Backdoor Roth Going Away

Backdoor Roth Going Away?

Under the current proposals in Washington, the Backdoor Roth is going away. If approved, investors would not be allowed to convert any after-tax money in IRAs to a Roth IRA as of January 1, 2022. This would eliminate the Backdoor Roth strategy and also kill the “Mega-Backdoor Roth” used by funding after-tax contributions to a 401(k) plan.

We have been big fans of the Backdoor Roth IRA and have used the strategy for a number of clients. We will discuss what to do if the Backdoor Roth does indeed go away. But first, here’s some background on Roth IRAs.

The Backdoor Roth Strategy

There are two ways to get money into a Roth: through making a contribution or by doing a conversion. Contributions are limited to $6,000 a year, or $7,000 if you are 50 or older. For Roth IRAs, there are also income limits on who can contribute. For 2021, you can make a full Roth contribution if your Modified Adjusted Gross Income is below $125,000 (single) or $198,000 (married).

If your income is above these levels, the Backdoor Roth may be an option. Let’s say you made too much to contribute to a Roth. You could still make an after-tax contribution to a Traditional IRA and then convert it to your Roth. You would owe taxes on any gains. But, if you put in $6,000, after-tax, and immediately converted it, there would be zero gains. And zero taxes. Yeah, it’s a loophole to get around the income restrictions. But the IRS determined that it was legal and people have been doing it for years.

This change won’t happen until January 1. So, you can still complete a Backdoor Roth now through the end of the year. I have some clients who wait until April to do their IRAs, but this year, you had better do the Backdoor by December 31. If you are eligible for the Backdoor, you should do it. Why would you not put $6,000 into an account that will grow Tax-Free for the rest of your life? Couples could do $12,000 or up to $14,000 if they’re over 50.

Instead of the Backdoor Roth…

Your 401(k) Plan may offer a Roth option. Many people are not maximizing their 401(k) contributions. You can contribute $19,500 to your 401(k), or $26,000 if over 50. Let’s say you are currently contributing $12,000 to your 401(k) and $6,000 to a Backdoor Roth. Change that to $12,000 to your Traditional 401(k) and $6,000 to your Roth 401(k). You can split up your $19,500 in contributions however you want between the Traditional and Roth buckets. I often find that with couples that there is room to increase contributions for one or both spouses.

Self-employed? Me, too. I do a Self-Employed 401(k) through TD Ameritrade. Through my plan, I can also make Traditional and Roth Contributions. And I can do Profit-Sharing contributions on top of the $19,500. It’s better than a SEP-IRA, and there is no annual fee. I can set up a Self-Employed 401(k) for you, too.

What if you have both W-2 and Self-Employment Income? In this case, you can maximize your 401(k) at your W-2 job and then contribute to a SEP for your self-employment. Contact me for details.

Health Savings Accounts. HSAs are the only account where you get both an upfront tax-deduction and the money grows tax-free for qualified expenses. And there’s no income limit on an HSA. As long as you are participating in an HSA-compatible high deductible plan, you are eligible. If you are in the plan for all 12 months, you can contribute $3,600 (individual) or $7,200 (family) to an HSA this year.

529 Plans. You want to grow investments tax-free with no income limits and very high contribution limits? Well, that sounds like a 529 College Savings Plan. If your kids, grand-kids, or even great-grand-kids will go to college, you could be growing that money tax-free. They don’t even have to be born yet, you can change the beneficiary later. We can use 529 plans like an inter-generational educational trust that also grows tax-free. And 529s will pass outside of your Estate, if you are also following the current proposals to cut the Estate Tax Exemption from $11.7 million to $5 million.

ETFs in a Taxable Account. Exchange Traded Funds (ETFs) are very tax-efficient. Hold for over a year and you could qualify for long-term capital gains treatment. Today, long-term capital gains taxes are 15%, whereas your traditional IRA or 401(k) money will be taxed as ordinary income when withdrawn, which is 22% to 37% for most of my clients. Some clients will drop to the 12% tax bracket in retirement, which means their long-term capital gains rate will be 0%. A married couple can have taxable income of up to $81,050 and pay zero long-term capital gains! (Taxable income is after deductions. If a couple is taking the standard deduction of $25,100, that means they could have gross income of up to $106,150 and be paying zero capital gains.)

Tax-Deferred Annuity. Instead of holding bonds in a taxable account and paying taxes annually, consider a Fixed Annuity. Today, I saw the rates on 5-year annuities are back to 3%. An annuity will defer the payment of interest until withdrawn. There are no RMDs on Annuities, so you could defer these gains for a long-time, potentially. And if you are in a high tax bracket now, you could hold off on taking your interest until you are in a lower bracket in retirement.

Save on Taxes

If Congress does away with the Backdoor Roth, we will let you know. There are a lot of moving parts in this 2,400 page bill and some will change. Whatever happens, my job will remain to help investors achieve their goals. We invest for growth, but we know that it is the after-tax returns that matter most. So, my job remains to help you find the most efficient and effective methods to keep more of your investment return.

Stretch IRA Rules

Stretch IRA Rules

What are the Stretch IRA Rules? The SECURE Act changed the Stretch IRA rules as of January 1, 2020. While this was a proposal, I wrote 7 Strategies If The Stretch IRA Is Eliminated, which continues to get read numerous times every month. Today, we are going to dive into the new rules for IRA Beneficiaries. This is important because if you are leaving a large retirement account to your heirs, there could be a large tax bill! And if you don’t know these rules, you could make it even worse.

First, old Stretch IRAs are unchanged and are grandfathered under the old rules. So, for anyone who passed away by December 31, 2019, their beneficiaries could still inherit the account into a Stretch IRA. That means that they only have to take Required Minimum Distributions each year. They can leave the money invested in a tax-deferred account. For many of my clients with inherited IRAs, their Stretch IRAs have grown even though they are taking annual withdrawals!

Under the new rules, there are three classes of IRA Beneficiaries. First, there are Eligible Designated Beneficiaries (EDBs) who will still be able to use the Stretch IRA Rules. Second, there are non-Eligible Designated Beneficiaries (non-EDBs), who are now going to have to withdraw all the money within 10 years. This is called the “10 Year Rule”. Third, there could be a Non-Designated Beneficiary.

Eligible Designated Beneficiaries

There are six situations where an IRA Beneficiary today could use the old Stretch IRA rules.

