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Using First Year RMD Delay to Your Advantage

Photo courtesy of Alicja Colon on

Photo courtesy of Alicja Colon on

When you are first subject to RMD (Required Minimum Distributions), which for most folks* is the year that you reach age 70½, you are allowed until April 1 of the following year to receive that first minimum distribution.  For all other years you must take your RMD by December 31 of that year.  For many folks, it makes the most sense to take that first year RMD during the first tax year (by December 31 of the year that you’re age 70½), because otherwise you’ll have two RMDs hitting your tax return in that year.  However, in some cases, it might work to your advantage to delay that first distribution until at least the beginning of the following year – as long as you make it by April 1, you’re golden.

There may be many circumstances that could make this delay work to your advantage – maybe you’re still working in the year you reach age 70½ and your income is much higher than it will be the following year, for example. Keep reading…

How to Deal With Missed Required Minimum Distributions

fixing missed required minimum distributions can be like staring into the sun

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What happens when a beneficiary doesn’t act in a timely fashion with regard to taking Required Minimum Distributions from the inherited IRA?  In other words, what are your options if you’ve missed Required Minimum Distributions (RMDs) in prior years?

The Inheritance

So, let’s say you inherited an IRA from your mother – this was her own IRA that she had contributed to or rolled over funds from a qualified plan at some point, and had designated you as the sole primary beneficiary.  Things get really hectic and confusing after the death of a parent, and sometimes we don’t cover all of the bases properly… and in this example, you didn’t realize that you needed to begin taking Required Minimum Distributions (RMD) from your inherited IRA as of December 31 of the year following the year of your mother’s death.  As of now, for example’s sake, let’s say we’re in the fourth year after your mother’s passing. (see Notes below) Keep reading…

Apple Pie and Ice Cream…Vanilla Ice Cream

Apple pie

Apple pie (Photo credit: Wikipedia)

From time to time we get asked by our clients and prospective clients why we manage our clients’ money the way that we do. Some even gravitate to our firm because of the way that we invest and our philosophy. Others shy away because they are looking for management that will beat the market and always make money and never lose money. Note: This is impossible. But hey, some folks still chase that illusion.

As many of our readers know our investment philosophy is pretty plain – like apple pie and ice cream. To make this summer analogy more apropos, when you go to the store to buy ice cream vanilla is generally cheaper and in more supply. As you peruse further into the freezer you start to come across more exotic flavors, combinations and brand names that not only look (and may taste) more appealing, but are also more expensive and you get less (.75 quarts instead of 1.75).

Granted these flavors look good initially, but eventually over time you’ve paid more for less.

Keep reading…

Annuity in an IRA? Maybe, now

Annuities can produce mountains of fees

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Forever and a day, the rule of thumb has been that you should not use IRA funds to purchase an annuity – primarily because traditional annuities had the primary feature of tax deferral. Since an IRA is already tax-deferred, it’s duplication of effort plus a not insignificant additional cost to include an annuity in an IRA.  This hasn’t stopped enthusiastic sales approaches by annuity companies – plus new features may make it a more realistic approach.

Changes in the annuity landscape have made some inroads against this rule of thumb – including guaranteed living benefit riders, death benefits, and other options.  Recently the IRS made a change to its rules regarding IRAs and annuities that will likely make the use of annuities even more popular in IRAs: The use of the lesser of 25% or $125,000 of the IRA balance (also applies to 401(k) and other qualified retirement plans) for the purchase of “longevity insurance”, which is another term for a deferred annuity. Keep reading…

Resurrecting the Qualified Charitable Distribution?

You could use your computer to make a qualified charitable distribution

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This past week the US House of Representatives passed a bill (HR 4719, known as the America Gives More Act) which would re-instate the Qualified Charitable Distribution from IRAs and make the provision permanent.  This provision expired at the end of 2013, as it has multiple times in the past, only to be re-instated temporarily time and again.

