Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial

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Did you know that there is a specific order for distributions from your Roth IRA? The Internal Revenue Service has set up a group of rules to determine the order of money, by source, as it is distributed from your account. This holds for any distribution from a Roth IRA account.

Ordering rules

First, return of your annual contribution (or excess contribution) for this tax year. This means that if you’ve made a contribution to your Roth IRA in this tax year, the first money that you withdraw from the account will be the money that you contributed this year. If you over-contributed to your account for a prior tax year, growth on this over-contribution needs to be removed at this time as well (it’s actually counted first), with tax and penalty paid as required.

Second, prior year regular annual contributions to the account. The next money that comes out is the total of all of the money you’ve contributed to the Roth IRA over the years. Of course, this is reduced by all previous distributions from the account. Growth (interest, capital gains, or dividends) on these contributions comes out later.

Third, converted amounts from IRAs or 401(k) accounts would be distributed, along with rollovers from other Roth-type accounts (* but not Roth IRAs, see below). Only the amount of the conversion or rollover is counted at this point and each conversion or rollover is considered on a first-in, first-out basis. As with the contributions, the growth or earnings within the account comes out later. This category is split into two parts, distributed in this order for each conversion or rollover (again, first-in, first-out):

taxable conversions – the portion of any conversion from a regular IRA or other non-Roth retirement plan
non-taxable conversions and rollovers – the portion of any conversion or rollover that is not included within your taxable income in the year of the conversion or rollover

Fourth and last, earnings, capital gains, and growth on your contributions, rollovers and conversions will be distributed. This is everything left in the account after the other categories of funds have been removed.

* Rollovers from other Roth IRA accounts maintain their character in the new account as if still a part of the old account – thus, if a rollover from another Roth IRA is made up of partly regular contributions, conversions, and growth, then those amounts are added to the same figures within the new account, and the date(s) of the conversions are added to the mix for first-in, first-out distribution ordering.

With the above note about rollovers from other Roth IRAs in mind, it makes sense that transactions for all Roth IRAs are aggregated and reported as if from one single account. It’s not allowed to only consider one account (of multiple) when determining the distribution ordering.

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Here’s an example: Jane, age 50, has a Roth IRA with a balance of $50,000. She has made annual contributions to the account over the years in the amount of $25,000 – part of which was a contribution this tax year of $5,000. She also made a conversion into this account with $10,000, all taxed, from an IRA a couple of years ago.

When Jane takes money out of the account, she can remove this year’s contribution of $5,000 first of all – no tax on that distribution. After that, the remaining $20,000 of contributions to the account would come out, also tax free. This money is followed by her taxable conversion of $10,000. If it’s been less than five years since the conversion, there will be a 10% penalty on the conversion since she’s under age 59½. Any withdrawal above and beyond $35,000 would represent growth and earnings on the account, which is also subject to the penalty since she’s under age 59½ unless one of the exceptions applies.

Posted on Feb 10th, 2025

by author: jblankenship.

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Posted in: contribution limit, conversion, IRA, ira contribution limits, Roth Conversion, Roth IRA, roth ira contributions.
Tagged: contribution limit · IRA · roth ira · roth ira conversion

Avoid Email Scammers Claiming to be IRS

Feb 3rd, 2025

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In a recent news release (IR-2024-306), the IRS warns about scams you need to be aware of, really heinous contacts where the scammers pretend to be the IRS. But here’s one key takeaway: the IRS doesn’t use email (or text messages) as the regular communication to deliver notices of deficiency, requests for additional information, and the like. The IRS is big about the paper notice – you’ll recognize it immediately, with the official IRS seal and all.

The information that the IRS presents is good to know, you should be familiar with what they have to say.

Here is the text of the news release:

WASHINGTON – Because identity thieves target the financial data of businesses and the self-employed using new schemes, the Internal Revenue Service and the Security Summit partners today urged companies and individual taxpayers to review and update their security measures and practices to guard against the latest scams.

Fraudsters often try tricking businesses and others into sharing personal information — such as names, passwords and account numbers — through emails, texts and direct messages made to look like they come from a legitimate source, like the IRS, a bank or a trusted tax professional.

In some recent schemes, social media is used to dole out misleading tax advice about refunds and eligibility for tax credits like the Fuel Tax Credit or the Paid Sick and Family Leave Credit. In other instances, social media has been used to connect taxpayers with scammers to try to get them to falsify forms. In others, scammers impersonate charity organizations, then use spoofed websites and phone numbers, as well as fake email messages, to draw in the unsuspecting.

“With the IRS and the Security Summit partners working together to increase our defenses against fraud, it means identity thieves increasingly look to steal valuable information from businesses large or small, individual taxpayers as well as tax professionals,” said IRS Commissioner Danny Werfel. “With these scammers constantly evolving their tactics, everyone needs to remain vigilant throughout the year. We urge businesses and taxpayers to review and update security measures regularly, keep abreast of the latest scams, and think before sharing any sensitive data — even with a seemingly trusted person or entity.”

Security Summit partners urge extreme caution about such solicitations and the accompanying links, attachments and contact information they contain. Never click, call or reply without first independently verifying the source.

Officials highlighted the threat to businesses and others on the fourth day of National Tax Security Awareness Week 2024 (this was in December, 2024). The annual event, now in its ninth year, was created by the Security Summit, a public-private partnership formed in 2015 between the IRS, state tax agencies and the national tax community. The partners work together to combat tax-related identity theft and raise awareness among taxpayers and tax professionals about safeguarding themselves and their customers from security threats.

Identity thieves often ramp up their efforts during the holiday shopping season, which is already in full swing, and as tax time approaches. They’ve increasingly focused on businesses and individual taxpayers in the hopes of circumventing the strengthened defenses the IRS and its Security Summit partners have put in place in recent years.

Since its inception, the work of the Security Summit partners has helped protect millions of taxpayers against identity theft and prevented billions of dollars from being wrongly paid out to fraudsters.

“At the Federal Trade Commission, protecting small businesses and their owners is always a top priority,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “During National Tax Security Awareness Week, the FTC commends IRS efforts to educate businesses on how to enhance their cybersecurity while recognizing and avoiding common scams – and, of course, reporting them to ReportFraud.ftc.gov.”

Taxpayers, businesses can protect themselves with extra security

With identity thieves looking for better sources of data to try filing false tax returns, business and taxpayer security is even more important. The Summit partners encourage taxpayers, businesses and tax professionals to remember to take some simple – but frequently overlooked – steps to protect their important financial and tax information. These include:

Set security software to update automatically.
Back up important files.
Require strong passwords and pair them with multi-factor authentication.
Encrypt all devices.

More information and additional recommendations can be found at the Federal Trade Commission’s Cybersecurity for Small Business page. Businesses and consumers are also encouraged to report IRS-related scams to phishing@irs.gov.

Businesses are also encouraged to keep their Employee Identification Number (EIN) information current and to report changes of address or reporting party promptly and within the required 60 days using IRS Form 8822-B, Change of Address or Responsible Party – Business.

What to do after a possible identity theft

If the theft occurred because of a scam targeting Form W-2 information, there are special reporting procedures, which can be found in the business section at Identity Theft Central.

Businesses can also use the Business Identity Theft Affidavit (Form 14039-B) to proactively report potential identity theft to the IRS if they:

Receive a rejection notice for an electronically filed return because another return is already on file for the same period.
Get a notice about a tax return they didn’t file.
Are notified about forms W-2 they didn’t file.
Notice a balance due when one isn’t owed.

If businesses are the victim of a data breach with no tax related impact, they should visit Identity Theft Central’s business section for details on reporting the theft.

Posted on Feb 3rd, 2025

by author: jblankenship.

Posted in: irs.
Tagged: irs

Facts About the 72t Early Distribution

Jan 20th, 2025

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In case you don’t know what a 72t distribution is, this is shorthand for the Internal Revenue Code Section 72 part t (or IRC §72(t) for short), and the most popular provision of this code section is known as a Series of Substantially Equal Periodic Payments – SOSEPP is the acronym.

Enough about the code section already. What exactly is this thing? A SOSEPP is a method by which you can access your IRA funds prior to age 59½. In order to take advantage of this rule, you determine the amount of the annual distribution from your IRA (this is done in a prescribed manner, more on this in a bit) and then begin taking the distributions. Once you start the SOSEPP, you have to keep it going for the longer of five years or until you reach age 59½.

