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Don’t Forget to Make Your IRA Contribution by April 18!

forgetmenotsWhen filling out your tax return, it’s allowable to deduct the amount of your regular IRA contribution when filing even though you may not have already made the contribution.

You’re allowed to make an IRA contribution for tax year 2015 up to the original filing deadline of your tax return. This year, that date is April 18, 2016.

The problem is that sometimes we file the tax return way early in the year, and then we forget about the IRA contribution. As of the posting of this article, you have 1 week to make your contribution to your IRA to have it counted for tax year 2015.

What To Do If You Miss the Deadline

If you don’t make the contribution on time, you’re in for some nasty surprises unless you take some corrective actions.

If you find yourself on April 19, 2016 without having made your IRA contribution and you had deducted one from your taxes for 2015, you need to amend your return. This means that you’ll fill out a Form 1040X and eliminate the IRA contribution that you originally deducted from your income. This will (most likely) result in additional taxes that you’ll owe, so when you send in the amendment you’ll have to send an additional tax payment.

Failure to amend your return in a timely fashion will result in the IRS contacting you later, requiring you to pay the additional tax plus interest. In addition, since your tax return was erroneous, the IRS will consider this to be “under-reporting of income” and “under payment of tax” – both of which carry penalties. Even if it was an honest mistake, you’ll owe these penalties.

You may even owe some penalties and interest if you file your amendment right away, since technically you’ve under-reported and underpaid. But if you amend as soon as you can, these penalties and interest should be minimized.

Should I Pay Off My Student Loans or Start Investing?

Businessman juggling fruit

Businessman juggling fruit

I had an interesting question come my way from a student the other day and I thought I’d expand on my answer that I gave to the student. The question was whether he should pay off his student loans and then start investing, or if he should start investing first and pay off the student loans gradually.

If we really look at it, paying down any type of debt is very similar to making an investment in a guaranteed account paying interest on the equivalent of the interest rate on the debt. This student’s interest rate on his debt was approximately 7%. Paying this off would not be unwise and would be a great way to earn 7% risk free – only this method keeps the 7% out of the lender’s pocket and puts it into the borrower’s.

However, if we completely ignore investing and saving for retirement we can miss out on some of the crucial, early years of investing where a young investor can take advantage of time, and compounding. Even a small amount set aside on a regular basis can reap huge rewards and returns over time through the value of compounding.

So here was my answer to the student. Depending on his risk tolerance, if he thought he could earn a return higher than 7% (subject to much more risk) than he could consider investing now and simply paying down the debt through the regular monthly repayments. I advised that deferring the repaying was not recommended.

If he thought he was a more conservative investor then he could consider paying a much larger amount monthly to reduce the debt even more, then, when the debt is paid off, use the free cash flow to enhance retirement savings.

Additionally, I told the student if he was participating in a 401(k) with a match, to definitely save into the 401(k) at least up to the employer match. This is free money from the employer and everyone should take advantage of this. Furthermore, the student should be aware that his student loan interest paid is deductible up to $2,500 every year as an adjustment to income (above the line deduction).

While I had no blanket answer for this student, it hopefully gave him an idea as to how he should think about his retirement savings and debt. The good news is that he was at least thinking about these things, which feels good. Sometime you wonder if you’re making a difference.

Taxes and Your Child

childrenWhen a child has unearned income from investments in his or her own name, taxes can be a bit tricky. Depending on how much the unearned income is, part of it may be taxed at the child’s parent’s tax rate, for example.

Recently the IRS published their Tax Tip 2016-52, which details What You Should Know about Children with Investment Income. The text of the Tip is below:

What You Should Know about Children with Investment Income

Special tax rules may apply to some children who receive investment income. The rules may affect the amount of tax and how to report the income. Here are five important points to keep in mind if your child has investment income:

  1. Investment Income. Investment income generally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.
  2. Parent’s Tax Rate. If your child’s total investment income is more than $2,100 then your tax rate may apply to part of that income instead of your child’s tax rate. See the instructions for Form 8615, Tax for Certain Children Who Have Unearned Income.
  3. Parent’s Return. You may be able to include your child’s investment income on your tax return if it was less than $10,500 for the year. If you make this choice, then your child will not have to file his or her own return. See Form 8814, Parents’ Election to Report Child’s Interest and Dividends, for more.
  4. Child’s Return. If your child’s investment income was $10,500 or more in 2015 then the child must file their own return. File Form 8615 with the child’s federal tax return.
  5. Net Investment Income Tax. Your child may be subject to the Net Investment Income Tax if they must file Form 8615. Use Form 8960, Net Investment Income Tax, to figure this tax.

Refer to IRS Publication 929, Tax Rules for Children and Dependents. You can get related forms and publications on IRS.gov.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

Break Even Points for Social Security Filing Ages

break evenLast week my article 3 Myths About Social Security Filing Age included some information about year-to-year break even points for the various Social Security filing ages. This prompted some questions about the break even points between all filing ages, not just the following year.

So for example, what are the break even points between choosing to file at age 62 versus age 66 or age 70?

This article shows the approximate break even points between all of the various filing ages. The first chart shows the break even points when your Full Retirement Age is 66. To use the chart, select your first filing age decision on the left, then move right to the second filing age you’re considering:

image

So, for the decision between filing at age 62 versus age 66, you can see that the break even point is at the age of 78. Comparing filing at age 66 with age 70, the break even point is at age 82.

It should be noted that these break even points are the age you will be when cumulative benefits received at the later filing age becomes greater than the cumulative benefits received based on the earlier filing age. The specific break even points occur sometime during the year indicated, as the analysis is done on an annual basis (not month-to-month). In other words, the actual break even month might be any month during that year. With this difference in mind, the prior article has been updated to reflect the same. Previously the analysis showed the first full year that the later filing age was superior to the earlier filing age.

This second chart shows the break even points for when your FRA is 67. It is used exactly the same as the chart above.

image

As before, choose the first filing age in the left column, and then move to the right for the break even points for the various filing ages. If you were choosing between age 63 and 66, for example, the break even point is age 77. Between age 65 and age 70, the break even point is 82.

How to Save Money

minimize taxesMany individuals hear the mantra to start saving money early, put something aside for retirement, or start accumulating a nest egg. However, as much as those mantras are good advice, sometimes an individual needs a specific direction on how to get started. Hopefully, this post can provide some of that direction.

Whether you’ve just graduated high school, college, or have been working for a number of years, if you haven’t started saving for an emergency or retirement, there’s still time to do so. It’s never too late.

One of the first things an individual can do is simply take a look at what is coming in and what is coming out of their income. An easy way to do this is by looking at the last three month’s bank statements. This will give an excellent representation of what income was coming in and what was being spent. From there, start separating needs from wants in the expenses. Be honest with yourself. Are you seeing expenses that you really have to have? Can these be put to better use?