A Qualified Charitable Distribution (QCD) is when a person who is at least age 70½ years of age and subject to Required Minimum Distributions from an IRA is allowed to make a distribution from the IRA and direct the distribution to a qualified charitable organization without having to recognize the income for taxable purposes.  This has been a popular option for many taxpayers, especially since the QCD can also be recognized as the Required Minimum Distribution for the year from the IRA. Keep reading…

How to Compute Your Monthly Social Security Benefit

steps to compute your monthly social security benefit

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So you’ve seen your statement from Social Security, showing what your benefit might be at various stages in your life.  But not everyone files for benefits at exactly age 62 or 66 – quite often there are months or years that pass before you actually file.  This article will show you how to compute your monthly Social Security benefit, no matter when you file.

Computing your monthly Social Security benefit

First of all, in order to compute your monthly Social Security benefit, you need to know two things: your Primary Insurance Amount (PIA) and your Full Retirement Age (FRA).  The PIA is rather complicated to define, but for a shorthand version of this figure, you might use the figure that is on your statement from Social Security as payable to you on your Full Retirement Age (or “normal” retirement age).  Keep reading…

The Dog Ate My Tax Receipts Bill

dog ate my tax receiptsNow here’s some legislation that I could get behind!

Recently, House Representative Steve Stockman (R-TX) introduced a bill in response to the IRS’ lame excuse of a “computer glitch” that purportedly erased all of the incriminating evidence from the agency’s computers.  This was part of the testimony offered by former IRS Exempt Organizations Division director Lois Lerner in response to the accusation that her division targeted organizations critical of the current administration.

Stockman’s bill provides that if the IRS can use lame, flimsy excuses to avoid prosecution, taxpayers should be allowed to use similar excuses.  The actual text of the bill follows below: Keep reading…

Should The CFP® Board Require Recertification?

CFP Recertification Exam (just like doctors)

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I wanted to post this article to see if any of our readers, both planners have an opinion on the question of whether you think the CFP® Board should require CFP® professionals to get recertified in order to keep the prestigious CFP® designation.

In recent years the Board has been marketing the CFP® designation as the trusted mark and gold standard when it comes to clients seeking professional financial planning. As you may or may not know there are no laws dictating who can call themselves a financial planner. In other words, anyone can say they’re a financial planner regardless of expertise, experience, ethics, or education (the Board’s 4 E’s).

To be a CERTIFIED FINANCIAL PLANNER™ requires much more rigorous work, testing and education, among others.

Keep reading…

QDRO vs Transfer Incident to a Divorce

sometimes people discuss transfer incident to a divorce in tall buildings in big cities

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Divorcing couples often face the need to split up some retirement account assets.  This can be done from a retirement plan such as a 401(k) or 403(b), or from an IRA.  Depending on which type of account you’re splitting, the rules are very similar but are referred to by different names.  For a qualified retirement plan (401(k) or 403(b) plan), the operative term is Qualified Domestic Relations Order or QDRO (cue-DRO).  For an IRA, the action is known as a transfer incident to a divorce.

We discussed the QDRO in several other articles, so we’ll focus on the transfer incident to a divorce in this article.

Keep reading…

Starting a new job in the middle of the year? Use the part year withholding method to avoid excess tax withheld

part year withholding works for cab drivers too

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When you file your W4 form with a new employer, this instructs the employer how much tax to withhold from your pay, based on a full year’s pay rate.  There is a strategy you can employ that will reduce the amount of tax withheld from your pay – known as the part year withholding method.  This method of tax withholding calculation takes into account that you are only working and earning for a part of the year, so your overall income will be less, and there would be less tax required.

If you start working in the middle of the year (or worse, late in the year) the normal rate of withholding would result in significant over-payment of tax withheld.  The standard tables used to calculate withholding make the assumption on each pay that you are earning at this rate over the entire period.

Keep reading…

Why You Should Participate in a 401(k)

2559353875_e08d93e193_m1We all know that we should save money for a rainy day, a message we’ve received since we were little ones, but this article covers some more reasons why you should participate in a 401(k) plan, if you have one available.