Methods of Distribution

There are three ways that you can determine the amount of the distribution from your IRA, and all are based upon the balance of the IRA account and your age. The first method is the simplest, known as the Required Minimum Distribution method.

The Required Minimum Distribution method for calculating your Series of Substantially Equal Periodic Payments (described in full under IRC §72(t)(2)(A)(iv)) calculates the specific amount that you must withdraw from your IRA (or other retirement plan) each year, based upon your account balance at the end of the previous year, divided by the life expectancy factor from either the Single Life Expectancy table, the Uniform Lifetime table, or the Joint Life and Last Survivor Expectancy table, using the age(s) you have reached (or will reach) for that year. This annual amount will be different each year.

The second method is called the Fixed Amortization Method. Calculating your annual payment under this method requires you to have the balance of your IRA account at the end of the prior year, from which you then create an amortization schedule over a specified number of years equal to your life expectancy factor from either the Single Life Expectancy table, the Uniform Lifetime table, or the Joint Life and Last Survivor Expectancy table, using the age(s) you have reached (or will reach) for that year, coupled with a rate of interest of your choice that is not more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB).

The third method is similar to the second, but it is called the Fixed Annuitization Method. Calculating your annual payment under this method requires you to have the balance of your IRA account from the end of the prior year and an annuity factor, which is found in Appendix B of Rev. Ruling 2002-62 using the age you have reached (or will reach) for that year, coupled with a rate of interest of your choice that is not more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB).

Once you’ve calculated your annual payment under one of the two fixed methods, your future payments will be exactly the same each year until the SOSEPP is no longer in effect. There is a one-time opportunity to change to the Required Minimum Distribution method, described here.

An Important Note

It’s important to know that the amounts you’ve calculated are and will be the exact figures for your payments from the account, no more, no less. It’s not allowable to simply name your own amount and take that each year – you have to use the prescribed amount from one of the methods. No deviation from the prescribed amount is allowed.

The one way to impact the amount of the payment is to adjust the balance in the IRA. If you have more than one IRA available, you can rollover funds into one account prior to enacting the SOSEPP and therefore increase or decrease your payment. This has to be done prior to establishing the SOSEPP though – it’s not allowed to deposit money into or remove funds from your IRA while the SOSEPP is in place (well, other than the required payments from the account each year).

Any deviation from the prescribed payments will cause the SOSEPP to be “busted”, which can result in some not-so-nice consequences – which you can read more about here.

Posted on Jan 20th, 2025

by author: jblankenship.

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Posted in: 72t, Early Distribution, IRA, retirement plan, sosepp, traditional ira.
Tagged: early retirement · IRA · retirement plan · traditional ira

When to File For Social Security Benefits

Jan 13th, 2025

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All future Social Security recipients face this question at some point: When should I file for benefits?

As you are likely aware, age 62 is the earliest that you can file for retirement benefits. By filing at this age, you will begin receiving your benefit at a reduced amount – perhaps as much as 30% reduced from your Primary Insurance Amount (PIA), the amount you could receive at your Full Retirement Age, or FRA.

Waiting to file until your Full Retirement Age (FRA) will allow you to receive the full benefit amount, without reductions. You could also wait until age 70 to file for benefits, which would result in an overall increase to your monthly benefit amount, by as much as 32% for some. Granted, you will have foregone several years’ worth of payments if you wait to file at some age later than 62, but on average, it all works out about the same. The system is designed using that likelihood as its basis.

The way that these reductions and increases are designed is to ensure that, on average, all Social Security recipients, regardless of the age that they begin receiving benefits, ultimately receive roughly the same amount of benefits during their lifetimes. This is all calculated by actuaries, and it involves the population’s average lifespan.

So if you start receiving your benefit earlier, even though it’s reduced you’re receiving it for a longer period of time than waiting until later to file. On the other hand, if you delay filing until FRA or age 70, your benefit is greater each month, but you’ll be receiving it for a shorter period of time. Eventually these strategies “cross over” – that is, one method begins to work more in your favor than another – at roughly age 82, give or take a few years.

What I mean by that is that, filing earlier at the reduced rate will pay you more in overall benefits up to the crossover age, at which point the later filing ages will begin paying you more over your lifetime if you live beyond that. If you take into account the annual cost-of-living adjustments (COLAs), the break-even point is actually quite a bit lower, possibly as early as age 76. This is due to the fact that the COLA is a percentage applied to your monthly benefit – and if your monthly benefit is reduced by filing early, your COLA adjustments will be smaller as well, and vice versa when you file later.

So, assuming you have the resources to do so and if you plan to live past age 76, it most likely is in your best interest to wait until the latest point to file for your benefit. And if you need more reasons to consider delayed application, read on.

Survivor Benefits

One additional reason that you might want to delay applying for your benefit is if you have family members that will depend upon your benefit upon your passing. This is due to the fact that the survivors’ benefit based on your record, for your survivors, are calculated using the actual benefit that you were receiving at your death in most cases. So, if you delayed filing for benefits and therefore received a higher benefit amount, your surviving spouse (and other family members, if eligible) will receive a higher survivor benefit amount for the remainder of his or her life, assuming that the Survivor Benefit is greater that his or her own retirement benefit.

This gives you another reason that delaying benefits could be the better option. Otherwise, if your benefit is the same as or smaller than your spouse’s benefit, or if you don’t have a spouse, then it’s up to you: if you think you’ll outlive the average and you have the resources to do so, it’s better to wait. If you don’t think you’ll live that long, then start as early as you like.

* The above review doesn’t take into account a situation where you may still be working while receiving Social Security retirement benefits. I’ll cover that in another article.

Posted on Jan 13th, 2025

by author: jblankenship.

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Posted in: cost of living adjustment, early retirement, social security benefits, social security survivor benefits.
Tagged: cost of living adjustment · early retirement · social security survivor benefits

Say Goodbye to GPO and WEP

Jan 6th, 2025

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In what some, including myself, may find a surprising move, recently Congress approved a measure to completely eliminate the Government Pension Offset and Windfall Elimination Provision. The President has signed this bill into law.

What this means is that there is no longer a reduction factor for Social Security benefits (including Spousal and Survivor Benefits) if you are receiving a pension based on work that was not subject to Social Security taxation.

Let’s go over each provision briefly to review what is changing.

WEP (Windfall Elimination Provision)

The WEP was originally put into place as a measure to eliminate a perceived “windfall” that would otherwise occur without it.

The design of the Bend Point calculations for determining an individual’s own retirement benefit is meant to provide significantly higher replacement rates for lower income individuals. As such, the first Bend Point of average lifetime income ($1,226 for 2025) is replaced at a rate of 90%. Higher levels of income result in increasingly lower rates of income replacement, resulting in a regressive policy, which is what a social insurance is often designed to do.

However, in the case where the individual in question has worked much of his or her life in a job that was not subject to Social Security taxation, and therefore earned only a small amount of income under Social Security taxation, the resulting Social Security benefit calculation (without WEP) provides the higher income replacement rate with no regard for a pension being received for the non-SS-taxed earnings. In response to this, WEP was introduced – and the result has been that in many if not most cases, the income replacement rate in the first Bend Point was reduced to 40% instead of 90%.

Now, with the elimination of WEP, there is no additional calculation involved when a non-SS-taxed pension is being received. The Primary Insurance Amount calculation retains the 90% income replacement rate regardless of the presence of a non-covered pension. Note that this provision not only applied to government workers, but all persons who receive a pension based on work that was not taxed by Social Security. This can include foreign pensions and other non-governmental pensions.

Under the old rules there were ways to work your way out of WEP impact by earning “substantial” wages for 30 years or more, but now there is no need to have this part of the process.

GPO (Government Pension Offset)

The GPO affected Survivor and Spousal Benefits, and could result in complete elimination of these for an individual who is receiving a government pension while also eligible for Survivor or Spousal benefits. Only US-based governmental pensions were included in this provision.

The offset was put into place to result in a different treatment for a recipient of a government pension as compared to a non-working (or lower-earning) spouse – each of which is otherwise in line to receive a Social Security Spousal or Survivor benefit from a spouse or ex-spouse (or late spouse).

The rules of GPO subtracted 2/3 of the amount of the government pension (non-SS-taxed) that is being received from any Spousal or Survivor Benefit that was available to the individual. Oftentimes this would result in the Spousal or Survivor Benefit being completely wiped out – no benefit at all was available.

But now in the new world, GPO has been eliminated completely and government pension recipients will be treated just the same as any other spouse, regarding Social Security Survivor or Spousal Benefits.

