University Retirement Specialists, LLC

Making and Keeping Financial Resolutions

What you might do (or do differently) in the months ahead?

  

How will your money habits change in 2016? What decisions or behaviors might help your personal finances, your retirement prospects, or your net worth?

Each year presents a “clean slate,” so as one year ebbs into another, it is natural to think about what you might do (or do differently) in the 12 months ahead.

Financially speaking, what New Year’s resolutions might you want to make for 2016 – and what can you do to stick by such resolutions as 2016 unfolds?

Strive to maximize your 2016 retirement plan contributions. The 2016 limit on IRA contributions is $5,500, $6,500 if you will be 50 or older at some point in the year. Contribution limits are set at $18,000 for 401(k)s, 403(b)s, and most 457 plans; if you will be 50 or older in 2016, you can make an additional catch-up contribution of up to $6,000 to those accounts.¹

 

If you want to retire in 2016, be mindful of the end of “file & suspend.” Social Security is closing the door on the file-and-suspend claiming strategy that married couples have used to try and optimize their Social Security benefits. If you are married and you will you be at least 66 years old by April 30, 2016, you and your spouse still have a chance to use the strategy. Starting May 1, that chance disappears forever for all married couples. (It will still be permitted on an individual basis.)^2,3

 

Similarly, the opportunity to file a restricted application for spousal benefits has also gone away. This was another tactic retirees employed in pursuit of greater lifetime Social Security income.²

 

Can you review & reduce your debt? Look at your debts, one by one. You may be able to renegotiate the terms of loans and interest rates with lenders and credit card firms. See if you can cut down the number of debts you have – either attack the one with the highest interest rate first or the smallest balance first, then repeat with the remaining debts.

 

Rebalance your portfolio. If you have rebalanced recently, great. Many investors go years without rebalancing, which can be problematic if you own too much in a declining sector.

 

See if you can solidify some retirement variables. Accumulating assets for retirement is great; doing so with a planned retirement age and an estimated retirement budget is even better. The older you get, the less hazy those variables start to become. See if you can define the “when” of retirement this year – that may make the “how” and “how much” clearer as well.

 

The same applies to college planning. If your child has now reached his or her teens, see if you can get a ballpark figure on the cost of attending local and out-of-state colleges. Even better, inquire about their financial aid packages and any relevant scholarships and grants. If you have college savings built up, you can work with those numbers and determine how those savings need to grow in the next few years.

 

How do you keep New Year’s resolutions from faltering? Often, New Year’s resolutions fail because there is only an end in mind – a clear goal, but no concrete steps toward realizing it.

So, if your aim is to save $20,000 toward retirement this year, map out the month-by-month contribution to your retirement account(s) that will help you do it. Web tools like Level Money and Mint.com can help you examine your cash flow week-to-week and month-to-month – you can use them to keep track of your saving effort as well as other aspects of your finances.⁴

If you wish, you can let a loved one or a close friend in on your New Year’s financial resolutions. That loved one or friend may decide to adopt them. Even if he or she does not, sharing your resolution might increase your commitment to carrying it out. Dominican University of California did a study on this very subject and found that when people set near-term goals and kept those goals private, they achieved them about 35% of the time – but when they informed friends about them and sent weekly progress updates, the achievement rate surpassed 70%.⁴  

Lastly, you may want to automate more of your financial life. If you have not set up monthly money transfers to a retirement or investment account, 2016 can be the year this happens.

 Citations.

1 - money.usnews.com/money/retirement/articles/2015/10/26/how-401-k-s-and-iras-will-and-wont-change-in-2016 [10/26/15]

2 - money.usnews.com/money/retirement/articles/2015/12/04/say-goodbye-to-the-social-security-file-and-suspend-strategy [12/4/15]

3 - tinyurl.com/p3exq5s [12/18/15]

4 - forbes.com/sites/bethbraverman/2015/12/29/4-tricks-to-get-your-new-years-resolutions-to-actually-stick-this-year/print/ [12/29/15]

Taking Loan from Retirement Plan = Bad Idea

Why you should refrain from making this move.

 Thinking about borrowing money from your 401(k), 403(b), or 457 account? Think twice about that, because these loans are not only risky but injurious to your retirement planning.

    

A loan of this kind damages your retirement savings prospects. A 401(k), 403(b), or 457 should never be viewed like a savings or checking account. When you withdraw from a bank account, you pull out cash. When you take a loan from your workplace retirement plan, you sell shares of your investments to generate cash. You buy back investment shares as you repay the loan.

