I have been asked this question a lot lately as I help my clients plan for their retirement. Here are a few questions I ask to determine if you should pay off your mortgage before retiring.

Do you still get a tax deduction for the interest you are paying?
If you can still deduct interest, I think that is a good thing. Any deductions that help reduce your Federal Income Tax works in your favor.

What is your interest rate?
If you have a mortgage with a 3 or 4% rate, in my book that is a cheap loan, why rush to pay it off when you can potentially earn more through investments.

Will paying off your mortgage cut into your emergency fund?
Having good cash reserves, especially in retirement, are important. If paying off your mortgage will leave you cash poor, rethink that decision.

One tip to pay down your mortgage faster is to make bi-monthly payments. You can potentially cut ten years off the life of the mortgage.

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Recently a client asked if a sizable payment being made from their Ex-spouse’s 401k to them was taxable.

This type of distributions is called a QRDO, Qualified Domestic Relations Order. This is how it generally works:

A QDRO allows a former spouse to receive a predefined amount of their spouse’s retirement plan assets. For example, a QDRO might pay out 50% of the account’s value that has grown during the marriage. The funds, as a result of the QDRO, could then be transferred or rolled over into an IRA for the beneficiary spouse.

So to answer my client, if the QDRO is sent directly to a new IRA, no, it will not be taxable.

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Congrats! You have worked hard and saved for retirement, now what is the best way to fund all of the years and plans you have in front of you? Here is my humble opinion as to where to go to make sure you have the cash flow necessary to do what you want in retirement.

Cash accounts:
These can be checking, savings, or money market accounts set up for funding your lifestyle, not your emergency fund account. Cash accounts will not earn much, if anything in the way of interest, but these accounts are easily accessible for funding your lifestyle.

Annuities:
If you happen to have an annuity in your investment portfolio, annuities grow on a tax deferred basis, when the time comes to withdraw from them, and part of your withdrawal may be considered return of principal. Many times annuities will pay all income first, which will be taxable, then return of principal, there is also the option to have a guaranteed payment from an annuity.

Non-retirement investment accounts:
These accounts invested in mutual funds, or individual stocks will earn dividends and capital gains. If you have been reinvesting the dividends and capital gains, you can now have those paid out to you. For most people, capital gains are taxed at a lower rate than ordinary income, this is a plus in my book.

Roth IRAS:
Roth IRA accounts grow tax-free, so again, with my distain for paying taxes, I would tap into this area before Traditional IRA accounts.

Traditional IRA:
Depending on when you were born, you may not have to take a Required Minimum Distribution from your IRA until age 75. This will allow those dollars to grow as long as possible without having to pay ordinary income tax on your withdrawals.

Everyone’s situation is different, depending on your cash flow needs and income from various sources, these recommendations may work for you. Please consult your tax professional before putting your plan into action.

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If your child is graduating from high school, you have to figure out how to pay for college, if they are graduating from college, you have to pay back the loans. I am going to share with you how we dealt with this question. When I went to college I worked full time. My employer paid my Parents 80% of my college costs as long as I maintained a B average, which I did. My husband financed his college completely through loans, which I then married as I had none of my own. Paying back the loan principal and interest took a long time. When it came time for our daughter to go to college, we decided that being a student was her job and we took FAFSA loans to help fund her education. Every year FAFSA sends out a statement with the interest that has accrued for the loans, we paid the interest off annually so when she graduated there was only principal to pay back. This is my tip for those whose children are in college now. For those who have graduated and now must start paying back the loans, here is what we did. Each month we would transfer the loan payment to our daughter, then she paid the loan. This allowed her to build a credit rating. This worked well for us, please feel free to do the same. Congrats to the Grads!

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Those of us that are money managers know this, but lay people don’t always realize how true this is.
While talking to someone yesterday this came up in conversation. This person recently inherited a large sum of money from a relative that worked a blue-collar job. What this relative did was regularly save from every paycheck to invest in what they deemed to be quality companies. Initially they invested in individual stocks as mutual funds were not widely available. As the investing world changed and became more assessable, they bought mutual funds. They point this relative made to the person I was talking to was “time in the market is what matters, not trying to time the market”.

This is a statement that I have lived by in the almost 40 years I have been managing money for my clients. It may sound trite, but it has been proven to be true many times over.

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Taxes are the bane of our existence, and they may be applied to income that were never thought would be taxed. Yes, Social Security is a tax we pay while we are working, depending on your income in retirement, you may pay tax on the Social Security income you receive.

Here is how the potential tax plays out:

For individuals, up to 50% of benefits are taxed on a “combined income” between $25,000 and $34,000.
Up to 85% of benefits are taxed
For individuals with combined income of more than $34,000.
For married filers, a combined income of $32,000 to $44,000 triggers tax on up to 50% of Social Security benefits.
Up to 85% of benefits are taxed for married filers with a combined income of more than $44,000.

For purposes of this calculation, “combined income” is considered to be your adjusted gross income plus your nontaxable interest and half of your Social Security benefits.

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I read an article on MSN Money that I found interesting, let me share some of the points, you can determine how true they are or are not.

The rich carefully monitor their credit. They know if they have good credit and they know what their credit score is. 72% of the wealthy knew their credit score vs. 5% of the poor.

Poor people like to play the lottery. 77% of the poor admitted to playing the lottery regularly vs. 6% of the rich. But it’s not just the lottery they gamble their money on…..
52% of the poor admitted that they gamble on sports at least once a week vs. 16% of the wealthy.

Parents who are success mentors, raise wealthy kids. 75% of the rich learned good daily success habits from their parents. 94% of the poor admitted that they learned bad habits from their parents.

How do the rich and the poor think when it comes to wealth and poverty? 79% of the poor believe wealth is the result of random good luck. 92% of the rich believe you create your own luck.

62% of the rich floss regularly vs. 16% for the poor.

If you want to change your financial circumstances, you must change. You must grow into the person you need to be in order for financial success to visit you.

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We are almost at the end of tax season, now is the time to decide when you want to pay your taxes on your retirement savings.
If you are making IRA contributions, you have a decision to make. Pay now or pay later, Traditional IRA or Roth, which is better for you?
The difference between a traditional IRA and Roth IRA comes down to one thing: When you pay taxes. With a traditional IRA, you can possibly deduct your contributions from your taxable income, but you’ll pay taxes when you take withdrawals in retirement.

With a Roth IRA, you contribute after-tax money and can take tax-free withdrawals in retirement. The ability to have your money grow tax-free is a blessing from the IRS, and it’s arguably one of the best retirement savings hacks available.

You can make a 2022 contribution up until 4/18/23, make your choice now.

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Many of us are in the midst of completing our taxes for 2022. If you have not filed yours yet and have not fully funding your IRA or Roth, you still have time. If you are single and have a company retirement plan but make less than $73,000, you can still make an IRA or Roth contribution of $6500 if under age 50, or $7500 if over age 50. If you are married and file jointly, the income phase-out starts at $116,000.

If you contribute to an IRA, you will pay less in tax now, to a Roth, you will pay no tax at withdrawal if the funds are in the account for five years or more.

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A client recently asked what he could say to his son to get him to start securing his financial future. My reply to him was “he is young and has a lot of time to save, this is the biggest assets he has right now”. His son has just started his first real job, so I of course want to know if there is a 401(k) for him to take advantage of. I told him to explain to his son that every dollar he puts into the 401(k) for his retirement is a dollar that does not go to the Federal government for taxes. This kid has about 40 years to save for himself, that is an asset he will not be able to get back, but right now he can take advantage of.

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