Timing

The change to the provisions – elimination of WEP and GPO – are set to be retroactive to January 1, 2024. This means that, if you otherwise were impacted by WEP and/or GPO during that period, you will be eligible to receive a lump sum retroactive payment for the months you were impacted by these, now eliminated, rules.

There has been no comment by SSA about retroactive filings, however. I can see that there are likely many situations where the individual affected by WEP and especially GPO simply did not file for those benefits earlier, because the impact to benefits was so great that it was deemed not worthwhile to file for the benefit. This is only pure conjecture on my part, but I wouldn’t be surprised if there was a provision for some period of time to allow a retroactive filing back to January 2024 to pick up benefits that should have been available. I’ll keep you posted if I find out anything more on this.

Posted on Jan 6th, 2025

by author: jblankenship.

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Posted in: GPO, Social Security, Social Security spousal benefit, social security survivor benefits, windfall elimination provision.

Pre-Death Planning: Roth Conversion

Dec 30th, 2024

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roth conv Financial planning often requires us to face our own certain demise – something that we never wanted to do, but still a certainty that we all must face.

Among the things that we want to do when planning for the inevitable would be to make certain that our surviving loved ones have access to adequate monetary resources to support themselves, in the most cost-effective manner. Another thing that we hope to accomplish is to make the transition as easy as possible for our loved ones. One way to do this is to convert a good portion of your IRA or other tax-deferred funds to a Roth IRA account. Here’s why:

By converting to a Roth account, you will make the funds in that account available to your heirs totally tax free.

Granted, your estate will also be smaller by the amount of tax that you paid on the conversion. At the same time, your heirs will also not have to go through the rather painstaking process of managing the IRD deduction, if the estate is of a size that requires estate tax to be paid. This will simplify the overall process dramatically, and depending upon the size of your overall estate this could be a significant.

On the downside of this, it’s likely that if you convert your account in a single year the tax paid on the conversion would be much, much higher than if your heirs paid tax on the ordinary required distributions if the account is left as a traditional IRA.

However, if you convert your account gradually over several years in smaller amounts using a strategy like filling up the brackets, the overall tax cost of the conversion will be less, maybe even less than the cost that your heirs would experience otherwise.

Other possible downsides include –

causing difficulties with itemized deductions, since increasing your income will increase certain deduction limitations like healthcare expenses;
triggering IRMAA increases to your Medicare premiums due to the increase in your income;
if under Medicare age and using ACA exchange insurance, increasing your income might result in significant overpayment of advance credits;
other tax credit issues due to the increased income.

However in today’s tax climate, with careful tax planning there are otherwise very few reasons not to go ahead with a Roth conversion strategy, setting up your heirs with a tax-free resource upon your passing.

Posted on Dec 30th, 2024

by author: jblankenship.

Posted in: conversions, estate tax, financial planning, IRA, qrp, qualified retirement plan, Roth conversion, Roth IRA, roth ira conversion.
Tagged: estate tax · IRA · roth ira conversion

Net Unrealized Appreciation Treatment

Dec 23rd, 2024

http://financialducksinarow.com/7711/nua-allocation-twist-not-as-easy-as-it-looks/

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When you have a 401(k) plan that contains stock in your company, there is a special provision in the tax law that may be beneficial to you. This special provision is called Net Unrealized Appreciation, or NUA, treatment. It allows you to take advantage of potentially lower tax rates on the growth, or unrealized appreciation, of the stock in your company.

When your company stock is withdrawn from the account, you pay ordinary income tax only on the original cost of the stock. Then later when you sell the appreciated stock at a gain, you pay capital gains tax (at a lower rate) on the growth in the value of the stock.

The Way It Works

The distribution from your 401(k) must be a total distribution in a single calendar year. This means that your entire 401(k) balance, including not only the stock, but also any other funds in the 401(k) plan, must be withdrawn in one year.

Commonly the funds that are not company stock will be rolled over into an IRA or another 401(k) plan, although you could take it in cash, paying the tax on the withdrawal. Only company stock (and only your company) can be treated with the NUA provision.

The company stock is moved into a taxable investment account – in kind. This means that you move the actual stock shares rather than selling the stock and moving the money. If you sell the stock before you move it, you won’t have NUA treatment available to you.

When you move the stock over from your 401(k) into a taxable account, you will have to pay ordinary income tax on the original cost (basis) of the stock. This means that you need to know what is the basis (the amount you originally paid) for the stock. Your company, 401(k) administrator, or custodian will have this information for you.

Although the entire account has to be withdrawn in a single year, you don’t have to elect NUA treatment for the entire holding of company stock. You could move only a portion of the stock if you choose to, and rollover the remaining stock to an IRA. You may choose to do this because the amount of company stock is more than you care to pay ordinary income tax on during that tax year. More on this a bit later.

An Example

For example, let’s say you have a 401(k) with a $500,000 balance. $200,000 is invested in the stock of your company, and the basis of the company stock is $100,000. You can move the company stock into a taxable investment account, and then you’ll pay ordinary income tax on $100,000, the basis. If you’re in the 25% bracket, this would amount to $25,000.

The remaining $300,000 is rolled over to an IRA. When you take money out of the IRA, as with any IRA, you’ll pay ordinary income tax on the money that you withdraw from the IRA.

At any point later you can sell the stock in the taxable account and pay tax at the long-term capital gains rate, which ranges from 0%, 15%, or 20% these days, much lower than the ordinary tax rate. (That capital gains rate is for long-term capital gains, and any stock that you elect NUA treatment for is taxed at that rate. The rate you pay is based on your other income, so if your income is low you’ll get by with the lowest rate, and so on.)

Since paying tax on the entire $100,000 basis in your company stock would require a significant tax payment ($25,000 in our example), you might wish to work this out in a different fashion, reducing the tax. Here’s where a twist to the tax code could REALLY be helpful – possibly eliminating taxation.

Basis Allocation Twist* (see note below)

(The following is only a theory, I have not seen this implemented “in the wild”. See note below.) When you move only a portion of the company stock, you need to allocate the basis between the NUA stock and that which was rolled over. Since, in our example, the basis was $100,000 and the total company stock was worth $200,000, you could elect to rollover $100,000 worth of the stock to your IRA (along with the other $300,000 of funds), allocating the basis of $100,000 to the rolled over stock. Then, when the remaining $100,000 of stock is moved from the 401(k) to the taxable account, there is no basis to be taxed at ordinary income tax rates. The entire transaction has occurred without tax – and when you sell the stock, the entire value is taxed at capital gains rates.

This move is allowed because the tax law states that when there is a partial rollover of an account into an IRA, the rolled portion is “treated as consisting first of the portion that is includible in gross income” – meaning the basis in the stock, plus the other funds in the account.

Note on the Basis Allocation Twist

I have not had a client do this, but (in my opinion, and seemingly that of others in the industry) the regs seem to allow it. The problem is that you have to get the 401(k) administrator to go along with coding the 1099R correctly, and no one wants to go out on a limb so far. Here’s a link to a followup article I wrote about this:

And this is my explanation of why I believe it should work:

Code section 402(c)(2) is where this comes from, where it is indicated that if a distribution is partially rolled over to an IRA, the rolled portion “shall be treated as consisting first of the portion of such distribution that is includible in gross income…”. Since basis in the NUA-eligible stock would be “includible in gross income”, the amount that is left behind in the QRP is everything except the basis (or the rolled portion was more than the basis), what remains can only be capital gains-treated.

The order of rollover needs to be into the IRA first, as the code section referenced specifically indicates the rolled portion “shall be treated as consisting first of the portion of such distribution that is includible in gross income…” – so you want to roll out (via direct transfer) the basis to be excluded from gross income over to the IRA first. Then whatever is left can go to the taxable brokerage account.

Also see Natalie Choate’s book “Life and Death Planning for Retirement Benefits”, 7th Edition, pp 178, 179 for additional discussion.

As a practical implementation matter, it is difficult and (so far) impossible to get the QRP administrator to code the 1099R appropriately – indicating the appropriately-taxable portion, due to lack of understanding and (likely) distrust of the system. For this reason the basis allocation in this fashion may not be available.

Posted on Dec 23rd, 2024

by author: jblankenship.

Posted in: capital gains tax rates, IRA, net unrealized appreciation, NUA.
Tagged: IRA · net unrealized appreciation · NUA

Do You Need to File a Tax Return This Year?