 

So in borrowing from a 401(k), 403(b), or 457, you siphon down your invested retirement assets, leaving a smaller account balance that experiences a smaller degree of compounding. In repaying the loan, you will likely repurchase investment shares at higher prices than in the past – in other words, you will be buying high. None of this makes financial sense.¹

 

Most plans charge a $75 origination fee for a loan, and of course they charge interest – often around 5%. The interest paid will eventually return to your account, but that interest still represents money that could have remained in the account and remained invested.¹

 

Your contributions to the plan may be halted. Some workplace retirement plans suspend regular employee salary deferrals when a loan is taken. They can resume when you settle the loan.¹

 

Your take-home pay may be docked. Most loans from 401(k), 403(b), and 457 plans are repaid incrementally – the plan subtracts X dollars from your paycheck, month after month, until the amount borrowed is fully restored.¹

 

If you leave your job, you will quickly have to pay 100% of your loan back. This applies if you quit; it applies if you are laid off or fired. You will have 30-60 days (per the terms of the plan) to repay the loan in full, with interest.²

 

If you are younger than age 59½ and fail to pay the full amount of the loan back, the IRS will characterize any amount not repaid as a premature distribution from a retirement plan – taxable income that is also subject to an early withdrawal penalty.^1,2

   

Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you will not turn 59½ in the year in which repayment is due). If you default on the loan, the retirement plan may bar you from making future contributions.¹

 

Would you like to be taxed twice? When you borrow from an employee retirement plan, you invite that prospect. One, you will be repaying your loan with after-tax dollars. Two, those dollars will be taxed again when you withdraw them for retirement (unless your plan offers you a Roth option).¹

    

Why go into debt to pay off debt? If you borrow from your retirement plan, you will be assuming one debt to pay off another. It is better to go to a reputable lender for a personal loan; borrowing cash has fewer potential drawbacks.   

 

You should never confuse your retirement plan with a bank account. Some employees seem to do just that – in 2013, Fidelity researched participants in its retirement plans and found that 66% of those who had borrowed from 401(k)s had done so more than once. No doubt they became acquainted with the above dilemmas in the process.¹

 

In a recent TIAA-CREF survey, 44% of those who had taken loans from their 401(k) plans said they regretted doing so. Why risk joining their ranks? Look elsewhere for money in a crisis, and borrow from your employer-sponsored retirement plan only as a last resort.² 

 

    

Citations.

1 - cnbc.com/id/101848407 [9/14/14]

2 - mainstreet.com/article/why-you-cant-borrow-your-401k-and-only-way-you-should [7/24/14]

 

Getting It All Together for Retirement

Where is everything? Time to organize and centralize your documents.

 Before retirement begins, gather what you need. Put as much documentation as you can in one place, for you and those you love. It could be a password-protected online vault; it could be a file cabinet; it could be a file folder. Regardless of what it is, by centralizing the location of important papers you are saving yourself from disorganization and headaches in the future.

 

What should go in the vault, cabinet or folder(s)? Crucial financial information and more. You will want to include...

 

Those quarterly/annual statements. Recentperformance paperwork forIRAs, 401(k)s, funds, brokerage accounts and so forth. Include the statements from the latest quarter and the statements from the end of the previous calendar year (that is, the last Q4 statement you received). You no longer get paper statements? Print out the equivalent, or if you really want to minimize clutter, just print out the links to the online statements. (Someone is going to need your passwords, of course.) These documents can also become handy in figuring out a retirement income distribution strategy.

 

Healthcare benefit info. Are you enrolled in Medicare or a Medicare Advantage plan? Are you in a group health plan? Do you pay for your own health coverage? Own a long term care policy? Gather the policies together in your new retirement command center, and include related literature so you can study their benefit summaries, coverage options, and rules and regulations. Contact info for insurers, HMOs, your doctor(s) and the insurance agent who sold you a particular policy should also go in here.

 

Life insurance info. Do you have a straight term insurance policy, no potential for cash value whatsoever? Keep a record of when the level premiums end. If you have a whole life policy, you need paperwork communicating the death benefit, the present cash value in the policy and the required monthly premiums.

 

Beneficiary designation forms. Few pre-retirees realize that beneficiary designations often take priority over requests made in a will when it comes to 401(k)s, 403(b)s and IRAs. Hopefully, you have retained copies of these forms. If not, you can request them from the account custodians and review the choices you have made. Are they choices you would still make today? By reviewing them in the company of a retirement planner or an attorney, you can gauge the tax efficiency of the eventual transfer of assets.¹

 

Social Security basics. If you have not claimed benefits yet, put your Social Security card, your W-2 form from last year, certified copies of your birth certificate, marriage license or divorce papers in one place, and military discharge paperwork and a copy of your W-2 form for last year (or Schedule SE and Schedule C plus 1040 form, if you work for yourself), and military discharge papers or proof of citizenship, if applicable. Take a look at your Social Security statement that tracks your accrued benefits (online or hard copy) and make a screengrab of it or print it out.²

 

Pension matters. Will you receive a bona fide pension in retirement? If so, you want to collect any special letters or bulletins from your employer. You want your Individual Benefit Statement telling you about the benefits you have earned and for which you may become eligible; you also want the Summary Plan Description and contact info for someone at the employee benefits department where you worked.