It’s on you

Back in the olden days when the earth was still cooling, employees could count on (or at least thought they could count on) a pension benefit from their employer upon retirement.  This pension plan provided a safety net that allowed the employee to go into retirement with relatively little concern about whether there would be enough money to live on. Keep reading…

Roth 401(k) In-Plan Conversions

As of the beginning of 2013, a new provision became available for participants in 401(k), 403(b) and 457 deferred compensation retirement plans: the Roth 401(k) In-Plan Conversion.  This provision allows current employees participating in one of these Qualified Retirement Plans to convert funds from the traditional 401(k) (or other) account into the Designated Roth Account (DRAC) that is part of the plan.

This is new and different because previously the only way to convert funds from the 401(k) plan to a Roth-like account was to have left employment by the sponsoring employer. Keep reading…

Emergency Fund vs. Credit Card

Credit Card

During moments in our lives we are faced with bad luck or simply things that go awry and inevitably cost us money. From a car needing repairs to the water heater going out, or an unexpected doctor bill we don’t plan for these to happen, but we can in place in case they do.

As financial planners we generally recommend that our clients have emergency funds in the event that such events are going to happen. On different occasions I will get the argument that an emergency fund isn’t necessary if one has a credit card to simply pay for the unplanned expenses when they happen.

Generally, in an emergency a credit card can come in handy as one may not have quick access to cash, etc. However, the flaw with thinking that a credit card can be used in place of an emergency lies here: How do you pay off the credit card?

The point is that the emergency may go away, but the credit card debt remains and the interest compounds not only the money used but the headache of the emergency the card was used to fund. Several emergencies in a small period of time can lead to high credit card debt – which is an emergency itself; only this emergency is preventable.

One thing folks can consider is to utilize both if necessary. In a pinch a credit card can come in handy if an unexpected emergency happens out of town, or as mentioned previously you don’t have immediate access to your emergency fund. The solution lies in once you have access to your emergency fund use that money to pay off the credit card that you just used for the emergency, and work on replenishing your fund.

The Designation Everybody Should Be Aware Of

We will stick tog...

At some point in your life you have probably started a new job, applied for life insurance, started an IRA or retirement account, or opened a bank account. You may remember when filling out the paperwork that the form asked for a beneficiary – both primary and contingent. This is simply telling the account’s custodian to whom you want your account to go to should you pass away.

Your primary beneficiary is the first (hence the name primary) that receives account balance or death benefit. The contingent is who receives the account balance in the event your primary beneficiary predeceases you. When choosing beneficiaries you had the choice of allocating a certain percentage to the primary and some to the contingent if needed. You may have even had two or more primary beneficiaries that you allocated a certain percent of your account to totaling 100%

Then you may have forgotten about the whole beneficiary thing. Until now.

It’s important to review and if necessary update your beneficiary designations ion your IRAs, 401(k), 403(b), life insurance and other savings and brokerage accounts.  This is especially important if you’ve recently had a divorce, or your primary beneficiary has passed away.

In the divorce example, a couple could have gone through a nasty divorce and perhaps many years have passed and both have remarried. If they haven’t updated their beneficiary designations on their accounts and policies, guess who gets the proceeds? Yep. The ex-spouse.

Some folks think that if they have a will they can forgo naming beneficiaries as their wishes will be carried out through the will – maybe and maybe not. Also, not only is proving a will (called probate) made public, wills can also be contested by family members.

For example, a couple may have family that disagrees with their relationship. If they both have wills, those will could potentially be contested by the family. Any directives in the will allocating money to the surviving partner can be challenged. This can be virtually eliminated by the couple naming each other as beneficiaries on their life insurance and retirement accounts. Now their money passes to the surviving partner by operation of contract – and avoids the publicity of probate.