Once you’ve identified expenses that aren’t needs, tally them up for your monthly total. Here’s the fun part. Since you’ve already budgeted for these items and you’re already used to these being expenses, simply take that sum and have it put into a savings account (for an emergency fund) or open an IRA (for retirement). The nice thing about this step is it can be done automatically. At the beginning of each month you can have the sum automatically transferred to the savings or IRA and this reduces the “pain” of writing out a check or the effort if physically transferring the money yourself.

Additionally, if and when you have access to a retirement plan at work, such as a 401(k), you can apply the same principles. Choose a percentage of your gross income that you’d like to save (15% is an excellent start) and have it taken out of your check before you’re paid. This accomplishes two things: it takes care of the need to save and forces you to live off the rest. Furthermore, by saving a percentage of your income you automatically give yourself a raise to your retirement contributions any time you get a pay raise.

Saving doesn’t have to be daunting. It can be hard to start and confusing on what approach to take. If you’re willing to be honest with expenses (needs versus wants) and make your savings automatic, you may find it easier to save than you thought. And in just a few years’ time, you’ll have quite a bit of savings to show for it.

3 Myths About Social Security Filing Age

myth-myth-yethWe hear all kinds of things about Social Security filing age – that we should always delay as long as possible, that we will gain 8% every year that we delay, and that the “break even” point is 80 years of age.

This article takes a long hard look at these three “facts” about Social Security filing age and shows the real math behind them. All three are only true to a point – and as you’re planning your Social Security filing age, you should understand the real truth behind these three items.

First, let’s look at the concept of delay.

You Should Always Delay Your Social Security Filing Age to 70

This one is the easiest to understand why it’s wrong – but the component of truth in it can be important because it could work in your favor to delay. Of course an absolute like this is going to be proven incorrect in some circumstances.

If you happen to be able to delay your Social Security filing age and you live a long time after age 70, over your lifetime you will receive more from Social Security than if you file early. However, if you need the cash flow earlier due to lack of other sources of income, filing early may be your only choice.

Filing earlier can provide income earlier, but depending on your circumstances you may be short-changing your family by filing early. When you file early, you are permanently reducing the amount of benefit that can be paid based on your earnings record. Your surviving spouse’s benefits will be tied to the amount that you receive when you file, and so if you delay to maximize your own benefit and your spouse survives you, you’re also maximizing the benefit available to him or her. This is to assume that your surviving spouse’s own benefit is something less than your benefit.

John has a benefit of$1,500 available to him if he files at age 66, his Full Retirement Age (FRA). His wife Sadie has a benefit of $500 available at her FRA. If John files at his age 62, his benefit is reduced permanently to $1,125 per month. When John dies, assuming Sadie is at least at FRA, Sadie’s benefit will be stepped up to $1,237 (the minimum survivor benefit is 82.5% of the decedent’s FRA benefit amount).

On the other hand, if John delayed his benefit to age 68, he would receive $1,740 per month since he has accrued delay credits of 16%. Upon John’s death, Sadie will receive $1,740 in survivor benefits. By delaying his benefit 6 years, John has improved his surviving spouse’s lot in life by over $500 per month. Of course this has required him to come up with the funds to get by in life in the meantime, and so if he has the funds available this makes a lot of sense. If he doesn’t have other funds available, one thing that can help matters out is if Sadie files for her own benefit at age 62 – this will provide them with $375 per month while John delays his benefits.

The key here is that it’s often wise for the member of a couple that has the larger benefit to delay benefits for the longest period of time that they can afford, in order to increase the survivor benefit available to the surviving spouse. But it’s also often necessary for household cash flow to file earlier. As we’ll see a bit later, only the question of surviving benefits makes this delay a truism. Otherwise, it could be more beneficial to file earlier.

Increase Your Benefits by 8% Every Year You Delay Filing

This one again comes from a truth: for every year after FRA that you delay your Social Security filing age, you will add 8% to your benefit. But the year-over-year benefit differences are not always 8%, and often the difference is much less.

It is true that if you compare the benefit you’d receive at age 66 to the benefit you’d receive at age 67, it will have increased by 8%. However, if you compare your age 67 benefit to your age 68 benefit, it will have increased by 7.41%. This age 68 benefit is 16% more than the age 66 benefit, but only 7.41% more than the age 67 benefit.

The table below shows the differences across the spectrum of filing ages when your FRA is age 66:

Filing Age Difference
62
63 6.67%
64 8.33%
65 7.69%
66 7.14%
67 8.00%
68 7.41%
69 6.90%
70 6.45%

And this table shows what the differences are year-over-year if your FRA is age 67:

Filing Age Difference
62
63 7.14%
64 6.67%
65 8.33%
66 7.69%
67 7.14%
68 8.00%
69 7.41%
70 6.90%

So as you can see, only from one specific year, your FRA, to the following year, is the increase 8%. Otherwise, with only the exception of one filing age (the difference between 3 years before FRA and 2 years before), the year-over-year increase is less than 8%, and sometimes it’s less than 7%.

The Break Even Point is 80 Years of Age

I’ve often quoted this as a fact – rarely pinning it down to a specific year, but giving the range of around 80 years old. It’s not that simple though when you consider all of the different ages that an individual can file.

For example, when deciding between a Social Security filing age of 62 versus filing at age 63, your break even point occurs at age 77 (when your FRA is age 66).  But when deciding between age 63 and age 64 (with FRA at 66), the break even occurs at age 78.

On the other end of the spectrum, when choosing between filing at age 69 versus filing at age 70 (FRA of 66), the break even occurs at age 84 – considerably later than age 80. The break even for the decision to file at age 68 versus age 69 occurs at age 82.

The two tables below illustrate the ages at which the break even occurs between the various filing ages. This first table is when your FRA is 66:

Filing Age Break Even
62
63 77
64 78
65 76
66 79
67 80
68 80
69 82
70 84

And this table shows what the differences are year-over-year if your FRA is age 67:

Filing Age Break Even
62
63 77
64 75
65 78
66 79
67 79
68 81
69 83
70 85

So the year-over-year break even point ranges, depending on which Social Security filing age you’re considering. If the two options are earlier (before FRA) the break even point occurs before age 80. If at or around FRA, then the break even occurs right around age 80. But if the Social Security filing age you’re considering is near age 70, count on the break even being much later, as late as age 85.

IRS Reports 9 Common Tax Prep Errors

errorsUnless you’ve been under a rock for the past several years, you know that this time of year is tax season. If you haven’t already filed your 2015 income tax return, of course you’ve got some work ahead of you. Unfortunately filing your tax return often results in errors – and these can be quite costly in terms of delays in processing as well as potential penalties and interest if your error results in underpayment of tax.