 

Real estate documents. Gather up your deed, mortgage docs, property tax statements and homeowner insurance policy. Also, make a list of the contents of your home and their estimated value – you may be away from your home more in retirement, so those items may be more vulnerable as a consequence.

 

Estate planning paperwork. Put copies of your estate plan and any trust paperwork within the collection, and of course a will. In case of a crisis of mind or body, your loved ones may need to find a durable power of attorney or health care directive, so include those documents if you have them and let them know where to find them.

 

Tax returns. Should you only keep your 1040 and state return from the previous year? How about those for the past 7 years? Have you kept every one since 1982 or 1974? At the very least, you should have a copy of returns from the prior year in this collection.

 

A list of your digital assets. We all have them now, and they are far from trivial – the contents of a cloud, a photo library, or a Facebook page may be vital to your image or your business. Passwords must be compiled too, of course. 

     

This will take a little work, but you will be glad you did it someday. Consider this a Saturday morning or weekend project. It may lead to some discoveries and possibly prompt some alterations to your financial picture as you prepare for retirement.

   

Citations.

1 - fpanet.org/ToolsResources/ArticlesBooksChecklists/Articles/Retirement/10EssentialDocumentsforRetirement/ [9/12/11]

2 - cbsnews.com/8301-505146_162-57573910/planning-for-retirement-take-inventory/ [3/18/13]

IRS Raises Plan Contribution Limits

Roth & traditional IRAs won’t get 2015 COLAs, but other plans will.

 A little inflation means a little adjustment. As the Consumer Price Index is up 1.7% over the last 12 months, the federal government is giving Social Security benefits a 1.7% boost for 2015 and lifting annual contribution limits on key pension plans as well.¹

    

401(k), 403(b), 457 & TSP annual contribution limits increase by $500. You will be able to defer up to $18,000 into these plans in 2015. The catch-up contribution limit will also rise by $500 to $6,000 next year, so if you are 50 or older in 2015 you are eligible to contribute up to $24,000 to these retirement savings vehicles. (The above adjustments do not apply to all 457 plans.)²

    

SIMPLE IRAs get a similar COLA. Their base contribution and catch-up contribution limits also go up $500 for 2015. The limit for the base contribution will be $12,500 next year, and the catch-up limit rises to $3,000.³

    

Limits also rise for SEP-IRAs and Solo(k)s. Small business owners will want to take note of the new maximum deferral amount of $53,000 for 2015, a $1,000 increase. As for the compensation limit factored into the savings calculation, that limit will be $265,000 next year, $5,000 more than the 2014 limit. A side note: the threshold for an employee to be included in a SEP plan goes up $50 to $600 next year (i.e., that worker has to receive $550 or more in compensation from your business in 2015).^2,3

    

Take note of the slightly higher phase-out range for Roth IRA contributions. Next year, you won’t be able to make a Roth IRA contribution if your AGI exceeds $193,000 as a married couple filing jointly, or $131,000 should you be a single filer or head of household. Those figures are $2,000 above the 2014 eligibility thresholds. Joint filers with AGI of$183,001-193,000 and singles and heads of household with AGI of $116,001-131,000 will be able to make a partial rather than full Roth IRA contribution next year.³

      

Phase-out ranges on the deduction of regular IRA contributions have also been altered. Here are the 2015 adjustments to these thresholds (this gets pretty involved). If you are a single filer or file as a head of household and you contribute to a traditional IRA and you are also covered by a workplace retirement plan, the AGI phase-out range for you is $1,000 higher next year ($61,001-71,000). If you file jointly and contribute to a traditional IRA and are also covered by a workplace retirement plan, the AGI phase-out range is $98,001-118,000. Above the high end of those phase-out ranges, you can’t claim a deduction for traditional IRA contributions.²

 

If you contribute to a traditional IRA and your employer doesn’t sponsor a retirement plan, yet your spouse contributes to a workplace retirement plan, the AGI phase-out on deductions of traditional IRA contributions strikes when your combined AGI ranges from $183,001-193,000.²

And if you are married, filing separately and covered by a workplace retirement plan, the phase-out range on deductions of traditional IRA contributions is $0-$10,000 (this never receives a COLA).^2,3

      

AGI limits for the Saver’s Credit increase. Americans saving for retirement on modest incomes will be eligible for the credit next year if their AGI falls underneath certain thresholds: single filers and marrieds filing separately, adjusted gross income of $30,500 or less; heads of household, AGI of $45,750 or less; joint filers, $61,000 or less.³

     

Contribution limits for profit-sharing plans rise as per limits for 401(k)s. A participant in such a plan is looking at a 2015 elective deferral limit of $18,000 ($24,000 if she or he is old enough to make catch-up contributions). The yearly compensation limit on such plans will be $5,000 higher in 2015 at $265,000.⁴

                    

    

Citations.