It never hurts to review your beneficiaries and if necessary update them. It only takes a few minutes to check and that few minutes can save you (and your desired beneficiaries) hours, if not years of hassle, hurt, and financial hardship.

A Quick Trick to Reduce Your Tax Liability

Considering The Tax Shelter

Now that most folks are recovering from tax time there may be some individuals that paid an excessive amount of tax to Uncle Sam and are looking for ways to reduce their tax liability for next year. This post will be short and sweet, but hopefully it will drive a few points home.

The best way to explain this is through an example. Let’s say that Mary and her husband Paul both work and file their taxes jointly. Their tax liability for 2013 was $4,000 – meaning that’s the amount of the check they wrote to the IRS. Needless to say, they are both looking for a potential way to reduce that liability – at least in the here and now. In this case, their marginal tax rate is 25%.

The quick trick in this example is to take their tax rate which is 25% and divide it into their tax liability of $4,000. In this case it turns out to be $16,000. This magic number of $16,000 is what Mary or Paul or both of them combined could contribute to their pre-tax retirement plan such as a 401(k), 403(b), 457, etc. All else being equal, this significantly reduces their tax liability for 2014. The reason why is that the money deferred to their retirement accounts is taken from their paychecks before taxes are taken out, thus they have less money to take home that’s subject to taxation. And in this case – they’re paying themselves first!

Granted, they will eventually have to eventually pay tax on the amounts in their retirement plans, but what they are doing now is reducing their tax liability in the present, and paying for it later. This may work out for the both of them as their tax rate in the future may be lower than their current 25%. It could also work against them if their tax liability happens to be higher when they start taking money from their accounts.

This situation may apply to some folks reading this article. If it does and you have question feel free to contact us, or any competent financial professional.

Take Dave’s Advice With a Grain of Salt

Image courtesy of Stuart Miles at

Image courtesy of Stuart Miles at

Dave Ramsey hands out advice to millions of people every day, and much of the time he’s right on track – or at least relatively so.  However, like all purveyors of financial advice to the masses, his advice should be taken with a grain of salt.

There are two reasons for this: First, your circumstances are very likely to be very different from the individual to whom the “vending machine” advice is rendered.  A subtle change to the circumstances can make a major difference as to whether the recommendation applies to you the same as the asker.  Dig deeper than just taking the recommendation verbatim, making a decision based on your own circumstances.

Second, the very nature of the forum that Dave (and Suze, Malcom, and others) use, that of mass-produced financial advice, is oriented toward the sound bite.  Take the recommendation Dave makes in this recent column as an example.  In the first question, Dave’s got no idea what the tax situation is for Jennifer, her income, her age (several years before retirement could be 5 or 50!), if she has other accounts, not even if she’s married.  Yet his response is unequivocal: a Roth 401(k) is best – presumably (at least in part) because that’s what Dave has chosen for himself.  Dave’s financial circumstances are bound to be drastically different from Jennifer’s, but the sound bite wins out.  Millions of followers now have the idea that in all circumstances, if you have a Roth 401(k) available, you should utilize it.  That’s not exactly poor advice, but it’s very generalized and incomplete at the very least.

A proper answer would require more information about Jennifer, much more.  For example, if it turns out that Jennifer has a very high income now and expected future income will be much lower, the traditional 401(k) could be the best for her.

Another problem with this answer is Dave’s calculation of the tax hit on distribution.  He says it could be $300k to $400k on a million-dollar account.  That could be the case if Jennifer withdrew the entire $1 million in one tax year (makes for a great sound bite!). However, if she takes that money out over a 20-year timeframe at $50,000 per year, is married, and that’s the only income that Jennifer and Mr. Jennifer receive, at today’s tax rates they’d pay less than $64,000 in tax during that period.  Not such a juicy sound bite, but likely a lot closer to reality.