Dec 16th, 2024

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Have you ever wondered if it was actually necessary to file a tax return? Perhaps your income is relatively low, and so you wonder if it’s really required of you to file a return.

Often it’s not entirely a case of a return being required, but rather it might be in your best interest to file a return in order to receive certain credits against your income. The IRS has an interactive tool that you can use to determine if it’s necessary for you to file a tax return. You can find this tool at www.irs.gov/help/ita/do-i-need-to-file-a-tax-return. As of this writing, the tool has not been updated to help for 2024 tax returns – expect an update in the coming weeks. In the meantime, read on for some guidance that may help.

Do I Need to File a Tax Return This Year?

To determine whether you need to file a tax return, you need a few things:

Filing status.
Federal income tax withheld.
Basic information to help you determine your gross income.

You are required to file a federal income tax return if your income is above a certain level, which varies depending on your filing status, age and the type of income you receive. However, the Internal Revenue Service reminds taxpayers that some people should file even if they aren’t required to because they may get a refund if they had taxes withheld or they may qualify for refundable credits.

The amount of income that a couple filing jointly (filing status Married Filing Jointly) with only the Standard Deduction without needing to file is $29,200 for 2024. For single folks (filing status Single) using the Standard Deduction, the amount of income is $14,600 for 2024. These are only general rules of thumb, if you’re near that level of income you’ll want to do some more research to be sure. If you’re over age 65, for example, there is an additional exemption allowed which will increase the non-taxed income.

To find out if you need to file, check the Individuals section of the IRS website at www.irs.gov or consult the instructions for Form 1040 or 1040SR for specific details that may help you determine if you need to file a tax return with the IRS this year. You can also use the Interactive Tax Assistant available on the IRS website. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions.

Even if your income is low enough that you don’t have to file for 2024, here are five reasons why you may want to:

1. Federal Income Tax Withheld If your income is below the standard deduction amount, you should file a return to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund even if you don’t owe any tax. To get the credit you must file a return and claim it.

3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.

5. Premium Tax Credit If you buy health insurance through the Health Insurance Marketplace and meet other criteria, you may be able to claim the Premium Tax Credit. This is a refundable credit based on your income and the cost of your healthcare plan.

Posted on Dec 16th, 2024

by author: jblankenship.

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Posted in: hope credit, income tax credit, tax credits, taxable compensation.
Tagged: income tax credit · tax credits · taxable compensation

The Social Security Survivor Benefit – Part 2

Dec 2nd, 2024

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Note: you can find the first part of this discussion of Social Security Survivor Benefits at the link. Part 1 covered the basics of Survivor Benefits, and this article covers other considerations with the Survivor Benefit, including non-spouse survivor’s benefits and coordinating the Survivor Benefit with your own benefit. As mentioned in the prior articles, don’t expect to fully understand these calculations and definitions in the first run-through. Check over the other articles (Part 1 here, Spouse Benefits here and especially the further explanation of Spouse Benefits here) for more information, and post questions in the comment section if they come up.

Coordinating the Survivor Benefit With Your Own Benefit

The Survivor Benefit is exclusive of the surviving spouse’s own retirement benefit. If the surviving spouse is eligible for a retirement benefit that is greater than the Survivor Benefit, only the greater of the two will be payable.

Technically the surviving spouse can choose between the two benefits, if he or she is eligible for both at the same time. This can work to the surviving spouse’s advantage if the Survivor Benefit was taken early. By starting the Survivor Benefit early, the Surviving Spouse could wait to take his or her retirement benefit, allowing this retirement benefit to earn the delayed retirement credits up to as late as age 70. This generally amounts to an increase in the retirement benefit of 8% for each year delayed beyond Full Retirement Age.

Here’s an example – Dick and Jane, both age 62 with retirement benefits available when they reach Full Retirement Age of $2,000 and $1,300, respectively. Neither of them has filed for Social Security retirement or Spousal Benefits. Dick has recently passed away.

If we run the calculation, we find that Dick’s current-age benefit would have been 75% of his Full Retirement Age benefit of $2,000 since he would be 62 at this date. (You can take my word for this reduction, or you could look it up on the table in the earlier article.) Then, if Jane was to apply for Survivor Benefits at this age, her benefit would be further reduced by the early filing, a 19% reduction from the table above.

So here’s the calculation for the Survivor Benefit: Dick’s Full Retirement Age Benefit is $2,000, reduced to 75%, or $1,500. That amount is then reduced by the 19% reduction factor, since Jane is filing early for Survivor Benefits, to total $1,215.

Notice that Jane’s own benefit at Full Retirement Age would be greater than this reduced Survivor Benefit – but at this point, her own benefit would be 75% of $1,300, or $975. So Jane could start taking the reduced Survivor Benefit now, and then later at Full Retirement Age she could switch over to her own retirement benefit, which would be the full $1,300 (plus Cost-of-Living Adjustments), or even later to age 70 when the delayed retirement credits would apply, making her own benefit even greater.

Non-Spouse Dependents

Survivor Benefits aren’t only for spouses. Other dependents can be eligible for Survivor Benefits as well. These dependents include children, grandchildren, and even parents, if they qualify. Just like leaving a sinking boat, children first.

Children

The children of a deceased Social Security participant can be eligible for a Survivor Benefit of 75% of the participant’s Primary Insurance Amount or PIA (effectively the amount of benefit that the participant would receive at Full Retirement Age) if the child is under age 18. As long as the child was the dependent of the deceased participant, whether his or her own son or daughter, step-child, or grandchild, and the deceased participant provided at least half of the support for the child, this Survivor Benefit is available. The child didn’t have to live with the late parent to be eligible.

In addition, the surviving mother or father of the dependent child described above is also eligible for a Survivor Benefit at any age (less than FRA), equal to 75% of the Primary Insurance Amount of the deceased participant. This benefit is available until the child or children are age 16 (no age limit if the child is disabled and entitled to benefits). The only remaining qualification is that the surviving spouse and the deceased participant must have been married for at least 9 months (less if the death is accidental). A divorced spouse can receive this benefit if he or she was married to the decedent for at least 10 years.

Parents

The parents of a deceased participant may be eligible for Survivor Benefits as well, if they were considered dependents of the deceased. If the parents were receiving more than half of their support from the deceased participant and they are over age 62, they can be eligible for this benefit.

If there is only one parent surviving the participant, the Survivor Benefit is equal to 82.5% of the Primary Insurance Amount of the deceased participant. If there are two surviving parents and both are eligible, each would receive a benefit of 75% of the Primary Insurance Amount.

This benefit is exclusive to any retirement benefit that the parents may have available to them. If the parent is eligible for a retirement benefit that is greater than the Survivor Benefit, he or she (or both of them) may receive the Survivor benefit at age 62 (with no reduction) and then later switch over to the retirement benefit at Full Retirement Age or later.

Maximum Family Benefit

Each of these Survivor’s Benefits could be limited by a Maximum Family Benefit that each family unit must adhere to. Essentially there is a limit prescribed by the Social Security Administration on the amount of benefits, based upon the deceased participant’s Primary Insurance Amount (a good explanation of the Primary Insurance Amount and Full Retirement Age can be found by clicking this link). The Maximum Family Benefit ranges between 150% and 180% of the Primary Insurance Amount. Once total benefits exceed the limit, each recipient’s benefit is reduced by the same ratio down to the limit. For a detailed explanation of the Maximum Family Benefit, click the link.

So that completes our discussion of Survivor Benefits. For more information on any of these factors, click the links within the text above – and you can also find all of this information in the book A Social Security Owner’s Manual. If you have comments and questions, I invite you to leave post them below and we’ll try to work out answers for you.

Posted on Dec 2nd, 2024

by author: jblankenship.

Posted in: social security benefits, social security survivor benefits, spousal benefits.
Tagged: social security benefits · social security survivor benefits

The Social Security Survivor Benefit – Part 1

Dec 2nd, 2024

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In a previous article we reviewed the very confusing Social Security Spousal Benefit. That article raised a lot of questions from readers about another confusing provision of the Social Security system: the Survivor Benefit.

As with all of these discussions, don’t expect to immediately understand it – this stuff is complicated, and even the Social Security staff often have difficulty explaining it. Read through this carefully, see the referenced articles for background, and then re-read as needed. And ask questions if you have them.

The Survivor Benefit is not related to the Spousal Benefit, although certain portions of the article with further explanations of the Spousal Benefit will be useful to review as we discuss the Survivor Benefit.