  1. A Spouse
  2. Minor Children (see below)
  3. Disabled Persons
  4. Chronically Ill Individuals
  5. Persons Not more than 10 years younger than the IRA owner
  6. Certain See-Through Trusts

These individuals could inherit an IRA and use the old Stretch IRA rules. For example, if you left money to your sister who is 8 years younger than you, she could do a Stretch. Or to a friend who was disabled. The old rules and benefits will still apply in these cases!

Spouses and Children

Minor Children are not given an unlimited Stretch IRA, unlike in the past. Today, Minor Children can stretch the IRA until the age of majority, 18 or 21, depending on the state. If they are a full-time college student they can stretch until age 26. When they reach that age, then the 10 Year Rule kicks in and they must withdraw the remainder of the IRA within 10 years.

Spousal beneficiaries have a choice in how they treat the inherited IRA. They can roll it into their own IRA and treat it as their own. This is helpful if they are younger than the decedent and want to have smaller RMDs. However, if they are younger than 59 1/2, they might prefer to put it into a Stretch IRA. That way they can take withdrawals now and avoid the 10% pre-mature distribution penalty. If a surviving spouse is older than the decedent, they could use the Stretch IRA so they can put off RMDs until the decedent would have been 72.

Non-Eligible Designated Beneficiaries

Any person who is not one of the six EDBs is a non-Eligible Designated Beneficiary. Non-EDBs are must withdraw their entire IRA within 10 years. This would include adult children, grandchildren, or any other relative or friend who is more than 10 years younger than the IRA owner. Most non-spouse beneficiaries will be non-EDBs.

The IRS created some confusion this year as to what the 10 Year Rule Means. One document suggested that beneficiaries would still be required to take out some of the inherited IRA annually. That turns out not to be the case, as the IRS clarified in publication 590-B, Distributions from IRAs. Under the 10 year rule, there is no RMD or annual requirement. Beneficiaries have complete choice in when they withdraw from the IRA. The only requirement is that the whole account is withdrawn in 10 years.

For most beneficiaries, you will still want to draw down a large account gradually. Taking small withdrawals each year is likely to result in lower taxes than if you wait until the 10th year. For example, it would be better to take $100,000 a year for 10 years than $1 million all at once. This does give us some room for customization. If you have a low earning year, that could be a better year to take out a larger amount. If your tax rate will go up in 2022 or 2026, you might want to accelerate withdrawals while under a lower rate.

Non-Designated Beneficiaries

The third category is Non-Designated Beneficiaries. An NDB could occur if you don’t name a beneficiary, if you name your Estate as the beneficiary, or a charity or certain trusts. NDBs have the worst outcome, the old 5-year Rule. NDBs must withdraw the entire IRA within 5 years. Many people who established Trusts prior to 2020 named their trusts as the beneficiary of their retirement accounts. This will backfire now because the Trust cannot Stretch the distributions. And with Trust tax rates higher than for individual beneficiaries, this could hurt your beneficiaries quite a bit. If you have a Trust from before 2020, it should be revisited.

It is important that we review your beneficiaries from time to time to make sure they are up to date. It is also a good idea to have contingent beneficiaries in case your primary beneficiary pre-deceases you. IRAs do not have to go through probate. But if there are no beneficiaries, then this money could be tied up from months to more than a year as the Probate Court decides how to distribute your money.

Roth IRA Stretch Rules

Roth IRAs are inherited tax-free. So, on day one, any beneficiary can withdraw the entire Roth IRA balance and owe zero taxes. However, there are some options available for Roth Beneficiaries, too. And these also changed under the SECURE Act.

First, for spouses. A spousal beneficiary of a Roth IRA could take a lump sum distribution. Or they could roll the inherited Roth into their own Roth. Third, they could roll the Roth into an Inherited Roth account. In an Inherited Roth, they have two options for distributions. They can take annual Required Minimum Distributions based on their own age. Or, they can use the 5-year rule and withdraw the entire amount in 5 years. For most spouses, rolling the inherited Roth into their own will be a good course of action.

Non spouse beneficiaries also have an option to continue tax-free growth of a Roth. For Roth owners who passed away before 2020, beneficiaries could have elected to take RMDs. Under the new rules (owners who passed away after January 1, 2020), Roth Beneficiaries can use the 10 year rule. They have up to 10 years to take money out of their inherited Roth IRA.

Other Considerations

An inherited IRA also has a beneficiary. What happens then? Let say Mom left her IRA to her son years ago. Son has a Stretch IRA. Son passes away and leaves the inherited IRA to his wife. What now? You don’t get to Stretch twice. So the wife, in this case, is going to be under the 10-Year Rule. This is called a Successor Beneficiary.

A second example: Mom passes away in 2020 and leaves her IRA to her son. Son is under the 10-Year Rule. Son passes away in 2025 and names his wife as Successor Beneficiary. Does she get to restart the 10-Year Rule? No, the old rule applies, and she must withdraw the full account by 2030.

If you have a Beneficiary IRA, and are over age 70 1/2, you can also do Qualified Charitable Distributions. Most people don’t realize that QCDs could count towards their RMDs from an inherited IRA, too.

While I often only have one or two clients who inherit an IRA each year, every IRA owner should understand what will happen when they pass away. That’s why I am writing this somewhat technical article on the new Stretch IRA rules. By planning ahead, we can determine the best course of action for your situation. It could involve leaving a your IRA to charity, to a spouse, to children, grandchildren, or a trust. It may make sense to convert your IRA to a Roth.

For many of my clients, their largest accounts are IRAs. And there is a significant tax liability attached to those IRAs, for the owners, spouses, and heirs. If we plan well, we can help reduce those taxes!

What Percentage Should You Save

What Percentage Should You Save?

One of the key questions facing investors is “What percentage should you save of your income?” People like a quick rule of thumb, and so you will often hear “10%” as an answer. This is an easy round number, a mental shortcut, and feasible for most people. Unfortunately, it is also a sloppy, lazy, and inaccurate answer. 10% is better than nothing, but does 10% guarantee you will have a comfortable retirement?

I created a spreadsheet to show you two things. Firstly, how much you would accumulate over your working years. This is based on the years of saving, rate of return, and inflation (or how much your salary grows). Secondly, how much this portfolio could provide in retirement income and how much of your pre-retirement salary it would replace.

The fact is that there can be no one answer to the question of what percentage you should save. For example, are you starting at 25 or 45? In other words, are you saving for 40 years or 20 years? Are you earning 7% or 1%? When you change any of these inputs you will get a wildly different result.