In addition, an error on your return could result in missing out on refunds or credits that you are entitled to.

Recently the IRS issued Tax Tip 2016-42, which lists out 9 common filing errors that they see, and tips to avoid the errors. The actual text of the Tip follows:

Avoid Errors; File an Accurate Return

The IRS encourages you to file an accurate tax return. Take extra time if you need it. If you make an error on your return then it will likely take longer for the IRS to process it. That could delay your refund. You can avoid many common errors by filing electronically. IRS e-file is the most accurate way to file your tax return. Seven out of ten taxpayers can use IRS Free File software at no cost.

Here are nine common tax-filing errors to avoid:

1. Wrong or Missing Social Security Numbers.  Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.

2. Wrong Names.  Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards.

3. Filing Status Errors. Some people use the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on IRS.gov can help you choose the right status. If you e-file, tax software helps you choose.

4. Math Mistakes. Math errors are common. Tax preparation software does the math for e-filers.

5. Errors in Figuring Tax Credits or Deductions. Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.

6. Incorrect Bank Account Numbers. Choose direct deposit for your refund. It’s easy and convenient.  However, be sure to use the right routing and account numbers on your return. The fastest and safest way to get your tax refund is to combine e-file with direct deposit.

7. Forms Not Signed.  An unsigned tax return is like an unsigned check – it’s not valid. Both spouses must sign a joint return. You can avoid this error by e-filing your taxes since you must digitally sign your tax return before you send it to the IRS.

8. Electronic Filing PIN Errors.  When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that. If you don’t know it, enter the Adjusted Gross Income from the 2014 tax return that you originally filed with the IRS. Do not use the AGI amount from an amended return or a return that the IRS corrected.

9. Health Care Reporting Errors. The most common health care reporting errors that taxpayers make involve failing to claim a coverage exemption and not reconciling advance payments of the premium tax credit. If you don’t have qualifying health care coverage but meet certain criteria, you might be eligible to claim an exemption from coverage and avoid an unnecessary payment when you file your tax return. If you enrolled in health coverage through the Health Insurance Marketplace and received advance credit payments, you must file a tax return to reconcile the advance payments made on your behalf with the amount of your actual premium tax credit.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

Additional IRS Resources:

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Taxes and the 401k Withdrawal

401k withdrawalIf you take a 401k withdrawal and the money in the 401k was deducted from your taxable income, you’ll be taxed on the funds you withdraw. Depending on the circumstances, you may also be subject to a penalty. There’s a lot of confusion about how the taxation works – and the taxation and penalties can be different depending upon the circumstances.

Taxation of the 401k Withdrawal

When you take a distribution of pre-tax money from a 401k plan, the amount of the 401k withdrawal that is pre-tax will be included in your income and will be taxed at your marginal income tax rate in that year.

Unless you meet one of the exceptions noted in the article 16 Ways to Withdraw Money From Your 401k Without Penalty, your 401k withdrawal will also be subject to a 10% early withdrawal penalty.

For example – if you have a 401k plan at a former employer and you are 45 years of age, unless your 401k withdrawal meets one of the exceptions, taxation would work like this for a $50,000 401k withdrawal:

Taxable Income before withdrawal $60,000
Tax (assumes MFJ) $8,072.50
Effective Tax Rate 13.45%
401k Withdrawal $50,000
Other taxable income $60,000
Total taxable income $110,000
Tax (assumes MFJ) $23,836.75
Effective Tax Rate 21.67%
Penalty (10%) $5,000
Total Tax and Penalty $28,836.75
Total Effective Tax Rate 26.22%

Nothing really dramatic about the first part, it’s just more taxable income and you’ve likely grown to understand the effect of the graduated tax schedule. But what will likely open your eyes is the fact that this $50,000 was actually taxed at a rate of 41.53%! Your 401k withdrawal of $50,000 resulted in $20,764.25 in taxes and penalties, so in effect you only “net” $29.235.75 from this withdrawal. Almost makes a payday loan look cheap by comparison.

On the other hand, if you met one of the exceptions (such as being age 59½ or older, the penalty would not apply. The effective tax rate on the 401k withdrawal is 10% less, at only 31.53%.

Mandatory Withholding

Another thing you need to understand about your 401k withdrawal is the mandatory withholding. Unless your 401k withdrawal is a direct rollover to another plan (such as an IRA), part of a Series of Substantially Equal Periodic Payments (SOSEPP, or 72t option), is a Required Minimum Distribution or a hardship distribution, there is a requirement for the administrator to withhold 20% from the 401k withdrawal.

This 20% is sent to the IRS and will be included as part of your withholding and estimated tax payments that will apply against your tax when you file. If the withholding was too much, you’ll get a refund of the extra withholding, just as you do from extra withholding or estimated payments.

Here’s a continuation of the previous example to illustrate withholding:

401k Withdrawal $50,000
Mandatory Withholding (20%) $10,000
Other Withholding (from W4 wages) $9,000
Total Withholding $19,000
Total Tax and Penalty (from prior) $28,836.75
Amount You Owe $9,836.75

As you can see, even though the mandatory withholding from the 401k withdrawal is substantial, it’s not enough in many cases to cover the tax and penalties from the withdrawal.

Information on the 403(b)

Image courtesy of KROMKRATHOG at FreeDigitalPhotos.net

Image courtesy of KROMKRATHOG at FreeDigitalPhotos.net

As many of our readers know, employees that work for a school district, hospital, university or other non-profit organization may have access to a retirement plan called the 403(b). Similar to its cousin the 401(k), the 403(b) works very similar in that it allows employee contributions, and the employer may or may not match a percentage of those contributions.

The 403(b) is also subject to the maximum contribution rules. In other words, an employee is allowed to contribute up to $18,000 annually if they’re under age 50 and those aged 50 and older are allowed an additional $6,000 catch-up contribution. Many of these plans also allow Roth contributions for their employees.

A unique aspect of the 403(b) that readers may not be aware of is the 15-year rule for contributions. Generally, the 15-year rule allows an employee with at least 15 years of service (and their plan allows it) to make an additional contribution to their 403(b). An employee’s years of service are the total number of years worked as a full-time employee for the same employer that maintains the 403(b).

The limit on additional contributions is increased by the least of:

  1. $3,000
  2. $15,000, reduced by the sum of:
    1. The additional pre-tax elective deferrals made in prior years because of this rule, plus
    2. The aggregate amount of designated Roth contributions permitted for prior years because of this rule; or
  3. $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years.