To start with, there are two benefits available to the spouse of a deceased Social Security participant. The first is a small death benefit, amounting to $255 in a one-time payment. The second is the Survivor Benefit, which is a lifetime benefit based upon the deceased participant’s benefit amount at his or her current age.

The Survivor Benefit is generally equal to the deceased worker’s benefit amount (if he or she was collecting benefits at death), and then reduced depending upon the surviving spouse’s age. This is similar to the reduction that is applied to regular retirement benefits. One major difference is that Survivor Benefits can be claimed as early as age 60, rather than age 62 as with regular retirement benefits. At age 60, the Survivor Benefit is reduced to 71.5% for all dates of birth (we’ll get to more on this later).

In addition to the fact that the Survivor Benefit can be received two years earlier than the normal age of 62, the table for Full Retirement Age (FRA) is shifted by two years:

Year of Birth	Survivor’s FRA
1939 or before	65
1940	65 and 2 months
1941	65 and 4 months
1942	65 and 6 months
1943	65 and 8 months
1944	65 and 10 months
1945-1956	66
1957	66 and 2 months
1958	66 and 4 months
1959	66 and 6 months
1960	66 and 8 months
1961	66 and 10 months
1962 or later	67

This means that your Full Retirement Age for Survivor Benefits could be offset by a couple of years from that for your own retirement benefit.

Calculation

Now to add some more complexity to the situation. In order to calculate the Survivor Benefit, we have two factors to consider:

1. The amount of benefit that the deceased spouse would be receiving had he or she survived to this age; and

2. The age of the surviving spouse.

The First Factor: Benefit of the Deceased Spouse

When determining the value of the First Factor, you first need to know whether or not the deceased spouse was currently receiving benefits at the time of his or her death. If so, the First Factor is equal to the present benefit that the deceased spouse was receiving at the time of his or her death plus any Cost of Living Adjustments that would have been applied if time has passed between the death and the survivor applying for benefits.

It’s important to note here that when the deceased spouse was already receiving benefits, any reductions or increases that had been applied are also applied to the Survivor Benefit. For this reason, it’s critical to consider the implications when taking retirement benefits early – doing so can permanently reduce any Survivor Benefit that your spouse might receive should you die first. If the deceased spouse began benefits early and was receiving a reduced benefit, the survivor is guaranteed the higher of the deceased spouse’s benefit or 82.5% of the deceased spouse’s PIA.

On the other hand, if the deceased spouse is not already receiving benefits, if the deceased spouse dies at FRA or later, the First Factor is the amount that the decedent would have received at the current age, if he or she were still living. Otherwise, if the deceased spouse dies before FRA and had not yet begun receiving retirement benefits, the surviving spouse is eligible for a benefit equal to 100% of the deceased spouse’s PIA.

This makes the whole process a lot more complicated to understand, but here’s how it works: If the decedent spouse would have been at Full Retirement Age (FRA) at the time that the survivor applies for benefits, then the First Factor of our equation is based upon his or her Primary Insurance Amount, or PIA. If you’ll recall, the Primary Insurance Amount is the amount of benefit that an individual receives in Social Security benefits at Full Retirement Age.

If the deceased spouse would have been younger than Full Retirement Age when the surviving spouse is filing for benefits and had not filed for benefits as of death, the First Factor is equal to the Primary Insurance Amount. However, if the deceased spouse would have been older than Full Retirement age when the Survivor Benefit is applied for, there is an increase applied to the Primary Insurance Amount. These reductions and increases are explained more completely via the tables in the article that provides further explanations of the provisions of the Social Security system.

The First Factor amount should be relatively easy to come up with, either from prior statements or by giving in and calling the Social Security Administration and getting the proper number.

So now that we have the First Factor figure, let’s move on to the Second Factor.

The Second Factor: Age of the Surviving Spouse

As mentioned previously, the Survivor Benefit can be available as early as age 60. And as with all Social Security benefits, filing at an age earlier than Full Retirement Age (FRA) will result in a reduction of benefits, with a graduated elimination of the reduction as the surviving spouse approaches the Full Retirement Age for Survivor Benefits.

The reductions at various ages are listed in the table below by the surviving spouse’s year of birth:

Year of Birth	60	61	62	63	64	65	66	67
1939 or before	-28.5%	-22.8%	-17.1%	-11.4%	-5.7%	0.0%
1940	-28.5%	-23.0%	-17.5%	-12.0%	-6.4%	-0.9%
1941	-28.5%	-23.2%	-17.8%	-12.5%	-7.1%	-1.8%
1942	-28.5%	-23.3%	-18.1%	-13.0%	-7.8%	-2.6%
1943	-28.5%	-23.5%	-18.4%	-13.4%	-8.4%	-3.4%
1944	-28.5%	-23.6%	-18.7%	-13.8%	-9.0%	-4.1%
1945 to 1956	-28.5%	-23.7%	-19.0%	-14.2%	-9.5%	-4.7%	0.0%
1957	-28.5%	-23.9%	-19.3%	-14.6%	-10.0%	-5.4%	-0.8%
1958	-28.5%	-24.0%	-19.5%	-15.0%	-10.5%	-6.0%	-1.5%
1959	-28.5%	-24.1%	-19.7%	-15.3%	-11.0%	-6.6%	-2.2%
1960	-28.5%	-24.2%	-19.9%	-15.7%	-11.4%	-7.1%	-2.8%
1961	-28.5%	-24.3%	-20.2%	-16.0%	-11.8%	-7.6%	-3.5%
1962 or later	-28.5%	-24.4%	-20.4%	-16.3%	-12.2%	-8.1%	-4.1%	0.0%

As you can see, at age 60, the reduction is 28.5% for all dates of birth. Then the reduction factor is gradually eliminated up through the Survivor Benefit Full Retirement Age.

The Calculation

Now that we have our two factors, the amount of the deceased spouse’s benefit and the age/reduction factor for the surviving spouse, we move on to the actual calculation. The reduction factor is simply applied to the deceased spouse’s benefit.

For example, let’s say that the deceased spouse’s benefit would have been $1,500, and the surviving spouse is 62 years old. If the surviving spouse were to take the Survivor Benefit beginning today, the $1,500 would be reduced by 19.0%, to $1,215 (the 19.0% figure is based upon the table above – the surviving spouse is 62, so he or she was born in 1949 or 1950). Waiting another four years would allow the surviving spouse to receive the full benefit (with no reduction), plus any Cost-of-Living Adjustments (COLAs) that would be applied between now and that date.

Additional Facts About the Survivor Benefit

There are a few more facts that could change the situation completely.

First of all, if the surviving spouse has remarried before age 60, the Survivor Benefit is no longer available to him or her. If the surviving spouse re-marries before age 60 and then subsequently divorces or is subsequently widowed again, the Survivor Benefit is once again available. And if the surviving spouse has more than one late spouse, he or she is eligible to receive Survivor Benefits based upon the highest possible benefit from any of the prior spouses.

In addition to the Survivor Benefit that is available as early as age 60, there is also a Survivor Benefit available for a (potentially) much younger surviving spouse if that survivor is caring for a child aged 16 or younger. This benefit is equal to 100% of the benefit that the decedent-spouse was receiving at his or her death, or the Primary Insurance Amount on his or her record, if he or she was not currently receiving benefits at death.

All of the benefits are dependent upon the fact that the deceased spouse has earned adequate quarters of credit with the Social Security system. For full benefits, the deceased would need to have earned at least 40 quarters, or ten years of work earning (for 2025) $1,810 per quarter or $7,240 for the year. For the surviving spouse caring for a child younger than age 16, reduced benefits are available if the deceased spouse had earned at least 6 quarters of credit in the three years prior to his or her death. Any amount of quarters between the minimum of 6 and the maximum of 40 would allow for a phased increase in the benefit amount.

If a person was married to the deceased spouse for at least 10 years and was divorced, the Survivor Benefit is available just the same as if the couple had not divorced (as long as he or she has not remarried prior to age 60, as mentioned above).

Lastly for now, if the surviving spouse is disabled, the Survivor Benefit could be available as early as age 50, with the same reduction as for a non-disabled surviving spouse at age 60, 28.5%.

Okay, this is enough for Part 1. In Part 2, I’ll cover some of the other types of Survivor Benefits – for children and other beneficiaries – as well as to review coordinating the Survivor Benefit with the surviving spouse’s own benefit. If you’ve got more questions, please leave them as comments, or if you’d like more information I invite you to check out my book, A Social Security Owner’s Manual.