10% from age 25

Let’s start with a base case of someone who gets a job at age 25. He or she contributes 10% of their salary to their 401(k) every year until retirement. They work for 40 years, until age 65, and then retire. Along the way, their income increases by 2.5% a year. Their 401(k) grows at 7%. All of these are assumptions, not guaranteed returns, but are possible, at least historically.

In Year 1, let’s say their salary is $50,000. At 10%, they save $5,000 into their 401(k) and have a $5,000 portfolio at the end of the year. In Year 2, we would then assume their salary has grown to $51,250. Their 401(k) grows and they contribute 10% of their new salary. Their 401(k) has $10,475 at the end of Year 2.

We continue this year by year through Year 40. At this point, their salary is $130,978, and they are still contributing 10%. At the end of the year, their 401(k) would be $1,365,488. That’s what you’d have if you save 10% of your 40 years of earnings and grow at 7% a year. Not bad! Certainly most people would feel great to have $1.3 million as their nest egg at age 65.

How much can you withdraw once you retire? 4% remains a safe answer, because you need to increase your withdrawals for inflation once you are in retirement. 4% of $1,365,488 is $54,619. How much of your salary will this replace? The answer is 41.7%. We can change the amount of your starting salary, but the answer will remain the same. With these factors (10% contributions, 2.5% wage growth, 7% rate of return, and 40 years), your portfolio would replace 41.7% of your final salary. That’s it! That could be a big cut in your lifestyle.

What percentage should you replace?

41.7% sounds like a really low number, but you don’t necessarily have to replace 100% of your pre-retirement income. To get a more accurate number of what you need, we would subtract the following savings:

  • You weren’t spending the 10% you saved each year to your 401(k)
  • 7.65% saved on FICA taxes versus wage income
  • Some percentage saved on income taxes, depending on your pre- and post-retirement income.
  • Your Social Security Benefit and/or Pension Income
  • Have you paid off your mortgage, or have other expenses that will be eliminated in retirement?

Many people will only need 75% to 80% of their final salary in retirement income to maintain the same standard of living. If their Social Security benefit covers another 20%, then they would only need a replacement rate of 55% to 60% from their 401(k).

Time Value of Money

The biggest factor in compounding is time. In our original example of 40 years of accumulation, the final portfolio amount was $1,365,488. However, what if you only save for 30 years? Maybe you didn’t start investing until 35. Perhaps you want to retire at age 55 and not 65? Either way, at the 30 year mark, the portfolio would have grown to $666,122. By saving for another 10 years, your accumulation will more than double to $1.365 million.

Here’s a chart that is perhaps a more useful answer to the question of what percentage you should save. It depends on how many years you will save and what percentage of your income you want to replace.

Income Replacement50%60%70%
in 40 Years12.0%14.4%16.8%
in 35 Years15.7%18.8%22.0%
in 30 Years20.9%25.1%29.2%
in 25 Years28.5%34.2%39.9%
in 20 Years40.3%48.4%56.4%

How do you read this? If you want to replace 50% of your income in 40 years from now, starting at zero dollars, you need to save 12% of your income. Actually, this is pretty close to the 10% rule of thumb. But no one says “If you are starting at age 25 and are planning to save for the next 40 years, 10% is a good rule of thumb”. What if you are starting later? Or, what if you want to have your portfolio replace more than 50% of your income.

As you reduce the accumulation period, you need a higher contribution rate. For example, at the 50% replacement level, your required contribution increases from 12% to 15.7% to 20.9% as you go from 40 to 35 to 30 Years. And if you are planning to retire in 20 years and have not started, you would need to save 40.3%.

Similarly, if you want your portfolio to replace more than 50% of your income, the percent to contribute increases as you stretch to 60% or 70%. These figures are quite daunting, and admittedly unrealistic. But one thing that may help slightly will be a company match. If you contribute 10% and your company matches 4% of your salary, you are actually at 14%. Don’t forget to include that amount!

What can you do?

We’ve made some conservative assumptions and perhaps things will go even better than we calculated. For example, if you achieve an 8% return instead of 7%, these contribution requirements would be lower. Or if the inflation rate is lower than 2.5%. Or if you can withdraw more than 4% in retirement. All of those “levers” would move the contribution rate lower. Of course, this cuts both ways. The required contribution rate could be higher (even worse), if your return is less than 7%, inflation higher than 2.5%, or safe withdrawal rate less than 4%.

If you want to consider these factors in more detail, please read the following articles:

If you’d like to play around with the spreadsheet, drop me an email ( and I’ll send it to you, no charge. Then you can enter your own income and other inputs and see how it might work for you. While our example is based on someone who is starting from zero, hopefully, you are not! You can also change the portfolio starting value to today’s figures on the spreadsheet.

The key is this: Begin with the End in Mind. The question of What percentage should you save depends on how long you will accumulate and what percent of income you want to replace in retirement. Saving 10% is not a goal – it’s an input rather than an outcome. Having $1.3 million in 40 years or $2.4 million in 35 years is a tangible goal. Then we can calculate how much to save and what rate of return is necessary to achieve that goal. That’s the start of a real plan.

You don’t have to try to figure this out on your own. I can help. Here’s my calendar. You are invited to schedule a free 30 minute call to discuss your situation in more detail. After that, you can determine if you’d like to work with me as your financial advisor. Sometimes, it isn’t the right fit or the right time, and that’s fine too. I am still happy to chat, answer your questions, and share whatever value or information I can. But don’t use a Rule of Thumb, get an answer that is right for your personal situation.

Invest $5,466 a month

Where to Invest $5,466 a Month

Why should you invest $5,466 a month? Why that very odd number? Well, at an 8% hypothetical return, investing $5,466 a month will get you to $1 million in 10 years. That’s what we are going to explore today and it is very possible for many professional couples to save this much.

Last week, we looked at where to invest $1,000 a month. That’s a reasonable goal for many people, a 10% savings rate for a couple making $120,000 or 15% for an individual making $80,000. And while saving $1,000 a month may be okay, it will take decades to amass enough for retirement. If you want to accelerate the process or aim for a higher goal, you have to save more.

Saving $5,466 a month is $65,592 a year. For a couple making $200,000, that represents saving 33% of your income. That’s challenging, but not impossible. After all, there are many families who get by with making less than $134,000.

There are many different ways you could invest $5,466 a month, but I’m going to focus on adding tax benefits both in the present and future. Let’s get right to it!