It’s also important to understand that the 15-year catch-up can be used in addition to the age-based catch-up. For example, if an employee (age 50 or older) qualified, they could contribute the maximum salary deferral for 2016 of $18,000. Then, they could contribute the 15-year catch up of $3,000. Finally, they would be allowed the age-based catch-up of $6,000. This totals a whopping $27,000.

An important point to understand is that if an employee qualifies for both the 15-year catch-up and the aged-based catch-up, amounts over the initial $18,000 employee deferral are applied to the 15-year rule first, then to the age-based rule.

For example, if an employee contributed $23,000 to his 403(b), the $18,000 maximum employee deferral is considered first, followed by the 15-year contribution. In the case, $18,000 is considered to be contributed first, followed by $3,000 for the 15-year serviced-based catch-up. The remaining $2,000 is then applied to the age-based catch-up limit.

While the age-based catch-up is based on an annual limit, the 15-year serviced-based catch-up is subject to a use test, lifetime, and annual limit. Additionally, employee deferrals to a 403(b) are subject to the aggregation rule if an employee is also participating in a 401(k), SIMPLE, another 403(b), etc., but not a 457(b). In other words, if an employee under age 50 has access to both  403(b) and a 401(k), the maximum she can contribute in total for both plans is still $18,000, not $36,000.

If you find yourself as a participant in one of these plans, it pays to check and see what your options are regarding how much you’re able to contribute.

Restricted Application – the Definitive Guide

this fellow didn't file a restricted applicationMuch has been written and discussed regarding the option to file a Restricted Application for Social Security spousal benefits, but there are still many, many questions. This article is an attempt at covering all of the bases for you with regard to restricted application.

The topic of restricted application is so popular these days because it’s being eliminated as a result of the Bipartisan Budget Act of 2015 (BBA15). In fact, if you were born on or after January 2, 1954, the changes to the rules have eliminated the option to file a restricted application for you altogether.

So – unless you were born on or before January 1, 1954, you might as well stop reading, because restricted application is not available to you. Period.

Restricted Application Rules

Okay, if you’re continuing to read, you (or your client, if you’re an advisor) must have been born early enough to be eligible for a restricted application. There are a few rules that you must be aware of for filing a restricted application:

  1. THERE IS NO DEADLINE FOR FILING A RESTRICTED APPLICATION OTHER THAN YOUR AGE 70. In other words, the upcoming deadline of April 30, 2016 has nothing to do with restricted application eligibility.
  2. You must be at or older than Full Retirement Age (FRA) to file a restricted application.
  3. You must not have filed for your own Social Security benefit previously. This includes File & Suspend.
  4. You may have previously received Social Security benefits as a young parent of a child under age 16, or as a child yourself under age 18. These benefits do not eliminate your eligibility for a restricted application.
  5. You cannot be actively receiving disability benefits. If you previously received disability benefits that were terminated some time in the past because the disability (or your eligibility) ceased, you may still be eligible for a restricted application.
  6. Your spouse must have filed for his or her own benefits. May also have suspended benefits, if the suspense was completed before April 30, 2016. But if the suspense was after April 30, 2016 you will not be eligible for spousal benefits until the suspense is lifted.
  7. If you are divorced and the divorce was finalized more than 2 years prior, your ex-spouse must only be at or older than 62 years of age, and is not required have filed for benefits. (*This is the exception to the rule in #6.)
  8. Only one member of a married couple may file a restricted application (doesn’t include ex-spouses).

Why Would You Want to File a Restricted Application?

A restricted application allows you to receive spousal benefits while delaying your own benefit, in order to accrue the delayed retirement credits (DRCs).

For example, Jeff and Cindy are both at FRA, age 66 this year. Jeff has filed for his benefits, in the amount of $2,000 per month. Cindy’s own benefit could be $900 if she filed now, but she wants to delay her benefit until age 70, when the DRCs will have increased her benefit to $1,188 (DRCs are 8% per year of delay).

Since Jeff has already filed for his benefit, and Cindy is at FRA in 2016 (therefore having been born before January 2, 1954), Cindy is eligible to file a restricted application for spousal benefits. She’ll receive a spousal benefit of $1,000 (50% of Jeff’s benefit at his age 66) and then her own benefit will accrue the DRCs since she has not filed for her own benefit.

For another example, Simon is 67 years of age and his wife Patty is 63 this year. Simon’s age 66 benefit would have been $1,500, and Patty’s would be $1,000. Patty has just retired from her job, and is filing for her own Social Security benefit. She’ll receive a reduced benefit in the amount of $800 since she filed early. Simon has not filed for Social Security benefits prior to this, as he intends to delay his filing until age 70.

Since Patty has filed for her own benefit and Simon is older than FRA in 2016 (therefore having been born before January 2, 1954), he is eligible to file a restricted application for spousal benefits. Simon will receive $500 per month for the coming three years, and then at age 70 he will file for his own benefit, which has increased to $1,980 with the DRCs.

So you can see, there may be much to be gained by filing a restricted application in the right circumstances.

How to File a Restricted Application

In order to accomplish the filing of a restricted application, you have four options to choose from. These options are listed below:

  1. Go to www.SocialSecurity.gov and apply using the online application. When you do this, fill out the application as if you will be receiving ordinary benefits, and there’s a question on the application which asks: If you are eligible for both retirement benefits and spouse’s benefits, do you want to delay receipt of retirement benefits? Answer this question “Yes”, and continue to complete the application. You have now filed a restricted application.
  2. You can file a paper application (Form SSA-1-BK is available online as well). Fill it out as if you were going to receive benefits, and then indicate in the REMARKS section “I want to restrict the scope of this application to spousal benefits only. I wish to delay filing for my own benefit to age 70.”
  3. Call 1-800-772-1213 to apply by phone. Tell the representative that you wish to file for benefits and restrict the application to spousal benefits only, and that you wish to delay filing for your own benefits to age 70 in order to earn the delay credits.
  4. Visit your local Social Security Administration office. Tell your representative that you wish to file for benefits and restrict the application to spousal benefits only, and that you wish to delay filing for your own benefits to age 70 in order to earn the delay credits.

That’s it. You don’t need to do anything else. It’s not necessary for your spouse to file & suspend (only to file), so the April 30, 2016 deadline for file & suspend doesn’t necessarily have anything to do with this.

And whoever is filing the restricted application definitely does not file & suspend – see the 3rd rule earlier in this article. File & suspend would actually derail your plan to file a restricted application.

The Spare Change Challenge

credit for delayingMany individuals who know me know that I’ll run in front of oncoming traffic to pick up a penny (or anything shiny for that matter). While some may think that this is a waste of time and that “it’s only a penny”, the fact is that the small change adds up. Whenever I get weird looks or folks laugh at the mention of a penny to be grasped, I always ask, “Would you walk past a $100 bill?” The point being, it all adds up. The tiniest snowflakes create earth-moving avalanches.