1 - tinyurl.com/lxbv6rq [10/21/14]

2 - irs.gov/uac/Newsroom/IRS-Announces-2015-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$18,000-to-their-401%28k%29-plans-in-2015 [10/23/14]

3 - forbes.com/sites/ashleaebeling/2014/10/23/irs-announces-2015-retirement-plan-contribution-limits-for-401ks-and-more/ [10/23/14]

4 - irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions [10/23/14]

 

IRS Announces 2014 Retirement Plan Contributions

Rules changes for IRAs, 401(k)s & other savings vehicles.

   

The IRS has made minor adjustments to retirement plan limitations for 2014. As inflation has been tame in 2013, these COLAs aren’t dramatic; as a result, some retirement plans won’t see any next year. Here is a roundup of the changes for 2014.

 

IRAs. Not much change here: the 2014 contribution limit is still set at $5,500, with an additional $1,000 catch-up contribution permitted for those 50 and older.¹

 

The AGI phase-out ranges affecting your ability to deduct traditional IRA contributions have been slightly adjusted north:

 

* Single & head-of-household filers covered by a workplace retirement plan: $60,001-70,000

* Married filing jointly, you contribute to a workplace retirement plan: $96,001-116,000

* Married filing jointly, spouse contributes to workplace plan, you don’t: $181,001-191,000. ^1,2

  

The limits on eligibility to make Roth IRA contributions have been adjusted. You can make a full Roth contribution in 2014 if your adjusted gross income does not exceed these limits:

 

* Single & head-of-household filers: $114,000 (phase-out range is $114,001-129,000)

* Married filing jointly: $181,000 (phase-out range is $181,001-191,000) ^1,3

  

401(k)s, 403(b)s, most 457 plans & the federal Thrift Savings Plan. Contribution limits on these plans are unchanged for 2014. You will be able to put up to $17,500 in these accounts next year if you are younger than 50, and $23,000 if you are 50 or older (thanks to the catch-up contribution).^2,4

 

If you participate in more than one of these defined contribution retirement plans – for example, you contribute to a 401(k) and a 403(b), or two 401(k)s – you should know that the total contribution limit for both employee and employer contributions across all such accounts in 2014 is the lesser of: a) 100% of your compensation, b) $52,000 if you are younger than 50, or c) $57,500 if you are 50 or older.⁵

 

With regard to 401(k)s, the above limits apply to both traditional and “safe harbor” versions.⁵

 

SEP & Simple plans. In 2014, the maximum allowable compensation used in the calculation of SEP-IRA contributions increases $5,000 to $260,000. The threshold for an employee to be included in a SEP plan remains at $550 for 2014 (that is, an employee is eligible if he or she receives at least $550 in compensation from your business for the year). SIMPLE plans see no changes to contribution limits next year: the maximum plan contribution remains at $12,000 for 2014, with catch-up contributions still limited at $2,500.^2,6

 

Profit-sharing plans. The 2014 deferral limit is $17,500, the catch-up contribution limit is $2,500, the compensation limitation is $260,000, and the maximum contribution amount across multiple plans is the lesser of a) 100% of your compensation, b) $52,000 if you are younger than 50, or c) $57,500 if you are 50 or older.^4,5

 

ESOPs. Next year, the dollar amount used to figure out the maximum account balance in an ESOP subject to a 5-year distribution period increases by $15,000 to $1,050,000. There is also a $5,000 rise in the dollar amount used to determine the lengthening of the 5-year distribution period – it is $210,000 in 2014.^2,4

 

The dollar limitation used to define a key employee in a top-heavy plan increases. This limit was set at $165,000 for 2013. Next year, it rises to $170,000.^2,4

 

Income limits for the saver’s credit are slightly increasing. This federal tax credit is offered to low-income and middle-income workers saving for retirement. In 2014, you will be eligible for the credit if your AGI doesn’t exceed these thresholds:

 

* Married filing jointly: $60,000

* Head of household: $45,000

* Married filing separately & single filers: $30,000 ³

    

Keep these retirement plan adjustments in mind as you think about your financial moves for 2014.

 

Citations.

1 - bankrate.com/financing/retirement/new-irs-rules-for-retirement-plans/ [11/1/13]

2 - irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions [10/31/13]

3 - blogs.marketwatch.com/encore/2013/10/31/irs-releases-2014-limits-for-401ks-iras/ [10/31/13]

4 - irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [11/4/13]

5 - irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---401%28k%29-and-Profit-Sharing-Plan-Contribution-Limits [11/1/13]

6 - irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Participation [2/13/13]

 

Two Biggest Retirement Misconceptions

While the idea of retirement has changed, certain financial assumptions haven’t.