Posted on Dec 2nd, 2024

by author: jblankenship.

Posted in: social security benefits, social security survivor benefits, survivor benefits, survivors.

Using An IRA Rollover to Eliminate Federal Spousal Rights

Nov 25th, 2024

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Qualified Retirement Plans (QRPs), which include 401(k), 403(b) and many other employer-based plans, are governed by federal law under ERISA. One of the tenets of ERISA is that there are certain rights for the spouse of the employee-participant in the plan. One of those rights is that the spouse must consent to any distribution from that plan that is in the form of anything other than a Qualified Joint and Survivor Annuity (QJSA).

Depending upon your circumstances, this might not be the way you would like for things to work out. For example, if you’re planning to get married and you want to ensure that your future spouse doesn’t control distributions from your retirement plan, you could rollover your QRP to an IRA before your marriage – because an IRA isn’t covered by ERISA like the QRP is. A prenuptial agreement could be used to limit a spouse’s rights to an IRA, but it cannot usurp the ERISA rules.

If you’re already married and you have a reason to consider this option, hopefully it’s not because there are storm-clouds on the horizon for your marriage. If this is the case, you will likely have some difficulty in enacting this rollover. The problem, as mentioned before, is that the spousal rights provision requires that your spouse signs off on any distribution other than the QJSA.

If you’re going through a divorce, it’s possible that you’d need to have your ex-spouse sign off on a distribution from your QRP if the QRP isn’t part of the assets to be split. If the QRP isn’t being split for the divorce, you’ll want to make sure that you have a statement in the decree that ensures that the QRP is positively identified as belonging solely to you. Otherwise, your ex could make a claim against a portion of your QRP later, under ERISA.

Bear in mind that the spousal distribution rights from the QRP also apply to death benefits from the plan, in addition to lifetime benefits.

One other thing to keep in mind is that your own state’s law may provide rights to your IRA to your spouse anyhow. If that is the case, the rollover to the IRA may not have the effect you expected.

Posted on Nov 25th, 2024

by author: jblankenship.

Posted in: IRA, qrp, qualified retirement plan, retirement plan.
Tagged: IRA · qrp · qualified retirement plan

The Social Security Spousal Benefit – Further Explanation

Nov 11th, 2024

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Note: with the passage of the Bipartisan Budget Act of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

Following up my article which provided several brief examples of the Social Security Spousal Benefit, I thought I’d provide some further explanation and background for the provision. It appears from some of the feedback I have received that there is a great deal of confusion over this provision, so hopefully the further background explanation that I’m providing here will be of help.

I have listed below several additional background details about how the Social Security System works, in order to help you better understand the prior article.

Additional Background Explanation

As stated at the outset of the previous article, this is one of the most confusing provisions of the Social Security system. Don’t expect to fully understand the tenets of the provision in a brief reading – you’ll want to read through the examples carefully, comparing each example to your own situation and considering the outcomes.

1. In the original article, I used two acronyms in my explanations, both of which were explained briefly at the outset of the article. I’ll explain and define each of them further here.

FRA – Full Retirement Age. This is the age at which you would become eligible for your full Social Security benefit (also known as your Primary Insurance Amount, which we’ll get to next). It used to be that FRA (Full Retirement Age) was 65 for all people – but with the 1983 amendment to the system, the age was gradually increased. Full Retirement Age (FRA) depends on your year of birth, according to the table below:

Year of Birth	FRA
1937 or before	65
1938	65 and 2 months
1939	65 and 4 months
1940	65 and 6 months
1941	65 and 8 months
1942	65 and 10 months
1943-1954	66
1955	66 and 2 months
1956	66 and 4 months
1957	66 and 6 months
1958	66 and 8 months
1959	66 and 10 months
1960 or later	67

PIA – Primary Insurance Amount. This amount is, for most folks*, equal to the amount that you would receive at Full Retirement Age (FRA). This figure is the primary figure against which all calculations are run for figuring your retirement benefit, and for calculating a Spousal Benefit for your wife or husband.

* If an individual is also receiving a pension from a job which was not subject to Social Security withholding taxes, such as a teaching job or a federal, state or local government job, certain reductions will likely apply. You can read more about the impact of these non-Social Security jobs at this article which explains the Windfall Elimination Provision and the Government Pension Offset (WEP and GPO respectively, if you’d like more acronyms).

2. There is a minimum age at which you become eligible for Social Security retirement benefits, and this is the same for all people, 62. If you file at this age (or at any age before Full Retirement Age), you will be subject to a reduction from your Primary Insurance Amount (PIA) based upon the number of months you’re filing before Full Retirement Age. It’s a somewhat complicated formula (but then again, what about this system isn’t?) so rather than explaining how to build a watch I’ll show you what time it is.

The table below shows the reduction factors for various ages and years of birth. You’ll need to find the row for your Year of Birth, and then work your way across to the right for your reduction factor at various ages. Space limitations don’t allow us to display every possible age (limited to exact years), but you can get the idea of how the reduction works for ages in-between.

Year of Birth	62	63	64	65	66	67
1937 or before	-20.00%	-13.33%	-6.67%	0.00%
1938	-20.83%	-14.44%	-7.78%	-1.11%
1939	-21.67%	-15.56%	-8.89%	-2.22%
1940	-22.50%	-16.67%	-10.00%	-3.33%
1941	-23.33%	-17.78%	-11.11%	-4.44%
1942	-24.17%	-18.89%	-12.22%	-5.56%
1943 to 1954	-25.00%	-20.00%	-13.33%	-6.67%	0.00%
1955	-25.83%	-20.83%	-14.44%	-7.78%	-1.11%
1956	-26.67%	-21.67%	-15.56%	-8.89%	-2.22%
1957	-27.50%	-22.50%	-16.67%	-10.00%	-3.33%
1958	-28.33%	-23.33%	-17.78%	-11.11%	-4.44%
1959	-29.17%	-24.17%	-18.89%	-12.22%	-5.56%
1960 or later	-30.00%	-25.00%	-20.00%	-13.33%	-6.67%	0.00%

To use this table, find your Year of Birth in the first column. Move right until you reach the age that you wish to begin early benefits. This figure is the amount of reduction from your Primary Insurance Amount (PIA, see the explanation above) that you will experience by filing at this age.

At the earliest filing age of 62, for a person who was born in 1960 or later the reduction factor will be -30%. In other words, if this person files for benefits at age 62, the benefit would be 70% of the amount that this person would receive if he or she waited until Full Retirement Age (FRA) of 67 to file for benefits.

(FYI – there is also a maximum age for all people, after which your Social Security benefit will no longer earn delayed credits, and that is age 70. Delaying receipt of your benefit after Full Retirement Age causes an increase to your benefit, up to age 70.)

3. A Spousal Benefit can be available to one spouse or the other but not both. The maximum amount that this benefit could be is 50% of the other spouse’s Primary Insurance Amount (PIA, the amount that he or she would receive at Full Retirement Age). The 50% amount is available if the spouse applying for the Spousal Benefit is at least Full Retirement Age. If he or she is younger than Full Retirement Age, a reduced amount could be available. The reductions are listed below:

Year of Birth	62	63	64	65	66	67
1937 or before	-25.00%	-16.67%	-8.33%	0.00%
1938	-25.83%	-18.06%	-9.72%	-1.39%
1939	-26.67%	-19.44%	-11.11%	-2.78%
1940	-27.50%	-20.83%	-12.50%	-4.17%
1941	-28.33%	-22.22%	-13.89%	-5.56%
1942	-29.17%	-23.61%	-15.28%	-6.94%
1943 to 1954	-30.00%	-25.00%	-16.67%	-8.33%	0.00%
1955	-30.83%	-25.83%	-18.06%	-9.72%	-1.39%
1956	-31.67%	-26.67%	-19.44%	-11.11%	-2.78%
1957	-32.50%	-27.50%	-20.83%	-12.50%	-4.17%
1958	-33.33%	-28.33%	-22.22%	-13.89%	-5.56%
1959	-34.17%	-29.17%	-23.61%	-15.28%	-6.94%
1960 or later	-35.00%	-30.00%	-25.00%	-16.67%	-8.33%	0.00%

Following the example listed above where a person born in 1960 or later files for Spousal Benefits at age 62, the 50% factor is reduced by 35%. In other words, the Spousal Benefit factor for this person would be reduced to 65% of the full 50% factor, which calculates to 32.5% of the other spouse’s PIA.