The small amounts I pick up are usually deposited into my kids’ piggy banks. When we’re together and we find money they call the change “lucky coins”. The interesting thing is that these lucky coins have gotten pretty heavy in their banks. Both of my kids can barely lift their piggy banks due to all of the luck we’ve come across. What I’ve never really done, it add it all up – at least over a specific period.

So here’s what I’d like to propose. And it’s something I’m going to do myself for the next year. Every coin I find and my kids find we’re going to keep track of and see what it adds up to over one year. This includes anything from pennies, to the occasional quarter to the rare dollar bill. I’m curious to see what it will all add up to over a year, and how that amount would grow over time at a compounded rate.

There’s a saying that there is no free lunch; this comes pretty close – free money. Should you decide to play along, drop us a note and tell us how you’re doing and how much you’ve acquired along the way. I’ll do the same. Keep an eye out…

Mutual Funds vs. 529 Plans

collegeSaving for college is a tough job – on par with saving for retirement, and often in direct conflict with that goal as well. Adding to the difficulty of the task is the fact that there are so many different options out there (in terms of investment vehicles) that really muddy the waters for the individual college saver.

One question that comes up very often is whether it is just as effective to utilize tax-effficient mutual funds instead of 529 plans as we save for college. The idea is that the mutual fund can generate a higher overall return than the 529 plan due to the additional costs associated with the administration of the 529 plan.

It is a fact that most 529 plans charge management fees that have a direct impact on the overall return of the account, and it is also a fact that many tax-efficient mutual funds (such as index funds) can produce higher returns at a lower cost than most other investments. But here are a few reasons why a 529 plan is nearly always the superior choice when it comes to college savings activities:

A. Taxing Matters – with a 529 plan, you pay no tax at all (when the funds are used for Qualified Higher Education Expenses, QHEE), while with any other type of account, you’ll likely pay some tax. In my book, no tax is always better than some tax, no matter how little.

In addition, while today’s tax rates on capital gains (the tax you’d pay on an indexed mutual fund) are at the lowest they’ve historically ever been, at either 0% or 15%, depending upon your tax bracket – these rates are liable to sunset soon, increasing the rates to 10% or 20% or even ordinary income tax rates. So, the question becomes: will your student be finished with college before the rise in rates?

The third taxing matter has to do with the Kiddie Tax. Recently there have been some changes made to this portion of the tax code, with detrimental effects for parents who have counted on a strategy of repositioning funds to the child’s name in order to benefit from a lower tax rate. The child’s investment income above a minimum of $1,700 can be taxed at the parent’s highest rate all the way up to age 23!

B. Financial Aid Impact – any income that is reported on your form 1040 (which includes capital gains) is considered as a part of the calculation for financial aid for the following year. As you begin drawing monies from the mutual funds, it is possible that you will be increasing your income to the detriment of available need-based financial aid. If, on the other hand, these funds were in a 529 plan and withdrawn for use in paying QHEE, there will be no taxable income reported on your 1040, thereby having no impact on the financial aid calculation.

C. Inherent Costs – with the 529 plans, there are administrative and manager fees, but, as shown with the recent changes to the BrightStart plan in Illinois, these fees are beginning to come down. Plus, most 529 plans (Illinois’ BrightStart and Bright Directions included) have very low-cost investment options available, reducing the expense ratio of the funds themselves. Analysis of 529 plans versus mutual funds has consistently shown that, when considering the tax benefits and the costs of the two options, there are very few instances where a low-cost mutual fund performs better than a 529 plan, and then only when the 529 plan in question is one where the administrative expenses are relatively high and the taxpayer is in the lowest possible tax bracket.

In addition to the internal costs of the various options, mutual funds quite often make certain investment decisions that have tax consequences, such as distributing capital gains and dividends. 529 plans do not have to make this sort of decision, and therefore decisions can be based entirely on investment considerations.

All in all, while non-529 investments may provide additional investment options over those available in the 529 plans, unless for some reason you do not have the option of choosing a 529 plan for specific college savings, the 529 plan is the better choice across the board.

What Must I Do Before April 30, 2016?

April 30 CalendarThere is a great deal of confusion surrounding the new Social Security rules that were put into place with the Bipartisan Budget Act of 2015 (BBA15). The part that is bothering folks the most right now is the deadline that is coming up, on April 30, 2016.

What’s important about April 30, 2016? What must I do before April 30, 2016?

The rule changes in BBA15 indicated that the suspension of Social Security benefits would be treated differently beginning 180 days after passage of the law. The law was passed on or about November 2, 2015, and so 180 days after that is April 30, 2016.

What’s the change?

First of all, in order to suspend your benefits, you must be at or older than Full Retirement Age (FRA). For folks who will be eligible to take advantage of the old suspend rule, that means you must be 66 before April 30, 2016, so you must have been born before April 30, 1950.

Previously, when someone suspended his or her Social Security benefits, his or her spouse or children could receive benefits based upon his or her record. This is still the case if you suspend your benefit prior to April 30, 2016.

After April 30, 2016, when someone suspends his or her Social Security benefits, all benefits based on his or her record will also be suspended. This means that his or her spouse or child cannot receive benefits based on his or her record while suspended.

Why would you want to suspend benefits in the first place?

For every month after your FRA that you delay receiving Social Security benefits, you accrue a delay credit of 2/3% – a total of 8% for every year of delay. This only happens if you are not receiving benefits, and it only happens after your FRA.

You can earn these delay credits by doing nothing – there is no requirement for you to do anything at all. The simple fact that you are not receiving benefits allows you to accrue this credit. You can accrue the delay credit up until the age of 70 – at that point your Social Security benefit is maximized.

On the other hand, if you file for your benefits, your dependents can receive benefits based on your record. Your spouse can receive up to 50% of your benefit amount, and your children under age 18 (19 if a full-time student, or any age if disabled) can also be eligible for 50% of your benefit amount.

“File & Suspend” gives you the ability to do both things – earn the delay credits AND provide benefits for your spouse or children. But this is only available if you file and suspend prior to April 30, 2016.

So what has to happen before April 30, 2016?

There is only one thing that must happen before April 30, 2016 if you want to take advantage of this rule before it changes: If you’re at or older than age 66 (your FRA) you must file and suspend your benefits at some point before April 30.

To do this, you have 4 choices:

  1. Go online to www.SocialSecurity.gov and apply online. When you do this, you fill out the application as if you will be receiving benefits, and then in the “Comment” section at the end of the application, write: I wish to immediately suspend my benefit to earn delay credits.
  2. You can file a paper application (form available online as well). Do the exact same thing as #1 above – fill it out as if you were going to receive benefits, and then indicate that you wish to suspend.
  3. Call 1-800-772-1213 to apply by phone. Tell the representative that you wish to file for benefits and immediately suspend them to earn the delay credits.
  4. Visit your local Social Security Administration office. Tell your representative that you wish to file for benefits and immediately suspend them to earn delay credits.