 

We’ve all heard about the “new retirement”, the mix of work and play that many of us assume we will have in our lives one day. We do not expect “retirement” to be all leisure. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven’t really changed with the times.

In particular, there are two financial misconceptions that baby boomers can fall prey to – assumptions that could prove financially harmful for their future.

#1) Assuming retirement will last 10-15 years. Previous generations of Americans planned for retirements anticipated to last only 10-15 years. Today, both men and women who reach 65 can anticipate around 20 additional years of life. It’s important to note that this is just an average; a quarter of people reaching 65 will live beyond 90 and ten percent will live another five years or more.¹

However, some of us may live much longer. The population of centenarians in the U.S. is growing – the Census Bureau counted 53,364 folks 100 years or older in 2010 and showed a steady 5.8 percent rise in centenarians since the previous count in 2000. It also notes that between 1980 and 2010 centenarians experienced a population boom, with a 65.8% rise in population, in comparison to 36.3% overall.²

If you’re reading this article, chances are you might be wealthy or at least “affluent.” And if you are, you likely have good health insurance and access to excellent health care. You may be poised to live longer because of these two factors. Given the landmark health care reforms of the Obama administration, we could see another boost in overall American longevity in the generation ahead.

Here’s the bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years … or longer. So assuming you’ll only need 10 or 15 years worth of retirement money could be a big mistake.

Many people don’t realize how much retirement money they may need. There is a relationship between Misconception #1 and Misconception #2 …

#2) Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be a danger in becoming too risk-averse.

Holding onto your retirement money is certainly important; so is your retirement income and quality of life. There are three financial issues that can affect your quality of life and/or income over time: taxes, health care costs and inflation. Over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less.

Here’s a hypothetical challenge for you: for the rest of this year, you have to live on the income you earned in 1999. Could you manage that?

This is an extreme example, but that’s what can happen if your income doesn’t keep up with inflation – essentially, you end up living on yesterday’s money.

Taxes may be higher in the years ahead. So tax reduction and tax-advantaged investing have taken on even more importance whether you are 20, 40 or 60. Health care costs are climbing – we need to be prepared financially for the cost of acute, chronic and long-term care.

As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live - and how long retirement may last - growth investing is extremely important.

No one wants the “Rip Van Winkle” experience in retirement. No one should “wake up” 20 years from now only to find that the comfort of yesterday is gone. Retirees who retreat from growth investing may risk having this experience.

How are you envisioning retirement right now? Has your vision of retirement changed? Is retiring becoming more and more of a priority? Are you retired and looking to improve your finances? Regardless of where you’re at, it is vital to avoid the common misconceptions and proceed with clarity.

Citations.

1 - www.socialsecurity.gov/planners/lifeexpectancy.htm [8/23/13]

2 -  www.census.gov/prod/cen2010/reports/c2010sr-03.pdf [12/12]

 

The Right Beneficiary

Who should inherit your IRA or 401(k)? See that they do.

 

 

Here’s a simple financial question: who is the beneficiary of your IRA? How about your 401(k), life insurance policy, or annuity? You may be able to answer such a question quickly and easily. Or you may be saying, “You know … I’m not totally sure.” Whatever your answer, it is smart to periodically review your beneficiary designations.

 

Your choices may need to change with the times. When did you open your first IRA? When did you buy your life insurance policy? Was it back in the Eighties? Are you still living in the same home and working at the same job as you did back then? Have your priorities changed a bit – perhaps more than a bit?

 

While your beneficiary choices may seem obvious and rock-solid when you initially make them, time has a way of altering things. In a stretch of five or ten years, some major changes can occur in your life – and they may warrant changes in your beneficiary decisions.

 

In fact, you might want to review them annually. Here’s why: companies frequently change custodians when it comes to retirement plans and insurance policies. When a new custodian comes on board, a beneficiary designation can get lost in the paper shuffle. (It has happened.) If you don’t have a designated beneficiary on your 401(k), the assets may go to the “default” beneficiary when you pass away, which might throw a wrench into your estate planning.

 

How your choices affect your loved ones. The beneficiary of your IRA, annuity, 401(k) or life insurance policy may be your spouse, your child, maybe another loved one or maybe even an institution. Naming a beneficiary helps to keep these assets out of probate when you pass away.

 

Beneficiary designations commonly take priority over bequests made in a will or living trust. For example, if you long ago named a son or daughter who is now estranged from you as the beneficiary of your life insurance policy, he or she is in line to receive the death benefit when you die, regardless of what your will states. Beneficiary designations allow life insurance proceeds to transfer automatically to heirs; these assets do not have go through probate.^1,2

 

You may have even chosen the “smartest financial mind” in your family as your beneficiary, thinking that he or she has the knowledge to carry out your financial wishes in the event of your death. But what if this person passes away before you do? What if you change your mind about the way you want your assets distributed, and are unable to communicate your intentions in time? And what if he or she inherits tax problems as a result of receiving your assets? (See below.)