4. Furthermore, the Spousal Benefit is only available if the other spouse has filed for benefits already. Stay with me on this – it’s confusing. This means that until the other spouse files for retirement benefits, the first spouse can’t file for Spousal Benefits. Once the other spouse files for retirement benefits, the first spouse, as long as he or she is at least age 62, can file for Spousal Benefits. It’s important to note that the Spousal Benefit is available only to one spouse in the couple at at time – not both, so you have to choose which option works out better for you and your spouse.

5. At Full Retirement Age, a special provision is available that allows one spouse or the other to file for her own benefit and then suspend receiving the benefit. Originally before the passage of BBA15 this would enable the other spouse to file for Spousal Benefits based upon the first spouse’s record. However, under the new rules, suspending benefits also suspends any auxiliary benefits (including Spousal Benefits) that are based on the record that is suspended. Generally, suspending benefits is no longer a useful strategy with this change to the rules.

6. Deemed Filing requires that, if the individual is eligible for both the Spousal Benefit and his own benefit then that individual must file for both benefits at that time. The only other alternative is not filing for either benefit. This used to only apply when filing before FRA, but now (since 2015) it applies at all ages.

If the individual is not currently eligible for the Spousal Benefit and he is filing for his own benefit, Deemed Filing does not apply. However, if for example a month later his spouse files for her own benefit, making this first spouse eligible for the Spousal Benefit, Deemed Filing will apply and the Spousal Benefit is deemed to have been filed for.

Back to the examples

Now, with this additional background information, you should be able to go back to the first article and it will (hopefully) make more sense.

Keep in mind what I mentioned at the beginning: this is complicated. Don’t expect to pick up on it immediately. If all this does is raise questions, feel free to post your questions in the comments and I’ll try to address your questions as best I can.

In addition, bear in mind that I am an independent financial advisor; I don’t work for the Social Security Administration. As such, in these articles I am reporting the way the system works – not advocating it, not agreeing with it, not defending it. I agree that many of the provisions of the system can be unfair when applied, but I don’t have any sway with the Social Security Administration to fix the problems. I’m a taxpayer just like you, and I have to deal with the system the way it stands as well.

I have spent quite a bit of time studying how the system works in order to help my clients. As a result of my study of the system, I’ve also written a book that you may find useful – A Social Security Owner’s Manual. The Spousal Benefit and many other confusing provisions of the Social Security system are explained in the book.

Posted on Nov 11th, 2024

by author: jblankenship.

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Posted in: Social Security, social security benefits, Social Security spousal benefit, spousal benefits.
Tagged: Social Security · spousal benefit

The Post-55 Exception to the 10% Penalty for Withdrawals from 401(k)

Nov 4th, 2024

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Most of the time, when taking a distribution from a 401(k) or other Qualified Retirement Plan (QRP) prior to age 59½, there generally is a 10% penalty that applies. That is, unless one of the exceptions applies.

If you happen to be over age 55 (technically, if you’re in the calendar year you’ll reach age 55) when you leave employment, there is another exception that applies. Any distribution that you take from the QRP, as long as you were at least 55 years of age when you left employment, will not be subjected to the 10% penalty. Only ordinary income tax will apply to the withdrawal.

This provision only applies to QRPs, such as a 401(k) or 403(b), and not to IRAs. So if you’re leaving employment at or after age 55 but before reaching 59½, it can be in your best interest to not rollover your QRP to an IRA, at least until after you reach 59½. Even if you don’t need the money right away, it could be beneficial to have the source of funds available penalty-free.

For retiring police, firefighters and medics, the age for this exception is 50 – so these folks can take distributions from their QRPs after age 50 if they’ve left employment without penalty.

Posted on Nov 4th, 2024

by author: jblankenship.

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Posted in: 401 k 403 b, Early Distribution, qrp, qualified retirement plan.
Tagged: 401 k 403 b · early retirement · qrp · qualified retirement plan

Converting an Inherited 401(k) to Roth

Oct 21st, 2024

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Photo credit: jb

One of the provisions that is available to the individual who inherits a 401(k) or other Qualified Retirement Plan (QRP) is the ability to convert the fund to a Roth IRA.

This gives the beneficiary of the original QRP the option of having all of the tax paid up front on the account, and then all growth in the account in the future is tax free, as with all Roth IRA accounts.

What’s a bit different about this kind of conversion is that, since it came from an inherited account, the beneficiary must take distribution of the account over the prescribed distribution period, which could be 10 years, or it could be over the lifetime of the beneficiary. This means that, in order for this maneuver to be beneficial, the heir should be in a relatively low tax bracket during the year of the conversion – making the future tax-free withdrawals during the distribution period worthwhile.

A downside to this move is that the heir should be in a position to pay the tax on the account from other funds, otherwise the tax pulled from the account will reduce the funds that can be converted to Roth to grow tax free over time.

If the heir has an IRA of his or her own that could be converted, and there are only enough other funds for paying tax to enable the conversion of one account or the other, the IRA should be converted rather than the QRP. This is because the IRA has a much better chance for long-term growth than the inherited QRP due to the requirement for distribution of the account (as discussed above).

At any rate, this is yet another reason that an individual might want to leave funds in a 401(k) plan rather than rolling it over to an IRA – since the heir does not have this Roth conversion option available if the money is in a traditional IRA. This option is only available for an inherited 401(k) or QRP, and if your heir is likely to want the option of conversion to Roth, it would need to come from the inherited QRP.

Posted on Oct 21st, 2024

by author: jblankenship.

Posted in: 401k, 403 b, conversion, inherited IRA, IRA, minimum distributions, qrp, qualified retirement plan, retirement plan, Roth Conversion, Roth IRA.
Tagged: qualified retirement plan · roth conversion · roth ira

Which Account to Take your RMDs From

Oct 14th, 2024

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When you’re subject to Required Minimum Distributions (RMDs) and you have more than one IRA account to take the distributions from, you have a choice to make. Even though you have to calculate the RMD amount using all of your IRA accounts combined, the IRS allows you to take the total of all your RMDs from a single account if you wish. The RMDs could also be taken from each account separately, or any combination of all of your traditional IRA accounts.

With this provision in mind, you could take all of your RMDs from the smallest IRA, which would provide you the opportunity to eliminate one of the accounts in your list, thereby simplifying things. By reducing the number of IRA accounts that you have, you could simplify the calculation of RMDs, estate planning, and just general paperwork.

Likewise, if one of your IRAs is held at a custodian that has limited choices or more costly options than your other IRAs, you could take your RMDs from that account, to eventually eliminate the undesired custodian. Or, perhaps one IRA holds an investment that has run up considerably, prompting you to rebalance – this could be an opportunity to take some earnings out of that holding to reduce losses with an anticipated drawback in value.

Another situation is where you have an IRA that owns something very thinly-traded or otherwise difficult to sell. You might bypass taking an RMD from this account, taking the RMD in combination with your other IRA accounts so that you don’t have to suffer a potential loss for this holding.

It might not always work to your best interests to reduce the number of accounts that you have. You may have multiple accounts in order to simplify your estate planning process, so that you can direct each account to a specific beneficiary or class of beneficiaries, for example.

In addition, if you’re hoping to eliminate some of your IRA accounts, you could always combine several IRAs together by rollovers – the end result is essentially the same.

This combination of accounts for RMDs can also be used separately with 403(b) accounts – if you happen to own several 403(b) accounts from previous employers, you can combine the RMDs and take them all from one account. However, this doesn’t work with 401(k) plans, you must take a separate RMD from each 401(k) plan. You also cannot combine unlike accounts (IRAs with 403(b)s or 401(k)s) to take the RMDs for those dissimilar accounts.

Posted on Oct 14th, 2024

by author: jblankenship.

Posted in: IRA, ira money, minimum distributions, qrp, qualified retirement plan, required minimum distribution, retirement accounts.
Tagged: IRA · qualified retirement plan · required minimum distribution

Arguments in Favor of a Rollover

Oct 7th, 2024

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If you have a 401(k), 403(b), a tax-sheltered annuity or other qualified retirement plan from a former employer, you may have considered if it would be beneficial to leave it where it is, or perhaps enact a rollover to an IRA.

While it might be easiest to leave the account where it is, it’s possible that you are sacrificing flexibility and/or paying higher fees in exchange for the easier path.