That’s all you have to do. Nothing else needs to be done before April 30.

Your dependent doesn’t have to start taking spousal or dependent’s benefits immediately or even before April 30. Since you have filed for benefits, your dependent (spouse or child) is eligible to take benefits based on your record, whenever they happen to file.

Why You’re Getting Form 1095

healthcare workersMany taxpayers are receiving a new form in the mail this tax season – Form 1095, either A, B, or C. This is because of the Obamacare law which requires that taxpayers have healthcare coverage. Form 1095 provides documentation of the taxpayer’s coverage by healthcare insurance. Depending upon the type of coverage you have, you will receive a certain type of form. And what should you do with this form?

Form 1095 A

If you have coverage through the Health Insurance Marketplace (established as a result of Obamacare), you’ll receive Form 1095-A. This form is used when you fill out your income tax return for the year, so that your tax credit for the healthcare premium can be reconciled, especially if you received the premium credit in advance.

Form 8962 is filled out and filed with your tax return, using the information in Form 1095 A. If your advance payments are more than what your income supports, you will owe some of these advance payments back – or the amount will reduce your refund. On the other hand, if your advance payments are less than what your income supports or if you didn’t receive advance payments, you’ll get the credit on your tax return.

Form 1095 B

If you had health insurance coverage via a self-insured employer or insurance that you purchased through some other means besides an employer or the Health Insurance Marketplace (including Medicare, Medicaid, or CHIP), you will receive Form 1095 B. This form is used to indicate that you had health insurance coverage as required throughout the tax year.

You (or your tax preparer) will use this form to show whether or not you had insurance coverage in the tax year on Form 8962. If you did not have coverage for any month of the year and you don’t meet one of the exceptions, you will owe the individual shared responsibility payment.

Form 1095 C

If you had health insurance coverage by way of your employer, you will receive Form 1095 C. Just the same as Form 1095 B, this form is used to prepare Form 8962, determining whether or not you had coverage, and subsequently whether or not a shared responsibility payment is due.

If you haven’t received a Form 1095 and you’re expecting one, you should wait until you receive it before filing your tax return. In a practical sense, as long as you definitely had coverage (Medicare, employer benefits, etc.) for the entire year, you can probably go ahead and file without receiving the form, but if you receive a form later and it indicates that you didn’t have coverage, you’ll need to file an amended return to correct the issue.

New Deemed Filing Rules

deemed filingWhen the Bipartisan Budget Act of 2015 was passed, there were a few changes made to Social Security rules. One of the rules that changed significantly is the deemed filing rule.

The old deemed filing rule

The current or old deemed filing rule works as follows:

When an individual who is under Full Retirement Age (FRA) is eligible for a spousal benefit in addition to a benefit based upon his or her own record files for either benefit, he or she is deemed to have filed for all benefits that he or she is eligible for at that time.

At any other time (other than the time of application for benefits) deemed filing does not apply.

For example, Anna and John are both nearing 62 years of age. Anna has a PIA (FRA benefit) of $800, and John has a PIA of $2,000. Anna is planning to file for her own benefit when she reaches 62. If John files for his benefit before Anna, deemed filing will require Anna to file not only for her own benefit but also for the spousal benefit, since she’s under FRA and she’s eligible for the spousal benefit.

On the other hand, if John had not already filed for his benefit, Anna can only file for her own benefit. Later, when John files for his own benefit, Anna has the option to file for spousal benefits, but is not required to. Deemed filing only applies upon the first month of entitlement, the month that your benefit first begins. If Anna wishes, she can delay filing for the spousal benefit in order to increase the amount of spousal benefits she can receive.

It may seem trivial, but in the example above where Anna has the choice to delay, it can mean a difference of $100 per month. If deemed filing applies, Anna will have $700 per month in benefits from her filing date through the rest of her life; if she delays filing for the spousal benefit, beginning at FRA she could receive $800 per month.

In addition, if Anna delayed filing for any benefit until she was at least FRA, then deemed filing would not apply to her at all, regardless of whether John had filed for his benefits. This would allow Anna to, at FRA, file an application for spousal benefits only, which is known as a Restricted Application. In doing so, she could receive spousal benefits while accruing delay credits on her own benefit.

The new deemed filing rule

The law in the Bipartisan Budget Act of 2015 (BBA15) changed the deemed filing so that it applies at any age, including after FRA. This means that the Restricted Application option is no longer available. The new deemed filing rule applies to anyone born on or after January 2, 1954.

So back to our example – assuming that Anna and John were born after January 2, 1954 – Anna can still file for her own benefit at age 62. If John has already filed, deemed filing applies as it did in the past. But if John has not filed for his benefit and then he files for his benefit, say 3 months later, Anna will be forced to take the spousal benefit at that time. This is due to the fact that she 1) has filed for benefits, and 2) she’s eligible for a spousal benefit, by virtue of the fact that John has filed for his benefit.

This takes away the planning strategy detailed earlier which would allow Anna to choose between receiving $700 now or $800 at FRA. She can only take the $700 now.

More significantly, if Anna had delayed until her FRA, under the new deemed filing rule, if she wants to file for benefits at FRA (or any age) she must file for all benefits which she is eligible for – in other words, no Restricted Application is allowed.

Exceptions to the new deemed filing rule

There are a few exceptions to the deemed filing rule, listed below:

  • If Anna (from our example above) is under FRA and is receiving a spousal benefit based upon the child-in-care rule, meaning that she and John have child who is under age 16 and John has applied for benefits. If this is the way that Anna is receiving spousal benefits, deemed filing does not apply to Anna. When she reaches FRA or the child reaches age 16, Anna is no longer eligible for the child-in-care benefit; any benefit that she applies for will be subject to deemed filing.
  • Likewise, if Anna was receiving a disability benefit (under FRA), deemed filing would not apply. Upon reaching FRA, Anna’s disability benefit will automatically switch over to a retirement benefit, and if she’s eligible for spousal benefits at that time, deemed filing will require her to receive the spousal benefit at that time.
  • Deemed filing also doesn’t apply to survivor benefits. If John had died before Anna reached age 62, Anna could still file for her own benefit at 62 and then delay receiving survivor benefits until they are maximized at her FRA.