Retirement Accounts

  1. Maximize 401(k), $1,625 a month each. That will get you to the 401(k) annual contribution limit of $19,500. It is surprising to me how many people don’t do this. For a couple, that is $3,250, more than half our goal to invest $5,466 a month.
  2. Company match, $416 a month each. Many companies match 5% of your salary to your 401(k). For an employee making $100,000 a year, that equals $416 a month. I am assuming this couple each makes $100,000. For two, that’s $832 a month. Added to your 401(k) contributions and we are now at $4,082 a month.
  3. Backdoor Roth, $500 a month each. At $200,000 for a couple, you make too much to contribute to a Roth IRA. However, you may still be able to make Backdoor Contributions to a Roth IRA, for $6,000 a year or $500 a month each. Added to 1 and 2 above and your monthly total is $5,082. We only need to find another $384 to invest a month to reach the goal of $5,466.

Additional Places to Invest

  1. Health Savings Account (HSA), $600 a month. If you’re a participant in an eligible family plan, you can contribute $7,200 a year to an HSA. That could be up to $600 a month, and that is a pre-tax contribution!
  2. 529 Plan, $1,250 a month. If you are saving for a child’s future college expenses, you could contribute to a 529 College Savings Plan. A 529 Plan grows tax-free for qualified higher education expenses. Most parents choose to stay under the gift-tax exclusion of $15,000 a year per child, which is $1,250/month.
  3. Taxable Account, $ unlimited. You can also contribute to a taxable account. And while you will have to pay taxes on capital gains, dividends, and interest, we can make these accounts relatively tax efficient.

Other Notes

  1. Tax Savings. While trying to invest $5,466 a month is a lot, you will be helped by the tax savings. A couple making $200,000 a year (gross) will have just entered the 24% Federal tax bracket after the Standard Deduction of $25,100 (2021). Some of your tax deductible contributions will be at 24%, but most will be at 22%. Using just 22%, your joint $39,000 in 401(k) contributions will save you $8,580 in taxes. That is $715 a month back in your pocket. Add in $7,200 to an HSA and save another $1,584 in taxes ($132 a month).
  2. Catch-up Contributions. If you are over age 50, you can contribute more to your 401(k) and Roth IRA accounts. There are also catch-up contributions for an HSA if age 55 or older.

I wish more people had the goal of becoming a Millionaire in 10 Years. We cannot control the market, but we can do our part and do the savings. At an 8% hypothetical return, starting to invest $5,466 a month can put you on track to $1 million in a decade. And if you already have $1 million, saving $5,466 for another 10 years would get you to $3.2 million.

For couples making over $200,000, can you afford to invest $5,466 a month? Can you afford not to? Planning is the process of establishing goals and then creating the roadmap to get you there. If you’re ready to create your own roadmap, give me a call.

retirement buckets

Retirement Buckets

Our fifth and final installment of our series on retirement income will cover the strategy of five-year retirement buckets. It is a very simple approach: you maintain two buckets within your portfolio. Bucket 1 consists of cash and bonds sufficient for five years of income needs. Bucket 2 is a long-term growth portfolio (stocks).

We could start with up to a 5% withdrawal rate. Let’s consider an example. On a $1 million portfolio, we would place $250,000 in Bucket 1. That is enough to cover $50,000 in withdrawals for five years. Bucket 1 would be kept in cash and bonds, for safety and income. Each year, you would take withdrawals from Bucket 1.

Bucket 2, with $750,000, is your stock portfolio. The goal is to let this money grow so that it can refill Bucket 1 over time. In years when Bucket 2 is up, we can refill Bucket 1 and bring it back up to five years worth of money. At $750,000, a 6 2/3% annual return would provide the $50,000 a year needed to refill Bucket 1.

Addressing Market Volatility

When the market is flat or down, we do not take a withdrawal from Bucket 2. This addresses the big risk of retirement income, having to sell your stocks when they are down. Instead, by having five years of cash in Bucket 1, we can wait until the market recovers before having to sell stocks. That way, you are not selling stocks during a time like March of 2020, or March of 2009! Instead, we hold on and wait for better times to sell.

Historically, most Bear Markets are just for a year or two, and then the market begins to recover. Sometimes, like this year, the recovery is quite fast. The goal with our Retirement Buckets is to never have to sell during a down year. And while it is always possible that the stock market could be down five years in a row, that has never happened historically.

Retirement Buckets is different from our other withdrawal strategies, such as the 4% rule or the Guardrails strategy. Those strategies tend to have a fixed asset allocation and rebalance annually. The Retirement Buckets Strategy starts with a 75/25 allocation, but that allocation will change over time. Our goal is not to maintain exactly 25% in the cash/bonds bucket, but rather to target the fixed amount of $250,000. If the market is down for two years, we may spend Bucket 1 down to $150,000.

Stocks for Growth

For most people, having five years of cash and bonds in reserve should be sufficiently comfortable. However, if you wanted to increase this to 7 years, a 65/35 initial allocation, that would also work. But, I would suggest starting with at least a 60% allocation to stocks. That’s because when Bucket 2 is smaller, you need an even higher return to refill the $50,000 a year. If you started with 60/40 ($600,000 in Bucket 2), for example, you’d need a return of 8 1/3%.

Retirement Buckets can work because you are creating flexibility around when you are going to sell stocks. When you maintain any fixed allocation, you run into the problem of selling stocks when they are down. Rebalancing is good when you are in accumulation – it means you are buying stocks when they are low. But for retirement income strategies, selling stocks when they are down is likely going to be a bad idea.

Selling Bonds First

Somewhat related to a Buckets Strategy is another income strategy, the Rising Equity Glidepath. In this approach, you sell your bonds first. So, if you started with a 60/40 allocation at retirement and withdraw 4% a year, your bonds would last you 10 years (actually a little longer, with interest). If you avoid touching your stocks for 10 years, they are likely to have doubled in value, historically, with just a 7% annual return. I see the Rising Equity Glidepath as being related to the buckets strategy because both approaches focus on not selling stocks. This reduces the Sequence of Returns risk that market losses impact your initial retirement years.

However, most investors become more conservative as they age, so they aren’t going to like the Rising Equity Glidepath. If they retire at 65, that puts them on track to be at 100% equities at age 75. That’s not what most want. So, even though the strategy looks good in theory, it’s not going to make sense in practice.

What’s Your Plan?

The Retirement Buckets approach can provide a strategy that is logical and easily understood by investors. We maintain five years of cash and bonds, and can replenish the cash bucket when the market is up. This gives you a flexible process for how you are going to fund your retirement and respond to market volatility.