 

How your choices affect your estate. Virtually any inheritance carries a tax consequence. (Of course, through careful estate planning, you can try to defer or even eliminate that consequence.)

 

If you are simply naming your spouse as your beneficiary, the tax consequences are less thorny. Assets you inherit from your spouse aren’t subject to estate tax, as long as you are a U.S. citizen.³

 

When the beneficiary isn’t your spouse, things get a little more complicated for your estate, and for your beneficiary’s estate. If you name, for example, your son or your sister as the beneficiary of your retirement plan assets, the amount of those assets will be included in the value of your taxable estate. (This might mean a higher estate tax bill for your heirs.) And the problem will persist: when your non-spouse beneficiary inherits those retirement plan assets, those assets become part of his or her taxable estate, and his or her heirs might face higher estate taxes. Your non-spouse heir might also have to take required income distributions from that retirement plan someday, and pay the required taxes on that income.⁴

 

If you designate a charity or other 501(c)(3) non-profit organization as a beneficiary, the assets involved can pass to the charity without being taxed, and your estate can qualify for a charitable deduction.⁵

 

Are your beneficiary designations up to date? Don’t assume. Don’t guess. Make sure your assets are set to transfer to the people or institutions you prefer. Let’s check up and make sure your beneficiary choices make sense for the future. Just give me a call or send me an e-mail – I’m happy to help you.

 

 

Citations.

1 - smartmoney.com/taxes/estate/how-to-choose-a-beneficiary-1304670957977/ [6/10/11]

2 - www.dummies.com/how-to/content/bypassing-probate-with-beneficiary-designations.html [1/30/13]

3 - www.nolo.com/legal-encyclopedia/estate-planning-when-you-re-married-noncitizen.html [1/30/13]

4 - individual.troweprice.com/staticFiles/Retail/Shared/PDFs/beneGuide.pdf [9/10]

5 - irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes [8/1/12]

 

Charitable IRA Gifts

In 2013, you can once again donate up to $100k to a charity tax-free.

 

 

The IRS extends a major tax break. Thanks to the American Taxpayer Relief Act of 2012, charitable IRA gifts are once again allowed in 2013. An IRA owner aged 70½ or older may gift up to $100,000 this year to either a 170(b)(1)(A) public foundation or a 501(c)(3) charity. Congress may elect to extend this opportunity in 2014 and subsequent years.^1,2

    

What do you gain by doing this? The possible tax benefits of a qualified charitable distribution (QCD) from an IRA are threefold.

 

A QCD counts toward your RMD, but it doesn’t count as taxable income. If you dread mandatory IRA withdrawals and the taxes that come with them, you should know that a charitable IRA gift can be used to satisfy all or part of the annual Required Minimum Distribution. At the same time, the contribution amount is excluded from your gross income. With higher tax rates and surtaxes kicking in this year, reducing your AGI may be a priority.^1,3

 

A QCD can help you reduce the size of your taxable estate. Most of the money in a traditional IRA will eventually be taxable. Donating some or all of these assets to charity will lower your taxable estate dollar for dollar. (As you can surmise, QCDs are more beneficial to traditional IRA owners than Roth IRA owners from this standpoint.)^3,4

 

A QCD could also help you contend with charitable donation limits. You may reach a point where you would like to donate an amount greater than 50% of your AGI to charity. Normally, the IRS doesn’t allow that – but charitable IRA gifts don't count against that 50% limit as they aren’t included in a taxpayer’s gross income. While a charitable IRA gift isn’t tax-deductible, you may not itemize to begin with – many retirees just take the standard deduction.³

 

How do you do this? To realize most or all of these tax perks, the gift has to take the form of a qualified charitable distribution (QCD), alternately known as a trustee-to-trustee transfer or IRA charitable rollover. In other words, the financial firm serving as the trustee of your IRA writes a check directly to the charity. A financial professional you know and trust can help you fill out the accompanying paperwork.² 

 

If the IRA trustee makes the check payable to you and you deposit it and write a check for the equivalent amount made payable to the charity, it is a taxable event and the whole purpose of the charitable IRA gift is defeated. Should you make that blunder, you will have to declare the income and just take a normal charitable deduction on the donation.²

 

What does the fine print say? To make a QCD, you have to own an IRA and be age 70½ or older. You can’t make a QCD from an employer-sponsored retirement account such as a 401(k) or 403(b); in fact, you can’t make a QCD from a SEP or Simple IRA either.^1,2

 

The QCD can’t be made in a way whereby you would derive benefits from the charity or foundation later. It can’t become the basis of a charitable remainder trust or a gift annuity, for example. A QCD also can’t be made to a donor-advised fund (via which the contributed assets would be invested and grow tax-free prior to the actual charitable donation).²

 

A QCD can’t be a split interest gift. The amount of the QCD must otherwise have been considered taxable income, and you are not permitted to claim a charitable deduction for it.²

  

Help a charity, help your financial situation. If you are well off and don’t really need or want the additional income and income taxes that would result from your RMD, a charitable IRA gift may offer you a solution with the flavor of a win-win – a boon for the charity, a tax break for you and/or your heirs.