IRS Warns of Surge in Email Scams in 2016

scamRecently the IRS issued a memo regarding the recent uptick in the occurrence of email phishing scams this year. Below is the text of the warning memo (IR-2016-28):

Consumers Warned of New Surge in IRS E-mail Schemes during 2016 Tax Season; Tax Industry Also Targeted

WASHINGTON – The Internal Revenue Service renewed a consumer alert for e-mail schemes after seeing an approximate 400 percent surge in phishing and malware incidents so far this tax season.

The emails are designed to trick taxpayers into thinking these are official communications from the IRS or others in the tax industry, including tax software companies. The phishing schemes can ask taxpayers about a wide range of topics. E-mails can seek information related to refunds, filing status, confirming personal information, ordering transcripts and verifying PIN information.

Variations of these scams can be seen via text messages, and the communications are being reported in every section of the country.

“This dramatic jump in these scams comes at the busiest time of tax season,” said IRS Commissioner John Koskinen. “Watch out for fraudsters slipping these official-looking emails into inboxes, trying to confuse people at the very time they work on their taxes. We urge people not to click on these emails.”

This tax season the IRS has observed fraudsters more frequently asking for personal tax information, which could be used to help file false tax returns.

When people click on these email links, they are taken to sites designed to imitate an official-looking website, such as IRS.gov. The sites ask for Social Security numbers and other personal information. The sites also may carry malware, which can infect people’s computers and allow criminals to access your files or track your keystrokes to gain information.

The IRS has seen an increase in reported phishing and malware schemes, including:

  • There were 1,026 incidents reported in January, up from 254 from a year earlier.
  • The trend continued in February, nearly doubling the reported number of incidents compared to a year ago. In all, 363 incidents were reported from Feb. 1-16, compared to the 201 incidents reported for the entire month of February 2015.
  • This year’s 1,389 incidents have already topped the 2014 yearly total of 1,361, and they are halfway to matching the 2015 total of 2,748.

“While more attention has focused on the continuing IRS phone scams, we are deeply worried this increase in email schemes threatens more taxpayers,” Koskinen said. “We continue to work cooperatively with our partners on this issue, and we have taken steps to strengthen our processing systems and fraud filters to watch for scam artists trying to use stolen information to file bogus tax returns.”

As the email scams increase, the IRS is working on this issue through the Security Summit initiative with state revenue departments and the tax industry. Many software companies, tax professionals and state revenue departments have seen variations in the schemes.

For example, tax professionals are also reporting phishing scams that are seeking their online credentials to IRS services, for example the IRS Tax Professional PTIN System. Tax professionals are also reporting that many of their clients are seeing the e-mail schemes.

As part of the effort to protect taxpayers, the IRS has teamed up with state revenue departments and the tax industry to make sure taxpayers understand the dangers to their personal and financial data as part of the “Taxes. Security. Together” campaign.

If a taxpayer receives an unsolicited email that appears to be from either the IRS e-services portal or an organization closely linked to the IRS, report it by sending it to phishing@irs.gov.  Learn more by going to the Report Phishing and Online Scams page.

It is important to keep in mind the IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help protect taxpayers from email scams.

Phishing and malware schemes again made the IRS “Dirty Dozen” tax scam list this year. Check out the last IRS Phishing Scam news release for more info.

What to look for in these scams

Taxpayers receive an official-looking email from what appears to be an official source, whether the IRS or someone in the tax industry.

The underlying messages frequently ask taxpayers to update important information by clicking on a web link. The links may be masked to appear to go to official pages, but they can go to a scam page designed to look like the official page. The IRS urges people not to click on these links but instead send the email to phishing@irs.gov.

Recent email examples the IRS has seen include subject lines and underlying text referencing:

  • Numerous variations about people’s tax refund.
  • Update your filing details, which can include references to W-2.
  • Confirm your personal information.
  • Get my IP Pin.
  • Get my E-file Pin.
  • Order a transcript.
  • Complete your tax return information.

Numbers provided are for phishing and malware incidents combined.

SSA Updates File & Suspend Guidance

suspended

You can listen to this article by using the podcast player below if you’re on the blog; if you’re reading this via RSS, there should be a “Play Now” link just below the title to access the audio. If you’re receiving this article via email, there should be a “Download Now” link within the text of the message to retrieve the audio file.

Recently the Social Security Administration provided some guidance regarding how the end of file & suspend will be handled, in light of the changes that were brought about by the passage of the Bipartisan Budget Act of 2015 (BBA15).

If you’ll recall, the option to suspend your Social Security benefit (part of File & Suspend) allowed one member of a couple to establish a filing date which would then provide the other member of the couple with the eligibility to file for a spousal benefit. The first member of the couple (who suspended benefits) is allowing his or her benefit to accrue the delay credits while the second member receives benefits. This provision was eliminated 180 days after the passage of BBA15.

Below is how the Social Security Administration will handle the suspension of benefits going forward:

  • For individuals who are FRA or older, if a request for suspension of benefits has been submitted before April 30, 2016:
    • The suspension will be treated as in the past (even if it has not been processed by that date, as long as it was submitted timely). This means that auxiliary benefits (such as spousal or dependent’s benefits) can continue to be paid based upon that suspended record while it is suspended.
    • In addition, the numberholder (NH) who requests a suspension prior to April 30, 2016 can in the future ask that benefits are reinstated as of any date after the suspension request, up to the present date (this is known as a lump-sum retroactive payment).
    • During the period that the NH benefit is suspended, he or she can collect excess spousal benefits based on a spouse’s record. An excess spousal benefit is the amount of spousal benefit that is “excess”, or greater, than the NH own benefit.
  • For individuals who submit a request for suspension of benefits on or after April 30, 2016:
    • No auxiliary benefits (spousal, child’s, or other, including benefits that have been received in the past) can be paid on the NH record while the benefit is suspended – EXCEPT for ex-spouse benefits. This is a significant exception, as had the rules been applied exactly as written, a NH could control benefits to an ex-spouse. With this exception, that is not going to be the case.
    • In addition, when removing the suspension, benefits will resume in the month following the month that the request was received (or later). In other words, no lump-sum retroactive benefits will be available.
    • No excess spousal benefits can be paid to the NH while the primary benefit is suspended.

The other significant item is that the date has been set at April 30, 2016 – but it’s not as significant as it seems. Anyone born on or before April 30, 1950 (actually May 1, 1950) is considered to be FRA during the entire month of April, 2016, so even if born on May 1, 1950 the NH should be in good shape if they want to use this provision.

If you would like to see the actual message from SSA, follow this link.

Ready, Set, Go! When To Start A Pension Payout?

decisionsThe question comes up often: I’m ready to retire at age 55, and I can begin collecting my pension right away. Should I? The amount of the pension increases to almost double if I wait to start collecting at age 62, and two-and-a-half times if I wait until age 65. What’s the best way to do this?

