Alright, we're back with Scott Braddock from Scott Braddock financial talking about retirement planning. Let's go over what the Roth IRA does. Alright, so the Roth is unique in and of itself, so the big difference here is we're going to pay taxes on the money going into the roof, but then that roof is going to grow tax free.
You can take from it tax free and you can pass it on to your heirs tax free. And there's also no requirement of distribution at 72, so those are huge advantages. The way that I describe it to folks is you'll pay taxes on the seed as the money goes in, but you're not required to pay taxes on the harvest as that money grows and you use it in retirement. And that can kind of help you out when you're making less money because you're retired and things of that nature so you don't get hit with extra taxes. Is there a limit on how much you can put into the Roth IRA like the regular IRA? Well, there is now here. It's it depends upon your your earned income and if you're a single person and you're in more than $144,000 then then you're not allowed to contribute to the Roth and then for married couples $214,000 or more and you're not allowed to contribute to that role. But here's the tip, there is a such thing as a backdoor Roth IRA and this is where you earn too much money, so you can't contribute to the raw.
You go ahead and you contribute to an IRA and then later. You can you start to convert that IRA money over to a Roth OK, Alright, so let's talk about these questions that people are putting in. I'm turning 72 this year. Do I have to withdraw from my 401K or can I let it keep compounding? Ohh great question. So yes and no. If you're still working for your employer that offers that that exact 401K, you do not have to start taking out mandatory distributions.
However, if you have a 401K from another employer, you do have to start taking from that 401K. And of course if you're not working you do also have to start taking from that 401K at 72. OK, this next question is can he explain the different types of annuities? OK, sure, so let's just talk about the we have the traditional type of annuity, which is a straight fixed annuity very similar to a CD at the bank. It's going to guarantee you a certain interest rate and then the next one would be a variable annuity. A variable annuity is different because this one is the security product. You can invest this in what usually looks like mutual funds and then next is going to be the fixed indexed annuity. The fixed index annuity is like the fix where there's going to be guarantees.
And protection there's going to be a flooring very unlike the variable annuity. It also will offer some minimum guarantees, but it allows you to participate in the stock market up to what are known as caps. There's a limit to how much you can actually earn there, and then the last type of annuity is what we would call a single premium immediate annuity. This is where you take a chunk of money. You put it in the immediate annuity and it starts to pay you an income right away. OK, so let me ask you this.
So when you like, put into your 401K, your IRA, are you putting in and buying a new? Please. No, you're not OK now that the the over view here is that most of your money's going to be invested in stock market. If you have a 401K through your employer now, you can find annuities within those four. One case that you can contribute to as well when we're talking specifically about the 401K when it comes to eye raising rolls, those could be stocks, bonds, mutual funds. They could be fixed or variable annuities. They also could be certain types of insurance products as well, right? This person's asking what can you do if your employer does not offer 401K's and you want to lower your AGI and save for retirement. Well, absolutely here what we're going to do is look at the IRA.
That's going to be the way that you're going to be able to put some money away. Take a tax deduction, and allow that money to grow tax deferred. Now, if you're self employed, that's a little different. You can take advantage of what's known as a a set, a self-employed plan, and here you can actually put in quite a bit of money as well, just like the 401K and this next question is, at what age should you back out of the market for something more stable? Well, you know again, everybody's financial situation and their overall risk tolerance and their wishes and goals, desires and retirement are gonna be unique and different.
This is where you want to sit down with a financial professional that'll take you through a good process to figure out what's going to be right for you. It's different for everyone. However, I will say that as folks get closer to retirement, they tend to taper off the risk. They start focusing more on protection versus just growth. You know, there's two I two different phases of life, the accumulation phase, and then that distribution phase. And as you get closer to that. That's where we want to start looking at protection. Alright, we got about one minute left. This person says my company was sold. Should I move my 401K to the new company or to a Roth? Hmm, well it it really depends.
I again you wanna in this case, since we're looking at the wrath and that's gonna be a taxable event, because if your 401K is a traditional 401K in order to convert that to raise money, you gonna pay taxes. So you want to meet with the CPA on on on that one. But it depends. That's the right answer. You know really need to take a look at the options of the new employers 401K. Will they allow you to roll your old 401K into their plan? That's another good question all right now if you missed any of this or you want to get in touch with Scott.
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We often get the question asking us, “what’s the best retirement plan if I’m self-employed?” Well, that’s hard to say. There’s lots of plans out there, and the best one depends on your situation, right? Do you have employees or is it just you? How old are your employees? What are their salaries? So just to simplify, I’m just going to assume that – one person, self-employed, maybe their spouse is involved in the business, but that’s it, no employees. in that case, you might want to look into something called a solo 401(k) or an individual 401(k). It’s really simple to set up, not really a lot of cost to maintain, but it gives you a great amount of flexibility. As a self-employed person you’re the employee and the employer. And with a solo 401(k), you can make an employee contribution, as well as a profit sharing or a matching contribution on behalf of the business – again, because you’re also the employer. It’s straightforward, like I said, easy to set up, and gives you a pretty large amount of flexibility. If we’re talking about larger plans, and something that’s going to give you an even greater tax benefit, you might want to look into something called a defined benefit plan.
This is a little bit more costly to establish. There are some filing requirements, there are minimum annual funding requirements, but if you’re making a fair amount of money and you’re looking to put away really large sums of money, a defined benefit plan can be the way to go. You can put hundreds of thousands of dollars a year away into a plan like this. You could also pair that with a solo 401(k) to give yourself even greater flexibility. So like I said, while there’s not one end all be all plan that’s perfect or the right one, it’s going to depend on your actual situation.
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