I hope you’ve enjoyed our series on retirement income approaches. It is so important to understand how to create sustainable withdrawals from your portfolio. Whether you are already retired or have many years to go, we are here to help you find the right strategy for you.

guardrails withdrawal strategy

Guardrails Withdrawal Strategy

After looking at Bengen’s 4% Withdrawal Rule last week, today we turn to the Guardrails Withdrawal Strategy created by Guyton and Klinger in 2006. Bengen’s 4% Rule is a static withdrawal strategy – he tested various fixed withdrawal rates over 30-year periods to calculate a safe withdrawal rate for retirement income. This is a static approach because he did not attempt to adjust withdrawals based on market performance.

As a result, one criticism of the 4% Rule is that it is too conservative and is based on the historical worst case scenario. In many scenarios, retirees could have taken much more income than 4%. Or they could have retired years earlier! In bad market scenarios, it also seems unlikely that a retiree would continue to increase their withdrawals every year for inflation if it risked depleting their assets.

A Dynamic Withdrawal Strategy is one which adjusts retirement income up or down based on market performance. Guyton’s Guardrail approach establishes a framework for retirees to adjust their income if necessary. The benefit is that you could increase your withdrawals if performance is above average. It also means you may need to reduce withdrawals during a bad stretch. A dynamic approach means you could start with a much higher withdrawal than just 4%. The guardrails creates an ongoing process to know if your withdrawal rate is in the safe zone or needs to change.

Guyton’s Guardrail Rules

Like Bengen’s framwork, Guyton looked at historical market performance over a 30-year retirement. Here are the main points of his Guardrails Withdrawal Strategy:

  • Your initial withdrawal rate could be 5.4%.
  • You increase withdrawals for inflation annually, EXCEPT in years when the portfolio has fallen in value, OR if your withdrawal percentage exceeds the original rate of 5.4%. In those years, you keep the same withdrawal amount as the previous year.
  • If a market drop causes your current withdrawal rate to exceed 6.48%, then you need to cut your withdrawal dollars by 10%.
  • If market gains cause your withdrawal rate to fall below 4.32%, then you can increase your withdrawal dollars by 10%.
  • This strategy worked with allocations of 65/35 and 80/20. With a 50/50 portfolio, the safe withdrawal rate drops from 5.4% to 4.6%.
  • After a year when stocks were down, withdrawals should only come from cash or bonds. On years when the market is up, he would trim stocks and add to cash to meet future withdrawals.

On a $1 million portfolio, the Guardrails approach suggests you could safely withdraw $54,000 in year 1. That’s significantly higher than the $40,000 under Bengen’s static 4% rule. And while you might forgo annual inflation increases if the market does poorly, you were already starting at a much higher income level. Even if you had a 10% cut in income, from $54,000 to $48,600, you are still getting more income than if you were using the 4% Rule.

Dynamic Withdrawal Range

The Guardrails approach establishes an ongoing withdrawal range of 4.32% to 6.48%. That is a 20% buffer from your original 5.4%. If your withdrawal rate goes outside of this range, you should decrease (or can increase) your withdrawals. The static 4% rule only focused on your initial withdrawal rate and then just assumes you make no changes regardless of whether your future withdrawals are high or low. The 4% rule is an interesting study of market history, but I think retirees want to have a more strategic approach to managing market risk.

The benefit to a retiree for implementing a Guardrails approach is significant. If you need $40,000 a year, you would only need an initial nest egg of $740,740 with the guardrails, versus $1 million under the 4% rule. And you now have a clear process each year to evaluate the sustainability of your current withdrawals. You are responding to markets to aim for an effective retirement strategy.

Calculating a sustainable withdrawal rate for retirement income will always be an unknown. We’ve talked about the challenges of sequence of returns risk, inflation, and longevity. While we can’t predict the future, having a dynamic approach to retirement withdrawals is appealing and intuitive. Is a Guardrails Withdrawal Strategy right for you? Along with portfolio management, our retirement planning process can offer great peace of mind that you are taking a prudent, well-thought approach to managing your wealth.

The 4% Withdrawal Rule

The 4% Withdrawal Rule

Many retirement income projections are based on the work of William Bengen, a financial advisor who created the 4% withdrawal rule. Today, in part three of our five-part series on creating retirement income, we look at Bengen’s 4% Rule and what it can mean for your retirement.

Bengen’s Research

Twenty-five years ago, there had been little research done on how to create retirement income from a portfolio. Thankfully, most people had pensions which guaranteed their payments. However, with the rise of 401(k) plans, the responsibility for retirement income shifted from the employer to the employee and their investment portfolio. We needed a more rigorous framework for retirement planning.

Bengen looked back at the history of the stock and bond returns and considered a 30-year retirement period. Since inflation increases your cost of living, he assumed that retirees would need to increase their retirement withdrawals annually. He then calculated, for every period, the maximum withdrawal rate that would have lasted for the full 30 years, adjusting for inflation.

He examined this for every 30 year period with available data. For example, 1930-1960, and then 1931-1961, 1932-1962, etc. all the way up to the present. In the all 30-year periods, retirees were able to withdraw at least 4% of their initial sum. In the worst case scenario, retirees with a $1 million portfolio could withdraw $40,000 in year 1, and increase it every year with inflation. This is the Safe Withdrawal Rate, or SAFEMAX as Bengen called it.

Interestingly, Bengen did not name this the 4% Rule. In interviews with reporters, they started calling it the 4% Rule and the name stuck.

Portfolio Implications

Bengen originally used a simple two asset portfolio using one-half US Large Cap Stocks and one-half US Intermediate Treasury Bonds. He assumed annual rebalancing, which helped with stock market volatility. He found that the 4% Rule would work with about one-half to three-quarters invested in stocks. With higher allocations to stocks, the portfolio became more likely to implode during bear markets. And with higher allocations to bonds, the portfolio could not keep up with the inflation-adjusted withdrawals. So, the sweet spot for a retirement allocation seemed to be from 50/50 to 75/25.

In the majority of 30-year periods, the potential withdrawal rate was much higher than 4%. In a few periods, it even exceeded 10%. The 4% rate was the worst case scenario. 4% worked for all of the 51 different 30-year periods starting in 1926 that Bengen considered in his original paper. At a 4% withdrawal rate, your money actually grew in most of the periods. If you started with a $1 million portfolio and took 4% withdrawals, your portfolio would have actually exceeded $1 million, 30 years later, in the majority of cases.

