your life. Choose a job that expresses your talents and interests, and that provides a place where your experiences are valued by others.

Virtually anyone with a qualified retirement savings account can convert funds into a Roth IRA. A Roth is different from other retirement accounts in that contributions come from after-tax dollars, while earnings are tax-free. The question for taxpayers with funds in tax-deferred Traditional IRAs, SEP-IRAs, 401(k)s, and 403(b)s is whether converting them into a Roth is worth it.

Roth Basics
Major benefits of a Roth IRA:

• Earnings are free from federal tax. This can be of tremendous benefit if you are in a high tax bracket during retirement.
• Unlike Traditional IRAs, you can keep contributing to a Roth after age 70½.
• Unlike Traditional IRAs, there are no minimum required distribution rules.

Downsides of a Roth IRA:

• Because initial contributions are made with after-tax funds, you must pay income tax on the amounts converted from other retirement funds.
• If the tax paid during the conversion is taken from your retirement funds, you could be subject to a 10% early withdrawal penalty.

 
Things to Consider
Prior to making the decision to convert funds into a Roth IRA, consider the following:

• You should have enough money outside of your retirement account to pay the tax on the conversion.
• A Roth makes the most sense if you think you will face higher tax rates when you retire.
• A Roth conversion will increase your reported annual income by the amount converted during the year. If you aren't careful, this could disqualify you for important tax benefits, such as dependent child and college tuition tax credits.
• A Roth needs time to build tax-free earnings. The more time you have before retirement, the more a Roth makes sense.

It is important to understand your options, so remember to ask for assistance prior to making a Roth conversion.

An Early Roth IRA Conversion Tip

It's best to act early in the tax year if you want to roll funds into a Roth IRA. That's because an early move into a Roth typically gives you the option to re-convert your funds through October 15th of the following tax year. The IRS calls this process recharacterization.
 
Example: Sam converts $50,000 from a Traditional IRA to a Roth in January. By October, the Roth is worth only $40,000 because Sam's investments lost value. If Sam does nothing he will still pay taxes on $50,000 converted from his Traditional IRA in January. Instead Sam can recharacterize some or all of the funds back into a Traditional IRA and pay no taxes on the conversion.

Here are some things to consider with an early rollover to a Roth IRA:

• Full year of earnings growth. After your conversion, you will have a full year to build after-tax earnings (or accumulate losses) in your new Roth, giving you time to see if a recharacterization makes sense.
• You have a full year to plan for the tax. Remember, you will want to pay the tax on rollovers with after-tax funds. This allows you to maximize the amount converted.
• Separate the account. Keep the funds you convert in a separate account from other Roth investments. This will keep the account clean should you need to undo your conversion.

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Each person's situation is unique. Carefully review your options prior to acting.

​If you collect Social Security benefits, you might have to pay federal income tax on part of those payments. These tips can help you determine if you need to do so.

• Form SSA-1099. If taxpayers received Social Security benefits in 2016, they should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of their benefits.
• Only Social Security. If Social Security was a taxpayer’s only income in 2016, their benefits may not be taxable. They also may not need to file a federal income tax return. If they get income from other sources, they may have to pay taxes on some of their benefits.
• Tax Formula. Here’s a quick way to find out if a taxpayer must pay taxes on their Social Security benefits: Add one-half of the Social Security income to all other income, including tax-exempt interest. Then compare that amount to the base amount for their filing status. If the total is more than the base amount, some of their benefits may be taxable.

The three base amounts are:

• $25,000 – if taxpayers  are single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from their spouse for all of 2016
• $32,000 – if they are married filing jointly
• $0 – if they are married filing separately and lived with their spouse at any time during the year

It’s possible that you will find it necessary to take out money early from your IRA, 401(k), or other retirement plan. This might create an extra tax on top of your income tax.

Here are some facts to remember if you're considering taking an early distribution:

1. Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.
2. Additional Tax. If a taxpayer took an early withdrawal from a plan last year, they must report it to the IRS. They may have to pay income tax on the amount taken out. If it was an early withdrawal, they may have to pay an additional 10% tax.
3. Nontaxable Withdrawals. The additional 10% tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the plan.
   A rollover is a form of nontaxable withdrawal. A rollover occurs when people take cash or other assets from one plan and put the money in another plan. They normally have 60 days to complete a rollover to make it tax-free.
4. Check Exceptions. There are many exceptions to the additional 10% tax. Some of the rules for retirement plans are different from the rules for IRAs.
5. File Form 5329. If someone took an early withdrawal last year, they may have to file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, with their federal tax return.
6. It’s Complicated. Early withdrawal rules can be complex. Make sure you use a qualified tax professional or some other reliable way to complete and submit your taxes after you’ve made an early withdrawal.
   

If you have a low- to moderate-income you can take steps now to save for retirement and receive a special tax credit.

The “Saver’s Credit” helps offset some of the first $2,000 that you voluntarily contribute to an IRA, 401(k) plan or similar workplace retirement program. Also known as the “Retirement Savings Contributions Credit”, the Saver’s Credit is available in addition to any other tax savings for which you may qualify.

If eligible, you still have time to make qualifying retirement contributions and get the Saver’s Credit on your 2016 tax returns. You have until the due date for filing your 2016 return (April 18, 2017), to set up a new IRA or add money to an existing IRA for 2016. Elective deferrals (contributions) to a 401(k) plan or similar workplace program must be made by the end of the year.

Who can claim the Saver’s Credit?

• Married couples filing jointly with incomes up to $61,500 in 2016 or $62,000 in 2017;
• Heads of Household with incomes up to $46,125 in 2016 or $46,500 in 2017; and
• Married individuals filing separately and singles with incomes up to $30,750 in 2016 or $31,000 in 2017.

Similar to other tax credits, the Saver’s Credit can increase a taxpayer’s refund or reduce the tax owed. Although the maximum Saver’s Credit is $1,000 ($2,000 for married couples), it is often much less.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.

The Saver’s Credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Roth IRA contributions are not deductible, but qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to a 401(k) or similar workplace plan are not taxed until they are withdrawn.

There are some other special rules that apply to the Saver’s Credit. To learn more or find out if you qualify, contact Ellsworth & Associates at (513) 272-8400. Mention this article and receive a free consultation.