Quite often, 401(k) plans (and other qualified retirement plans, QRPs) are restricted to managed mutual fund investment options. Managed funds often carry high expense ratios, often greater than 1%. As you know, if you’ve read much about index funds, it is possible to reduce most of your investing expense ratios to far below .5%, in some cases as low as .1%. Over the course of many years, reducing these expenses can have a profound impact on your investment returns.

For example, if you were to save even 1/2 of a percent in expenses, over 20 years this could compound to a 11.05% improvement in your overall investment returns. This also assumes that the new funds you’ve chosen will perform at the same rate that the funds you’re leaving behind would have.

It’s not a pure “no brainer” to decide to do a rollover. There could be compelling reasons to leave the money where it sits, such as if you believe the funds in your plan are superior to options that you could choose outside the plan (such as restricted-access or closed funds), or maybe you have access to investment advice from the custodian at no additional cost. In addition, if you left the employer during or after the year when you reached age 55, you might want to leave the money where it is until you’re at least age 59½ for flexibility in withdrawals without penalty – see this article on post-55 withdrawals for more information. There is also the chance that you could benefit by leaving the funds in the former plan if there is Net Unrealized Appreciation of your former employer’s stock that you intend to have treated by the NUA rules.

In general though, the flexibility to reduce your expenses by choosing any investment available is a pretty compelling argument in favor of the rollover.

Posted on Oct 7th, 2024

by author: jblankenship.

Posted in: employer plan, IRA, qrp, qualified retirement plan, retirement plan.
Tagged: IRA · qrp · qualified retirement plan

Using an IRA Distribution and Withholding to Reduce Estimated Tax Payments

Sep 16th, 2024

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A little-known fact about how withholding works for IRA distributions can work in your favor. While withholding from a paycheck and estimated tax payments are credited as paid during the quarter actually paid, it’s different for withholding from an IRA distribution.

When you have taxes withheld from a distribution from an IRA, no matter when it occurs during the calendar year, it is treated by the IRS as having been withheld evenly throughout the tax year. This means that if you had the bulk of your income in the first quarter of the year, you could take care of the tax burden with a distribution from an IRA and withholding enough tax even in late December of the same year, and there would be no penalty for underwithholding.

So – many folks find themselves in this position, especially in years when income is is not equal in each quarter, or if the tax burden was not known or misunderstood throughout the year.

This method could be used by anyone at any time, as long as you have access to your IRA funds. For example, if you are required to take a distribution, that is, if you’re over age 73 these days or you have an inherited IRA, you could use that distribution to cover your tax burden for the entire year (if it was enough).

Rather than making quarterly estimated tax payments throughout the year, toward the end of the year you could instruct your IRA custodian to distribute enough funds to cover the tax burden for the year (and don’t forget to include the amount of your IRA distribution in your calculation). Then you would also instruct the custodian to withhold the distribution as taxes, using form W-4P.

The one downside to this method is that if the IRA account owner dies before the distribution with withholding for the tax year (and let’s face it, this will probably happen at some point), then the estate will owe penalties for underpayment of estimated tax for that year.

Posted on Sep 16th, 2024

by author: jblankenship.

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Posted in: income tax, IRA, ira funds.
Tagged: income tax · IRA

Using the Prohibited Transaction Rules to Your Advantage

Sep 2nd, 2024

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I’ve written in the past about the types of transactions that are prohibited in your IRA, and how these transactions are generally quite onerous if you happen to use one of them. In fact what happens is that your entire IRA becomes disqualified as of the first of the year in which the transaction occurred.

So – if you’re inquisitive you might wonder: How could I use this to my advantage?

It is possible to work this rule in your favor – but I don’t necessarily recommend it. I present this option here as an exercise of what could be done according to the rules. I learned this one from Natalie Choate, by the way, who you may recall I regard as a rock star in the world of IRA law.

Working in your favor

So, given that the rule against prohibited transactions requires that the IRA is considered to have been entirely distributed on the first day of the tax year when the prohibited transaction occurred, this is a factor that could be used to work to your advantage.

Let’s say for example you owned an investment in your IRA that was worth $10,000 as of the first of the year. Over the course of the year, the investment has now grown in value to something ridiculous, let’s say $500,000. If you were particularly inventive, you might take advantage of the rules and perform some sort of prohibited transaction with your IRA before the end of the tax year. By doing so, your IRA would be disqualified as of the first of the year, and the investment you owned would have been considered distributed at that point in time.

This means that you would owe ordinary income tax on the original $10,000 value, and your investment then has a basis of $10,000 – if you sold it now at its $500,000 value, the additional $490,000 would be taxed at the capital gains rate. If your ordinary income tax rate is 25%, the tax on the full $500,000 would work out to $125,000. But under this plan, only $10,000 is taxed at 25% ($2,500), and $490,000 is taxed at 15% ($73,500), for a total tax on the IRA of $76,000, a savings of $49,000. You’d have to wait until at least the second day of the following year in order to qualify for long-term capital gains. (The above tax calculation is oversimplified. In the real world, the rate of tax would be considerably higher since you’d be bumped up several tax brackets, and Net Investment Income Tax would also apply. Since we’re working in hypotheticals, forgive the simplification.)

If you were caught in just such a situation, this is a way you might use the tax law in your favor for a bit of hindsight tax planning. It doesn’t happen often, but this is one case where you could work the rules to your advantage.

Note: Bear in mind that I have not used this method myself or with clients, and the example I have given is purely hypothetical. If you choose to use this method, although the rules appear to be in your favor, but there are no guarantees that the IRS would agree with this. On face value I believe it will work exactly as I have written, but I have not seen any cases where this set of facts was put into play, successfully or not. Proceed at your own risk.

Posted on Sep 2nd, 2024

by author: jblankenship.

Posted in: capital gains rate, IRA, prohibited transaction.
Tagged: capital gains and losses · IRA · prohibited transaction

Earned Income Credit and Due Diligence

Aug 26th, 2024

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For those familiar with the Earned Income Credit (EIC), you hopefully are familiar with the preparer’s due diligence checklist. This is a checklist that the preparer uses to help determine if the taxpayer’s circumstances are in keeping with the conditions that are required to be met in order to be eligible for the credit. The checklist is formally known as Form 8867, and is available at www.IRS.gov.

When it originally appeared, this checklist was been filled out by the preparer and kept in the preparer’s files. This fact has changed a bit over time – the IRS changed the requirements, such that now the due diligence checklist must be filed along with the return. This filing requirement is the only thing that has changed, the due diligence is the same as before.

Form 8867 is a multi-use checklist, as many of the due diligence requirements cross over between the various tax credits. This form is used for due diligence for the Earned Income Credit (EIC), American Opportunity Tax Credit (AOTC), Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), and Credit for Other Dependents (ODC). It is also used for proof of due diligence in determining the Head of Household (HOH) tax filing status.

The checklist

You can refer to the actual form to see the actual questions that are asked regarding Earned Income Credit. These questions change from time to time. The general emphasis is on proving that the taxpayer is in fact eligible for the EIC based on the number of children claimed, or is claiming the EIC without a qualifying child. Additionally, the checklist requests information about the explanation of half-year residence of a child with the taxpayer, along with tiebreaker rules when the child could possibly be claimed as an eligible child by more than one taxpayer.

Tax Preparer Questions

The tax preparer has to answer a few questions to round out the due diligence. Again, the form itself has this checklist, which will be a much better place to view the questions. The gist of the tax preparer portion makes certain that the taxpayer has taken appropriate steps to ensure that the information collected regarding the EIC is based on facts received from the taxpayer, and not simply on verbal statements. There is requirement for the tax preparer to receive and maintain documentation for the residence of any eligible child, as well as information about income, residency status and the like for the taxpayer and spouse if applicable.

The point of all of this is to ensure that the tax preparer has exerted due diligence in gathering information to ensure that the credit being claimed is allowable and correct. Without this sort of checklist, in the past there have been substantial abuses of this particular credit. Because of this abuse, the due diligence checklist was implemented, along with prescribed penalties to the preparer for not filing the appropriate due diligence, or incomplete due diligence.

This penalty is $560 per credit per return to the preparer – so of course, this can add up pretty quickly if the preparer isn’t doing a good job. Since Form 8867 is used by up to four classes of credits (CTC, ACTC and ODC are considered one class of credits), there can be a penalty of up to $2,240 on a single return if all four credits are being claimed and due diligence is missing or incomplete.

Posted on Aug 26th, 2024

by author: jblankenship.