My point is not that you should disregard what Dave Ramsey (or any of the other financial “gurus” out there) has to say.  Much of the time, as I stated before, he gives good guidance (notwithstanding his irrational fear of debt and his expectation of a 12% return from the stock market). I like a lot of what he has to say, helping folks via his Financial Peace University and whatnot.  Plus, how can you not like a guy whose offices are right next door to a Cracker Barrel and a Krispy Kreme, all right across the street from a swanky Galleria Mall??? No, my point is to understand the nature of the recommendations given, and that your circumstances are most likely very different from the seeker of wisdom from the mount.

The Power of Endorsements

A White gold wedding ring and a single diamond...

Whether you rent or own your home chances are you have (or should consider having) renter’s or homeowner’s insurance. Generally these insurances cover you in the event of being liable for damages or if you suffer a loss of your own due to a fire, tornado, hurricane, etc.

What many polices do not cover or provide very limited coverage on is specific items such as jewelry, antiques, coins, firearms, etc. Generally if there is coverage for these items it’s for an aggregate amount not to exceed a certain dollar limit – such as $1,000 for the total amount lost.

For example, Herb has an extensive coin collection worth $50,000 and his wife Peaches has an engagement ring worth $10,000. Under their normal home policy, if there was a theft, fire or tornado causing a total loss of their coins and ring, they may only get up $2,000 (assuming the aggregate coverage amount was $1,000 respectively). This puts them at a $58,000 loss.

Both Peaches and Herb could have prevented this by adding an endorsement to their home policy. Think of an endorsement as an “insurance policy within the main policy”. Essentially an endorsement specifically covers an article of personal property that is either excluded or not fully covered in the main policy. With an endorsement, the owner can choose their own deductible for the loss and coverage is much more inclusive. This means that if the home policy deductible is $500, the endorsement can have a deductible for, say, Peaches’ ring for $100. So in this case, their loss would only be the deductible on the endorsement – a considerably smaller sum.

Additionally, many endorsements will cover mysterious disappearance. This means that should Peaches lose her ring washing dishes, it’s likely covered with the endorsement, something the home policy wouldn’t. Also, an endorsement supersedes and conflicting terminology in the main policy.

Generally, endorsements are an inexpensive way to broaden coverage under an existing policy. Should you have an extensive collection or an item of considerable value an endorsement may be worth considering.

File Now. Suspend Later.

Photo courtesy of Lacey Raper on

Photo courtesy of Lacey Raper on

Suspending benefits is a facet of Social Security filing that usually only gets written about in connection with filing – File and Suspend is often referred to as a single act, but it’s actually two things.  First you file for your benefits, which is a definite action with the Social Security Administration, establishing a filed application on your record.  Then, you voluntarily suspend receiving benefits.  If this happens all at once, the end result is that you have an application filed with SSA, but you’re not receiving benefits.  Since you have an application filed (in SSA parlance, you’re entitled to benefits), your spouse and/or dependents may be eligible for a benefit based on your record.

Since you are not receiving benefits, your record earns delayed retirement credits (DRCs) of 2/3% per month that you delay receipt of benefits past your Full Retirement Age (FRA).  (Note: you can only suspend receipt of benefits when you are at or older than FRA, age 66 for folks born before 1955.)

It doesn’t have to happen all at once though.  You could file for benefits and receive them for a few months or a long period of time, and then suspend benefits later in order to receive delayed retirement credits to increase your benefit later.

For example, Tim started receiving his Social Security benefit at age 62, because he figured he couldn’t count on the government to make the funds available for him in the future, and by gum he was going to get what was coming to him.  By starting early, Tim has reduced his benefit from a possible $2,000 (had he waited until FRA to file) to $1,500 per month.  The crazy thing is that Tim has a pension that covers his and his wife Janice’s monthly expenses completely, so he doesn’t really need the SS benefit for living expenses.

A couple years later, Janice explained (tactfully of course) to Tim how he had unnecessarily thrown money away by filing so early.  Since more than 12 months had passed, he couldn’t do anything about it, right?