    

Citations.

1 - irs.gov/Retirement-Plans/Charitable-Donations-from-IRAs-for-2012-and-2013 [5/1/13]

2 - fpanet.org/ToolsResources/ArticlesBooksChecklists/Articles/CharitablePlannedGiving/QualifiedCharitableDistributionsfor2012and2013/ [1/29/13]

3 - bankrate.com/finance/taxes/gifts-to-charity-pay-off-on-your-taxes-1.aspx [1/10/13]

4 - fidelitycharitable.org/giving-strategies/advisors/donating-retirement-assets-to-charity.shtml [5/7/13]

 

RMD Precautions and Options

Meeting your obligations & finding some opportunities.

  

After you turn 70½, the IRS requires you to withdraw some of the money in your retirement savings accounts each year. These withdrawals are officially called Required Minimum Distributions (RMDs).¹

 

While you never have to make withdrawals from a Roth IRA, you must take annual RMDs from traditional, SEP and SIMPLE IRAs, pension and profit-sharing plans and 401(k), 403(b) and 457 retirement plans annually past a certain age. If you don’t, severe financial penalties await.¹

 

If you are still working as an employee at age 70½, you don’t have to take RMDs from a profit-sharing plan, a pension plan, or a 401(k), 403(b) or 457 plan. Your initial RMDs from these accounts will only be required after you retire. However, you must take RMDs from these types of accounts if you own 5% or more of a business sponsoring such a retirement plan.²

 

You must take RMDs from IRAs after you turn 70½ regardless of whether you are still working or not.²

 

The annual deadline is December 31, right? Yes, with one notable exception. The IRS gives you 15 months instead of 12 to take your first RMD. Your first one must be taken in the calendar year after you turn 70½. So if you turned 70½ in 2011, you can take your initial RMD any time before April 1, 2012. However, if you put off your first RMD until next year you will still need to take your second RMD by December 31, 2012.¹

 

Calculating RMDs can be complicated. You probably have more than one retirement savings account. You may have several. So this gets rather intricate.

 

• Multiple IRAs. Should you have more than one traditional, SEP or SIMPLE IRA, the annual RMDs for these accounts must be calculated separately. However … the IRS gives you some leeway about how to withdraw the money. You can withdraw 100% of your total yearly RMD amounts from just one IRA, or you can withdraw equal or unequal portions from each of the IRAs you own.
• 401(k)s and other qualified retirement plans. A separate RMD must be calculated for each qualified retirement plan to which you have contributed. These RMD amounts must be paid out separately from the RMD(s) for your IRA(s).
• Inherited IRAs. The same applies – a separate RMD must be calculated for each inherited IRA you have, and these RMD amounts must be paid out separately from RMD(s) for your other IRA(s).¹

 

This is why you should talk to your financial or tax advisor about your RMDs. It is really important to have your advisor review all of your retirement accounts to make sure you fulfill your RMD obligation. If you skip an RMD or withdraw less than what you should have, the IRS will find out and hit you with a stiff penalty – you will have to pay 50% of the amount not withdrawn.²

 

Are RMDs taxable? Yes, the withdrawn amounts are characterized as taxable income under the Internal Revenue Code. Should you be wondering, RMD amounts can’t be rolled over into other tax-deferred accounts and excess RMD amounts can’t be forwarded to apply toward next year’s RMDs. ²

 

What if you don’t need the money? If you are wealthy, you may come to see RMDs as an annual financial nuisance – but the withdrawal amounts may be redirected toward opportunities. While putting the money into a savings account or a CD is the usual route, there are other options with potentially better yields or objectives. That RMD amount could be used to…

 

• Start a grandchild's education fund.
• Fund a long term care insurance policy.
• Leverage your estate using life insurance.
• ·        Diversify your portfolio through investment into stock market alternatives.  

 

There are all kinds of things you could do with the money. The withdrawn funds could be linked to a new purpose.

 

So to recap, be vigilant and timely when it comes to calculating and making your RMD. Have a tax or financial professional help you, and have a conversation about the destiny of that money.

 

Citations.