Obviously, there are a lot of factors that will go into the answer to such a question, so right off, it’s hard to say for sure, but here are the basics of making this decision:

These types of pensions are based on the employer’s assumption about your life expectancy. If you live to exactly the expected age, the cost to the employer will be roughly the same no matter which option you choose. You just need to do the math – bigger payments later are made for (expected) fewer years.

It goes without saying that if you were sure you’d die at age 60, you would be much better off starting your pension payout as early as possible. On the other hand, if you live longer than expected, starting your payout as late as possible will likely make up for the late start. But at what projected life span does this make sense?

An Example

Let’s start with an example: Say at age 55 you could begin a pension paying $1,229 per month, or at age 62, $1,990 per month, or you could begin receiving $2,263 per month if you wait to age 65 to begin collecting. For the purpose of simplicity, the example will not factor in taxes or any cost-of-living adjustments.

At age 70, your first option is still ahead of the other two. So, if you were to die before age 71, the first option, collecting at age 55, works the best, because you would have collected a total of $221,220 by that point, versus $214,920 for the age 62 option and only $162,936 with the age 65 option.

However (and isn’t there always a however in life?) – if you lived beyond that age, the other options begin to take the lead. If you lived to at least 71 but not to age 85, the age 62 option would work out the best. Anything from age 85 on up, you’re best off to wait until age 65 to get started.

What about spouse benefits?

The above example considered only a single life – what about if you have a spouse who may be dependent on your pension in retirement? In those cases, you have the option of choosing a “joint & survivor” pension option. These are often presented in terms of the original pension amount and an amount to be paid to your surviving spouse. The amounts here are based on your age as well as your spouse’s age, since the actuarial calculations have to account for two lives receiving the money instead of just one.

As we’ve discussed in other articles, for a couple who are both age 65, there is a 72% chance that one of them will live to at least age 85, and a 45% chance that one will live to age 90. These factors cause a further reduction in the pension amounts.

So here is a sample table illustrating the benefit amounts for some example options using Joint & Survivor (J&S) pension amounts, as well as a 10-year certain annuity:

Age 55 62 65
Single Life $1229 $1990 $2263
25% J&S $1202 $1921 $2174
50% J&S $1190 $1887 $2125
75% J&S $1150 $1797 $2015
100% J&S $1126 $1741 $1944
10-year Certain $1219 $1944 $2126

As you can see, the more pension that is available to the surviving spouse, the lower the overall pension payment. This is due to the fact mentioned earlier that when considering the lives of a couple the actuarial chance of one spouse living longer is increased.

The various benefit level differentials are offered in order to allow the pension recipient to provide a benefit for his or her surviving spouse, depending upon the perceived future need for benefits. The single life option provides no further benefits after the death of the pension recipient, while the 100% J&S option continues to provide the same benefit to the surviving spouse after the death of the pension recipient. The other percentages provide a benefit to the surviving spouse, but in a limited amount.

The 10-year Certain option provides a level benefit for the greater of 10 years or the life of the pension recipient. So if the pension recipient died the day after he or she started the pension, it would be paid to his surviving beneficiary or his estate for 10 years. If the recipient lived longer than 10 years after starting the pension, it will be paid to him or her until death but no surviving spouse benefits would be paid.

The title of this article is “When” to start your pension payout, so we won’t reflect on the reasons why you might choose one type of benefit over another, we’ll just run some numbers to see what timeline provides the best benefit amounts for the various payout options.

We covered the crossover points for the Single Life option above. If we look at the 100% J&S option next, we see that the outcome is very similar to the Single Life option, but delayed a bit. If the pension recipient chooses to start his or her pension at age 55, this will provide the most benefits if either member of the couple lives to age 71. This is because the benefit paid out is exactly the same before and after the death of the recipient. After age 71, the age 62 option pays the greatest amount of benefits up to the point where either member of the couple lives to at least age 89. This is a bit later than the Single Life option – and a statistically significant period of time. From that point forward the age 65 starting point pays the best.

So, according to averages, the age 62 option is an attractive choice for this payout level, since the chance of one member of the couple living beyond age 90 is (as we noted above) approximately 45%. But still, the age 65 option will provide the most benefits from age 90 onward, so it still may be the best option for your situation.

Looking at the other J&S options – at this point we need to start thinking about when the first (recipient) spouse will die, because after his or her death the benefit amounts are reduced, often dramatically. In all cases if the recipient spouse lives beyond age 90, waiting to age 65 to start is superior. But if the recipient dies earlier, the results start to favor other options.

If the recipient spouse dies at age 73 for example, the age 62 option provides the greatest benefit for all 3 of the J&S options (other than the 100% option). Any age between 75 to 85 produces (essentially) the same outcome – the crossover point is around age 100 for a death age of 85 at the 75% survivor benefit level. Any earlier death (before age 73) results in the age 55 start age being the best choice.

And The Point of This Is…?

The point of all this, well actually there are two points: First – the answer to the question of when to take the pension depends on what you’ll do with it, and whether or not you need those funds right away. Couple those factors with how long you’ll live, as well as how long your spouse will live (if you have one). If you’ll need a larger amount to live on, such as if you don’t have any other retirement savings, the longer you can wait before starting your pension payouts the better, especially if you’re in good health and expect to live beyond age 80.

The second point is that, even if you have a pension available to you, it is definitely in your best interest to develop a savings strategy in addition to the pension. And this is doubly important if your pension is fixed (no cost-of-living adjustments) as in our example.

The best way to answer this question is to gather all of these factors, along with considerations regarding investment risk tolerance, tax implications, family longevity and your own health, as well as your lifestyle costs, healthcare costs, and propensity to continue working after your official “retirement” – at whatever age that might be – and then run the calculations.

Qualified Charitable Distributions for 2016

300px-IRS.svg_Individuals needing to take their required minimum distributions (RMD) for 2016 may consider having all or part of their RMD distributed as a Qualified Charitable Contribution (QCD).

In order to qualify, the following rules must be met.

  1. The individual taking the QCD must be age 70 ½.
  2. The maximum allowed QCD is $100,000 per individual, annually.
  3. The QCD must come from an IRA. QCDs from 401(k)s, 403(b)s, 457(b)s, SEPs, SIMPLEs are not permitted. An individual may roll over an amount to their IRA and then made the QCD.
  4. The QCD is counted toward the individual’s RMD for the tax year. If the RMD was already taken, the QCD cannot be retroactively made.
  5. The QCD must be made directly to the charitable organization.
  6. Generally, the charity must be a public charity.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 made allowing QCDs from IRAs permanent. The tax benefit from this distribution is that the individual is not allowed to take a charitable deduction for the gift to the charity; however, the distribution is not taxed as income to the individual.