Later, Bengen added Small Cap stocks to the mix, with a portfolio of 30% large cap, 20% small cap, and 50% bonds. With this portfolio mix, he found that the safe withdrawal rate increased to 4.5%. Bengen considers this work to replace his initial 4% Rule. Unfortunately, the name had already caught on and Bengen will forever be known as the creator of “The 4% Rule”, but he would rather it was called “The 4.5% Rule”.

There is definitely room for higher withdrawals than 4%. The problem is that we don’t know what future returns will be and we don’t know the sequence of returns. So, the safest bet remains to start at only a 4% withdrawal. For people who retire before age 65, we may want to plan for a longer potential horizon than Bengen’s 30 year assumption. A longer retirement might require a lower rate than 4%.


The 4% Withdrawal Rule is a good rule of thumb for retirement income. When we use other analytical tools, such as a Monte Carlo evaluation, it often generates results similar to Bengen’s rule. If you want to use a 4% rate, your nest egg needs to be 25-times your annual needs. This is a very high hurdle for most people. It’s incredibly challenging for most Americans to save 25 times their annual expenses during their working years.

So while it is a conservative way to calculate retirement income, the 4% rule may make people over-prepared in most periods. As a result, people could have spent more money in retirement. Or they could have retired years earlier, but waited to accumulate enough assets to meet the 4% Rule. That’s a flaw with the 4% Rule.

The other weakness is that it is based on history. Just because it worked in the past century is no guarantee that it will work in the future. For example, if we have very low bond yields, poor stock returns, or higher inflation, it’s possible that a 4% withdrawal fails. One researcher, Wade Pfau, tried to apply the 4% Rule to investors in other countries. He found that it didn’t work for every country. We have had a really good stock market, and low inflation, here in the US and that’s why it worked historically.

Bottom line: the 4% Withdrawal Rule is a good starting place to understand retirement income. But we can do better by having a more dynamic process. We can adjust withdrawals based on market performance. Or you can delay or reduce inflation adjustments. We can avoid selling stocks in down years. All of these strategies can enhance the 4% rule and potentially enable you to start with a higher withdrawal rate. We will consider two such strategies in the next articles, considering Guardrails and a 5-year Bucket Approach.

Bengen is retired now, but still writing and continuing his research. He realized that his initial research left a lot of money on the table for retirees. Two months ago, he produced a new article looking at stock market valuations and inflation to refine the initial withdrawal rate. If you are retiring when stocks are expensive, future returns are likely to be lower, and you should start with a lower withdrawal rate. If stocks are cheap, you might be able to start with a higher withdrawals than 4%. Bengen believes this new process could calculate a safe-withdrawal rate of 4.5% to 13%. (The present calculation using his new method is 5.0%.) Time will tell if his new research gains wider acceptance, but for now, he will be best known as the father of the 4% withdrawal rule.

Guaranteed Retirement Income

Guaranteed Retirement Income

Guaranteed Retirement Income increases satisfaction. When you receive Social Security, a Pension, or other monthly payment, you don’t have to worry about market volatility or if you will run out of money. You’re guaranteed to receive the payment for as long as you live. That is peace of mind.

Research shows that people prefer pension payments versus taking withdrawals from an investment portfolio. When you were working, you had a paycheck show up every month and you didn’t feel bad about spending it. There would be another paycheck next month. Unfortunately, with an investment portfolio, retirees dislike spending that money. There is “range anxiety” that their 401(k) or IRA will run out of money. There is fear that a market drop will ruin their plans. After spending 40 years building up an account and it’s not easy to reverse course and start to spend that nest egg and see it go down.

Corporate and Municipal pensions have been in decline for decades. As a result, most of us have only a Social Security benefit as guaranteed income. That’s too bad. 401(k) plans are a poor substitute for a good pension. You need to accumulate a million bucks just to get $40,000 a year at a 4% withdrawal rate. It places all the responsibility on American workers to fund their own retirement, and this has led to wildly disparate retirement readiness between people. Even those who accumulate significant retirement accounts still have the worries about running out of money. Sequence of Returns, poor performance or mismanagement, cognitive decline, or longevity are all risks.

The solution to create guaranteed lifetime income is a Single Premium Immediate Annuity, or SPIA. A SPIA is a contract with a life insurance company in which you trade a lump sum in exchange for a monthly payment for life. For as long as you live, you will get that monthly check, just like a Pension or Social Security. When you pass away, the payments stop. For married couples, we can establish a Survivor’s Benefit that will continue the payout (sometimes reduced at 50% or 75%) for the rest of the survivor’s life, if the owner should pass away.

How much would it cost? For a 65-year old man, a $100,000 premium would establish a $537/month payment for life. That is $6,444 a year, or a 6.4% rate on your premium. For a 65-year old woman, it would be $487, a month, or $5,844 a year (5.8%) For a couple, if the wife was also 65, that same premium would offer $425/month for both lives (100% survivors benefit). That’s $5,100 a year, or 5.1%. The greater the expected longevity, the lower the monthly payment.

There are some fairly obvious advantages and disadvantages of a SPIA.


  • Lifetime income, fixed, predictable, and guaranteed
  • No stock market risk, no performance concerns, no Sequence of Returns risk


  • Permanent decision – cannot reverse later
  • Some people will not live for very long and will get only a handful or payments back
  • No money leftover for your heirs
  • No inflation protection – monthly payout is fixed

I’ve been a financial advisor since 2004 and I have yet to have a client who wants to buy a SPIA. For some, the thought of spending a big chunk of money and the risk that they die in a year or two, is unbearable. However, the payout is fair, because some people will live for much longer than the average. The way insurance works is by The Law of Large Numbers. An insurance company is willing to take the risk that someone will live for 40 or 50 years because they know that if they sell thousands of annuities, it will work out to an average lifespan across the group. Some people live longer than average and some live less than average.

Two Ways to Use a SPIA

Although they remain unpopular, SPIAs deserve a closer look. Let’s immediately throw away the idea that you should put all your money into a SPIA. But there are two ways that a SPIA might make sense as part of your retirement income plan.

  1. Use a SPIA to cover your basic expenses. Look at your monthly budget. Assume you need $3,000 a month to cover all your expenses. If you have $2,200 in Social Security benefits, buy a SPIA that would cover the remaining $800 shortfall. For the 65-year old couple above, this $800/month joint SPIA would cost $188,235. Now you have $3,000 a month in guaranteed lifetime income to cover 100% of your basic expenses. Hopefully, you still have a large investment portfolio that can grow and supplement your income if needed.