Wrong – once Tim reaches FRA, he has the option of suspending his benefits, which will provide the ability for his benefit record to begin accruing the Delayed Retirement Credits at the rate of 2/3% per month, or 8% per year.  After four years, Tim’s benefit could be increased by 32%, up to a new monthly benefit of $1,980 per month – almost as much as what his original benefit would have been. (Cost of Living Adjustments have not been factored into the equation.)

Roth 401(k) Rules

Photo courtesy of Mario Calvo on

Photo courtesy of Mario Calvo on

If your employer has a 401(k) plan available for you to participate in, you may also have a Roth 401(k) option available as a part of the plan. (We’re referring to 401(k) plans by name here, but unless noted the rules we’re discussing also apply to other Qualified Retirement Plans (QRPs) such as 403(b) or 457 plans.)  Roth 401(k) plans are not required when a 401(k) plan is offered, but many employers offer this option these days.

The Roth 401(k) option, also known as a Designated Roth Account or DRAC, first became available with the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, with the first accounts available effective January 1, 2006.  The Roth 401(k) was designed to provide similar features present in a Roth IRA to the employer-provided 401(k)-type plans.

Similar to traditional 401(k)

Certain features of the Roth 401(k) are similar to the traditional 401(k) plan – since the Roth 401(k) is just an extension of the traditional 401(k), in practice.  For example, the employee-participant has the option to elect to defer a portion of her income into the account, and the employer may provide matching contributions based upon the elected deferrals.

The deferred funds are held in a separate account, and the funds invested in selected investment options.  While the funds are in the plan (before distribution) the growth of the funds occurs without taxation.  Upon reaching retirement age (59½ years of age, usually), the funds can be distributed without penalty to the employee-participant.

Funds can also be rolled over into another employer’s plan or a like-ruled IRA (Roth IRA) without tax or penalty.  If the funds remain in the Roth 401(k) plan and the employee-participant has reached age 70½ years of age, and is no longer employed by the plan sponsor (or is still employed and is a 5% or greater owner), the employee-participant must begin taking Required Minimum Distributions from the plan.

Different from traditional 401(k)

Some very important features about the Roth 401(k) are different from the traditional 401(k), but very similar to features of the Roth IRA.  If not, what’s the point of the separate account, right?

First of all, unlike the traditional 401(k), funds deferred into the Roth 401(k) plan are subject to ordinary income tax.Once contributed, growth in the account is tax-deferred – and if taken out after age 59½, the distributions are not subject to income tax.  This is the same treatment that funds contributed to a Roth IRA receive.

When the employer provides matching funds, those funds are contributed to a traditional 401(k) account rather than the Roth 401(k) account.  Vesting rules apply just like with the traditional 401(k) plan, and these only apply to the matching funds.

In addition, when money has been contributed to the Roth 401(k) plan, in order for the distributions to be fully tax-free, the account must have been established at least five years prior to the distribution, and the account owner must be at least 59½ years of age.

Combined Rules

In total, the employee-participant’s contributions for any tax year to ALL 401(k) plans, traditional or Roth, for all employers, cannot exceed the annual deferral limit – which is $17,500 for 2014, plus a $5,500 catch-up for folks who are over age 50.

Rollovers from the plan to an outside plan (Roth IRA or another employer’s Roth 401(k) plan) are generally not allowed until the employee has ceased employment with the plan sponsor.

Although the traditional and Roth 401(k) plans are likely reported on the same statement to the employee-participant, they are always kept in separate accounts, totally segregated from one another.  This simplifies the application of future tax treatment of the funds in the two types of accounts.  When you have deferred funds into the Roth 401(k) account this action is irreversible – in other words, you cannot move the funds into your traditional account or take them in cash after you’ve deferred into the Roth 401(k) without consequences.

It is possible for the employer to allow in-service rollovers (conversions) from the traditional 401(k) to the Roth 401(k) account – paying ordinary income tax on the converted funds in the tax year of the conversion.  These conversions are an allowed, non-penalized distribution from the 401(k) plan.