1 – www.hartfordinvestor.com/servlet/Satellite?c=Page&cid=1284290138050&pagename=Investor%2FPage%2FCommon [9/23/11]

2 - www.irs.gov/retirement/article/0,,id=96989,00.html#8 [1/5/12]

 

Get Off on the Right Foot in 2012

A look at some financial changes & the opportunities they may present.

 Every year brings some financial change, so here are some relevant changes relating to investment, tax and estate planning for 2012.

 Retirement plans. 401(k), 403(b) and 457 plan annual contribution limits rise slightly to $17,000, and you can contribute an additional $5,500 to these accounts if you are 50 or older this year. IRA contribution levels are unchanged from 2011: the ceiling is $5,000, $6,000 if you will be 50 or older in 2012.¹

 

As you strive to contribute as much as you comfortably can to these accounts this year, you will probably notice some changes with the retirement plan at your workplace. In 2012, retirement plan sponsors (i.e., employers) will have to note all of the fees and expenses linked to the funds in the plan to plan participants. So if you have a 401(k) or 403(b), you may notice some differences in the disclosures on your statements and you will probably notice more information coming your way about fees. There is also a push in Washington, D.C. to have financial companies provide lifetime income illustrations on retirement plan account statements, projections of your expected monthly benefit at retirement age.²

 

Income taxes. Wealthy Americans are set to face greater income tax burdens in 2013, so 2012 may be the last year to take advantage of certain factors. For example, the top tax bracket in 2013 is slated to be at 39.6% instead of the current 35%. This year, capital gains and dividends will be taxed at 15% or less for everyone, 0% for those in the 10% and 15% tax brackets. In 2013, the qualified capital gains tax rate is scheduled to rise to 20% and qualified dividends will be taxed as ordinary income. So taking a little more income in 2012 could be smart.³ 

 

In 2013, the wealthiest Americans are supposed to be hit with new Medicare taxes: a new 3.8% levy on unearned income (such as capital gains, income from real estate, dividends and interest) and a new 0.9% tax or earned income. So next year, the truly wealthy could effectively face in the neighborhood of 45% federal taxes.³

 

Additionally, the IRS is planning to limit itemized deductions for upper-income taxpayers in 2013. A phase-out will also apply for the personal exemption deduction.³

 

Estate & gift taxes. At the end of 2012, some very nice estate tax breaks could sunset. Barring action by Congress, 2013 could see a 20% leap in the federal estate tax rate from 35% to 55%. The individual estate tax exclusion (currently $5.12 million) is scheduled to be reduced to $1 million.³

 

As we have unified gift and estate tax rates, those numbers and percentages also apply to gift taxes. That is, from 2012 to 2013 top federal gift tax rate is set to go from 35% to 55% and the lifetime gift tax exemption amount is scheduled to fall $4,120,000 per individual to $1 million. The annual gift tax exemption is $13,000 per recipient in 2012; there is an exemption limit for qualifying educational and medical payments. If you want to gift relatives or friends, you may want to avoid procrastinating for another very good reason: when you make such a gift early in a year, the recipient will gain both the principal and any appreciation tied to the gifted asset in that year.^3,4

 

Speaking of gifts, we said goodbye to charitable IRA gifts in 2011. The IRA charitable rollover, a boon to non-profits and a handy tax deduction option for taxpayers older than age 70½, was not extended into 2012, not even temporarily as a sweetener to the payroll tax extension bill. There is hope it will be back. Two bills have been introduced in Congress with that goal, one sponsored by Sen. Olympia Snowe (R-ME) and Sen. Charles Schumer (D-NY) and another by Rep. Wally Herger (R-CA) and Rep. Earl Blumenauer (D-OR). The proposed legislation would let IRA owners start making charitable IRA gifts at age 59½ and remove the $100,000 limit on the rollovers.⁵

 

The limits on the generation-skipping transfer tax could change, too: assuming the Bush-era tax cuts do sunset, the GSTT rate would jump from 35% this year to 55% in 2013, with the GSTT exemption falling from $5,120,000 per person this year to roughly $1.3 million per person next year.³

 

So given all these changes, it might be wise to meet with the financial professional you know and trust early in 2012 as you strive to start the year off on the right foot. You have until April 17 to file your federal return, but you can plan now.

 

 

Citations.

1 - www.irs.gov/retirement/article/0,,id=96461,00.html [10/20/11]

2 - www.marketwatch.com/story/retirement-plan-changes-coming-in-2012-2011-12-29 [12/29/11]      

3 - www.sbnonline.com/2012/01/how-to-approach-tax-and-estate-planning-opportunities-for-2012/?full=1 [1/3/12]

4 - advisorone.com/2012/01/06/10-tax-tips-for-advisors-in-2012 [1/6/12]

5 - www.northjersey.com/news/business/business_opinion/136217658_Payroll_tax_cut_benefits_charities.html [12/25/11]