The nice thing about this approach is that it takes a bit less cash than if you follow the 4% rule. If you needed $800 a month ($9,600 a year), a 4% withdrawal rate would require you have a portfolio of $240,000. The SPIA only requires $188,235.

Let’s say you have a $1 million portfolio. You could (a) put it all in the portfolio and start a 4% withdrawal rate, or (b) put $188,235 into the SPIA and keep the remainder in the portfolio. Here’s what that would look like for year one:

  • a. $1 million at 4% = $40,000 potential income
  • b. $188,235 SPIA = $9,600, PLUS $811,765 portfolio at 4% = $32,470. The combined income from the SPIA and portfolio is now $42,070

You have increased your income by $2,070 a year and you have established enough guaranteed income to cover 100% of your monthly needs. Then, you are not dependent on the market to cover your basic expenses each month.

2. The second way to think of a SPIA is as a Bond replacement for your portfolio. Instead of buying Treasury Bonds and worrying if you will outlive them, you can buy a SPIA, and the insurance company will buy very safe bonds. The insurance company then assumes your Longevity risk.

Back to our example above, let’s say your $1 million portfolio is invested in a 60/40 allocation (60% stocks, 40% bonds). Just consider the SPIA as part of your fixed income sleeve. If you had a target of $400,000 in bonds, rather than letting them sit in 10-year Treasuries earning 0.7% today, go ahead and put $188,235 in the SPIA and keep $211,765 in bonds. Your $600,000 in stocks remains the same. Now, on your SPIA, you are getting a withdrawal rate of 5.1% to 6.4%. And although you are eating your principal with a SPIA, you have no longevity risk, it’s a guaranteed check. You have reduced the withdrawal requirement from your equities and can better weather the ups and downs of the stock market.

Is a SPIA Right For You?

A SPIA isn’t going to be for everyone. But if you want lifetime guaranteed retirement income a SPIA is a solid, conservative choice. Used in conjunction with the other pieces of your income plan (Social Security and Investment portfolio), a SPIA can help you sleep well at night. Especially for investors who are in great health and with a family history of longevity, it may be worth putting some money into a SPIA and turning on that monthly check. It can help offset the stock market risks that could derail your plans.

I know many parents think putting money into a SPIA will reduce money for their kids to inherit. That might be true. Of course, if you live a long time and run out of money, you won’t be leaving any money to your kids either. Our goal with any retirement income solution is to make sure you don’t outlive your money, which hopefully also means you are able to leave some money to your heirs.

What if the insurance company goes under? Isn’t that a risk? It is. Thankfully, most states protect SPIA policy holders up to $250,000. If you are planning to put more than $250,000 into a SPIA, I would seriously consider dividing your funds between several companies to stay under the limits. Read more: The Texas Guaranty Association. (Note that this information is provided solely for educational purposes and is not an inducement to a sale.)

In the next three articles in this five-part series, we will look at different withdrawal strategies for your investment portfolio. These approaches include the 4% rule, a Guardrails approach, and 5-year Buckets. All of these will help you manage the risks of funding retirement from stocks. But before we get to those, I wanted you to realize that you don’t have to put all your money into stocks to create retirement income. These withdrawal approaches are likely to work, and we know they worked in history. But if you want to buy your own pension and have a guaranteed retirement income, a SPIA could be the right tool for the job.

Creating Retirement Income

Creating Retirement Income

Today, we are starting a five-part series to look at creating retirement income. There are various different approaches you can take when it is time to retire and shift from accumulation to taking withdrawals from your 401(k), IRA, or other investment accounts. It is important to know the Pros and Cons of different approaches and to understand, especially, how they are designed to weather market volatility.

In upcoming posts, we will evaluate SPIAs, the 4% rule, a Guardrails Approach, and 5-Year Buckets. Before you retire, I want to discuss these with you and set up an income plan that is going to make the most sense for you. Today, let’s start with defining the challenges of creating retirement income.

Sequence of Returns Risk

During accumulation, market volatility is not such a bad thing. If you are contributing regularly to a 401(k) and the market has a temporary Bear Market, it is okay. All that matters is your long-term average return. If you invest over 30-40 years, you have historically averaged a return of 8-10 percent in the market. Through Dollar Cost Averaging, you know that you are buying shares of your funds at a more attractive price during a drop.

Unfortunately, market volatility is a big problem when you are retired and taking money out of a portfolio. You calculated your needs and planned to take a fixed amount of money out of your portfolio. If the market averages 8% returns, can you withdraw 8%? That should work, right?

Let’s look at an example. You have a $1 million portfolio, you want to take $80,000 a year in withdrawals. Imagine you retired in 2000, having reached your goal of having $1 million! Here’s what your first three years of retirement might have looked like, with $80,000 annual withdrawals:

  • Start at $1,000,000, 9% market loss = $830,000 ending value
  • Year 2: start at $830,000, 12% market loss = $650,400 ending value
  • Year 3: start at $650,400, 22% market loss = $427,312 ending value

This would blow up your portfolio and now, your $80,000 withdrawal would be almost 20% of your remaining funds. This is Sequence of Returns Risk: the order of returns matters when you are taking income. If you had retired 10 years before these three bad years, you might have been okay, because your portfolio would have grown for a number of years.

Because a retiree does not know the short-term performance of the stock market, we have to take much smaller withdrawals than the historical averages. It’s not just the long-term average which matters. Losses early in your retirement can wreck your income plan.

Longevity Risk

The next big risk for retirement income is longevity. We don’t know how long to plan for. Some people will have a short retirement of less than 10 years. Others will retire at 60 and live for another 40 years. If we take out too much, too early, we risk running out of funds at the worst possible time. There is tremendous poverty in Americans over the age of 80. They didn’t have enough assets and ran out of money. Then they end up having to spend down all their assets to qualify for Medicaid. It’s not a pretty picture.

And for you macho men who intend to die with your boots on – Great. You may wipe out all your money with your final expenses and leave your spouse impoverished. She will probably outlive you by 5-10 years. That’s why 80% of the residents in nursing homes are women. You need to plan better – not for you, but for her.

Read more: 7 Ways for Women to Not Outlive Their Money

We plan for a retirement of 30 years for couples. There’s a good chance that one or both of you will live for 25-30 years if you are retiring by age 65. There are different approaches to dealing with longevity risk, and we will be talking about this more in the upcoming articles.

Inflation Risk

Longevity brings up a related problem, Inflation Risk. At 3% inflation, your cost of living will double in 24 years. If you need $50,000 a year now, you might need $100,000 later, to maintain the same standard of living.

A good retirement income plan will address inflation, as this is a reality. Luckily, we have not had much inflation in recent decades, so retirees have not been feeling much pressure. In fact, most of my clients who start a monthly withdrawal plan, have not increased their payments even after 5 or 10 years. They get used to their budget and make it work. Retirement spending often follows a “smile” pattern. It starts high at the beginning of retirement, as you finally have time for the travel and hobbies you’ve always wanted. Spending typically slows in your later seventies and into your eighties, but increases towards the end of retirement with increased health care and assistance costs.

When we talk about a 4% Real Rate, that means that you would start at 4% but then increase it every year for inflation. A first year withdrawal of $40,000 would step up to $41,200 in year two, with 3% inflation. After 30 years (at 3% inflation), your withdrawal rate would be over $94,000. So, when we talk about a 4% withdrawal rate, realize that it is not as conservative as it sounds. Even at a low 3% inflation rate, that works out to $1,903,016 in withdrawals over 30 years. It’s a lot more than if you just were thinking $40,000 times 30 years ($1.2 million).

Periods with high inflation require starting with a lower withdrawal rate. Periods with low inflation enable retirees to take a higher initial withdrawal amount. Since we don’t know future inflation, most safe withdrawal approaches are built based on the worst historical case.

Invest for Total Return

There is one thing which all of our retirement income approaches agree upon: Invest for Total Return, not Income. This is counter-intuitive for many retirees. They want to find high yielding bonds, stocks, and funds. Then, they can generate withdrawal income and avoid selling shares.

It sounds like it would be a rational approach. If you want a 5% withdrawal rate, just buy stocks, bonds, and funds that have a 5% or higher dividend yield. Unfortunately, this often doesn’t work as planned or hoped!

Over the years, I’ve invested in everything high yield: dividend stocks, preferred stocks, high yield bonds, Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs), Closed End Funds, etc. They can have a small place in a portfolio, but they are no magic bullet.

Problems with Income Investing

  • Value Trap. Some stocks have high yields because they have no growth. Then if they cut their dividends, shares plummet. Buy the highest dividend payouts and your overall return is often less than the yield and the share price goes no where. (Ask me about the AT&T shares I’ve held since 2009 and are down 14%.)
  • Default risk. Many high yield investments are from highly levered companies with substantial risk of bankruptcy. Having 5% upside and 100% downside on a high yield bond or preferred stock is a lousy scenario. When you do have the occasional loss, it will be greater than many years of your income.
  • Poor diversification. High yield investments are not equally present in all sectors of the economy. Often, an income portfolio ends up looking like a bunch of the worst banks, energy companies, and odd-ball entities. These are often very low quality investments.

Instead of getting the steady paycheck you wanted, an income portfolio often does poorly. When your income portfolio is down in a year when the S&P is up 10-20%, believe me, you will be ready to throw in the towel on this approach. Save yourself this agony and invest for total return. Total return means you want capital gains (price appreciation) and income.

For investors in retirement accounts, there is no tax difference between taking a distribution from dividends versus selling your shares. So, stop thinking that you need to only take income from your portfolio. What you want is to have a diversified portfolio and a good long-term rate of return. Then, just make sure you are able to weather market volatility along the way.

Read more: Avoiding The High Yield Trap

Ahead in the Series

Each of the retirement income approaches we will discuss have their own Pros and Cons. We will address each through looking at how they address the risks facing retirees: Sequence of Returns Risk, Longevity Risk, and Inflation Risk. And I’ll have recommendations for which may make the most sense for you. In the next four posts, I’ll be explaining SPIAs, the 4% Rule, a Guardrail Approach, and 5-Year Buckets.

Even if you aren’t near retirement, I think it’s vitally important to understand creating retirement income. Retirement income establishes your finish line and therefore your savings goals. If you are planning on a 4% withdrawal rate, you need $1 million for every $40,000 a year in retirement spending. Looking at your monthly budget, you can calculate how much you will need in your nest egg. Then we can have a concrete plan for how much to invest and how we will get there. Thanks for reading!

457 403b Plan

Choosing a 457 or a 403(b) Plan

Does your employer offer both a 403(b) and a 457 Plan? What should you do and what is a 457 anyways? A 457(b) Plan is an employer sponsored retirement plan for state or local government employees. It is a pre-tax, salary deferral plan, with an annual contribution limit of $19,500. Sounds just like a 401(k) or 403(b), right? Yes, but with one very interesting difference.

If you have more than one 401(k) or 403(b), your combined contribution to all 401(k) and 403(b) accounts cannot exceed $19,500 a year. 457 Plans are not included in this rule. That means that if you work for a government employer who offers both a 403(b) and a 457, you can contribute the maximum to both!

IRS Publication 4484: Choose a Retirement Plan for Employees of a Tax-Exempt Government Entity

457 Versus 403(b)

Besides the amazing tax-savings of doubling your contributions, there are a couple of other unique features of 457 plans.

The 457 has the same catch-up feature as a 403(b). Participants age 50 and higher can contribute an extra $6,500 a year. Additionally, if you are within three years of normal retirement age, you may be able to contribute up to two times the usual limit. Instead of $19,500, you could contribute up to $39,000 to a 457. Eligibility for this catch-up is limited by your previous contributions, so check with your HR to calculate your actual amount.

Most employers do not contribute to a 457 Plan. If they do, their contribution is counted towards your $19,500 limit. That’s a difference from a 403(b), where an employer contribution is on top of your individual limit.

There is no 10% penalty on distributions before age 59 ½. At whatever age you retire, you can access your 457 Plan without penalty. This is a big advantage compared to a 403(b) or IRA for people who want to retire early. And it’s a good reason to not rollover a 457 into an IRA. Once it’s in the IRA you would have to wait until after 59 ½ to avoid the penalty.

Let’s Evaluate Your Options

If your employer offers a 457 in addition to a 403(b), look into the 457. Want to contribute the maximum to both plans? That would be $39,000 for 2020, or $52,000 if you are age 50 or above. And potentially even higher if you are within three years of normal retirement age. Of course, you will also want to compare both plans being offered to you. Consider if any match is available, as well as the investment options and expenses of each plan.

You’d love to do both, but not sure you can contribute more than $19,500? Start here: 5 Steps to Boost Your Savings

Whatever type of retirement plan you have, let’s make sure you are taking full advantage of the benefits available to you. Not sure where to begin? I’m here to help, just send me a note.